Carol V. Calhoun

There are no specific provisions for requiring a distribution in this case. However, some have suggested that if employees are issued individual annuities, the employer can stop filing Forms 5500 on the theory that it no longer has any involvement. Unfortunately, the authority on whether this works is pretty much nonexistent, so you have to assess the risks. ------------------------------------------- Employee benefits legal resource site

Actually, Congress may do better than that. In the tax bill it passed and the President vetoed, the MEA calculation would have been eliminated altogether. I think a lot of us are hoping that that provision comes back in whatever bill ultimately gets enacted. ----------------------------------------- Employee benefits legal resource site

Announcement 2000-1 sets forth the IRS position 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). The implication is that plans which do not meet such requirements must do W-2 reporting for amounts includible in income under their plans. This, of course, flies in the face of TAM 199903032, which had stated that no income tax withholding or W-2 income tax reporting was required until amounts under a failed 457 plan were actually or constructively paid out, even if the employee was subject to income tax withholding on such amounts at an earlier date. I guess this is IRS's happy new year's message? ---------------------------------------- Employee benefits legal resource site [This message has been edited by CVCalhoun (edited 01-11-2000).]

You're right about that. Here, for anyone who is interested, is the text of Notice 99-40: Extension of Relief Relating to Application of Nondiscrimination Rules for Certain Governmental Plans Notice 99-40 I. PURPOSE This notice provides that certain governmental plans shall be deemed to satisfy § 401(a)(4), 401(a)(26), 401(k)(3), and 401(m) of the Internal Revenue Code until the first day of the first plan year beginning on or after January 1, 2001. In accordance with this relief, the regulations relating to these provisions do not apply until plan years beginning after that date. This relief is available with respect to governmental plans within the meaning of § 414(d) other than plans of State and local governments or political subdivisions, agencies or instrumentalities thereof. This relief is provided in light of difficulties, which are unique to the governmental employers that maintain these plans, in determining compliance with the nondiscrimination requirements. See § 3.07 of Rev. Proc. 99-23, 1999-16 I.R.B. 5, for the remedial amendment period for disqualifying provisions of these plans relating to these nondiscrimination and other requirements. II. BACKGROUND A. Governmental Plans Section 414(d) of the Code provides that the term "governmental plan" means a plan established and maintained for its employees by the government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing. The term "governmental plan" also includes any plan to which the Railroad Retirement Act of 1935 or 1937 (the "Act") applies and which is financed by contributions under that Act and any plan of an international organization which is exempt from taxation by reason of the International Organizations Immunities Act (59 Stat. 669). Section 1505 of the Taxpayer Relief Act of 1997 ("TRA '97") generally provides that the nondiscrimination rules do not apply to State and local governmental plans. In particular, § 1505 amended the Code to provide that § 401(a)(3), 401(a)(4), and 401(a)(26) shall not apply to such plans. Section 1505 of TRA '97 amended § 401(k) of the Code to provide that State and local governmental plans shall be treated as meeting the requirements of § 401(k)(3). In addition, § 1505(a)(3) of TRA '97 amended § 410© of the Code to provide that governmental plans shall be treated as meeting the requirements of § 410 for purposes of § 401(a). This amendment to § 410©, by its terms, is not limited to State and local governmental plans but applies to all governmental plans within the meaning of § 414(d). B. Administrative Guidance The nondiscrimination requirements under the Code were substantially changed by the Tax Reform Act of 1986 (TRA '86). Announcement 95-48, 1995-23 I.R.B. 13, and Notice 96-64, 1996-2 C.B. 229, provided that the regulations under §§ 401(a)(4), 401(a)(26), 410(B) and 414(s) apply, in the case of governmental plans described in § 414(d), to plan years beginning on or after the later of January 1, 1999, or 90 days after the opening of the first legislative session beginning on or after January 1, 1999, of the governing body with authority to amend the plan, if that body does not meet continuously ("1999 legislative date"). Notice 96-64 also provided that the regulations under § 401(k) and (m) apply to governmental plans only for plan years beginning on or after the later of October 1, 1997, or 90 days after the opening of the first legislative session beginning on or after October 1, 1997, of the governing body with authority to amend the plan, if that body does not meet continuously. For plan years beginning before the applicable effective date, governmental plans are deemed to satisfy §§ 401(a)(4), 401(a)(26), 401(k), 401(m), 410(B), and 414(s). Section 3.07 of Rev. Proc. 99-23 extended, in the case of governmental plans described in § 414(d), the remedial amendment period under § 401(B) for certain amendments ("TRA '86 remedial amendment period") until the date described in Rev. Proc. 98-14, 1998-4 I.R.B. 22: the later of (i) the last day of the last plan year beginning before January 1, 2001, or (ii) the last day of the first plan year beginning on or after the 1999 legislative date. The amendments to which the TRA '86 remedial amendment period applies are those required to comply with TRA '86 and subsequent legislation through the Omnibus Budget Reconciliation Act of 1993. III. EXTENSION OF RELIEF RELATING TO APPLICATION OF NONDISCRIMINATION RULES FOR CERTAIN GOVERNMENTAL PLANS Under the relief provided by this notice, governmental plans within the meaning of § 414(d), other than those maintained by State or local governments or political subdivisions, agencies or instrumentalities thereof, shall be treated as satisfying the requirements of § 401(a)(4), 401(a)(26), 401(k)(3), and 401(m) until the first plan year beginning on or after January 1, 2001. In accordance with this relief, the regulations under §§ 401(a)(4), 401(a)(26), 401(m), 410(B) and 414(s), and the regulations implementing § 401(k)(3), apply to governmental plans described in this part only for plan years beginning on or after January 1, 2001. IV. COMMENTS Comments or suggestions regarding this notice should be addressed to CC:DOM:CORP:R (Notice 99-40), Room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Alternatively, taxpayers may hand deliver comments between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (Notice 99-40), Courier's desk, Internal Revenue Service, 1111 Constitution Ave., NW, Washington, DC, or may submit comments electronically by using the following site: cynthia.grigsby@m1.irscounsel.treas.gov V. EFFECT ON OTHER DOCUMENTS Notice 96-64 is modified. DRAFTING INFORMATION The principal author of this notice is Diane S. Bloom of the Employee Plans Division. For further information regarding this notice, please contact the Employee Plans Division's taxpayer assistance telephone service at (202) 622-6074 or (202) 622-6075, between the hours of 1:30 p.m. and 3:30 p.m. Eastern Time, Monday through Thursday. Ms. Bloom may be reached at (202) 622-6214. These telephone numbers are not toll-free.

Yep. Check out the regulations under 403(B). They include extensive rules for figuring out, for example, what the imputed employer contributions for prior years have been in the case of a state defined benefit plan, in which of course no actual contributions are made to employees' accounts. That's a major reason that some of us are hoping that although the Taxpayer Refund and Relief Act of 1999 was vetoed, its provision abolishing the maximum exclusion allowance will be included in some subsequent legislation. ------------------------------------ Employee benefits legal resource site

As far as I can make out, they are. Neither the original 1977 moratorium nor the later statutory moratorium on applying nondiscrimination rules to governmental plans applies to plans other than retirement plans. Of course, whether the IRS really wants to go after governmental plans for nondiscrimination issues, after the firestorm it encountered when it attempted to apply such rules to governmental retirement plans, is a whole other question.

There is at least a strong argument to be made that federal governmental plans are not subject to Code section 401(a)(4) at all, not even the pre-ERISA version. Brief history lesson: Soon after ERISA passed, the IRS began auditing a governmental retirement plan, and threatened to disqualify it based on a failure to comply with the pre-ERISA nondiscrimination rules. This caused such an outcry that the IRS reconsidered. In a 1977 Internal Revenue Service News Release, IR-1869 (August 10, 1977), the IRS announced a moratorium on imposing the nondiscrimination rules on state and local government plans until the IRS had a chance to study the issues involved. Although IR-1869 by its terms applied only to state and local governmental plans, in practice IRS forms (such as the Form 5300, used to apply for a determination as to whether a plan is qualified) exempted all governmental plans from the nondiscrimination rules. In the years after 1977, Congress gradually tightened the nondiscrimination rules further. Because of the moratorium, the nondiscrimination rules theoretically applicable to governmental plans were not an issue. Thus, unlike ERISA, much of the later nondiscrimination legislation did not contain specific exceptions for governmental plans. Beginning in 1989, the IRS began suggesting that it would begin imposing nondiscrimination rules on governmental plans. The exact rules which would apply were never clear, inasmuch as the statute by then included a patchwork in which governmental plans were subject to some pre-ERISA nondiscrimination rules and some post-ERISA rules-and the rules often conflicted with each other. After several years of uncertainty, Congress resolved the issue, at least for state and local government plans, by legislative changes to exempt governmental plans from the nondiscrimination rules. It added Code sections 401(a)(5)(G) (exempting such plans from Code section 401(a)(4) and (m)) and 401(a)(26)(H) (exempting them from 401(a)(26)). It also amended Code section 410© to exempt them from the minimum coverage requirements. All of these provisions were included in the Small Business Jobs Protection Act of 1997. They were theoretically effective as of August 5, 1997, but a special effective date in section 1505(d)(2) provided that state and local plans would be deemed to be in compliance with all of the rules for all taxable years before that. By their terms, the statutory changes did not explicitly cover plans of the federal government or international organizations. Although the Code treats such plans as governmental, they are obviously not plans of state or local governments. Nevertheless, as discussed above, the 1997 statutory moratorium tracked the language of the 1977 moratorium, and the 1977 moratorium had previously been extended informally to governmental plans other than state and local government plans. It appears that the IRS is taking the same position with respect to the statutory moratorium that it did with respect to the earlier moratorium, namely, that it will informally be applied to all governmental plans, not just those of state and local governments. See, for example, the instructions to the Form 5300, which state that all governmental plans (not just those of state and local governments) are exempt from filing the Schedule Q. Because that schedule is the one used to determine whether a plan has complied with the nondiscrimination requirements, the implication is that no governmental plan need comply with such requirements. Hope this helps!

This is an interesting question. The requirements of section 457(g) came into effect on January 1, 1999. However, section 457(g) merely says that assets of the plan must be held in trust. It does not say how long the employer has to put the assets into the trust. While there is guidance on this issue in the case of plans subject to Department of Labor rules, obviously a governmental plan is not subject to those rules. Thus, at least an argument could be made that if all 1999 deferrals are put into a trust by the end of 1999, the plan would still be an eligible plan under section 457(B). Even if the plan became ineligible for several months, the consequences may not be all that severe. Any vested account balances as of December 31, 1998 would not be taxable to participants, because they were deferred while the plan was still an eligible 457(B) plan. Thus, the only amount subject to tax would be amounts which became vested between January 1, 1999 and the date on which the problem was fixed. Moreover, in an amazing feat of logic, the IRS has held in TAM 199903032 (October 2, 1998) that even if amounts are includible in an employee's income for tax purposes due to having vested under a nonqualifying section 457(B) plan, the employer is not required to withhold income taxes on such amounts or include them in the amount shown as subject to income tax on the employee's Form W-2. (The TAM requires the free Adobe Acrobat Reader to read or print.) Apparently, employees are supposed to guess at what amount to include in their tax returns, with no guidance from the employer. Good luck! -------------------------------------- Employee benefits legal resource site

For what it's worth, the 403(B) examination guidelines state as follows with regard to the pre-1987 balance: Prior law (generally requiring distributions by the end of the calendar year in which the participant attains age 75) would apply to pre-1987 accruals. If records are not kept, the entire account balance is subject to § 401(a)(9). The minimum distribution incidental benefit ("MDIB") requirement applies to the entire account balance, although prior law applies to the pre-1987 account balance in this regard. See § 1.403(B)-2,Q&A-3 of the proposed regulations.Thus, you would be subject to both the age 75 distribution rule, and the MDIB rule (which required that at least 50% of the actuarial value go into the lifetime benefit) with respect to pre-1987 balances. ------------------------------- Employee benefits legal resource site

We have a ruling request in for a client on that very issue, right now. And so far, the IRS doesn't seem to know quite what to do with it. They have made some suggestion that maybe it is okay if every city is required to join, but not otherwise, but it's not clear that is a consensus view. We'll keep you posted. -------------------------------------- Employee benefits legal resource site

Currently, if the professor has a separate business (either his/her own corporation, or a sole proprietorship), the professor's 403(B) plan from the university is combined with the plan of the professor's business in applying the aggregate limits. However, the professor's 403(B) plan from the university is not combined with any contributions on the professor's behalf to a 401(a) plan maintained by the university. However, this rule is based on Internal Revenue Code § 415(e). With the repeal of Code § 415(e), effective in 2000, the question is whether the university would now have to aggregate 401(a) plans and 403(B) plans, in applying the limits, to the extent that they covered the same professor. Theoretically, the answer would appear to be yes. However, the top people at the IRS in charge of these issues are saying that the answer is no. Even if they are wrong, it is hard to see who would challenge their applying a more liberal rule than the statute would seem to require. Thus, we can expect that at least for now, the university does not have to begin aggregating its 401(a) and 403(B) plans in applying the limits. ------------------------------------ Employee benefits legal resource site [This message has been edited by CVCalhoun (edited 12-03-1999).]

Thanks, Dave! Of course, it's a little scary to find someone even more obsessive than me around here. I thought I held the prize in that regard!

More news on Rev. Proc. 99-44: It appears that the revenue procedure was issued by the financial products division, with no input by the employee plans division. The IRS has been getting numerous frantic calls about it, because the lack of understanding of employee benefits issues caused it to be unclear or misleading in several important respects. It is now being coordinated with the employee plans division, with the hope that it can be fixed within the next few days, so that the corrected version can appear in the next IRB. --------------------------------------- Employee benefits legal resource site

Adds a whole new layer to legal research. We can now cite the Q&As the ABA does--even though theoretically we can't cite private letter rulings.

Pax, I agree. Regardless of how dubious the legal theory may be, as a practical matter it makes sense. It would seem silly to have to begin a whole bunch of new testing now, only to backtrack when a bill later passes which makes the disaggregation retroactive. Moreover, I can't imagine who would question IRS' decision to apply more lenience than the statute might seem to allow. For right now, I'm just glad not to be sending out a bunch of letters to clients telling them they have to do something new in the next month. (Happy Chanukah, merry Christmas, happy New Year, and have you done your new 415 testing?) ----------------------------------------- Employee benefits legal resource site

Well, high level representatives of the IRS have stated in speeches and the like that they will continue the disaggregation of 403(B) plans with 401(a) plans, just as if 415(e) were still in place. Their theory is that the disaggregation is still in the regulations, so they will continue to rely on the regulations in the absence of a statute. Practitioners are scratching their heads at what gives the IRS authority to continue a regulation after the enabling statute is repealed. However, as a practical matter, looks like you don't need to worry about aggregation as of 1/1/2000. --------------------------------- Employee benefits legal resource site

I think that the idea was that an employer can still adopt an excess plan, which could include accruals for past years in which the 415 limits would otherwise have been exceeded. Since governmental plans are not subject to the section 411 rules on cutbacks of accrued benefits, and since most state anticutback rules permit the elimination of a benefit in one plan so long as it is replaced with an equal benefit in another plan, this should work. ---------------------------------------- Employee benefits legal resource site

As far as I can make out, you are right. Only pitfall to avoid would be if you allowed the executive director (or anyone else) to make salary reduction contributions, and did not provide the same right to other nonexcludible employees. See I.R.C. § 403(B)(12). But otherwise, the plan you propose should work. --------------------------------------- Employee benefits legal resource site

As far as I can make out, the 415 definition of compensation does not apply for purposes of the maximum exclusion allowance. However, you have to remember that the period in which the compensation is measured is different for 403(B) purposes than for 415 purposes. For section 415, the period used to calculate compensation is the limitation year. For the maximum exclusion allowance, it is the most recent one-year period of service. The regulations make clear that if someone has ceased working, you would look back to the most recent period when they did work to determine includible compensation. Indeed, if the person had part-time service, e.g., 50% time, you would add the most recent two years of compensation together to calculate includible compensation. As a result, absent the 415©(3)© rule, a disabled person would have no compensation at all in any year after the year of disability. However, a disabled person would go on having includible compensation for maximum exclusion allowance purposes indefinitely. -------------------------------------- Employee benefits legal resource site

The determination letter process is only for qualified plans. Rev. Proc. 99-6, Rev. Proc. 93-10 and Rev. Proc. 93-12. However, 403(B) plans can receive private letter rulings under Rev. Proc. 99-4. And although Rev. Proc. 99-3 indicates some specific areas in which rulings under section 457 will not be issued, it provides that such rulings are otherwise obtainable. ------------------------------------ Employee benefits legal resource site

No, the revenue procedure does not permit direct investment in such funds. The revenue procedure deals with a situation in which someone has invested in a contract which constitutes an annuity contract under applicable state law. However, because the contract is a variable annuity contract, it will not be treated as an annuity for federal tax purposes unless it meets the diversification standards of Code section 817(h). (You can click here for a general description of the tax requirements for and treatment of variable annuities.) For purposes of section 817(h), if a variable annuity contract is invested in a mutual fund which has no owners other than insurance companies and their separate accounts, you look to the underlying investments of the mutual fund to determine whether the diversification standards are met. However, if a variable annuity contract is invested in a mutual fund which is available to the public, you treat the mutual fund as being a single investment. Thus, if the only investment of a variable annuity contract is a publicly available mutual fund, the contract would not meet the diversification standards. Code section 817(h) was primarily developed with commercial annuities, not annuities under 403(B) plans or IRAs, in mind. The alleged abuses it was intended to deal with are simply not normally present in a 403(B) contract or IRA. Thus, the revenue procedure in effect says the Code section 817(h) will be disregarded in examining annuities purchased under such arrangements. Hope this helps! --------------------------------------- Employee benefits legal resource site

Are we talking about a governmental 457 plan? Because no governmental retirement plan is required to file a Form 5500. Click here for the full text of the IRS announcement on the subject. ------------------------------------------ Employee benefits legal resource site

You are correct. However, the recently passed (but vetoed) tax bill would have changed this result. And the consensus among practitioners is that the benefits provisions of that bill are noncontroversial enough so that they will show up in whatever tax bill passes. So when is one going to pass? Sorry, but I'd need a crystal ball to predict that one! -------------------------------------- Employee benefits legal resource site

The Title II requirements are basically the I.R.C. requirements for the contracts under the arrangement to qualify as a 403(B) contracts. They are found in I.R.C. § 403(B) itself, 401(f), 402(g), and 415. As for the Department of Labor, you might write them a note, or just wait for them to ask and then explain what is going on. There is not a formalized procedure for notifying them that your plan never was subject to Form 5500 requirements in the first place. --------------------------------------- Employee benefits legal resource site

There is absolutely no authority out there on this one. However, it would be hard to argue that an employer is maintaining a plan if it makes no contributions to the plan, if all of the assets of the plan are owned by participants directly with no employer involvement, and if the employer has no other involvement. --------------------------------------- Employee benefits legal resource site