Carol V. Calhoun

This is one of those totally unanswered questions that employee benefits lawyers like to speculate on. It could be argued that because the original exemption of governmental plans from funding requirements reflected the fact that the governmental entity would back up the plan's promises even if the plan itself lacked adequate funding, the exemption should apply to the whole plan, not just the portion derived during the period of governmental status. However, there simply is no authority as to what happens when a plan changes status, either from nongovernmental to governmental or the reverse.

I think a lot of states are going to want to pass legislation reflecting EGTRRA. The problems include the one you mentioned, plus laws limiting rollovers to amounts derived from other plans of the same type (e.g., a 401(a) plan might limit rollovers into the plan to those directly or indirectly from another 401(a) plan). In many instances, EGTRRA did not require plans to make changes, but those which do not may discover they are unnecessarily limiting employees' options.

I would agree with Kirk in general. However, PLR 200108010 (November 17, 2000) states that, "Health coverage provided to a domestic partner who is a dependent of the employee within the meaning of section 152 of the [internal Revenue] Code is not included in the employee's gross income and is not wages for employment tax purposes." In order to qualify as a dependent, (a) a domestic partner must derive more than one-half of his or her support from the employee, and (B) the relationship must not be in violation of local law. There is a more lengthy discussion of this issue available in Section III of the outline available at this link.

This is probably the correct interpretation, at least if the new annuity is not one available under the original plan. The existing authorities that have allowed a housing allowance in the context of a 403(B) plan have relied on some action taken by the plan sponsor. If the retiree is dealing directly with a provider without plan sponsor involvement, it would be harder to make the claim that a nontaxable housing allowance was available.

There are definitely a lot of ERISA 403(B) plans out there using individual TDA contracts. Typically, the contracts themselves will define things like distribution, hardship withdrawal and loan rights. However, it then becomes a question of how much you trust the product issuer to be complying not only with the IRS requirements for 403(B) status, but also thosee ERISA requirements that have to be imposed at the level of the individual investments. Also, it has always been unclear to me just how the fiduciary requirements operate in the context of a 403(B) plan, since the contract must be owned by the employee. Should we assume for Form 5500 purposes that the plan never holds any assets, because the contracts are in effect being distributed to employees immediately on their purchase? How can a fiduciary ever engage in prudent fund management if the contract is owned by the employee? What happens if, as is often the case, one employer contributes to a TDA started by a prior employer? Some have suggested that in the context of a 403(B) plan, fiduciary duties should apply only to the original purchase. However, the whole subject is pretty murky.

The official limit is not out yet, although I understand that some consultants have calculated what the new limit will be, based on the cost of living figures. If anyone has a definitive guide, let me know. I try to keep updated information on my site, but it's very late in coming this year.

Here is the IRS answer, at least with regard to 403(B) plans: This is from "Frequently Asked Questions regarding Tax Sheltered Annuities." Of course, it would not apply totally for purposes of section 457, because the definitions of includible compensation are different. However, it appears based on this that the IRS might argue that sick leave accrued in prior years was not deferred before it was earned, as would be required for a 457 plan.

You may want to click on this link to see an outline of new developments for governmental plans, including 457 plans.

For what purpose do you want to know the original effective date? If you are restating the documents for the plan, you would normally put that the initial effective date was the date the prior plan was adopted, but that the restatement effective date was the date as of which the employer began making contributions. However, the initial date upon which ERISA became effective as to the plan would not be before year the plan became subject to ERISA. Memorializing the terms of the arrangement would not make it subject to ERISA, if it was otherwise exempt.

Section 415(n) by its terms deals only with after-tax employee contributions to purchase service credit under a defined benefit plan. However, direct transfers from one 401(a) (including 401(k)) plan to another for any purpose have always been allowed, if both the transferring and receiving plan allow such transfers. They are rare in nongovernmental plans, mostly because the plan must preserve all of the rights protected by Code section 411(d) (including, for example, the right to receive the accrued benefit as a defined contribution account) with respect to the transferred money. However, because governmental plans are not subject to Code section 411, they can more readily provide for transfers. The real limitation on this practice, clearly, is that state and local governments that do not already have 401(k) plans are not allowed to adopt new ones. That is why the opportunity to transfer money from 403(B) or 457(B) plans, rather than just qualified plans, to purchase service under a qualified defined benefit plan, will be so important.

My favorite story was the one I was told by staff of a governmental retirement system when they were discussing my doing some work for them. They said that they had also considered another firm. To try to figure out which firm would be best, they had posed a hypothetical question of law. They were able to rule out the other firm when its representative's answer started with, "The first thing you would have to consider is whether the employer would get a tax deduction for its contributions to the plan." Yikes!

If the employer is one subject to ERISA (e.g., not a governmental or church entity), a 403(B) plan to which nonelective contributions are made will be subject to Title I of ERISA. Lots of books have been written about this, but there is not really anything that could be summarized within the confines of a message board. If the employer is a governmental or church entity, the requirements are much simpler (especially starting in 2002, when the complicated "maximum exclusion allowance" rules of section 403(B) go away), the rules are much simpler. However, the benefits must still be provided through an annuity contract, or through a custodial account wholly invested in mutual funds. Usually, whatever provider you select for the annuity contracts and/or as the custodian can also provide you with plan documents that set forth the rules.

Not really. I have a list of state retirement systems at http://benefitsattorney.com/states.html. But in some instances, particular employers within a state maintain separate deferred compensation plans. And in others, state law other than that governing the statewide retirement system(s) will impose limits on the deferral of compensation.

Are we talking about 403(B) and/or 401(k) plans that also have employer contributions, or employee-deferral-only plans? The rules are complicated enough that I'd like at least to narrow down what we are talking about before trying to describe the rules.

Yes, if s/he goes to work for a new employer that has a non-ERISA 403(B) plan that accepts such rollovers.

Many governmental entities use standard form 401(a) plan documents (volume submitter or otherwise) that were developed for nongovernmental entities. There are, however, a couple of problems with this approach. One is that governmental 401(a) plans are exempt from all of ERISA other than the Internal Revenue Code rules, and are even exempted from many of the Code 401(a) rules that would apply to private plans. (You can click here for a chart describing the differences.) Thus, if a governmental entity adopts a 401(a) plan intended for private employers, it is probably taking on obligations from which it would otherwise be exempt. In some instances, it can be difficult to figure out later how these obligations could be fulfilled. For example, because governmental plans are not subject to prohibited transaction rules administered by the Department of Labor, they cannot get exemptions from such rules. If a plan document obligates a governmental entity to comply with ERISA prohibited transaction rules unless it obtains an exemption, the governmental entity may actually end up more restricted in its investments than a private plan would be, because it has subjected itself to the ERISA prohibited transaction restrictions without being able to get an ERISA exemption from those restrictions. Second, state and local law are not preempted by ERISA in the case of governmental plans. Thus, a plan intended for adoption by private plans may fail to comply with applicable state and local law rules. It's a tough choice for many smaller governments. For a small governmental unit, adopting a standard form document may in some instances be the only way to have a plan at any reasonable cost. However, there are obvious risks associated with this approach.

To the best of my knowledge, the IRS has never commented. And, as you say, it is hard for the IRS to do much if the employer and the employee both agree to the distribution. The real risks would be that (a) an employee who did not agree to receive a distribution right away would be taxable on that distribution anyway, and (B) that employee might assert a contractual right under applicable state or local law to have the distribution (and therefore the tax) deferred. Obviously, the success of any such argument would depend a lot on the facts, and the provisions of applicable state and/or local law.

I believe that it does. And in my experience, a great many governmental plans are not aware of the subtleties of 415--they just figure that if the annual benefit does not exceed the amount set forth in the statute, they are okay. However, in many instances a plan will provide for a lump sum (e.g., of a DROP benefit), the return to a survivor of employee (after-tax or picked up) contributions, or other features that would require the adjustment of the 415(B) amount.

Why would corrected Forms W-2 need to be issued, if the amount is not (under the technical advice memorandum) treated as part of "wages" for reporting or withholding purposes?

I think that there is discussion of this in the legislative history. However, I'm afraid I don't have an exact citation for you. Does anyone else?

This will be permitted from governmental 457(B) plans, but not from 457(B) plans of nongovernmental tax-exempt organizations.

I have not heard of a teacher's group opposing such audits. Indeed, such audits are usually in the interests of the teachers or other covered employees as well as the employer. Not only do they directly help to ensure that the plan will not be attacked by the IRS, but they are often the occasion for reviewing the plan generally, which may result in consideration of things like more flexible investment options.

You might want to click on this link: http://benefitslink.com/boards/index.php?showtopic=11921 or http://benefitslink.com/boards/index.php?showtopic=2055 Although these refer specifically to 403(b) plans, the rules should be the same for 401(k) plans.

Are you talking about a 457(B) plan for the top-hat group, plus a 401(a) for the rank and file employees, or about funding a 457(B) plan through a 401(a) trust? You could definitely have a 457(B) plan limited to a top-hat group, plus a 401(a) plan for all employees, assuming that nothing in applicable state or local law prohibited it. A governmental 457(B) plan can be funded through a trust, but it's typically a 457(g) trust, not a 401(a) trust. In theory, you could set up a group trust under Rev. Rul. 81-100 that would be a 401(a) trust, and that would in turn hold moneys of a 457(g) trust as permitted by Code section 401(a)(25). However, the second layer of trust is useful only in certain limited investment situations. Finally, because 401(a) plan of a state or local government is not subject to nondiscrimination rules (see section 401(a)(5)(G)), you could in theory set up a 401(a) plan only for a top hat group, or that had special benefits for a top hat group. However, this is a very sensitive issue among governmental plans. Congress gave the 401(a)(5)(G) exemption because it was convinced that political pressures would make it unlikely that a governmental plan would in fact seriously discriminate in favor of the top paid employees. Many governmental plans are concerned that if 401(a) plans for top hat groups became wide-spread, Congress would repeal the exemption.

Hmm, I'd say the answer would be a firm "maybe." Going from a non-ERISA plan (either non-ERISA because the employer is a church or governmental entity, or non-ERISA because it is salary-reduction only and meets the other Labor Department tests for not being subject to ERISA) is one of the least explored areas in this whole area of law. I have long wished for guidance on whether the new ERISA rights apply to all money for all participants, or only to persons who have an hour of service after the transformation, or only to money contributed after the transformation. And as far as I've been able to make out, there simply has not been any guidance on this issue.