Carol V. Calhoun

Yeah, I think we can get around the new tax bill (assuming it even gets enacted) by having payout on vesting. But I'm not sure that gets around the top hat issues. They are not remotely interested in an after-tax plan.

We have a situation in which a corporation wants to have a plan for its employees, all of whom are physicians. We ruled out a qualified plan, because there are a lot of nonphysicians who would be considered leased employees and/or part of an affiliated service group, so any plan for just the physicians would fail nondiscrimination testing. However, we are now stuck on the question of whether they can have a nonqualified plan. The issue is that in order to be a top hat plan, a plan must be for a select group of management or highly compensated employees, and it seems unlikely that a group consisting of all employees could ever be "select." And while the leased employees and affiliated service group are all treated as part of the same employer for Code purposes, there does not seem to be an analogous provision under ERISA. Has anyone dealt with this situation? Any brilliant thoughts on resolving it?

I remember a long time ago saying jokingly to someone at IRS, "You'll be horrified to discover that some of our governmental plans don't comply with all of the IRS qualification requirements." Her disbelieving response was, "You mean some of them do?"

Thanks for trying! There is just so little guidance on what seems to me like an obvious issue.

We are looking at the taxation of benefits to provide for egg extraction and freezing. Publication 502 provides that: Two questions: Does the reference to "overcome an inability to have children" refer only to a current inability to have children, or a future inability? For example, suppose someone has cancer, and is just about to have radiation treatments that will forever eliminate the ability have children--can we provide IVF on a tax-free basis? What about someone who is trans, who is about to enter hormone treatment that may impair fertility? Or what about someone who is 35 now and has no partner, but wants to preserve eggs for later when her fertility may have declined? How long is "temporary" storage? I have heard, though been unable to locate documentation, that John Sapienza, IRS Office of Chief Counsel, made remarks at a May 2002 ECFC Teleconference that "temporary" might mean that eggs were stored and used within the same year. Obviously, that would in many instances be insufficient even in the case of current infertility (for someone who took a long time to get pregnant, or wanted to have a second child). And it would certainly be insufficient in instances such as those described in 1, above. Has anyone had any formal or informal contact with the IRS on either of these questions? Or does anyone have a copy of Sapienza's remarks?

It looks like they have received a letter on one of their plans, but not others. The list of approved plans is at https://www.irs.gov/pub/irs-tege/preapproved_403b_plans_list.pdf

We definitely have instances in which we as attorneys draft a form QDRO, which a nonattorney employee of the employer or plan then provides to plan participants or their attorneys. I don't see the purely ministerial function of providing the sample QDRO as being the practice of law. But I would not want a nonattorney drafting the QDRO in the first instance, or providing the participant with legal advice concerning it.

Has anyone considered the issue of whether a retirement plan can permit the employer discretion over whether to approve an employee's application for phased retirement without violating the definitely determinable benefits rule? Basically, the idea behind allowing phased retirement is that they want to hold onto a valued employee on a part-time basis so the employee can train a replacement. But they don't want to offer phased retirement to someone in other situations--e.g., if there are many other employees with the same skills, so they don't need the outgoing one to train the incoming one. It's a governmental plan, so we're not concerned about discrimination in favor of highly compensated employees. And I wouldn't have any issues if they said from the beginning something like, "Phased retirement is available only to employees in the X department," or "Phased retirement is available only to employees who are level Y or above." But can they retain the discretion to decide when the employee applies whether or not to grant that employee phased retirement? My concern would be that Employee A requests phased retirement, and gets it. Employee B is denied phased retirement, but then requests and receives part-time status. So in effect the employer has exercised its discretion in such a way that Employee A gets benefits from the retirement plan, and Employee B does not, even though both are otherwise in the same situation.

So long as the written document is effective January 1, 2009, and the VCP submission is filed with the proper fee, that seems to be the only correction required. See: https://www.irs.gov/retirement-plans/403b-plan-fix-it-guide-you-didnt-adopt-a-written-plan-intended-to-satisfy-the-law-by-december-31-2009

Sure! As long as the plan document is clear on what is allowed, this should be permissible. The one practical problem is that the IRS will no longer rule on custom plan documents, but will only issue opinion or advisory letters on pre-approved plans. So if you choose this mechanism, you'd be on your own in making sure it was acceptable under 403(b).

I'm not sure it does. The employee is still giving up cash, and getting more in the way of retirement benefits. In theory, the extra cash is retained by the employer instead of being contributed to the plan. However, when benefits rise, the employer ends up having to contribute more to the plan, sooner or later. So the IRS could argue that the employee still has a choice between more cash and a larger contribution to the retirement plan.

We've actually thought about that one, and it's not at all clear. Before the passage of section 415(n), it was unclear whether the contributions made by employees to purchase service credit should be treated as annual additions subject to the limits of 415(c), or part of the defined benefit subject to the limits on benefits of section 415(b). The reason was that the 415 regulations state that "If voluntary employee contributions are made to the plan, the portion of the plan to which voluntary employee contributions are made is treated as a defined contribution plan pursuant to section 414(k) and, accordingly, is a defined contribution plan pursuant to §1.415(c)-1(a)(2)(i). Accordingly, the portion of a plan to which voluntary employee contributions are made is not a defined benefit plan within the meaning of paragraph (a)(2) of this section and is not taken into account in determining the annual benefit under the portion of the plan that is a defined benefit plan." While this makes sense for nongovernmental plans, it is not clear that it is true for a governmental plan. A section 414(k) plan must be "A defined benefit plan which provides a benefit derived from employer contributions which is based partly on the balance of the separate account of a participant." Amounts used to purchase permissive service credit are typically not put into any kind of separate account. So the question is whether the language in the 415 regulations could actually apply to them, since the plans to which they are contributed are not in fact 414(k) plans. Section 414(n) was intended to remedy this issue by providing that if certain requirements were met, the plan could treat the purchase of service credit as subject to either 415(b) or (c), at its option. However, the down side is that purchases of more than five years of nonqualified service credit are automatically treated as violating section 415, even if they would otherwise comply with 415(b) or (c). However, the question is whether you can avoid the 415(n) rules simply by allowing people to contribute to the defined benefit plan, and increasing the benefit under the plan, without measuring the increased benefit by years of service. For example, suppose the benefit under the plan is 2 percent of compensation times years of service. The employee has compensation of $50,000 and 20 years of service, meaning that without anything else happening, the benefit would be $20,000. It is clear that you could not allow that employee to purchase 10 years of nonqualified service (which would result in a total benefit of $30,000) without running afoul of 415(n). However, can you simply provide that if the employee makes a contribution of $X, they will get an extra $10,000 in benefits, without tying that $10,000 to years of service? On the one hand, section 415(n) by its terms applies only to "service credit," which would suggest that the previous strategy would work (at least if you could figure out whether the 415(b) or (c) limit should apply, and limit the benefit or the employee's contribution accordingly). On the other hand, that employee has achieved exactly what would have happened if the extra 10 years of service had been credited, so this seems an end run around 415(n). To the best of my knowledge, the IRS has never considered this issue. So you are kind of on your own in figuring out a) whether this works at all, and b) whether the contributions should be treated as subject to 415(b) or (c) limits.

I would agree with you. However, they might consider providing that all accrued annual leave would be contributed to the plan, but that the employee would then have the choice either to take it out immediately (assuming the employee was at least 62), or to have it used to extend the DROP period. So long as the employee does not have an option concerning whether to have the cash contributed to the plan, there is no objection to giving the employee an immediate right of withdrawal.

I believe that you can avoid VCP. Rev. Proc. 2017-1 merely says that the written plan must have been“intended to satisfy the §403(b) requirements.” It does not say the written plan document must have been intended to satisfy the requirements of either the regulations or Announcement 2009-89. Since the plan you've got was a written plan document (which is all that either the regulations or Announcement 2009-89 would have required, anyway), it should satisfy the requirements. And that makes perfect sense. Both the regulations and Announcement 2009-89 were intended to interpret the 403(b) requirements. However, they were made prospective only, to reflect the fact that employers may not have realized before 2009 that 403(b) should be interpreted so as to require a written plan document. To the extent that employers did interpret 403(b) as requiring a written plan document before 2009, and complied before the regulations and the Announcement came out, they should not be penalized for doing what was necessary even earlier than the IRS would have required it.

Yeah, I'm thinking that our most conservative option is to talk to the client about disclosing, and/or to see whether we can limit our letter to "material" items and exclude it that way. But I was hoping someone had more definitive guidance.

On what basis did you decide it was not? I haven't been able to locate any direct authority, one way or the other.

Not under 457(b) plans. But other nonqualified deferred compensation plans of governmental and tax-exempt organizations are subject to a host of special rules. In many cases, such a deferred compensation plan will actually result in taxation when benefits become vested, even if there is no constructive receipt at all.

You might look at PLR 200918007 (May 1, 2009) for an example of a plan design. In that case, monthly benefits started automatically when someone attained a particular age and service. Another alternative would be to give the volunteers a one-time irrevocable election upon first participation in the plan as to when their benefits would be distributed. Or to give them an election each year as to when the benefits accrued in that year would be distributed. You could also pay out just enough to pay the tax at the point at which benefits were first made available. However, as you say, this would involve a lot of administrative complexity in handling the gains.

We have been asked to respond to an auditor's inquiry. We are not aware of any litigation regarding this company. However, there is a union grievance related to changes they made to the retirement plan. Has anyone considered the issue of whether a union grievance constitutes a "claim"?

I'm assuming that what we are talking about is a nonqualified unfunded plan for volunteers, exempt from section 457 due to Code section 457(e)(11). In that case, it is subject to the same tax rules that would apply to a nonqualified unfunded plan of a nongovernmental organization, except that it is exempt from Code section 409A.*/ Thus, a distribution is taxable when actually or constructively received. 26 CFR § 1.451-1. And it is constructively received when it is "made available" to the employee. 26 CFR § 1.451-2. */ The 409A exemption is found at Proposed 26 CFR § 1.409A-1(a)(4).

Thank you!

A defined benefit plan always requires a written plan document. In many instances, that document may be embodied in a statute or regulations. But it has to exist. You may want to ask your HR department how to get a copy. A summary plan description is not required in the case of a governmental plan.

A couple of things: There is no such thing as a QDRO for a governmental plan. If a plan complies with a domestic relations order (DRO), the tax consequences are the same as if the DRO had been a QDRO. But any DRO valid under state law--not just a QDRO--can apply to a governmental plan. There is no requirement that you get a divorce in order to get a DRO. In some cases, for example, spouses will get one if they are reconciling, but want some protection in case the reconciliation doesn't work out. So the fact that one's religious beliefs preclude divorce would not prevent someone from getting a DRO based on the separation. This would seem to me to avoid the equal protection issue. Because governmental plans are not subject to ERISA, they are also not subject to ERISA's preemption of state law. Thus, you would look to state laws (both the pension plan itself, which is often a statute, and state domestic relations laws) to determine the extent to which a court could issue a DRO after death.

I have moved this from the "Governmental Plans" topic, because governmental plans are not subject to PBGC insurance.

We have a question regarding the IRS policy on accepting certain kinds of corrections (not ones discussed in its common plan defects), and would like to speak to someone at the IRS about it. However, the IRS doesn't appear to publicize any information about which staff members are involved with the EPCRS program. Has anyone had any experience in finding an actual human to speak to?