Carol V. Calhoun

Hmmm, good question! Rev. Rul. 90-24 states that, "There is no actual distribution within the meaning of section 403(B)(1) of the Code where funds are transferred from one section 403(B) investment to another section 403(B) investment if the transferred funds continue after the transfer to be subject to any distribution restrictions imposed on them prior to the transfer by section 403(B)(11) or section 403(B)(7)(A)(ii)." In theory, it would seem to me that the same principles should apply to a transfer from an ERISA 403(B) to a non-ERISA one: that the transfer should be treated as not being an actual distribution only if the funds continued after the transfer to be subject to the same spousal consent requirements as they were before the transfer. However, the revenue ruling does not mention this scenario. Is anyone aware of whether there are any private letter rulings, or more informal guidance, dealing with this situation? --------------------------------------- Employee benefits legal resource site

This provision is found at Section 1221 of TRA '99, and is described in my explanation of TRA '99. The catch-up election for those over age permits contributions to exceed the section 415© limit (under TRA '99, $40,000 as indexed) if they do not exceed (a) the 402(g) limit, plus (B) the applicable percentage (10% in 2001, going up to 50% in 2005 and thereafter) of the 402(g) limit. The catch-up election under 402(g)(8) is not modified. So yes, it would appear possible to contribute a large amount (I haven't checked your math, but I'll take your word for it), by pyramiding a catch-up the new catch-up on top of the existing one, at least once the phase-in of the applicable percentage is complete.

Are you talking about a private school, or a public school district? A public school district, being a governmental entity, is not subject to ERISA rules regardless of how much employer involvement there is. It is only nongovernmental entities which need to worry about the DOL regulations concerning the extent of employer involvement. -------------------------------------- Employee benefits legal resource site

As Dave Baker has noted, BenefitsLink and I have collaberated on an expanded Employee Benefits Library of legal research links. Members of this board may be interested to know that one of the pages in the Library deals specifically with governmental plans research links and another deals with church plans research links. -------------------------------- Employee benefits legal resource site [This message has been edited by CVCalhoun (edited 09-27-1999).]

As Dave Baker has noted, BenefitsLink and I have collaberated on an expanded Employee Benefits Library of legal research links. Members of this board may be interested to know that one of the pages in the Library deals specifically with governmental plans research links. -------------------------------- Employee benefits legal resource site [This message has been edited by CVCalhoun (edited 09-27-1999).]

Actually, I think I'm trying to answer two different questions at once, and probably getting everyone totally muddled. Pax, as to your question, you've got two potential problems. First, you are in fact cutting back not just on future benefit accruals, but on existing benefits, if the lump sum generated by the GATT interest rates is lower than the lump sum generated by the former interest rates. (Unlike I.R.C. §411, which distinguishes between the "accrued benefit" and other benefit options, the constitutional obligation normally relates to any form of benefits.) The only exception to this would be if the only employees who got lump sums were those who would never been entitled to lump sums at all before the termination, regardless of how long they had remained employed. Because the constitutional obligation is an employer obligation, the employer may be obligated to ensure that the employees get an amount at least equal to the lump sum based on the former interest rates, even if there is not enough money in the plan itself to pay for this. Moreover, if the employees are continuing employment, terminating the plan at all would be a cutback of future benefit accruals, unless you are providing them with a new plan which gives each employee at least as favorable a benefit at retirement or other termination of employment as the old plan would have, if it had continued. Danwitz, more information on your question: I mentioned that the book I referenced was a few years old. I have just learned that there is a newer book which provides similar, but more updated, information: PUBLIC PENSION PLANS: THE STATE REGULATORY FRAMEWORK, 3d ed., 1998. The newer book is also by Cynthia Moore of the National Council on Teacher Retirement. ---------------------------------------- Employee benefits legal resource site [This message has been edited by CVCalhoun (edited 09-26-1999).]

My own understanding of this is that the language in the 403(B) Examination Guidelines concerning 401(a)(26) was intended to refer to defined benefit 403(B) plans. Of course, such plans are extremely rare, which is probably why the guidelines did not discuss this issue in detail. But I would agree with you that since 403(B)(12) is an attempt to make the nondiscrimination rules consistent between employer contribution 401(a) and 403(B) plans, it would not make sense to apply 401(a)(26) to a defined contribution 403(B) plan. Anyone have more definitive word on this? ------------------------------------ Employee benefits legal resource site

The "two-thirds" number is derived from the number of states which have interpreted federal or state constitutional nonimpairment of benefits provisions as affecting pension benefits. It is taken from statistics in Protecting Retirees’ Money: Fiduciary Duties and Other Laws Applicable to State Retirement Systems, Third Edition, by Cynthia Moore of the National Council on Teacher Retirement. The book is a few years old, but it contains a state-by-state analysis of fiduciary standards applicable to governmental plans, with appropriate citations, and I've found it an excellent starting point for research in the governmental plans area. Extensive support for the concept that if the nonimpairment of benefits provisions apply to pension plans, they would affect cutbacks in future benefit accruals, is found in California law. The vesting concept has been developed and firmly embedded in California law through a long line of cases starting with Kern v. City of Long Beach, 29 Cal.2d 848 (1947), with two of the more important of such cases being Allen v. City of Long Beach, 45 Cal.2d 128 (1955) and Betts v. Board of Administration, 21 Cal.3d 859 (1978). In Kern, it was decided that a public employee's pension constitutes an element of compensation, that a vested contractual right to pension benefits accrues upon acceptance of employment and that such a pension right may not be destroyed once vested without impairing a contractual obligation of the employing public entity. Kern, supra, at 852-853. In Allen v. City of Long Beach, which is considered to be the landmark case in this area, the vesting concept was described as follows: "An employee's vested contractual pension rights may be modified prior to retirement for the purpose of keeping a pension system flexible to permit adjustments in accord with changing conditions and at the same time maintain the integrity of the system. [Citations.] Such modifications must be reasonable, and it is for the courts to determine upon the facts of each case what constitutes a permissible change. To be sustainable as reasonable, alterations of employees' pension rights must bear some material relation to the theory of a pension system and its successful operation, and changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages. [Citations]. . ." Allen, supra, at 131. See also Carman v. Alvord, 31 Cal.3d 318 (1982) and Miller v. State of California, 18 Cal.3d 808 (1977). In Betts, it was affirmed that vesting applies not only to benefits that are in effect when an employee's employment commences but also to improvements in benefits that occur during his or her service. Betts, supra, at 866. Betts also reaffirmed the holding in Abbott v. City of Los Angeles, 50 Cal.2d 438 (1958), that the comparative analysis of disadvantages and compensating advantages in any modifications to a plan must focus on the particular employee or employees whose vested pension rights are involved. Betts, supra at 864. See also Olson v. Cory, 27 Cal.3d 532 (1980). Because the law is so well developed in California, many other states have cited it as to cases arising in their own states. Thus, I would suggest starting with those cases and checking out citations to them in whatever state you are interested in. ------------------------------------- Employee benefits legal resource site [This message has been edited by CVCalhoun (edited 09-24-1999).]

Well, you might want to check out the IPERS Web site on this matter. From a brief check, IPERS appears to be a defined benefit plan intended to fall under 401(a), not a 403(B) or 457 plan. (The pretax contributions would presumably be mandatory contributions made tax-exempt under I.R.C. § 414(h)(2).) But I didn't do extensive research; you should probably check it out for yourself. By the way, if you ever want to find any of the other state retirement systems, I keep a complete list of state retirement system Web sites at my Web site. --------------------------------------- Employee benefits legal resource site

Hmm, don't I know you from somewhere? In brief, BNA is wrong on this point. Because ERISA Title I does not apply to church plans which have not made an election under I.R.C. § 410(d) to be subject to ERISA, we need to look at the I.R.C. for guidance on this one. There are actually two I.R.C. sections (6057 and 6058) which provide for the Form 5500 requirements. I.R.C. § 6057(a) provides that the Form 5500 filing requirements apply to "each plan to which the vesting standards of [ERISA section 203] applies," a term which would not include a nonelecting church plan. I.R.C. § 6057© provides only for certain voluntary reports by church and governmental plans. I.R.C. § 6058 states that an employer shall file "such information as the Secretary may by regulations prescribe," so the IRS is free to exempt plans from its requirements. And as you note, the regulations also provide for the IRS to provide exceptions. Announcement 82-146 provides such an exception. It states that a nonelecting church pension benefit plan (which would include a 403(B)(9) arrangement) need not file a Form 5500. And as you point out, a similar statement appears in the Form 5500 instructions. Thus, a nonelecting church 403(B)(9) plan would not be required to file a Form 5500. ------------------------------------ Employee benefits legal resource site [This message has been edited by CVCalhoun (edited 09-23-1999).]

Yes, and yes. (Is that succinct enough? ) ------------------------------- Employee benefits legal resource site

Yep, that ruling confirms the availability of room to maneuver, subject to the constraints I mentioned. In the ruling, some school district employees had previously had their mandatory contributions to the state retirement system paid by the school district on a salary reduction basis. The state was anxious to provide higher total compensation, so that school districts could retain valued employees. The state could have accomplished its objective in one of two ways. The first would be to provide increases in cash compensation to the affected employees, in which case the mandatory contributions to the state retirement system picked up by the school districts would have continued to be subject to FICA. The second alternative, and the one the state adopted, was for the state instead to pick up a portion of the contributions, and to direct the school districts to provide additional cash compensation to employees exactly equal to the amount of contributions which the state (instead of the school district) now picked up. Obviously, the financial results of the two alternatives would have been identical. However, the IRS held that under the second alternative, the contributions picked up by the state would not be subject to FICA. The ruling emphasizes that the exact same arrangement may have different FICA consequences, depending on how the applicable documentation characterizes it. ------------------------------------- Employee benefits legal resource site

One more note here: the exclusion allowance calculation is always complicated where there is a defined benefit plan of any kind, much less a cash balance plan. The Taxpayer Refund and Relief Act of 1999, H.R. 2488, would have solved this problem by eliminating the exclusion allowance for years beginning in 2001, and by allowing the exclusion allowance to be calculated without reference to defined benefit (including cash balance) plan contributions for the year 2000. Click here for summary of the bill and links to the bill text and the Conference Committee explanation. I'm hoping that after a suitable period of wrangling between Congress and the President, something like this will eventually pass. --------------------------------------- Employee benefits legal resource site

Short version: The 414(h) contribution is the mandatory contribution to N.C.E.R.S. which is taken out of the employee's paycheck, but which is not included in his or her wages as shown on the W-2, because it is not immediately taxable. The box 14d notation is informational only; the amount does not have to be reported on this year's tax return. Long version: Hmm, okay, history lesson. I.R.C. § 414(h) was a Congressional response to a well publicized case in which an individual argued that because he never received, and never had the right to receive, the amounts taken from his paycheck to make mandatory contributions to his retirement plan, he was not taxable on such contributions. To avert this sort of argument, Congress passed I.R.C. § 414(h), which says in general that a mandatory contributions is treated as an employee contribution (and therefore as taxable to the employee) if the plan refers to it as an employee contribution. However, an exception was carved out for governmental plans. The reason was that it was quite common for a governmental employer (e.g., a municipality) to contribute to a plan (e.g., a state retirement system) which it has no power to amend. In many instances, the state retirement system might call for mandatory employee contributions. However, as a result of collective bargaining or otherwise, the employer might agree to make the contributions otherwise required of employees out of its own pocket, rather than deducting them from employees' wages. The general rule of I.R.C. § 414(h) would have treated the contributions in such a situation as being employee contributions, and therefore as taxable to the employee, even though the employer was in fact making them. For this reason, Congress included I.R.C. § 414(h)(2), which says that if a governmental employer picks up contributions which are designated by a plan as employee contributions, and if the employee has no choice about whether to make such contributions or to get the cash instead, the contributions will be treated as employer contributions (i.e. not taxable when made to the plan, but only when paid out in the form of benefits). In a series of first revenue rulings and then private letter rulings beginning in the early 1980s, the IRS has held that I.R.C. § 414(h)(2) applies to a broad range of arrangements that most people initially would not have thought of pickup arrangements. (No, I'm not going to cite all the citations or the details; I'm saving that for the really long version.) In particular, so-called pickups will exist if the employer says they exist, and if the contributions are mandatory, even if they are in fact taken out of the employees' paychecks. In the case you reference, N.Y.C.E.R.S. requires mandatory employee contributions. However, New York City has adopted the appropriate resolutions to treat the contributions as picked up within the meaning of I.R.C. § 414(h)(2), so the amount of the contributions is subtracted from the employee's pay in calculating Form W-2 income. However, the IRS requires that they nevertheless be disclosed in box 14d of the Form W-2, primarily so that the IRS will have a way to do an audit and make sure the contributions are appropriate and are being treated consistently on pay-in and pay-out. --------------------------------- Employee benefits legal resource site

Haven't researched this one recently. But I seem to recall some gossip to the effect that the IRS has at least informally suggested that one cannot defer vacation or sick leave pay after such leave is "earned." Thus, suppose you had a carryover of vacation from year to year, with a cash-out upon termination of employment. Under this theory, a salary reduction agreement entered into in January of the year of termination of employment might be able to cover only vacation pay earned in the year of termination, not that carried over from prior years and paid out upon termination. Anyone been following this enough to know whether this position has been codified or rejected at this point? Personally, I try to avoid citing gossip as authority when I can avoid it. -------------------------------- Employee benefits legal resource site

Actually, it varies. I.R.C. § 3121(v)(1)(B) provides that a 414(h)(2) pickup is subject to FICA only "where the pickup referred to in such section is pursuant to a salary reduction agreement (whether evidenced by a written agreement or otherwise)." Thus, in what I think of as the old-fashioned pickup situation, in which an employer simply decides as an extra benefit to pick up employee contributions without deducting the pickups from wages, the pickups would not be subject to FICA. However, if the pickups reduce the employees' wages, they are subject to FICA. Obviously, the fact that pickups must be mandatory (Rev. Ruls. 81-35 and 81-36) makes it hard to determine in some instances whether there is a salary reduction "agreement." I've always thought that there might be some room for maneuvering here. (In a collective bargaining situation, for example, is there any real difference between saying that employees' salaries, as increased for COLAs and the like, shall be reduced by X% to cover the pickup, versus saying that employees' salaries shall be increased by a lesser amount, and that the employer will pay for the pickups without a salary reduction?) However, there are a number of limitations on the room for maneuver. One is that if you treat pickups as not being pursuant to a salary reduction agreement for purposes of section 3121(v), and therefore has not being subject to FICA, they are also not part of wages for purposes of Social Security benefits. This can be a concern for some employees and unions. Another is that a state statute will typically treat pickups, other than those made pursuant to a salary reduction agreement, as not included in wages for purposes of benefit calculations. Similarly, other plans (e.g., life insurance plans) may treat non-salary reduction pickups as not part of wages in calculating benefits. Finally, public employers often have trouble competing for employees with the private sector, in those job positions in which wages are higher in the private sector. In theory, one should be able to argue that the $95x salary, plus the employer pickup of $5x, that one is offering is equivalent to another employer's offer of $100 in salary with a $5x salary reduction for the pickup. In the real world, though, the employee may see a $100x salary as better than a $95x salary, without going through the details enough to realize the equivalence. Thus, as a practical matter, the modern trend has been to have more and more pickups involve salary reductions. But those who are dealing with the older type of pickup arrangement should be aware that FICA would not apply to it. --------------------------------- Employee benefits legal resource site

Alas, I'm afraid that the answer is the same. Adopting the GATT provisions (particularly since governmental plans are not required to adopt them) would reduce participants' benefits. Thus, the question is whether such a reduction violates federal or state constitutional provisions, and/or state statutory or common law rules. -------------------------------- Employee benefits legal resource site

Hmm, in theory this is not supposed to happen, because the IRS and DOL definitions of "governmental plan" are supposed to be identical. However, as you point out, the different agencies may interpret the same requirements differently. The Department of Labor Form 5500 requirement would in theory be governed by ERISA Title I, not the Internal Revenue Code. However, depending on your willingness to take an aggressive approach, you might use the IRS private ruling as a basis for not filing a Form 5500 with either IRS or DOL. Indeed, you might want to check back and see whether the private letter ruling was cleared with DOL; most of the ones which concern common issues are. In any event, it would appear to be difficult for DOL to impose penalties for nonfiling of the Form 5500, since those penalties apply only if there is no "reasonable cause" for the nonfiling, if the IRS had held the plan to be governmental. ------------------------------ Employee benefits legal resource site

The 403(B) Examination Guidelines indicate that no plan document is required in the case of a 403(B) plan which is not subject to ERISA. Thus, presumably so long as the plan was not in operation violating the 401(a)(17) rules, those rules would not have to appear in a plan document unless ERISA applied. -------------------------------------- Employee benefits legal resource site

The Department of Labor has recently come out with Advisory Opinion 99-07A, which stated that a plan could be considered a governmental plan even if it covered a de minimis number of nongovernmental employees. However, the IRS appears to maintain a much stricter rule--perhaps allowing for some grey ares in terms of whether the employer is truly governmental, but treating a plan with any clearly nongovernmental employees as not being a governmental plan. ---------------------------------- Employee benefits legal resource site

One thing to watch out about--a governmental plan is in most cases subject under applicable state or local law to more stringent vesting rules than IRC § 411 would apply. I don't know whether it is possible to get an actual addendum to the plan, but in any case, it is important for those charged with the administration of the plan to know that they cannot necessarily cut off future benefit accruals for existing employees just because the plan says they can. -------------------------------------- Employee benefits legal resource site

It would not be illegal under federal law to make the transfer. However, if yours is a governmental plan, it may be illegal under state or local law. It is quite common to have state or local 403(B) plans limit the contracts to which transfers can be made. The reason for this is that the employer often wants to impose standards on the 403(B) carriers (e.g., requiring that they properly calculate maximum contributions, or make adequate disclosures to employees. These standards become meaningless if employees simply have money contributed to an approved carrier, and then immediately transfer the money to a nonapproved carrier. ---------------------------------- Employee benefits legal resource site

Actually, I would not think it was the plan administrator's job to worry about this. The plan terms presumably state that the money goes to the beneficiary named by the employee, and that is clearly the wife. It is clear from case law that the plan administrator is not obligated to consult other documents (e.g., a will or, in this case, a contract) which may purport to name other beneficiaries. Thus, the plan administrator should pay out to the wife. The wife then has a separate contract obligation to pay out 40% to the son. If she fails to do so, the son could sue her. But the issue would still be between her and her son, not the plan. ------------------------------ Employee benefits legal resource site

An employee can, if the plan terms so permit, opt out of the plan and take cash instead. However, two obstacles must be considered. First, if one employee is allowed a year-by-year option as to whether to participate or to take cash, all employees must be allowed such an option. I.R.C. § 403(B)(12)(ii). And once employees have this option, the contributions which are subject to such an option become subject to the I.R.C. § 402(g) limits on elective contributions. Alternatively, you might make that employee do a one-time election before first participation in the plan as to whether to take cash or plan benefits. A couple of issues here. First, has the employee already begun participation? If so, it may be too late for an election. Second, if the plan is subject to the nondiscrimination rules of I.R.C. § 403(B)(12)(ii), the plan may become disqualified if too many nonhighly compensated employees elect to take cash rather than benefits. --------------------------------- Employee benefits legal resource site

One issue to consider: is this a 403(B)(9) church retirement income account? Legislative history suggests that such accounts are subject to an exclusive benefit rule similar to section 401(a)(2). -------------------------------- Employee benefits legal resource site