Carol V. Calhoun

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.

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).