Carol V. Calhoun

The only thing I'd warn you about here is that you need to look at your state's law to determine whether it permits such a vesting schedule. Because governmental plans are not subject to either the vesting rules (other than vesting on plan termination) or the nondiscrimination rules of federal law, such an arrangement would not be prohibited by federal law. Also, do make sure that you define the affected classes of employees carefully, so that there will be no question later as to who is in which group. ------------------ Employee benefits legal resource site

Essentially, the limit on the employer's contributions to the 401(a) plan is the 415© limit--the lesser of 25% of compensation or $30,000. The limit on the employee's contributions to the 457 plan would be the normal 457 limit--the lesser of 25% of compensation before the contribution, or $8,000. Employees could make after-tax contributions to the 401(a) plan, if the employer set things up so as to permit this. However, in order to make pretax contributions to the 401(a) plan, they would have to make the irrevocable election called for by 414(h)(2) and the rulings thereunder, unless the employer was grandfathered for purposes of the rule that normally prohibits governmental entities from maintaining 401(k) plans. And of course, either pretax or after-tax employee contributions would be counted against the 415© limits under the 401(a) plan, thereby reducing the amount the employer could contribute. ------------------ Employee benefits legal resource site

JWK, you're right in this instance, since the employer is a municipality. But people should bear in mind the possibility of 401(m) being applied to governmental plans other than those of state and local governments (e.g., plans of the federal government or international organizations). See Notice 99-40. Obviously, you wouldn't need to worry about 457 matches in such situations, since those types of governmental units are not subject to 457. However, you do need to take into account the general issue of 401(m) and other nondiscrimination rules eventually applying to such plans. ------------------ Employee benefits legal resource site

Your subject line got a bit garbled. But if you are trying to figure out whether a municipality can match contributions to a 457 plan, the answer is yes. This can be done within the context of the 457 plan itself, but that is usually not a good idea. The reason is that all contributions, employer and employee, to a 457 plan are counted in computing the 402(g) limit. To maximize contributions, the employer can set up a 401(a) defined contribution plan. The employees can then make their contributions to the 457 plan, and the employer can put its match into the 401(a) plan. ------------------ Employee benefits legal resource site

Actually, you've got two different questions here. The first is what the plan itself says. Even if a particular form of distribution would be legal, a plan is not required to offer it. Second is the restrictions on distributions imposed on 457 plans by the Internal Revenue Code. Under those rules, distributions cannot be made earlier than (i) when the participant attains age 70½, (ii) when the participant separates from service, or (iii) when the participant faces an unforeseeable emergency. They must begin by the later of the April 1 of the year following the year (i) when the participant attains age 70½, or (ii) when the participant retires. There are additional, sometimes quite complicated rules regarding how fast the distributions must be made, and what happens in the event the participant dies. The primary penalty for failing to make distributions when required is I.R.C. § 4974, which imposes a 50% excise tax on the participant for failure to take required distributions. Although in theory the plan could also lose its 457(B) status for failure to make required distributions, such loss of 457(B) status would apply only if the plan failed to correct its procedures after the IRS notified it of the problem. Treas. Reg. § 1.457-2(l). ------------------ Employee benefits legal resource site

Your annuity contract is required to be fully vested. Thus, failing to pay further premiums will not cause it to lapse, or you to lose what is already in it. With respect to your questions regarding availability of and penalties for early withdrawal, you've got two different questions here. The first is what the annuity contract itself says. Even if a particular form of distribution (e.g., a hardship distribution, or a distribution upon separation from service) would be legal, a plan is not required to offer it. Similarly, an annuity issuer can impose surrender charges on early withdrawals from an annuity contract, even if the Internal Revenue Code does not. Thus, it is important to read the contract itself to determine what it says. Second is the restrictions on distributions imposed on 403(B) plans by the Internal Revenue Code. Under those rules, most distributions of salary reduction contributions cannot be made earlier than (i) when the participant attains age 59½, (ii) when the participant separates from service, (iii) when the participant dies, (iv) when the participant becomes totally and permanently disabled, or (v) when the participant faces a hardship. Moreover, only the original contributions, not the earnings thereon, can be distributed in the event of a hardship. Thus, since you have separated from service, you need not worry about the hardship distribution rules. Rather, the only issue in terms of your ability to get a distribution is whether your plan or annuity contract allows for distributions upon separation from service. If you have not attained age 55 when the distribution is made, you will be subject to an additional 10% tax on the taxable amount distributed. This additional tax would be in addition to (a) any surrender charges imposed by the annuity issuer, and (B) ordinary income taxes. However, this rule merely imposes an additional tax on a distribution, it does not preclude one. ------------------ Employee benefits legal resource site [This message has been edited by CVCalhoun (edited 01-26-2000).]

For any of you who missed the RIA article on 403(B) Plan Audit issues, it is available online by clicking here. ------------------ Employee benefits legal resource site

The one difference between 403(B)(7) contracts and 403(B) annuity contracts is that excess contributions to 403(B)(7) contracts may trigger the excise tax under I.R.C. § 4973, if they exceed the maximum exclusion allowance and/or the section 415 limitation (as opposed to just the 402(g) limitation). ------------------ Employee benefits legal resource site

Well, if you are a student of all of those things, you're probably in a better position to have an opinion on this than I am! I've always had mixed feelings on governmental immunity at all, and certainly as applied to governmental plans. On the one hand, it can be hard to get governmental employees to serve as fiduciaries at all at the rates of pay that governmental entities usually provide if the employees believe that they are potentially subject to billions in personal liability. On the other, if fiduciaries believe that they have no liability whatever, they may have little motivation to act in a manner to preserve and increase retirement fund assets. I would love to know what you think, since you've obviously spent far more time considering these issues than I have. ------------------ Employee benefits legal resource site

A federal District Court case just issued in December, Walker v. Board of Trustees, will be of interest to any members involved with collectively bargained plans. It held that governmental immunity would NOT apply to a board of trustees of a collectively bargained governmental plan, or to the board members in their individual capacities. This was true even though the court held that the board's actions would constitute "state action" for purposes of applying federal Constitutional provisions to the board. --------------------------------------- Employee benefits legal resource site

No. I.R.C. § 457(e)(5) and Treas. Reg. § 1.457-2(e)(2) define "includible compensation" for purposes of 457 plans to include only compensation which is includible in the employee's income (for tax purposes). Thus, amounts which are not includible in the participant's income (including amounts contributed to the 457 plan itself, as well as the contributions to defined benefit plans you mention) cannot be included in includible compensation. --------------------------------------- Employee benefits legal resource site

Well, there is no problem with having a plan funded in part by contributions of someone other than the employer and the employees. Rev. Rul. 63-46, 1963-1 CB 85; Revenue Ruling 68-223, 1968-1 CB 154; Rev. Rul. 65-178, 1965-2 CB 94. Thus, I wonder whether it would be possible either for the union itself make contributions to the fund (I'm assuming this is not a labor law problem in the case of a governmental plan, though I'm no expert on the labor side), or to have members of the public make direct contributions to the trust fund? ---------------------------------------- Employee benefits legal resource site

Apparently, the purpose behind Announcement 2000-1 was to reassure school systems which provided severance packages to their employees. Although there is a provision in 457 that says that the section 457(f) requirements do not apply to "bona fide severance arrangements," no one had ever defined "bona fide." Some school systems had apparently feared that if their employees had to report the present value of future severance pay as income, the employees would not have enough cash to be able to pay the tax. Thus, employees might be forced to terminate employment so that they could get the severance pay and use it to pay the tax. IRS responded in Announcement 2000-1 by setting up a broad safe harbor for existing severance plans. But since IRS was concerned just about severance plans for purposes of the Announcement, they didn't stop to think that saying that reporting was NOT necessary for severance plans might carry a negative (and false) implication that it WAS necessary for other plans which did not meet the 457(B) requirements. ---------------------------------------- Employee benefits legal resource site

I'd say your analysis is right on both counts--the law does permit the 3121(v)(3) exemption, and that provision was an accident. The 3121(v)(3) language was passed before 415(m) existed. Its intent was to grandfather old plans which were exempt from sections 457, etc., so that they would also be exempt from FICA taxes. It excluded the nonqualified deferred compensation plans which existed at the time it was passed. Because no amendment was made to 3121(v)(3) when section 415(m) was enacted, the statute by its terms would exempt 415(m) plans from FICA taxes. However, because the result was obviously unintentional, the IRS isn't thrilled with it. The result has been that IRS is for the moment punting on this issue. See, for example, the private letter ruling issued to the New York State and Local Retirement Systems on its excess plan. The Systems had requested a ruling that, "The contributions, benefit accruals and the payments under the Excess Plans will not be subject to FICA taxation." The IRS responded by stating, "Revenue Procedure 99-1 I.R.B. 6, section 5.14, provides that the Internal Revenue Service will not issue a letter ruling if the ruling request presents an issue that cannot be readily resolved before a regulation or any other published guidance is issued. After careful consideration of your request, we have concluded that the question of FICA tax treatment of a qualified governmental excess benefit arrangement under Code section 415(m) cannot readily be resolved before published guidance is issued. Consequently, we are unable to rule on that portion of the request." -------------------------------------- Employee benefits legal resource site

Oh, this one is a real can of worms! Short answer: If the amount used to purchase the service credit consists of amounts previously distributed by the plan, plus interest, it is totally excluded from 415 calculations by I.R.C. § 415(k)(3). To the extent that the amounts go beyond that, the rules of section 415(n) apply. Those rules distinguish between amounts purchased relating to (1) "qualified service" (i.e., any service exempted from nonqualified service under 415(n)(3)©), and/or (2) not more than 5 years of nonqualified service, and as to which the other requirements of 415(n)(3)© are met. In the case of such purchases either 415(B) (maximum limits on benefits) or 415© (the $30,000 limit on contributions) can be used to calculate the maximum contribution/benefit under the retirement system. However, this would affect the 403(B) plan only if (1) the retirement plan is also a 403(B) plan, or (2) the participant makes an election to calculate the maximum limits on contributions under the special rules described in section 415©(4)© (a "C election").[*]It is not entirely clear what happens if a plan permits purchases of service credit which do not meet the requirements or It is not entirely clear what happens if a plan permits purchases of service credit which do not meet those requirements of 415(k) or (n)--whether the 415 limits are automatically treated as exceeded, or whether the participant merely loses the election and is stuck with one or the other of the regular limits (perhaps dependent on whether the contributions are picked up or not?). In either event, though, this would be more of a problem for the retirement plan itself, than for the 403(B) plan. Hope this helps!

For a wrap-up on this issue, see http://benefitslink.com/boards/index.php?showtopic=2246

I just got a call this morning from an individual from the IRS. He was obviously speaking only in his individual capacity and not as a representative of the IRS as a whole. (Insert all standard disclaimers here. ) However, he was able to tell me that the language in Announcement 2000-1 stating that no W-2 reporting is required for a plan which meets either the requirements of, or the exceptions to (e.g., the exception for bona fide severance plans), I.R.C. § 457(b) was not intended to create any negative inference concerning plans which fail the 457(b) tests and therefore are described in 457(f). Thus, it appears that TAM 199903032 remains the position of the IRS with respect to plans described in 457(f).

You can click on this link for a complete list of which Title II provisions do and do not apply to governmental plans. --------------------------------------- Employee benefits legal resource site

It was included in the minimum wage bill which passed each house of Congress before the recess. However, the two versions were somewhat different, so they will have to be reconciled by a Conference Committee, and escape a Presidential veto, in order to become law. And I've been in Washington long enough to know that no provision is certain until the President signs it--I've seen a lot of "sure things" evaporate! ------------------------------------------ Employee benefits legal resource site

Okay, I fixed that width problem. I've got to be good for something around here. As for the income versus wages issue, I.R.C. § 457(f) clearly says that deferred vested amounts in a nonqualifying plan are income to the employee. The problem is that when Congress passed that provision, it did not make a corresponding change in I.R.C. § 3401 (dealing with the definition of wages). Thus, it would appear that the TAM is probably right as a matter of statutory construction. On the other hand, if the amounts are includible in the employee's income in a year when they are not included in Form W-2 wages, I seriously doubt that a lot of employees are going to do their own calculations of the taxable amount (which can be quite complex, even for employers) and then pay tax on it.

Concurring with what Ralph said, you should check carefully to see whether the new agency might still be eligible for governmental status. The test as set forth in private letter rulings has dealt more with function than form. Thus, for example, "private" bus companies which take over from a municipal transit system have been held to be governmental. If the organization is still in effect controlled by the various governmental entities, the fact that it is separately incorporated and/or also has 501©(3) status would not preclude it from continuing its old governmental plans. ---------------------------------- Employee benefits legal resource site [This message has been edited by CVCalhoun (edited 01-03-2000).]

If the old entity merged into the new entity, or if its assets were transferred to the new entity, then the new would generally be treated as a successor to the old one, and therefore as the same "employer." Under such circumstances, it could simply merge the old plan into the new one, and keep on going. The regulations under 411(d) make it clear that no participant has the ongoing right to prevent changes in investment options. If the old contracts are already owned by the participants, they could be converted into individual contracts. If money is being held in an account managed by the employer or other fiduciaries (e.g., in a custodial account, the money could simply be transferred to the default option under the new plan. Either way, there would be no plan termination, so the distribution problems simply would not arise. And the employer would not have to file Forms 5500 for more than one plan. ----------------------------------------- Employee benefits legal resource site

The problem is that if a 401(a) plans ceases to allow contributions, but continues to hold assets, it is NOT considered terminated. The institution retains fiduciary duties, the plan sponsor must continue to file Forms 5500, etc. Only when the assets are distributed do these obligations cease. The question is how to apply these rules to a 403(B) plan. If the assets were in 403(B) contracts before, and remain in 403(B) contracts, are they "distributed"? And since there is no provision similar to that for 401(a) plans, allowing for distributions on plan termination, how can you consider the assets "distributed" for purposes of considering the plan no longer to exist, while not considering them "distributed" for purposes of the restrictions on early distributions? I tend to favor the view that if you get all of the assets into contracts owned individually by each participant, you may cease to have ERISA obligations. But the absence of statutory guidance means that there are no guarantees in this area. ------------------------------------------- Employee benefits legal resource site

Hmm, I'm afraid I would disagree with you on this one. Form W-2, Box 1 requires reporting of "wages, tips, and other compensation," not all amounts which represent income. The statutory basis for Box 1 is I.R.C. §§ 6051, 6052, and 6053. Those sections require the reporting of wages subject to income tax withholding (in box 1), Social Security wages (in box 3), and Medicare wages (in box 5). However, they do not provide a basis for requiring the employer to report as "income" amounts which are not "wages" for purposes of I.R.C. § 3401 and are not otherwise described in I.R.C. § 6051(a). Moreover, the basis for in TAM 199903032 for not withholding on amounts taxable under 457(f) was that withholding is required only on amounts which are actually or constructively paid, not amounts includible in income for other reasons. Thus, the same reasoning should apply to prevent the amounts from being subject to Form 1099 reporting under I.R.C. § 6041. Although the amounts are "income," they are not actually or constructively "paid," so that under TAM 199903032, they would not be subject to reporting in either Box 1 of the Form W-2 or on a 1099. However, Announcement 2000-1 suggests, by negative implication, the opposite result. ------------------------------------------ Employee benefits legal resource site [This message has been edited by CVCalhoun (edited 01-11-2000).]

See my other message. The absence of a distribution provision for 403(B) plans upon plan termination makes the answers to all of these questions unclear. -------------------------------------------- Employee benefits legal resource site