Carol V. Calhoun

This has been a continuing issue. Although governmental entities can have qualified plans (you can click here to see the requirements for one), governmental entities are exempt from many of the rules that apply to nongovernmental entities, and are covered by state laws from which nongovernmental entities are exempt. Thus, standard form documents do not cover them very well. Some governmental employers just use plans designed for private employers, but this may cause the governmental plans to be subject to rules that otherwise would not apply to them, to have plan documents that do not work very well (e.g., to require Department of Labor consent to certain kinds of transactions, when the Department of Labor will not get involved with transactions involving governmental plans), and to violate state laws that do apply to them. The only other alternative is an individually designed plan. However, this may not be feasible if few employees are covered.

This has been a continuing issue. Although governmental entities can have qualified plans (you can click here to see the requirements for one), governmental entities are exempt from many of the rules that apply to nongovernmental entities, and are covered by state laws from which nongovernmental entities are exempt. Thus, standard form documents do not cover them very well. Some governmental employers just use plans designed for private employers, but this may cause the governmental plans to be subject to rules that otherwise would not apply to them, to have plan documents that do not work very well (e.g., to require Department of Labor consent to certain kinds of transactions, when the Department of Labor will not get involved with transactions involving governmental plans), and to violate state laws that do apply to them. The only other alternative is an individually designed plan. However, this may not be feasible if few employees are covered.

State and local governmental qualified plans are totally exempt from nondiscrimination testing under Internal Revenue Code sections 401(a)(5)(G) and 410©(2). Other governmental plans (e.g., federal governmental plans and plans of international organizations) are potentially subject to nondiscrimination rules under current law. However, postponed the effective date of those rules for governmental plans, and the pension reform legislation which has now passed the House, and is pending in the Senate, would eliminate the nondiscrimination rules for all governmental plans.

mmagidson, you can find the summary of "Qualification Rules for Governmental Plans" by clicking on the following URL: http://www.benefitsattorney.com/appfa.html You're right, John. This is an illustration of why I put a disclaimer at the bottom of each page saying, "The speeches and articles reflect the state of the law at the time they are written, and the law may have changed since that time." The outline was written before Rev. Proc. 2000-27 (http://www.benefitslink.com/IRS/revproc2000-27.shtml), and does not reflect the new deadline, which is as follows: "The remedial amendment period for governmental plans, as defined in sec. 414(d), is extended to the later of (i) the last day of the first plan year beginning on or after January 1, 2001, or (ii) the last day of the first plan year beginning on or after the "2000 legislative date" (that is, the 90th day after the opening of the first legislative session beginning after December 31, 1999, of the governing body with authority to amend the plan, if that body does not meet continuously)."

Yes, Cindie Moore (Washington counsel for the National Council on Teacher Retirement) and I are coauthoring such a book. Still working on getting the last few chapters to the publisher.

Yes, Cindie Moore (President of the National Association of Public Pension Attorneys and Washington counsel for the National Council on Teacher Retirement) and I are coauthoring such a book. Still working on getting the last few chapters to the publisher.

I think that there may actually be an issue here, even with respect to ERISA-covered plans. Typically, the employee actually owns a 403(B) contract once it is purchased. Indeed, in many instances an employee will have a single contract, to which contributions are made by various employers over time. Thus, the employer may not have any contractual right to move money around among investments specified in the contract, or to cash in the contract and move the money elsewhere. Indeed, some of the money in the contract may have come from different employers. Under your theory, would each of the employers be responsible for redirecting the investments of the contract attributable to that employer's contribution? This is quite different from a trusteed plan, in which the trustee owns all the investments for the benefit of the participants, and therefore can move money from one to another. This would seem to be more comparable to a SEP-IRA type of plan (in which the employer contributes money to the employees' IRAs, but the employees own the IRAs and are responsible for directing the investments of the IRA after the money is contributed) than to a trusteed qualified plan. Although I would agree that the employer has fiduciary duties with respect to the initial investment of ERISA-covered 403(B) money, I am not sure that the employer has a continuing duty (or indeed, a continuing right to make changes) after that.

I think Michael is right. Technically, a governmental plan is "qualified" only if it meets all of those requirements of section 401(a) which apply to governmental plans. (The plan need not have a determination letter -- and many governmental qualified plans do not -- so long as it meets the requirements.) However, people often use "qualified" more loosely, to refer to any plan (401(a),403(B), or 457(B)) which has favorable tax status.

I actually have an outline on this online. You can see it by clicking here.

You are correct. Because the contracts are owned by employees, an employer is not in a position to shut down the trust fund, as could be done for a 401(a) plan.

The tax bills in 1999 and 2000 would have permitted 403(B) money to be transferred to a 401(k) account. The legislation was not considered controversial, but failed to be enacted only because it was attached to tax bills which never managed to get both passed by Congress and signed by the President. However, the provision will most likely be included in some legislation this year. 403(B) money is supposed to be held in annuity contracts or custodial accounts owned by the employee. Thus, absent (a) the passage of the legislation referenced above, and (B) an employee's election to move money from the 403(B) to a 401(k), the employer typically has no way to force a transfer.

In general, they must be held in an annuity or custodial account. This requirement comes from section 403(B) itself. The beginning language refers only to an annuity. Section 403(B)(7) provides that a custodial account will be treated as if it were an annuity under certain circumstances. The one exception is that at one point, the IRS apparently permitted certain state qualified plans to also incorporate 403(B) features, even though the statute did not provide for this. This is no longer permitted, but there were a few plans grandfathered when IRS made the change.

Yes, it applies to governmental plans. However, the minimum distribution rule imposes only the minimum which is required to be distributed, so a plan rule requiring faster distributions would not be invalidated by it. Thus, you are not required to amend your plan to comply with it. However, if your plan incorporates a distribution schedule which was based on (but did not incorporate by reference) the old 401(a)(9) rules, you could amend it if you wanted to permit longer distributions.

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.