Carol V. Calhoun

With the IRS and Social Security just having announced the new year 2000 limits on everything from section 403(B) plans to the Social Security wage base, here's a handy chart showing the limits from 1996 through 2000. -------------------------------------- Employee benefits legal resource site

Well, we don't have to estimate any more; you can click here to see what all the new limits are. ------------------------------------- Employee benefits legal resource site

Yes, so long as the plan making the distribution is also a 401(a) plan, and if the written plan document allows for it. This is in I.R.C. § 402, which is the same for governmental and private plans. --------------------------------- Employee benefits legal resource site

Currently, it would. However, there was a proposal in this year's tax bill which would have changed that rule. And while the tax bill got vetoed, it is expected that future legislation will include most or all of the benefits provisions of the bill that was vetoed. --------------------------------- Employee benefits legal resource site

The problem is that I.R.C. § 415(e)(5) is the source of the rule that a 403(B) plan is not to be treated as a plan of the employer which actually sponsors it, but only of any business controlled by the participant. Although you are right that the first part of that rule is not explicit (since the statute by its terms mentions only the second part), it is the only part of 415 which could be construed to cause a 403(B) plan sponsored by an employer not to be treated as a plan of that employer for purposes of I.R.C. § 415(f), which calls for all plans of an employer to be combined in applying the 415 limits. The question may soon be moot, however. TRA '99 would have corrected the problem. While of course TRA '99 was vetoed (isn't that an annual tradition by now?), the general expectation seems to be that the pension plan provisions will eventually turn up in whatever tax bill is passed. -------------------------------- Employee benefits legal resource site [This message has been edited by CVCalhoun (edited 10-08-1999).]

Gee, Peter, looks like I forgot to play my "consult your state law" broken record this time--thanks for the catch! Seriously, you're right that while ERISA would not preclude employer involvement in a governmental plan, state law should be consulted to see whether it either requires or forbids a particular kind of employer involvement. -------------------------------------- Employee benefits legal resource site

Danwitz-- Further to our original discussion, the National Council on Teacher Retirement's program for its annual meeting, page 12, indicates that the National Retired Teachers Assocation has performed a study which showed the 31 out of the 50 states had constitutional pension protections. (The program requires the Adobe Acrobat reader, a free download, to view.) Is that close enough to 2/3 for you? ---------------------------------------- Employee benefits legal resource site

And just to make your life more complicated, the tax bill recently vetoed by the President, but expected to come back in some form, would modify the limits. However, these changes are typically not effective until 2001, so at least you have a little advance warning. ---------------------------------- Employee benefits legal resource site

Well, I'm not sure I'm the one to answer this. However, I modified your subject line, in hopes that perhaps someone else will see and answer it. ----------------------------------------- Employee benefits legal resource site

Yes and no. (Is that clear?) No annuity product issued to a governmental 457 plan before the new law would comply with the new law. However, minor amendments to the annuity contracts could bring them into compliance. The reason for this is that before I.R.C. § 457(g), a 457 plan was required to be UNfunded. (This rule still applies to 457 plans of tax-exempt employers other than governmental employers.) Thus, any annuity contract used to pay plan benefits had to be owned by the employer, or by a trust which was subject to the claims of the employer's creditors. Although the performance of the contract could be used to measure the ultimate benefit under the 457 plan, the plan participants could not have any kind of security interest in the contract itself. Under the new rules (click here for gory details), an annuity contract undera governmental plan must be used solely for the payment of benefits to employees, and must not be subject to the claims of the employer's creditors. Thus, none of the old contracts would meet the terms of the new law. However, if the contract is amended to state that amounts set aside under the contract are to be used solely for the benefit of plan participants and beneficiaries, and not used for the benefit of the employer or its creditors, it can comply with the new law. The rules on withholding may, however, be a stumbling block. Essentially, the entity which pays amounts from the contract is responsible for reporting on and withholding from such amounts. Thus, unless you can find a way to contract out the job of reporting and withholding, an inability to do that job yourself would be a problem if you decided to stay in (or go back to) that business. ------------------------------------ Employee benefits legal resource site

While no specific guidance yet exists on those 457 plans disqualified by the SBJPA amendments, the IRS has issued a technical advice memorandum, TAM 199903032, which discusses the consequences of a failed 457 plan in general. (The TAM requires the Adobe Acrobat reader, a free download if you don't have it already, to view or print.) Trust me, the consequences are truly bizarre; you can click here for an analysis of the effects of the TAM. ------------------------------------ Employee benefits legal resource site [This message has been edited by CVCalhoun (edited 09-29-1999).]

As Dave Baker has noted elsewhere on this site, BenefitsLink and Calhoun Law Group (the firm I belong to) 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 church plans research links. -------------------------------- Employee benefits legal resource site[Edited by CVCalhoun on 09-22-2000 at 02:23 PM]

My personal advice? Don't even go there! (Needless to say, as a lawyer, I have to explain that this is only personal advice, not legal advice. ) The problem is that the determination of whether these people are governmental employees is governed not by the terms of the contracts with the leasing agency, but by the traditional 20-factor test as interpreted by cases such as Microsoft. Since these tests are as clear as mud, you may well discover that the employees argue that they are employees of either the government agency or the leasing company, whichever happens to be the most favorable to them at any particular point in time. And since the issue is determined on an employee-by-employee basis, even if you are successful in litigation with one employee, the next one can still come along and argue the same issues. Some examples: suppose you decide that as leased employees, these individuals are not covered by a state retirement system which would have covered them had they been employees of the entity which leases them. Given that the state statute does not contemplate leased employees, the statute presumably includes some general language to the effect that "employees" in certain categories are covered. A leased employee could argue that even though the contract with the leasing agency says s/he is employed by the leasing agency rather than by any governmental entity, s/he is actually a common-law employee of the governmental entity, and is therefore covered under the state retirement system. And of course, the employee cannot be expected to argue this during employment, when employee contributions would be due. Instead, the argument would typically come up at retirement, when the employee would argue entitlement to a pension. That means that by the time the issue would even be litigated, you would have a lot of affected employees, and the potential for a class action suit against you, as well as not having collected employee contributions for all those years. And if the leased employee were also covered under a plan of the leasing agency, s/he might even end up with double coverage. Conversely, suppose that the state retirement system does cover these individuals. In that instance, a leased employee could argue that s/he was not a governmental employee, and therefore that the plan was, at least as to that employee, a plan covered by ERISA. This argument would be particularly likely if the employee died at a point when s/he was not entitled to benefits. A surviving spouse could argue that the preretirement survivor annuity provisions of ERISA applied, and therefore that the spouse was entitled to a retirement benefit which the retirement system never contemplated. Or suppose that the leased employees are covered by a plan maintained by the leasing agency. As an entity covered by ERISA, the leasing agency would normally have the right to cease benefit accruals at any time. However, an employee could argue that because s/he was really an employee of a governmental entity, federal and/or state Constitutional principles would preclude any diminution of the future benefit formula as applied to employees hired before the date of any such change. The best idea here would be to pay the leasing agency to perform administrative services, if needed, but to treat the individuals for all purposes as employees of the governmental entity. If you want to cut them out of particular benefits, amend the plan document to exclude them, rather than trying to argue that they are someone else's employees. Of course, this doesn't work in the case of a 403(B) plan which includes salary reduction contributions. And if you've got a state plan covering local employees, this may require some cooperation from your state legislature. And yes, I do understand the political pressures in many states to "privatize" employees, even if in practice they stay at the same desks performing identical jobs. In some instances, we have been able to come up with some fuzzy language which causes people to be arguably "privatized" while still being treated as governmental employees for withholding and employee benefits purposes. But trying to treat employees as leased from an agency can bring you into litigation which can be expensive even if you win, and can be lots worse if you lose. ----------------------------------- Employee benefits legal resource site

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