Carol V. Calhoun

The W-2 is the only option. The amount is wages, and is subject to income (though not FICA) withholding as such, even though payment is delayed until after termination of employment. It's the same way as you would deal with deferred compensation from a taxable entity.

How does a government "acquire" a not-for-profit entity? Such entities have no owners, so you can't purchase one. Did the government buy the assets, or what happened? The other issue to consider is whether the nonprofit is now itself a governmental instrumentality. If the only member of the nonprofit is a governmental entity, there is a good chance that it is. In any event, if the nonprofit has somehow failed to become a governmental instrumentality, and is still an ERISA plan and subject to coverage rules, I'm not sure how you could possibly apply them on a controlled group basis, given that such rules do not apply to governmental plans. You would, of course, still have to apply the universal availability rules.

Rather than having a separate rate group for each person, it would be simpler just to provide in the 401(a) plan that it will match contributions to the 457(b) plan. So long as you identify the 457(b) plan involved (so as to preclude employer discretion) , this would not be a legal issue.

No, the relevant language is that , What the DOL is saying is that a plan established and maintained for nonemployees does not fit within this definition, regardless of whether those nonemployees are fulfilling a governmental function.

Well, they wouldn't necessarily violate the exclusive benefit rule, but the plan would become subject to the ERISA rules that apply to nongovernmental plans--which would mean it would have to comply with things like the J&S rules. I didn't claim it made sense, but that was the position the DOL was taking, based on the literal language of the statute. As you can see in Advisory Opinion 94-02A, the DOL made us represent that there had never been any independent contractors in the plan before it would issue the opinion.

We definitely encountered this years ago, when we asked the DOL for an opinion letter stating that a particular 457(b) plan was a governmental plan. They made us exclude independent contractors from the plan before issuing the letter. See https://benefitsattorney.com/authorities/advisory-opinion-94-02a/ Of course, these days, neither the DOL nor the IRS will issue guidance on whether a plan is a governmental plan. But I would still keep plans for employees and independent contractors separate.

That would be a question of state law. Governmental plans are not subject to Internal Revenue Code prohibitions on cutbacks of benefits. However, many state courts have held that state constitutional prohibions on the impairment of contracts preclude cutbacks. The existence of such prohibitions, the extent to which they apply (e.g., only to existing accruals or to all future accruals for existing employees), and the extent to which they protect the form of benefits as opposed to just their actuarial value varies from state to state.

No. The requirement that a qualified joint and survivor annuity be provided, unless the spouse consents to a different form, comes from section 401(a)(11), which incorporates by reference section 417. However, section 401(a)(11) is made inapplicable to governmental plans by the last sentence of section 401(a) (following 401(a)(37)). I've got a checklist of which requirements do and do not apply to governmental plans at this link, if that's helpful.

Assuming that the sponsoring employer was not governmental, I can see no reason that Forms 5500 would not be required. Normally, these could be filed under the Delinquent Filer Voluntary Compliance Program (DFVCP).

Are we talking about a governmental 457(b) or a 457(b) of a nongovernmental entity? In the case of a nongovernmental entity, a 457(b) is purely a contractual obligation. Thus, I would assume that the contract could be set up in the first place so as to provide for forfeiture in the event of a crime against the employer. Doing so would likely not result in the amounts contributed being treated as subject to a substantial risk of forfeiture. 26 C.F.R. § 1.83-3(c)(2) says that it would not for purposes of section 83, and an old EO Text indicates that the same rule applies for purposes of section 457(b). In the case of a governmental entity, the same rules should apply. However, there are two issues. First, because a governmental 457(b) plan is funded, some provision would need to be made for what would happen in the event that an amount was forfeited. Presumably, this would involve decreasing future employer contributions, inasmuch as adding it to other participants' account could result in going over the annual 457(b) maximum. The second issue is that governmental entities are often subject to Constitutional rules prohibiting modification of even future accruals under a retirement plan with respect to individuals who have already begun participation. Thus, if a plan does not initially provide for forfeiture, it may be impossible to modify the plan to do so with respect to existing participants. Obviously, the judicial decisions in the particular state should be consulted to determine whether this is an issue.

For those following along at home, I was able to talk to a senior IRS official about this. He says that although EPCRS is not explicit about VCP fixing the participant taxation issue (as opposed to the qualification issue), the IRS will not challenge the tax-deferred status of elective deferrals to an ineligible 401(k) plan if VCP procedures are followed. Thus, we can do what we hoped: shut down the 401(k) plan to future deferrals (and eventually terminate it), and allow participants to make new deferrals and roll over the old money to a new 457(b) plan. Of course, this means that participants won't have to roll over, but can choose to just take the money, but the client does not consider this a problem.

Thanks--good to know!

Alas, apparently even the ASPPA conference couldn't get the IRS to disgorge the new limits!

Thanks for the insight, MPSLAW!

Thanks for letting me know about your experience. It seems weird to say "that the regs (1.401(k)-1(a)(5)) do provide clearly for what happens in this case, and no VCP is required." The regs clearly say what happens if your plan is disqualified, too, but people go into VCP precisely in order to avoid that result. In this case, the situation was not abusive. After all, if the employer had known the rules, they could have gotten the same result with a 457(b) plan. The only tax effect is on the employees, who were not responsible for the error, not on the employer or on the plan trust. And it seems comparable to an ineligible employer adopting a 403(b) plan, so one would think the correction could be the same. But it sounds like they are not willing to bend at all.

Yeah, my concern here is that we pay the fee, and get a boilerplate IRS letter back saying that the plan is now qualified. Of course, we already know it is qualified. What we need reassurance on is that the contributions are tax-deferred. It's different from the SARSEP or 403(b) situation, because there is nothing that prohibits a governmental entity from adopting a purported 401(k) plan and having it qualified. The only thing that happens is that contributions intended to be elective deferrals would be after-tax. And it's that "declining quality of the agents" that bothers me. We need to get the agent both to understand the problem, and to be willing to grant relief (allowing contributions to be tax-deferred, not just allowing the plan to be qualified) that is beyond the usual scope of VCP relief.

Has anyone dealt with correcting a situation in which a governmental employer impermissibly adopted a 401(k) plan, in spite of not being eligible for the grandfather? It appears that this situation is not one contemplated by EPCRS, inasmuch as the plan as a whole is qualified, but the purported elective deferrals would not be a cash or deferred arrangement (and thus would be after-tax). The client would like to follow the procedure for an employer that adopts a 403(b) plan, even though it is not eligible to do so—i.e., stop all contributions to the plan, pay the VCP fee, and make distributions only when otherwise permitted to do so. Has anyone gone to the IRS to negotiate a VCP-like solution to such an issue—one that would protect the pretax status of the employees’ contributions? What was the outcome?

The part that gets to me is that if your filing is more than 15 MB, you can only upload the first 15 MB, and then have to fax the rest. First off, 1990 is calling, and wants its fax back. And second, just how is the IRS going to associate the 15 MB file with the faxed remainder?

Has anyone heard anything about when the formal IRS notice might come out? They used to happen the same day the Social Security notice came out, but that hasn't happened the past couple of years. But it seems to be awfully late this year.

Thanks, Tom! Your charts this time of year are always so helpful. And the Social Security Administration just confirmed your estimate of the wage base.

Thanks--good to know!

No. One of those single employer plan offset by multiple employer plan things.

Does anyone have any thoughts on the meaning of "offset arrangement" on the Form 5300? We've got a defined benefit plan that offsets benefits by the benefits under another defined benefit plan. (There are complicated reasons for this structure.) I'm seeing lots of discussion that a "floor offset" plan involves only a DB plan that is offset by a DC plan, not by another DB plan. But I can't find a specific definition of "offset arrangement," without the "floor" part.

There are really only two restrictions I have encountered. First, if the employer is legally required to pay a particular amount of wages (by minimum wage laws, employment contract, or collective bargaining agreement), it may not be able to raise mandatory picked up contributions to a level that would result in wages, after reduction for the pickups, being below the required level. The second constraint is that the group subject to the pickup cannot be so small as to give rise to an implication that the employees in fact had individual discretion. For example, if the "group" consisted of a single employee, and that employee's contributions went up or down from one year to another, the IRS would likely take the position that the changes were made because the employee asked for them. It is not clear how large the group has to be to avoid this issue, but it is a consideration for very small groups.

Unfortunately, it appears that the IRS will no longer issue rulings on whether a governmental entity is part of the same "employer" as another part of the state or local government. The best we've got is Private Letter Ruling 200028042, which allowed the state of Idaho and all of its localities to be treated as part of a single employer, and thus to adopt a 401(k) plan based on the State Department of Health and Welfare having a grandfathered 401(k) plan. However, I have heard rumors that at least some IRS personnel think that ruling went too far, although it has never been revoked.