Carol V. Calhoun

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

I'd say this one is a judgment call. Obviously, the safest course is to go with the safe harbors, since the safe harbors provide a "cookbook" for making sure that withdrawals are permissible. But it has been my experience that employers (and presumably third-party providers) who try to use the safe harbors often sooner or later get tear-jerker cases which for one reason or another do not meet the safe harbors. At that point, the question is how much of a legal risk to take, versus to what extent the entity responsible for deciding on hardship withdrawals is going to lose business or suffer in a public relations sense (even leaving aside the moral aspects!) if the request is denied. -------------------------------- Employee benefits legal resource site

I would second Dowist's suggestion. In about two-thirds of the states, either federal or state Constitutional impairment of benefits clauses have been held to preclude any cut-back of benefits (and often even to preclude any cut-back of future benefit accruals for existing employees). In some instances, these provisions can for all practical purposes prevent the termination of a plan. You would want to make sure that they do not either preclude the termination, or preclude the change in interest rates. --------------------------------- Employee benefits legal resource site

This does indeed appear to be an unanticipated consequence of the elimination of 415(e)--and one which the new tax bill would fix. There is a summary of the bill provision at http://benefitsattorney.com/taxbill.html--just look under "INCREASES IN LIMITS ON RETIREMENT PLAN CONTRIBUTIONS AND BENEFITS" in the table of contents and click on "SEC. 1222(B). AGGREGATE LIMITS FOR 403(B) AND QUALIFIED PLANS." Of course, the President and Congress have to go through their usual dance in which the President vetoes whatever bill is first presented to him, and then the President and Congress come up with a compromise bill. However, it appears that that provision is noncontroversial, and is likely to turn up in the final bill. ------------------------------------- Employee benefits legal resource site

Thanks for the clarification, Dave. Because this board is specifically oriented toward governmental plans, my prior response did not discuss the situation for plans of private employers. You're right that because 457 plans of private employers are necessarily top hat plans, they would not eligible for rollover to 401(a) or 403(B) plans. ----------------------------------------- Employee benefits legal resource site

I would agree that regardless of the theory, the IRS is unlikely to go after an employer in instances in which the employer took reasonable efforts to avoid a problem, and the problem occurred anyway without the employer's knowledge. I guess my question is only what happens if the employer is aware that the issuer of a contract will allow hardship withdrawals with no effort at all to identify either whether the purported hardship would be considered a hardship under the regulations (either under the safe harbors, or under the general tests set forth in the regulations), or whether there are other means available to meet that hardship. Can the employer be said to reasonably believe that the amount contributed to such a contract is not subject to withholding? I am not particularly concerned about a situation in which the contract provides for the specific circumstances which would constitute a hardship, and provides that a hardship withdrawal would be available only if the participant certifies that such a hardship exists, and that there are no other resources to meet the need. What I am more concerned about is a situation (which appears to be quite common) in which the contract merely says that withdrawals will be available in the event of a hardship, makes no effort to define "hardship," and then requires the participant only to certify that s/he has a hardship, without even specifying what the hardship is. Trust me, in the latter situation, the most reasonable belief is that at least some participants will consider it a hardship to have to pay the credit card bill they incurred last month to buy a yacht, and will not take into account at all that they could meet that need by liquidating investments other than the plan account. (I've obviously been practicing WAY too long, and have become quite cynical!) ----------------------------------------- Employee benefits legal resource site

Unfortunately, the tax liability is not just that of the individual participant. The employer is liable for the taxes which should be withheld. And if it is unaware that there is a problem, and therefore fails to withhold the correct amount of taxes, the IRS can go after the employer, instead of the employee. --------------------------------- Employee benefits legal resource site

Posted on behalf of Becky Miller: I was curious about the ramifications of the elimination of Section 415(e)(5) for people who had made elections under IRC Section 415©(4)©. Doing business a block from the Mayo Clinic and in many college towns, we get a lot of business with persons with complicated histories for the exclusion allowance. Frequently the employer will prefer to calculate the exclusion allowance using the 415 rules as permitted by 403(B)(2)(B). We also have individuals who wish to make the © election because they have outside income as coaches, physicians, consultants, etc. It has been my understanding, that where the 415©(4) © election and the 403(B)(2)(B) election are in place and 415(e)(5) applies, the 403(B) plan is aggregated with the employer (say Mayo Clinic) and the outside practice/football camp(!) stands alone. However, in reading the regs. at 1.415-8(d)(2), it seems to say that under these circumstances the 403(B) plan is aggregated with the employer and with any outside practice of the individual. Is that only if 415(e) doesn't apply, i.e multiple DC plans involved or, heaven help me, have I misunderstood this rule for years? I have only done this in the context of defined benefit plans, thus the 415(e)(5) language tended to sustain the disaggregation of the individual's plan from that of the institutional employer. But, without 415(e). I don't know if I can rely on that. For example: LTR-RUL, UIL No. 403.04-00 Taxation of employee annuities, Annuities purchased by section 501©(3) organizations, Letter Ruling 8833047, (May 27, 1988) Section 1.415-8(d) of the regulations provides, generally, that the participant on whose behalf a section 403(B) contract is purchased is considered to have exclusive control of the annuity contract. Accordingly, the participant, and not the participant’s employer, is deemed to maintain the annuity contract. However, pursuant to section 415(e)(5) of the Code, the participant’s employer is considered to maintain the contract if the participant elects under section 415©(4)(D) to have the provisions of section 415©(4)© apply, or if the participant has the control of the employer required under subsection (B) or © of section 414 (as modified by section 415(h)). This came up because an American Express guy who is trying to sell our person some investments for his 403(B) told him that he couldn't put anything in a 403(B) and should have another investment vehicle instead. He said that there was a recent court case/ruling/IRS settlement for a football coach that held this way. I can't find anything on this, so I thought I would post the message to the web and see if others had heard. (I ran it through CCH Access, not Lexis or Westlaw. I checked for 403(B) and 415© and got nothing.) But I figured you might be interested. Especially if this is an unanticipated consequence of the elimination of 415(e).

For anyone who is interested, I now have a summary of the recently passed tax bill at my site. Although Clinton is almost certain to veto the bill, the bulk of the benefits provisions are likely to reappear in whatever tax legislation is passed this year. ------------------------------------ Employee benefits legal resource site

For anyone who is interested, I now have a summary of the recently passed tax bill at my site. Although Clinton is almost certain to veto the bill, the bulk of the benefits provisions are likely to reappear in whatever tax legislation is passed this year. ------------------------------------ Employee benefits legal resource site

The bill (a summary of which you can see by clicking here) actually contains two provisions concerning the rollover of amounts between plans. extends current law provisions allowing for rollovers upon a terminable event to allow the rollovers to be to a different kind of plan. The second permits in-service transfers among plans, but only for the purpose of purchasing service credit under a governmental defined benefit plan using funds from a defined contribution plan. -------------------------------- Employee benefits legal resource site [This message has been edited by CVCalhoun (edited 08-16-1999).]

One more thought: you might want to search BenefitsLink itself, not just the message boards. Here's the link to the BenefitsLink search page. ---------------------------------- Employee benefits legal resource site [This message has been edited by CVCalhoun (edited 08-13-1999).]

Yes, they have--but unfortunately, I have changed firms since then, and I didn't memorize all the numbers. But try looking in 1985 under 403(B) and formula, and I think they will come right up. -------------------------------- Employee benefits legal resource site