Carol V. Calhoun

As to the second question, definitely not--which is one of the big issues with pick-up contributions. But the first question is interesting. Normally, pick-ups must be irrevocable, but then again, normally you can take withdrawals from a profit-sharing plan after they have been in the plan for 2 years, or after you have 5 years of service. The question is whether the IRS would treat generous withdrawal rules for picked-up contributions as an end run around the irrevocability rules. My own view is that they shouldn't, because there would be no problem with having those withdrawals in the case of normal employer contributions, and 414(h)(2) is intended to treat picked-up contributions for income tax purposes as though they were employer contributions. But I have never seen any authorities discussing this.

You should probably talk to the staff of the plan involved. I'm not quite sure why they would not be labeled as life insurance proceeds under the circumstances you describe.

You can see a copy of Publication 515 by clicking here. You will need Adobe Acrobat to view or print this file. If you do not already have Adobe Acrobat--most people do--you can download it for free by clicking here.

No. Section 416 provides requirements for a plan to be considered a "qualified trust under 401(a)." A 403(B) plan has its own rules, separate from the qualified trust rules. The 403(B) rules do not include 416.

No, the limit will not increase the next year for the limit at age 56. The idea is to have the benefit be actuarially reduced to reflect the longer payout period of an early retiree. Thus, it is based on the age when payments begin, not the age at each payout. And the nontechnical version of "GAM83, GATT and 5% interest rate" is that it means that there are statutory restrictions on the mortality and interest rates which can be used for 415 purposes, even though a governmental plan may be using a different interest rate for funding, or for calculating the actuarial equivalence of different forms of benefit, or for the interest paid on employee contributions.

Sometimes a profit sharing plan is used when there are employer as well as employee contributions, if the employer wants to have flexibility about the amount of employer contributions each year. For example, you could have a plan in which the size of the employer contribution would depend in part on the achievement of certain goals (financial, educational, you name it). Also, remember that not all "mandatory" contributions are truly mandatory. I have heard of at least one jurisdiction which is using a profit sharing plan like a 401(k) plan, except that instead of being able to make annual elections as to the amount of their tax-deferred contributions, employees must make one irrevocable election and stick with it for the duration of their employment. While one could raise practical questions about such a plan, it would be legal under federal law. (As always with governmental plan, you would need to check to make sure it was legal under applicable state and local law.)

I assume you are talking about a governmental 403(B) plan, in which case the answer is no. Code section 4975 does not apply to governmental plans at all. Code section 503, which is the source for the prohibited transaction rules for governmental 401(a) plans, does not apply to 403(B) plans. I should caution you, however, that applicable state law may in some instances impose requirements similar to the prohibited transaction rules.

The top-25 rule is a 401(a)(4) rule, not a 401(a)(7) rule, and therefore would not apply to a state or local government plan.

FICA taxes apply if the contribution is "salary reduction," regardless of the election type. You might want to check out this thread for a discussion of the IRS view of what "salary reduction" means in a related area, the FICA taxation of "picked up" contributions to 401(a) plans. http://benefitslink.com/boards/index.php?showtopic=2174

The only place in which a governmental plan must use any specific assumptions is in calculating 415 limits. Otherwise, the only requirement is, as pax mentions, that the actuarial assumptions must be stated in the plan.

Yes, a governmental plan can be a profit-sharing plan. See Code section 401(a)(27). There is no specific bar to having contributions to a profit-sharing plan picked up. Of course, they would have to meet the requirements for a pick-up--e.g., be either mandatory or subject to an irrevocable one-time election on the part of the employee.

This is a good question--which doesn't mean that there is a clear answer. Clearly, pre-ERISA 401(a)(4) is no longer an issue, at least for state and local government plans. Thus, your only issue is pre-ERISA 401(a)(7). Pre-ERISA section 401(a)(7) did not include a concept of partial termination. Thus, if you are merely cutting off new benefit accruals under the DB plan, but leaving the existing accruals alone, you almost certainly would not have to worry about section 401(a)(7). If you are converting the DB accruals into account balances in the new money purchase plan, the question is more complicated. The specific regulations which require you to treat a conversion of a DB plan into a DC plan as a termination are in ERISA regulations which do not by their terms apply to governmental plans. However, those regulations do not appear to have any specific statutory basis. Thus, if they are intended merely to interpret the term "termination," IRS might argue that they would apply for 401(a)(7) purposes, requiring full vesting upon conversion of the DB plan to a money purchase plan. One question is how much of a financial difference this would make. In many instances, in the case of contributory governmental DB plans, we find that this is a no-cost item. The reason is that in the early years, before employees become vested, their own contributions plus interest may actually exceed the accrued benefit under the normal formula. Because employees are typically fully vested in their own contributions plus interest anyway, you may find that it does not cost the employer anything to fully vest all employees. Does the DB plan have a determination letter? You might consider getting one on the plan as amended by the amendments converting it to a money purchase plan. If a favorable determination letter were issued, this could protect you from trouble later on. And, as usual with governmental plans, you need to take into account any state and local laws applicable to the plan, as well as federal. In particular, some state courts have interpreted state Constitutional provisions dealing with impairment of contracts to forbid amending a plan's future benefit formula, as well as its existing accruals, in a way that was disadvantageous to any particular employee. To the extent that existing employees were being converted from one formula to another without their consent, this could be an issue.

No. A pension plan (including a money purchase pension plan) is not permitted to make distributions of any benefits attributable to employer contributions until the earlier of (a) attainment of normal retirement age, or (B) separation from service.

I fixed the link; it should be working now.

It appears that the W-8BEN is the form the IRS requires to assert treaty status, and it does not by its terms or in its instructions require an independent inquiry. Thus, I would be inclined to say that you can rely on it without other due diligence.

You could not receive the $20,000 from the plan. Whether you could receive it at all (even outside of the plan) would depend on whether the employer also had an "excess benefit plan" as described in Code section 415(m).

Hmm, this would be a most unusual death benefit to have inside of a governmental DB plan. (In the ones I have seen, the death benefit is usually equal to the accumulated employee contributions, or is a feature of a survivor benefit, but is not a multiple of earnings.) Is the benefit funded through life insurance owned by the plan? (There are special rules for that.)

The basic rule is that the excess of (a) the amount received in the aggregate, by the employee and his or her beneficiaries, over (B) the amount of after-tax contributions is ordinary income. However, the mechanism is complicated. If you click on this link, you can see IRS Publication 575, which gives details. (Reading or printing this publication requires the Adobe Acrobat Reader, which is probably already installed on your computer but can be downloaded for free by clicking on the link if it is not.)

I'm assuming the New Mexico case to which you are referring is Public Employees' Retirement Board v. Shalala, 153 F.3d 1160 (10th Cir. 1998). And no, I would not agree that that case holds that the "salary reduction" language is meaningless. Actually, it's the "agreement" language that I think was held to be meaningless, in the sense that the court clearly held that a salary reduction "agreement" could exist even in the absence of any individually negotiated contract. However, the court still said that "a salary reduction agreement necessarily includes any arrangement in which there is a reduction in an employee's salary in exchange for the employer's contribution of the amount of the reduction to a pension plan on the employee's behalf." Thus, a situation in which there is absolutely no reduction of an employee's salary (the employer makes the contribution in addition to the stated amount of the employee's salary) should not be a salary reduction agreement. But we understand that in some audits, even contributions made with no reduction in salary are being treated as subject to FICA.

Postscript to the above notes: it has come to our attention that in at least a couple of audits, the IRS has basically asserted that all contributions picked up by the employer are pursuant to a salary reduction agreement, and therefore subject to FICA taxes, regardless of other circumstances. Has anyone else faced this?

You may also find the message you can access by clicking on this link helpful: http://benefitslink.com/boards/index.php?showtopic=2423

You may also find this message helpful: http://benefitslink.com/boards/index.php?showtopic=2423

Well, this is kind of a meat-axe approach, but I have a fairly complete list of state retirement systems which you can get to by clicking on the link. You might want to start going through those and identifying the ones which have defined contribution plans.

I had a conversation on this matter recently with someone at the IRS who was in a position to know (although of course, as usual, he was speaking only for himself, not the IRS). He said that IRS recognizes that amounts cannot be removed from a 403(B) plan the way they can be from, for example, a 401(k) plan. Thus, they are permitting use of the two percent fee described in Section 8.03 of 99-13 to be used instead of having a return of contributions. Hope this helps!

It is exempt from all portions of ERISA other than the portions of ERISA Title II (the Internal Revenue Code provisions) that apply to governmental plans. The governmental exemption found in ERISA section 4(B)(1) (29 USC 1003(B)) would apply to it.