Carol V. Calhoun

Okay, to recap: Physican works for University (clearly no control). Physican works for VA (again, clearly no control). Physican works for "Other" (may or may not be not for profit, and you do not specify who controls it). Physican has Schedule C income (from unincorporated 100%-owned private practice, and/or expert witness fees). Further assume that the University has both a 401(a) plan and a qualified plan; that each of the University, the VA, the physician's unincorporated business, and "Other" has a qualified plan; and that there is no relationship between the University and the VA. For purposes of applying the limit of 415© in the year 2002 (i.e., the lesser of $40,000 or 100% of compensation), the following plans would be combined: The University's 401(a) plan would not be combined with the 403(B), no matter what, because the physician is not in control of the university, and the 403(B) is always treated as a plan of an entity over which the physician has control. The VA's qualified plan would not be combined with either of the University's plans, or with the physician's Keogh plan, because there is no common control between the VA and either the University or the physician. The qualified (Keogh) plan the physician sets up based on his or her Schedule C income will be combined with the University's 403(B) plan, because the Keogh plan is maintained by a business over which the physician has complete control. The qualified plan maintained by "Other" will be combined with the University's 403(B) plan and with the Keogh plan only if the physician has control or is considered under 414 to have control over "Other" (e.g., if "Other" is an incorporated business, and the physician is a 50% shareholder of "Other"). The qualified plan maintained by "Other" will be combined with the University's qualified plan only if "Other" is part of the same controlled group as the University (e.g., if "Other" is a taxable research subsidiary of the University, or a tax-exempt organization with the same Board of Directors as the University). The qualified plan maintained by "Other" will be combined with the VA's qualified plan only if "Other" is part of the same controlled group as the VA (e.g., if "Other" is an instrumentality of the VA). The qualified plan maintained by "Other" will not be combined with any other plan if "Other" is a business completely independent of the physician, the University, and the VA (e.g., a publicly traded corporation). For this purpose, I am using "control" to mean any relationship described in Code section 414(B), ©, (m), or (n). Thus, my examples, above, are all merely examples, not complete statements of what relationships will give rise to control. I hope this makes things clearer. At the very least, it is obvious that the elimination of the maximum exclusion allowance has not necessarily made this area clear and simple.

The former is correct. Maybe I need to get another cup of coffee before I start writing too hard?

EGTRRA adds new Code section 415(k)(4), which confirms the continued existence of the rule in section 415(e) before its repeal: that a 403(B) plan is combined with a Keogh or other qualified plan of an employer controlled by the participant, but not by a qualified plan of the employer that sponsors the 403(B) plan, in applying the 415© limits. For pre-EGTRRA periods, there is an exception if a participant makes a C election. However, the C election will no longer exist beginning in 2002, since the maximum exclusion allowance is being repealed. Thus, a 403(B) plan will never be combined with a qualified plan of the employer which sponsors the 403(B) plan.

I don't think so, so long as the benefit remains forfeitable (as it has to be for a 457(f) plan). Under section 402(B)(1), Under section 83,

If the funds are actually distributed, they will be subject to both tax and any early withdrawal penalties. (The penalties would apply only to the extent that the distribution consisted of amounts attributable to amounts from qualified plans, 403(B) plans, or IRAs.) However, the constructive receipt rule is abolished. This means that amounts either left in the 457(B) plan, or rolled to an IRA or other plan, will not be subject to either the tax or the penalty. The new rules, however, apply only to distributions in 2002 or later. Thus, for example, if you are subject to tax on a distribution paid in December, 2001 (either because it is actually received, or because the participant had the unconditional right to receive it), you will not be able to avoid the tax by rolling the amount over in January, 2002.

Thanks for the citation, Ralph--I knew it was out there, but didn't have it handy at the time. (I know, after this many years, I ought to have the whole Internal Revenue Code memorized--but then again, they keep changing it on me.)

Yes, it is exactly the same, except that (a) the ACP test does not apply to church plans, or plans of state and local government, and (B) the ADP test does not apply at all to 403(B) plans, but they are subject to a separate "universal availability" rule under 403(B)(12).

You are right, contributions are not supposed to be able to be picked up if the employee has any right to receive the amount in cash rather than having it contributed to the plan. However, the IRS has taken a liberal position in a number of recent private rulings, holding that, for example, if an employee makes a one-time irrevocable election to purchase service credit under a DB plan, the cost of that service credit can be treated as picked up. Perhaps this would be a way to go about getting the contributions to be tax-deferred, especially given that USERRA provides for making up the contributions over a period set forth in the statute. Of course, private rulings aren't binding on the IRS unless they are actually issued to the particular taxpayer, so some caution may be indicated.

I agree with you. The requirement of a trust is found in 457(g), which applies only to 457(B) plans, and therefore would not apply to a 457(f) plan. At the same time, some employers may want to set up trusts under 457(f) plans. (Or perhaps it would be considered a 402(B) plan if it had a trust.) The thinking is that if you have to impose forfeitability requirements to avoid taxation anyway, why not give the participant the additional security of a funded plan?

Good question! Rollovers to other types of plans are limited to governmental 457(B) plans. However, before EGTRRA, direct transfers from one 457(B) plan to another were allowed. Does anyone have thoughts on whether one can still transfer from a private 457(B) plan to a governmental 457(B) plan? And if so, is any separate accounting required to prevent the governmental plan being used as a conduit for an otherwise impermissible transfer from a private 457(B) plan to a 401(a) or 403(B) plan?

Almost everything will be optional (and may require new plan language to implement). The two exceptions are (1) the new tax rules--penalties on early distributions and new rules for the taxation of distributions--for 457(B) plans, and (2) the requirement that a plan transfer the amount of a distribution eligible for rollover to another plan at the participant's election. There's an outline available at my site, which you can see by clicking on this link.

Here's a link to the IRS announcement that governmental retirement plans do not have to file Forms 5500. Note, however, that it applies only to retirement plans; it appears that a governmental flex benefits or premium conversion plan may have to file Forms 5500.

It would appear that the answer is no. I.R.C. § 25B, as added by Section 638 of EGTRRA, gives the tax credit only for qualified retirement savings contributions. Qualified retirement savings contributions are defined as follows: This language would not appear to include picked up contributions.

You may want to contact both the DOL and the IRS in advance of filing, without identifying your client, and see whether you can work out an arrangement with them. In the old days, the agencies used to be pretty lenient with people who did this, figuring it was best to encourage them to file late than to have them to concerned about penalties to file at all. It's not clear whether now that DOL has the DFVCP program, it will simply expect everyone to use it. But your client does not lose anything by having you explore this on a no-names basis. And having some idea of how the agencies are likely to react may help your client to assess its options.

The NTSAA indicates that the new booklet should be available by 12/1/2001. At that point, you should be able to see it by going to http://www.ntsaa.org/compliance.html and following the instructions.

I think that some of the issue here may be the definition of "recent." To some of us old-timers, 403(B)(12) itself seems like a recent development. (Sorry, folks, just had another birthday, and have been reminded by my children that I really am older than the dinosaurs!) However, you are right that federal law is not necessarily clear on exactly when an employee who changes status becomes eligible/ineligible for the exclusion. For example, in determining whether someone "normally" works more than 20 hours a week, do you treat them as in the excluded category the very week that they switch from a 40-hour a week position to a 15-hour a week one? Or do you look at the issue on a year-by-year basis, treating them as eligible for a particular year if their hours averaged more than 20 per week for that year? The IRS examiners often seem to take an informal position that individuals who work less than 1,000 hours a year (20 hours per week times 50 weeks) can be excluded. However, on a practical basis, this may cause problems inasmuch as a decision on participation must be made before contributions can begin, and it may be unclear until the end of the year whether the 1,000 hours requirement will be met. As a practical matter, we tend to suggest that employers err on the side of letting in as many people as possible. Since employers are permitted (though not required) to include those who work less than 20 hours a week, letting them in will not cause problems under federal law, while keeping them out in uncertain situations might.

I don't think that there is any universal answer to this; a lot depends on the type of plan, and the circumstances. For example, many defined benefit plans do not normally allow rollovers, but may permit them for the limited purpose of purchasing prior service credit. Under these circumstances, the plan may for administrative reasons refuse any rollover or transfer which is not in the exact amount necessary to purchase a particular unit (e.g., one year) of service credit. After-tax contributions may be an issue if the plan does not otherwise allow them, because the plan may not have set up mechanisms to differentiate between pretax and after-tax contributions upon ultimate pay-out. In other circumstances, however, a plan may want to provide the maximum flexibility to employees, and may have the administrative capabilities to do so. And of course (I'm sounding like a broken record here!), you would have to look at applicable state and local law to make sure that they did not impose restrictions beyond those imposed by federal law. I am informed, for example, that some state laws limit the rollovers that can be accepted to rollovers from other qualified plans, in accordance with federal tax law prior to EGTRRA. This may prevent rollovers from 403(B) or 457 plans, even if federal law would otherwise allow them.

Sorry, I started typing without fulling engaging brain. And between terrorism (my office is 2 blocks from the White House) and tornados, I've been a bit absent here lately. You're right, Ralph, and I have edited my post to clarify that only the Medicare portion of FICA taxes, not the Social Security portion, would be due if (a) the entity is not subject to a Section 218 agreement and (B) the plan meets the requirements for being a substitute for Social Security.

Nope, you're not missing anything--I'm just trying to fit way too much information into a reasonably small chart. But I've added it in now. Here's the link.

There has always been a question in my mind as to whether picked up contributions to a defined benefit plan should be treated as employer contributions (and therefore that the plan would have to pay the benefit without the employee making up the contributions) or employee contributions (which the employee would have to make in order to get the benefit) for USERRA purposes. However, for what it is worth, I was recently told by a staff member of one of the state retirement systems that their local Department of Labor office was taking the position that picked up contributions (at least, in a salary reduction context) were being treated as employee, not employer, contributions for USERRA purposes. Note, however, that the question of whether the employee must receive the benefits without making contributions, and the question of whether the employer must make the contributions are not necessarily linked. For example, in some plans, the employer is required only to make a contribution equal to that made by the employee. Thus, if the employee were entitled to an additional benefit due to USERRA, without making a contribution, the employer would not necessarily be required to make a contribution either. In effect, the additional benefit would merely be an additional actuarial liability of the plan, to be satisfied ultimately by contributions made to the plan by all contributing employers, not specifically the employer of the USERRA-covered employee. To the extent that this is not the desired result, applicable state or local law and/or the plan document may need to be modified.

One caveat here--although applicable state and local law, and the plan document, define compensation for purposes of calculating a contribution formula (e.g. , if contributions can be made only in multiples of 1% of compensation), the Internal Revenue Code defines compensation for purposes of the exclusion allowance (through 2001) and section 415 limits. For this purpose, non-picked-up employee contributions would be part of compensation, but picked up employee contributions would not.

Just to clarify, a state or local governmental entity cannot establish a 401(k) plan if it doesn't already have one. (Figuring out whether it already has one can be difficult, since the definition of employer in a governmental context is often unclear, but this is the general rule.) This rule is not affected by whether the state or local governmental entity is also a 501©(3).

The employer contributions are automatically tax-deferred for federal income tax and federal income tax withholding purposes, and exempt from Medicare taxes. The employee contributions will normally not be tax-deferred. Through an arrangement known as a "pick-up" arrangement under Internal Revenue Code section 414(h)(2), they can be made to be tax-deferred for federal income tax and federal income tax withholding purposes. Check revenue rulings and private letter rulings under Code section 414(h)(2) for details and specific requirements. Regardless of whether a pick-up arrangement is adopted, however, the contributions will be subject to Medicare taxes under Code section 3121(v).

Whether they can opt out depends on how they ended up in Social Security in the first place. If they got in due to a Section 218 agreement, they cannot now opt out. However, even in the absence of a Section 218 agreement, a state or local government is now required to cover under Social Security any employee who is not covered by a retirement system that meets certain regulatory requirements. Because that test is performed on an employee-by-employee basis, a governmental entity that is not covered by a Section 218 agreement can in effect opt out of Social Security by covering its employees under a plan that meets the requirements. For more information, you can view the regulation by clicking here.

No, they are not. Governmental entities obviously are not concerned about the deductibility of contributions, as they are tax-exempt. And IRC section 4972(d)(1)(B) exempts governmental plans from the excise tax on nondeductible contributions. The only thing you need to watch out for is whether applicable state or local law imposes funding rules on the plan. However, such laws are much more likely to impose minimums (e.g., the New York State & Local Retirement Systems had some trouble with PUC for that reason some time back) than to impose maximums.