Carol V. Calhoun

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.

Is the employer a governmental or nongovernmental entity? If the employer is nongovernmental, the 457 plan cannot be funded. Thus, the payments from the disability plan would go to the employer, and would be treated the same as if the employer had made further deferrals under the 457 plan. Then the question was whether the disability payments themselves would be treated as Form W-2 compensation from the employer (which is part of includible compensation). I haven't looked at this lately, but my recollection is that sick pay paid directly from a third party insurer to an employee is treated as income to the employee but not as W-2 compensation from the employer. Rather, it would fall under separate "sick pay" withholding rules. This could cause difficulties in treating it as part of includible compensation. However, if the employer is governmental, the plan would be required to be funded. In that case, the disability insurance would be a plan asset. PLR 200031060 held that disability insurance was an appropriate investment of a 401(k) plan, subject to the incidental benefit rule, so I would assume that a 457 plan could also hold it. It also treated disability insurance payments as not being additional contributions to the plan, but rather as an investment return, which would mean that the employee's absence of includible compensation would not be an issue.

Thanks for your input, MWeddell! Obviously, this doesn't necessarily take care of any state law issues caused by late amendments, but it at least means that the IRS won't be knocking at the door of the late amenders.

It's the very fact that it is a new 401(k) arrangement that means it must be a money purchase plan. It could either be added to their existing money purchase plan, or adopted as a new money purchase plan. If it were old enough to be grandfathered, it would have to have been a profit-sharing plan, unless it were old enough to be a pre-ERISA money purchase plan. Don't ask me why rural cooperatives are required to format their new 401(k) plans as money purchase plans, while everyone else is forbidden from doing so! :confused:

For those whose browsers can't handle pdf, or who just prefer not to download large pdf files, Publication 571 is now available as a standard Web page. You can get to it by clicking here. Of course, the usefulness of this publication is somewhat limited by the fact that it does not include the EGTRRA changes effective in 2002. It does, however, include the EGTRRA changes that were effective for 2000 and 2001.

403(B) plans are not explicitly given a remedial amendment period. Thus, the safest course would be to amend them before the beginning of the period to which the changes relate. And in the case of governmental plans, even that may be a problem under applicable state constitutional provisions or statutes. I can foresee this becoming a big issue, and wonder whether the IRS is considering some relief in this area.

It is not clear that corrected W-2s need to be issued. See Technical Advice Memorandum 199903032, in which the IRS held that although accruals under plan would be includible in the participants' income under section 457(f), they would not be included in wages for withholding purposes before the participant actually received them. Of course, this seems to create a big mismatch between income tax withholding/W-2 reporting and personal income taxes.

Yes, a rural cooperative's 401(k) plan not only can but must be a money purchase pension plan if the rural cooperative does not have a grandfathered 401(k) plan. Code section 401(k)(1) reads as follows: Thus, although most employers can have a 401(k) arrangement only in a profit-sharing or stock bonus plan, a rural cooperative can have one in the context of a pension plan. Moreover, the definition of a "rural cooperative plan" is

Even if you did that, there is a serious question about whether existing money could be moved from the existing annuity or custodial account under the 403(B) plan to the trust under the 401(k) plan. See my note on this subject elsewhere on this board.

Even if putting new money into a 401(k) plan is permissible, it is not clear to me that you can modify a 403(B) plan with respect to the old money to make it into a 401(k) plan. Although the new law permits rollovers of money from a 403(B) to a 401(k), a rollover requires that there be a distributable event, and the termination of a 403(B) plan is not in itself a distributable event. That leaves the question of whether the money could be directly transferred from one plan to another at a time when no distributions/rollovers could be made. The only direct transfers permitted under the new law from a 403(B) to a qualified plan must be (a) to a defined benefit plan, and (B) for the purchase of service credit. Thus, a transfer to a 401(k) plan would not qualify.

Like many questions involving privatization, this one does not have a clear answer. Clearly, the hospital cannot go on making contributions to the 403(B) plan. However, because termination of a 403(B) plan is not a distributable event, the hospital may nevertheless have an obligation to go on holding the old money, unless it can structure the 403(B) contracts so that they are owned individually by the employees.

Using a 457(B) plan to satisfy the requirements should not be a problem. Of course, to the extent that deferrals under the 457(B) plan are elective, an employee would in effect be able to elect into Social Security by declining to make contributions.

Using a 457(B) plan to satisfy the requirements should not be a problem. Of course, to the extent that deferrals under the 457(B) plan are elective, an employee would in effect be able to elect into Social Security by declining to make contributions.