Carol V. Calhoun

I seriously doubt that this has ever gotten an official IRS interpretation, given that few governmental plans are ever audited. However, I would tend to believe that it would have to be interpreted to allow the delay in amendment for all plans that could be amended by a legislature, whether or not they could also be amended by some other body. The reason for this is twofold. First, in many instances a nonlegislative authority may have broad but not complete rule-making authority, or the extent that of the body's rule-making authority may not be clear. Thus, there would need to be some flexibility to allow that body to defer to the legislature, even if in theory it might be able to make the amendments on its own. Second, in some instances, there is more than one possible way of implementing GUST provisions, and each might have different cost implications. Thus, a body that had authority to amend the plan might nevertheless want to leave such policy decisions to the legislature. Anyone else have any thoughts on this?

The Internal Revenue Code and ERISA rules that impose spousal consent requirements on private retirement plans do not apply to governmental plans. (You can click here for a list of the rules that do and do not apply to governmental plans.) Thus, spousal consent requirements, if any, would come from the plan document or from applicable state and local law.

The only reason I could think of would be that it was paying out on a distribution schedule based on the old rules, and did not want to have to recalculate distributions it had already calculated once.

The new rules apply to "distributions after December 31, 2001." EGTRRA § 641(f)(1). Thus, the plan year would be irrelevant. However, if the distribution occurred on or before December 31, 2001, the individual would not be able to roll it over, even if the rollover occurred after December 31, 2001.

For anyone who is interested, the new version of Publication 571 (issued June 2001) can be viewed by clicking on this link. It is not yet available as a Web page, just as a pdf file, so you will need to have the Adobe Acrobat reader (a free download) to read or print it.

Beth, I suspect that the TPA's attorney is not familiar with governmental plans, and is therefore unaware that governmental plans have a way (Code section 414(h)(2)) to permit pretax contributions that is not available to private plans. ADP testing is mandated only under 401(k), and therefore is not applicable to a plan that is not a 401(k) plan. IRC401, I'm still pondering those "mandatory voluntary" contributions!

Revenue Ruling 57-128, 1957-1 C.B. 311, set forth a 6-factor test for distinguishing between governmental and nongovernmental entities, as follows: [*]whether it is used for a governmental purpose and performs and governmental function; [*]whether performance of its function is on behal of one or more states or political subdivisions; [*]whether there are any private interests involved, or whether the states or political subdivisions involved have the powers and interests of an owner; [*]whether control and supervision of the organization is vested in public authority or authorities; [*]if express or implied statutory or other authority is necessary for the creation and/or use of such an instrumentality, and whether such authority exists; and [*]the degree of financial autonomy and the source of its operating expenses.[/list=1] Another factor we have seen used (although it is not set forth in the revenue ruling) include whether the entity has ever been found to be exempt from unemployment taxes as a governmental entity. To the extent that the application of these rules is unclear, you may want to review advisory opinions from the Department of Labor, or perhaps even consider requesting your own advisory opinion. The Department of Labor has issued quite a few such advisory opinions in recent years. One factor that it looks at quite intensively is the source of funding for the entity. The theory is that governmental entities are not subject to as strict funding requirements as other entities because they are assumed to be able to raise taxes if plan assets are insufficient to pay benefits. Thus, an entity that does not have power to impose taxes may have a hard time showing that it is governmental. (Ironically, the rules are of course the opposite in the case of 457 plans; a governmental entity must fund them, and a private entity is effectively forbidden from doing so.) The IRS and the PBGC also issue private rulings or opinions on the issue of whether a plan is a governmental plan. However, historically, the IRS has not cared, because either a tax-exempt or governmental entity can maintain a 457 plan as far as the Internal Revenue Code is concerned. This may have changed some with the passage of 457(g), but it still seems as though the Department of Labor has gotten more involved in these issues. And the PBGC will not care, because the plan is not a defined benefit plan. What you really want to know is whether the plan will be subject to ERISA Title I requirements, so the Department of Labor is probably the best agency to ask.

I'm not sure on this one. You might want to try it out on the church plans message board .

Actually, there may be a problem with the employer removing money at all from the 403(B)(7) plan, since the 403(B)(7) contract is owned by the employee. (This differs from a typical qualified plan, in which assets are held in a trust for the benefit of employees, rather than directly by employees.) In informal conversations with people at the IRS, I have been told that the IRS recognizes this difference, and will typically have the employer pay the 2% penalty for excess contributions provided in other situations under the VCR program, rather than requiring a return of the money to the employee.

Ellie and STLGiant, actually a state or local organization that had a 401(k) plan prior to 5/6/86 not only can keep its existing 401(k) plan, but can establish a new one (as a successor to the old one, for a different group of employees, or whatever). This was what the state of Idaho did in PLR 200028042 (April 19, 2000 ). Two Idaho state agencies had maintained 401(k) plans as of 5/6/86, so the state of Idaho was able to establish a new 401(k) plan, covering the employees of both state and local governments. This, of course, means that there is a big premium put on the definition of "employer," because an employer with a 401(k) plan can start a new 401(k) plan and/or can add new employees of the same employer to the 401(k) plan, but a state or local governmental employer without one cannot start a new 401(k) plan. In this connection, you might be interested in the "Fields letter ," an IRS general information letter that discussed the definition of "employer" in a governmental context. The Fields letter dealt specifically with 415 issues, but we have been successful in getting the IRS to apply it in other contexts.

No, ERISA coverage is not a precondition for offering a 401(k) plan. For example, a federal government agency, an international organization, a state or local entity with a grandfathered 401(k) plan, or a Native American tribe would not be subject to ERISA coverage, but could have a 401(k). Other state or local government entities are barred from establishing a 401(k) plan by the terms of 401(k) itself, not by their exemption from ERISA.

Barring contrary provisions of applicable state or local law, a school district can normally select which custodians to allow based on any criteria it chooses, and could elect only to allow those that will sign a hold harmless agreement. This is because technically, it is the employer, not the employee, who contributes to the plan. And as a practical matter, the school district may be much more willing to accept a hold harmless agreement from a custodian (which presumably has the assets available to pay if the IRS assesses employment taxes against the school district based on incorrect calculation of permissible contributions) than from an employee (who may not, and against whom it may be uneconomic to proceed legally in any event).

Hmm, I'm interpreting this a bit differently. It seems to me that a self-employed minister is always treated as if s/he were employed by a tax-exempt organization and therefore eligible for a 403(B) plan. (Paragraph 2 of the eligibility rules for ministers.) A minister who is employed, rather than self-employed, is eligible for a 403(B) plan under one of two circumstances: [*]If the minister is employed by a 501©(3) organization, s/he can participate in the 403(B) plan of that organization. (Paragraph 1 of the eligibility rules for ministers.) [*]If the minister is employed by an organization that is not a 501©(3) organization, s/he can set up his or her own 403(B) plan if s/he functions as a minister, and does not share common religious bonds with the employer. (Paragraph 3 of the eligibility rules for ministers.)[/list=1] The question here is the definition of the word "employed." You refer to a self-employed minister who is employed by an organization that is or is not a 501©(3) organization. However, someone who is self-employed is, by definition, not "employed" by anyone other than him/herself.

One of many questions regarding transition of entities between governmental and private status to which there is no clear answer. I also wonder whether it makes any difference whether the entity had the plan as of the grandfather date, even if it wasn't governmental as of that date? We've seen it go the other way, too--a governmental entity becomes privatized, and the question is whether the plan then becomes subject to ERISA.

Currently, only transfers (no rollovers) are permitted between 457 plans. However, that will change next year, due to the recent tax bill.

A 401(k) plan is currently (with very limited exceptions) unavailable to employees of a state or local government unless the "employer" sponsored one before a transitional date set forth in the statute. A local governmental entity can sponsor a 457(B) plan. If it is a public school or university, or a governmental instrumentality that has obtained status as a 501©(3) organization, it can sponsor a 403(B) plan. And in some instances, it can sponsor a simplified employee pension ("SEP"). There are other types of plans available (e.g., a defined benefit plan, a profit-sharing plan, or a money purchase pension plan. But the ones set forth above are the primary ones that allow employees to make elections as often as annually to make pretax contributions.

Rollovers are not optional for the distributing plan. Section 641 of the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGATRRA") imposes the Internal Revenue Code section 401(a)(31) rules on section 457(B) plans. However, they are optional for the receiving plan. If the individual's new employer plan does not accept rollovers, the individual can still roll 457 money to an IRA, but cannot force the new employer's plan to accept the rollover.

Hmm, but that would exclude all governmental plans, even those that are qualified within the meaning of Internal Revenue Code section 401(a). ..

See my other message on this. A lot depends on whether the plan sponsor elects to amend the plan to permit new elections, which it is under no obligation to do. Moreover, as a practical matter, you are right that an employer likely cannot get the money back if it has purchased a life annuity, and therefore is not going to amend the plan to permit changes of elections in those instances.

That is a good question. We've had some discussions in my office about it. The issue is that all elections on termination of employment in the past under 457 plans have been irrevocable. The question is whether their prior irrevocable elections have now become revocable, or whether the new rules apply only to new elections. Although the statute is not entirely clear, it appears to us that after the effective date of EGATRRA, an employer could amend the plan and allow an employee to revoke the old election and make a new one. However, the employer is under no obligation to do so. Thus, a lot depends on what employers decide to do.

You're right, a transfer from a 403(B) to a 401(k) can take place only if it is in the form of a rollover, which means that there must be some distributable event first. However, a 403(B) contract is typically owned by the employee. So unless the plan provides otherwise, an employee could elect to have money directly transferred from the existing 403(B) to another 403(B), without a distribution, even before termination of employment or other distributable event. Also, money in a 403(B) plan can be directly transferred, even during employment, to a defined benefit plan for the purchase of service credit, assuming that both the 403(B) plan and the defined benefit plan permit such transfers.

Yes, but the IRS really has no statutory basis to object to differing rules for part-timers in the case of governmental plans. State and local governmental plans are now completely exempt under Code section 401(a)(5)(G) from all of the rules prohibiting discrimination in favor of highly compensated employees, other than the universal coverage rule for salary reduction contributions under 403(B) plans. Other governmental plans are exempt from the minimum coverage rules, and will be exempt from other nondiscrimination rules until at least 2003. (See Notice 2001-46.)

It is not subject to Internal Revenue Code section 411, which contains the anticutback rules for private plans. However, the impairment of contracts language of Article I, Section 10 of the US Constitution has been held by many courts to impose an even more stringent anticutback rule on plans maintained by the federal government, or the government of any state or locality. Under this standard, not only must benefits already accrued be protected, but an employee may have a protected right to continue to accrue benefits in the future under at least as favorable a method as the most favorable one used for earlier periods of employment. Obviously, this is merely a general statement, and different facts or different courts may result in differing interpretations.

There is no specific maximum on pick-ups, as such. Rather, the limit is that if the pickup contribution is made to a defined benefit plan, the benefit generated by that plan cannot exceed the 415(B) maximum. If the pickup contribution is made to a defined contribution plan, the pickup contribution plus all other annual additions cannot exceed the 415© maximum.

The original question asked about HR 1836. The provision allowing for direct transfers of money from 403(B) or 457 plans (even without a distributable event) is in Section 647 of HR 1836, which reads as follows: The Conference Report contains the following language with respect to this provision: Thus, under the new law (effective for transfers after December 31, 2001), direct in-service transfers will be permissible for the limited purposes specified by HR 1836. This should be distinguished from the separate provisions in HR 1836 for rollovers from 403(B) or 457 plans to 401(a) plans (or vice versa), which do require a distributable event.