Carol V. Calhoun

Outside of the governmental context, section 401(m) imposes nondiscrimination rules on employee contributions. However, in the governmental context, the annual additions limit in 415© is really the only limit on voluntary after-tax contributions.

It depends on the terms of the plan. In some cases, employees may elect to waive participation in the plan (e.g., in order to have a deductible IRA. In others, all employees participate.

From what I can gather, the IRS has not been anxious to enforce section 105(h) for any employers, much less governmental ones, after the fiasco with (now repealed) section 89. However, there is not a specific exemption for governmental plans.

You'll need to check with your employer, as the ability to transfer is discretionary with the employer.

A lot of governmental plans never file for determination letters. In most instances, this is because they are imposed by statute, and there is doubt whether changes to the statute required by IRS as a condition to qualification can be adopted within 90 days after issuance of a determination letter (as is required in order to have any favorable determination given effect). However, those plans which have previously routinely received determination letters (in general, those which do have the ability to adopt the necessary amendments in a timely manner) do appear to be filing again this year.

The major issue is that so long as the plan stays open, it will have to comply with new statutory and regulatory changes in order not to lose its qualified status. There may also be issues under applicable state and local law. Note that assets cannot revert to the employer unless the plan document so provides. However, unlike in the case of private employers, the provision does not have to have been in the plan for a certain period before plan termination. If you want to revert assets to the employer, and if this is permitted by applicable state and local law, you will need to make sure that the plan document is timely amended. Otherwise, termination is a relatively straightforward process. You may want to get an IRS determination letter on the termination, although that is not required. And whatever entity has authority to amend the plan must adopt a resolution terminating it.

457 plans are not subject to the 415 limits at all. Thus, they would not be aggregated with the 401(k) plan in applying the 415 limits.

You'd need to look at the plan document (which may consist of a statute, rules, and/or some other document(s)), and applicable state and local law. However, in most instances, a plan has a procedure for naming a beneficiary other than the estate. If this plan does, and if the procedure was followed, the money would go to the named beneficiary.

Here's what I've come up with so far, in terms of GUST changes other than USERRA which apply to defined benefit plans of local governments. Of course, not all of these require plan amendments, as some of them are merely changes in the effect of certain events: New or Amended Provision: A plan is not required to obtain a copy of a determination letter in order to treat a rollover as from a qualified plan. Effective Date: Rollovers made after December 31,1997 Statute and Guidance: TRA '97 § 1509, Prop. Treas. Reg. § 1.401(a)(31)-1, Prop. Treas. Reg. § 1.401©-2 Law: TRA '97 New or Amended Provision: Defined contribution/defined benefit aggregation under Code § 415(e)repealed Effective Date: Post-1999 limitation years Statute and Guidance: Code § 415(e) Law: SBJPA New or Amended Provision: Change in required beginning date to April 1 following the later of (a) the year in which the employee attains age 70½ or (B) the year in which the employee retires Effective Date: Post-1996 plan years Statute and Guidance: Code § 401(a)(9)©, Prop. Treas. Reg. § 1.411(d)-4, Q&A 10, Notice 96-67, Ann. 97-24, Ann. 97-70, Notice 97-75 Law: SBJPA New or Amended Provision: 10% early distribution penalty does not apply to tax levy distributions Effective Date: Tax levy distributions after December 31, 1999 Statute and Guidance: Code § 72(t)(2)(A)(vii) Law: RRA '98 New or Amended Provision: Five-year income averaging for lump sum distributions is repealed Effective Date: Post-1999 plan years Statute and Guidance: Code § 402(d) Law: SBJPA New or Amended Provision: 15% excess distribution/excess accumulation taxes repealed Effective Date: Distributions received or deaths after December 31, 1996 Statute and Guidance: Code § 4980A (repealed) Law: SBJPA, TRA '97 New or Amended Provision: Compensation definition: (a)Code § 415 definition of compensation includes deferrals and cafeteria plan reductions, though not 414(h)(2) pick-ups, (B) plan may elect not to include deferrals and cafeteria plan reductions for purposes of Code § 414(s), © family aggregation is eliminated, and (d) compensation limit is $160,000 for 1997 and 1998, and indexed thereafter Effective Date: Post-1997 plan years Statute and Guidance: Code § 415©(3), Code § 414(s)(2), Code § 401(a)(17) Law: SBJPA New or Amended Provision: "Leased employee" definition changed to one who is "under primary direction or control by the recipient" Effective Date: Post-1996 plan years Statute and Guidance: Code § 414(n)(2)© Law: SBJPA New or Amended Provision: $5,000 death benefit exclusion repealed Effective Date: Decedents dying after August 20, 1996 Statute and Guidance: Code § 101(B) Law: SBJPA Anyone got any additions or corrections to this?

Since vacation days are not an ERISA-covered benefit regardless of whether they are for a governmental or nongovernmental employer, this would depend on the employee's contract, and applicable state and local law.

How about Treas. Reg. § 1.414(l)-1(a)(1), which states as follows: Sections 401(a)(12) and 414(l) apply only to plans to which section 411 applies without regard to section 411(e)(2). Since a governmental plan is not one of those plans, section 414(l) does not apply to it.

Code section 414(l) is not applicable to governmental plans. Code section 401(a)(12) is the section which makes 414(l) applicable to most qualified plans. However, the flush language at the end of Code section 401(a) states that 401(a)(12) does not apply to governmental plans. As far as the "Joint Guidelines" go, there is no specific authority as to the extent to which they apply to governmental plans. Clearly, they are not 100% applicable, since they reference Titles 1 and 4 of ERISA, and Code sections 411 and 414(l), none of which apply to governmental plans. Nevertheless, governmental plans are subject to the pre-ERISA Code section 401(a)(7) requirement of full vesting upon plan termination (see Code section 411(e)(2)), and the Joint Guidelines may be useful in interpreting that section to the extent that it corresponds with present-day Code section 411(d)(3). You can click here to see more about which Code sections do and do not apply to governmental plans.

There are really two ways to deal with this one, and a lot depends on what the plan document says. In some instances, a 457 plan will either be funded through an annuity contract, or will purchase a 10-year annuity. In that case, an insurance company or other contract issuer promises to pay a certain amount each year for 10 years in exchange for the total value of the account. At that point, there is no amount left after the 10 years are up, because the contract issuer's obligation is complete. The second, and more common, alternative is to have the contract pay out 1/10 of its total value in year one, 1/9 of its total value in year two, etc. In that case, 100% of the remaining value is paid out in year ten.

The plan will be subject to ERISA unless the hospital is a governmental or church entity as well as being a 501©(3) organization. And if it is subject to ERISA, you've undoubtedly got some pretty massive compliance issues if, as seems likely, no one realized that it was a nongovernmental plan. You can click here for a list of the Internal Revenue Code qualification rules which are different for governmental plans than for ERISA-covered plans -- and that list does not even include ERISA rules such as 404© which do not have counterparts in the qualification rules. The hospital is going to need to consult an attorney, pronto -- both to fix the plan and trust documents for the future, and to make decisions as to whether to participate in IRS and/or Department of Labor corrective programs. This is way too big an issue to be resolved through this board, but there are corrective programs which can at least cut down on the penalties.

The employer should be withholding Social Security taxes on those employees who are not covered by a safe harbor plan, and paying the employer's share of Social Security taxes on such employees. What to do if the employer does not meet its obligation in that regard is a major can of worms, which I don't think I can get into within the confines of a general message board.

They must be covered by Social Security. There are regulations which say that coverage is measured for each employee, rather than overall for the employer. Some employers are specifically adopting separate safe-harbor-only plans for employees not covered by the regular retirement system, in order to deal with this issue.

It may depend on which "they" we are talking about--the beneficiaries, the other children, or the plan's fiduciaries. Also, in general, a "mindset" is not legally binding, so a lot may depend on whether the beneficiaries want to accommodate the rest of the children. (Another lesson in why people should engage in estate planning...) If this is an ERISA plan, ERISA would preempt state law on wills, trusts, and pretty much everything else aside from the annuity contract itself. Thus, in the absence of a disclaimer, the plan would pay to the two beneficiaries who were named. It would then be up to them to share the money with the other beneficiaries, if they wanted to or were forced by a court to, but it would not be the plan's problem. If the plan is an ERISA plan, and the two beneficiaries disclaim their interests, you would have to look at the plan terms and/or the terms of the annuity contract to see who would take in the absence of a beneficiary. State law would still not apply to the plan. If the plan is a non-ERISA plan (governmental or church plan, or salary-reduction-only plan which meets DOL requirements for not being subject to ERISA), then state law could theoretically apply. However, although I have not examined the particular state laws here, state probate law is seldom applicable to insurance contracts which pay directly to a beneficiary anyway. Thus, you would probably still be looking at the contract terms. Of course, if the beneficiaries receive the money, and then pass it on to others, the beneficiaries would be taxable on the distributions. Presumably, this would be taken into account in figuring out the share of each beneficiary.

No. This requirement is imposed by Code sections 401(a)(11) and 417, which are inapplicable to governmental plans. Treas. Reg. § 1.401(a)-11(a).You can click here for a more thorough discussion of which qualification requirements do and do not apply to governmental plans.

I would agree with your reading of the federal statute. From my experience, the reason that 457 plans so often permit emergency withdrawals and employee elections of distribution forms has to do with an employee relations perspective that this is "the employee's money," rather than with any particular legal requirement. Of course, you would need to consult applicable state and local law, as well as federal.

If the defined benefit plan is being terminated, employees could be given a chance to take their benefits in the form of either cash or annuity contracts. Under Code section 401(a)(31), employees could then choose to have the cash directly rolled over to any qualified plan or IRA which permitted rollovers. Provided that the 401(k) plan permitted (or was amended to permit) rollovers, the employees could elect to have the money transferred there. However, a direct transfer without the employee's consent could raise some issues. In a nongovernmental context, the right to receive a defined benefit rather than an account balance is treated as a protected benefit under the section 411 regulations. That is not true with respect to governmental plans (since they are exempt from most of section 411 under section 411(e)(2)). However, you indicate that the hospital has already been bought by the for-profit. If the for-profit has taken over the plan, it would presumably have become subject to section 411. Even if it has not, the rules for what happens if a governmental plan transfers to a nongovernmental plan are murky indeed.

Prop. Treas. Reg. § 1.125-4(f)(2) permits a premium conversion section 125 plan to make adjustments under such circumstances in one of two ways. The plan can be set up so that the salary reduction agreements under the premium conversion plan are automatically adjusted to take into account the increase or decrease or cost. Alternatively, if the cost significantly increases, the employer can permit employees to make a choice either to have their salaries reduced by the new premium amount, or to revoke their elections and, in lieu thereof, to receive on a prospective basis coverage under another benefit package option providing similar coverage. The proposed regulations state, however, that these options are not available under a health FSA, but only under a premium conversion option. Thus, it is important to keep the premium conversion feature as a separate election, not as part of a general health FSA, if this option is to exist.

Yes. (Is that black and white enough for you? ) Code section 457(B) permits either a state or local government, or a tax-exempt organization, to maintain a 457(B) plan. However, the 457(B) plan of a tax-exempt nongovernmental employer's plan is required to be unfunded under section 457(B), while that of a governmental employer is required to be funded under 457(g). A tax-exempt organization will nevertheless often maintain a trust fund or annuity contract to hold 457 plan assets, but the trust fund or annuity must be set up in such a way as to be subject to the claims of the employer's creditors (e.g., a "rabbi trust"). Morover, because of ERISA restrictions, a nongovernmental 457 plan must be a top hat plan. By contrast, many governmental 457 plans cover rank and file employees.

I have not seen anything indicating that there is a specific regulations or rulings project in this area. However, I was told informally recently by an IRS official that there is some concern about the tax treatment of 403(B) arrangements in which employees are permitted to choose the level of contributions, but the maximum limitations of 402(g) are disregarded based on a theory that the participant's elections are one-time irrevocable elections not covered by 402(g). However, it appeared that the IRS is still at a very preliminary stage in considering that issue, so it is not clear what, if any, guidance will be issued in that area.

I'm afraid the reason that you are not getting responses is that there really is no law on this one. Also, the penalties for problems with a 403(B)(7) typically fall directly on the employer or the employees, not the custodian. Thus, whether the custodian had liability might depend in large part on the specific facts and circumstances as to what its contracts were with the employer and/or employees, and whether any argument could be made that it had agreed to indemnify them.

A 401(a) plan is typically for all employees, or all employees who are within a particular category (e.g., all teachers in a school). However, because state and local government plans are exempted from most nondiscrimination requirements by Code section 401(a)(5)(G), it is possible to have a 401(a) plan which covers only a single employee such as the superintendent. You can click here for a list of requirements which apply to governmental 401(a) plans.