Carol V. Calhoun

Section 411(e)(2) by its terms subjects governmental plans to pre-ERISA vesting rules under sections 401(a)(4) and 401(a)(7). However, section 401(a)(5)(G) provides that 401(a)(4) (presumably including the vesting rules thereof) will not apply to state and local government plans. (Other governmental plans are technically not exempt, but it is anticipated that a pension technical corrections or similar bill will exempt them, if such a bill ever passes.) Thus, the only federal vesting rule is pre-ERISA section 401(a)(7), which read as follows: (a) Requirements for Qualification.-A trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust under this section-* * * (7) A trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that, upon its termination or upon complete discontinuance of contributions, under the plan, the rights of all employees to benefits accrued to the date of such termination or discontinuance, to the extent then funded, or the amounts credited to the employees' accounts are nonforfeitable. This paragraph shall not apply to benefits or contributions which, under provisions of the plan adopted pursuant to regulations prescribed by the Secretary or his delegate to preclude the discrimination prohibited by paragraph (4), may not be used for designated employees in the event of early termination of the plan. As you can see, this does not include the vesting rule on normal retirement age. And ADEA merely requires that older people be treated as well as younger people, not that they be treated better, so a vesting schedule which applied to workers of all ages (even those who had passed normal retirement date) would be acceptable. Thus, as you suspected, state and local law would govern this issue.

Yes, assuming the plan language allows for them. The only thing you have to watch out for is that it is my understanding (haven't looked at this recently enough to know if there is authority) that if the elective deferrals come from income which accrued before the date of the election, you have a problem. For example, suppose someone was entitled to an annual bonus at the end of the year, and made an election in December to have the entire 403(B) deferral for the year made out of that bonus. You could have an issue here, because most of the bonus would have been earned before the date of the election. This would not be a problem if the deferral was elected at the beginning of the year, even if it was all taken out of the bonus. Also, the same result might be accomplished by making the deferral out of the portion of the December paycheck which had not yet been earned, and then using the bonus for the living expenses the paycheck would otherwise have covered.

I'm assuming here that this is a plan which is subject to the 1,000 hours standard in the first place (e.g., not a governmental plan. In that case, you need to treat these employees the way other employees are treated by the plan. If other employees do not begin to participate until they have achieved 1,000 hours and/or reached their anniversary date, then these employees would need to be included only prospectively and/or on their anniversary dates. But if other employees are admitted to the plan immediately, these employees should normally be admitted retroactively. It may be possible to amend the plan to avoid this result. For example, if it is a particular category of worker that is likely to be in this situation, you could exclude that whole category of worker until they have reached 1,000 hours, subject to passing nondiscrmination tests. However, it is my understanding that the IRS examiners have in some instances disallowed a category which is too obviously related to temporary or part-time status, if that status does not preclude attainment of 1,000 hours.

The statute you want to look at is ERISA section 3(32), codified at 29 USC 1002(32). In general, if a governmental entity makes contributions to a plan, the status of the plan as a governmental plan depends on whether the individuals it covers are governmental employees, rather than who administers it.

You might want to check out a chart I did, Choosing Among 401(k),403(B), and 457 Plans. (Just click on the title to go to it.) It gives some of the major pros and cons of each.

There is no problem under federal law with the employer doing this. However, it may raise problems under state law. For example, courts have held that Constitutional provisions preclude modification of any employee's future pension accrual rights in a way that is unfavorable to that employee. Thus, if any employee's contribution went up (without a corresponding increase in the benefit), you could have a problem. You would also need to look at applicable state and local law to determine whether they imposed any restrictions on employee contributions, and/or on pick-ups.

Code sections 414(p)(9) and (10) rules do not impose 414(p) on 403(B) plans. Rather, they merely deal with the consequences of a situation in which a 403(B) plan complies with a QDRO based on ERISA section 206(d).414(p)(9) says that the taxation of the distribution will be the same as if it were a 414(p) distribution. 414(p)(10) says that a 403(B) plan will not be considered to be in violation of the restrictions on distributions due to compliance with a QDRO.

Yep, that's my understanding as well.

Yes, that is correct.

I'd agree with you on that one. My original response was based on Gibson's statement that the 403(B) plan in question had employer contributions as well as salary reduction. Thus, it would already be subject to ERISA (barring governmental or church plan status), regardless of what it did with QDROs.

Another advantage to keeping the life insurance outside of the plan is that benefits from life insurance are completely excludible from income if paid on account of death. Thus, the cash value (even to the extent created by earnings as opposed to original contributions) is excludible from income if the life insurance is purchased outside of the plan. By contrast, if the life insurance is purchased inside the plan, the cash value is all taxable. Although this is balanced by complete deductibility of premiums (beyond the PS 58 cost) for life insurance purchased inside of the plan, you may well find that the imputed premiums if the life insurance is purchased outside of the plan are lower than the actual premiums. Just one more thing to add to the mix in considering whether it makes more sense to purchase life insurance inside of a plan or outside.

We have never interpreted the regulation to require double inclusion. Rather, the normal rule is that amounts "previously excludable under section 403(B)(2)(A)(ii)" must be counted as prior employer contributions. Since the excess contributions were not previously excludible, they would not be includible in prior employer contributions at all, absent the language to which you refer. Thus, the language you cite merely results in adding them once, not twice, to the amount of prior employer contributions.

Having a plan document would not make them an ERISA plan, unless the plan document called for employer involvement or other features inconsistent with meeting the ERISA exemption. We have had success in the past in merely filing a final Form 5500 with an explanation.

The theoretical answer is, "not at all." But as a practical matter, a 403(B) plan almost always has to comply with a QDRO. If your plan is subject to ERISA (i.e., it is not a governmental or church plan), section 206(d) of ERISA will impose exactly the same requirements on the 403(B) plan as would apply if it were subject to 414(p). If your plan is not subject to ERISA because it is a governmental or church plan, then it is also not subject to ERISA preemption of state laws (including domestic relations laws). Thus, it might have to comply with a domestic relations order even if that order did not meet the requirements of a QDRO.

The quick answer is that a governmental plan can, provided that (a) there is no barrier to doing so under applicable state and local law, and (B) the stocks are held by a trustee under the plan trust. In the case of a nongovernmental plan, the stocks would have to be held in a "rabbi trust."

I would suspect that the 4.5 percent is "picked up" by the employer within the meaning of 414(h)(2) of the Internal Revenue Code. If the employees' wages are mandatorily reduced by an identical amount, it has the same effect as if the money were taken out of the employee's paycheck, but it is treated as an employer contribution (therefore pretax) for federal income tax purposes.

I haven't seen the actual plan documents to which you refer. However, I would suspect that the plan documents in some way refer to these as being employer contributions for tax purposes, even though they are being referred to as mandatory employee contributions for other purposes. Thus, they would be pretax in the same way as other employer contributions would be pretax.

That is interesting, and I'm not sure it is supported by law. However, it undelines the need for some kind of rollover mechanism for 457 plans, since apparently the IRS is taking the position that even the one current mechanism for making such plans portable is quite limited in its scope.

The exemption of governmental plans from 419 and 419A actually has two components. Governmental plans are exempt from the deduction rules in 419 and 419A themselves because governments don't pay income taxes, and therefore aren't concerned about income tax deductions. Governmental plans are exempt from the parallel unrelated business taxable income rules of 512(a)(3) because of 512(a)(3)(E)(iii), which exempts a welfare fund if substantially all of the contributions were made by tax-exempt organizations. (There is also a whole issue of whether a governmental plan--retirement OR welfare--can ever be subject to UBIT, but you'll have to wait for my book to come out for the answer to that one, because it's WAY too complicated for a message board!)

Yes, provided that the recipient plan provides for such transfers. (Many do not, and plans are only permitted, not required, to include provisions permitting such transfers.)

We've had some discussions of this issue on this board before. The basic problem is that a 401(a) plan is required to continue filing Forms 5500 so long as it has "trust assets," but not after it has distributed all of its assets to participants in the form of annuity contracts. In the 403(B) area, there are no comparable concepts, so it is harder to tell when Form 5500 filing can cease. And there simply is no black letter law on the issue. Of course, if you are dealing with a governmental or church plan, there is no Form 5500 requirement in the first place. See Announcement 82-146.

One question on this, for those of you involved with governmental or church plans (i.e., plans not covered by ERISA preemption): are you familiar with any state laws which could create a problem in this situation? I recall that in the case of 414(h)(2) pick-ups, we have sometimes run into problems with state laws which prohibit taking money out of an employee's paycheck without permission. Would this also be a problem in this situation, in which you would not have employee permission (although the employee would have the right to opt out)?

Governmental plans are not subject to 411(d)(6). See 411(e)(2). However, you need to watch out for state law and state Constitutional provisions. In many instances, routine "impairment of contract" provisions have been held to prohibit various modifications of benefits.

I looked at this once, and it appeared to me that it was indeed possible to have contributions which would be timely for the first year for minimum funding (412) purposes, but which would still be treated as part of the annual addition for the second year. As you say, this is a trap for the unwary. ------------------ Employee benefits legal resource site

Try this link for a discussion of fiduciary duties applicable to governmental plans in general. The article deals with 457 plans as well as other governmental plans. ------------------ Employee benefits legal resource site