Carol V. Calhoun

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

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!