Everett Moreland

You might consider whether the employer is obligated to fund the funding deficiency. The IRC does not required the employer to fund the deficiency. Most plan documents do not. A judge might interpret state law to require the employer to fund the deficiency. Collective bargaining agreements, the SPD, and representations to employees might be relevant to this. My starting assumption in analyzing this is that it would be better to take the position that the employer is not obligated to fund the deficiency than it would be to change the actuarial assumptions for the sole purpose of reducing the deficiency.

The discriminatory plan amendment rules in 1.401(a)(4)-5 apply to changes to the allocation formula.

I'm interested in how a DB plan amendment can extinguish an existing corporate liability to pay severance benefits. Is your thought that the amendment would not extinguish but merely fullfil the obligation?

For the 457 plan to comply with both 457(a) and ERISA, the plan could cover only "a select group of management or highly compensated employees." Under current law, the $10,000 elective deferral limit still would apply to the 403(B) plan, but 403(B) contributions would reduce the allowable $8,000 457 contributions dollar for dollar. Also prior years' 457 plan contributions would be used to calculate the exclusion allowance. Pending legislation, which has a good chance of passing, would change those rules. Both the full 403(B) limit and the full 457 limit could be used. This legislation also would repeal the application of the exclusion allowance for 403(B) plans, making them subject to only the $10,000 elective deferral limit and the 415 limit. You can find more information on 457 plans by download the IRS FY 99 training materials at http://www.irs.ustreas.gov/prod/bus_info/eo/topici.pdf

They do. See 1.410(B)-5(d)(3)(i) and -7(e). IRS reviewers count them when performing the test. Very recently (I wish I could remember where) I read an IRS statement that they are counted.

I agree. My prior comment intended to include the custodial account within the concept of the plan, as the question related to whether amendments were required by the SBJPA deadline for 403(B) plans. Although it is technically correct to state that no amendment was required to the plan document, it is not helpful and is misleading to imply that no amendment was required by the deadline to keep 403(B) plans qualified.

Plans funded with individually designed group custodial contracts did need to be amended by the SBJPA amendment deadline to comply with the change to 403(B)(1)(E).

The $5,000 cash-out limit in the IRC does not apply to a 403(B). A 403(B) generally does not have to pass the nondiscrimination tests in form, only in operation, so generally it is not a problem if the document uses the old HCE definition or family aggregation. The reason the funding source could make a difference is the provision in 403(B)(1)(E) (added in 1996) requiring the annuity contract or custodial account to meet the requirements of 401(a)(30). Most, if not all, individual annuity contracts and custodial accounts have long included the 401(a)(30) limit in them.

The plan document may not need to be amended if the plan is funded with individual annuity contracts or custodial accounts. I don't recall all the 403(B) provisions in the '96 act. What specific provision are you concerned about?

91-4 will not cover you. The mistake of fact exception is very narrow. I recommend that you think of another way to deal with the current year's problem.

This would violate the exclusive benefit rule.

412 does not apply. ERISA Title I may apply. See 29 CFR 2510.3-2(f). Also very helpful is the new DOL interpretive bulletin on whether Title I applies to payroll deduction IRAs. There also is DOL guidance on whether participation in the IRS amnesty program for 403(B) plans subjects the plan to Title I (generally no) and whether allowing hardship withdrawals subjects the plan to Title I (yes). Limiting employee contributions to the 415 limit or the exclusion allowance could subject the plan to Title I. The basic guidelines are that the plan is subject to Title I if employer-funded contributions are made or if there is excessive employer involvement with the plan. A governmental 403(B) would not be subject to Title I. This is a tricky area. You may want to hire a good employee benefits attorney.

I believe that limiting contributions to the excludible amount does establish a plan under ERISA, because it involves the employer in a very complex administrative task, especially where employees have available the alternative elections (as anyone who has wrestled with this knows). In plan documents I do not restrict the amount of contribution but do use the following to require employees to furnish the employer with information required to make proper withholding. I would appreciate thoughts on this question. "Each Employee who proposes to enter into or has in effect a Salary Reduction Agreement shall, when required by the Employer, determine and inform the Employer of the amounts of (1) the Employee's limit on elective deferrals under IRC Sections 401(a)(30), 402(g), and 414(u), (2) the Employee's exclusion allowance under IRC Sections 403(B) and 414(u), (3) the Employee's limit on annual additions under IRC Sections 415 and 414(u), and (4) any contributions under a plan, contract, or arrangement of an employer other than the Employer that are to be aggregated with contributions under this Program in determining the Employee's limit on elective deferrals under IRC Sections 401(a)(30), 402(g), and 414(u) or the Employee's limit on annual additions under IRC Sections 415 and 414(u). The Employer shall receive this information for the sole purpose of determining the Employer's obligations regarding income tax withholding and payroll taxes. The Employer may refuse to enter into a Salary Reduction Agreement with an Employee who fails to demonstrate to the Employer's reasonable satisfaction what portion of the contributions to be made by the Employer under this Program is excludable from the Employee's gross income. The Employer may require this demonstration on a worksheet provided by the Employer or in such other reasonable format as the Employer determines."

http://www.cashpensions.com/

For a trusteed governmental 457 plan, the Internal Revenue Code rules that apply to qualified plans apply. Some states have statutory lists for trusteed governmental 457 plans. These statutory lists are not preempted by the Internal Revenue Code. The following authorities describe the Internal Revenue Code investment requirements for qualified plans. Treasury Regulation § 1.401-1(B)(5)(i); Revenue Ruling 69-494, 1969-2 C.B. 88; Revenue Ruling 73-532, 1973-2 C.B. 128; IRS General Counsel Memorandum 39870 (July 7, 1992); Shedco, Inc. v. Commissioner, Tax Court Memo. 1998-295 (1998).

Revenue Rulings 81-35 and 81-36

See Private Letter Rulings 9850011 (September 10, 1998), 9717018 (January 22, 1997), 9603011 (October 18, 1995), 9242012 (July 20, 1992), 9231062 (May 7, 1992), 9109060 (December 6, 1990), and 9034048 (May 29, 1990). Tax Analysts states that an IRS Field Service Advice Memorandum has been released on this, but I haven't seen it. As to taxation, Treasury Regulation 1.61-21(B)(1) and (2) states that the fair market value of the fringe benefit, less the amount the employee pays for it and also less any amount excludable by the Code from gross income, is the taxable amount. What is not clear is whether the fringe benefit for this purpose is the coverage of all persons covered by the employee's policy or just the coverage of the domestic partner. The above IRS rulings are not clear, but seem to suggest that the fringe benefit is just the coverage of the domestic partner. This is consistent with the following example in Brazelton & Kaenzig, "Taxablility of Employer-Provided Benefits to Domestic Partners Depends on Domicile," 5 J. Tax. Employee Benefits 66, 67 (July/August 1997): "Example. Ron and Steve are domestic partners. Ron's employer extends employee benefits to domestic partners at their marginal cost. Steve purchases a health insurance plan through Ron's employer for $120 per month, whereas he would pay $330 on the open market. Ron will have gross income of $210 ($330 FMV less $120 cost) each month attributable to the savings on the health insurance."

I am dealing with this for some clients and can probably help you. Email me your phone number and I'll call you.

PLR 199902016 is right on point.

Our state statutes prohibit withholding employee-funded pickup contributions of nonunion employees unless "The employer is required to do so by law." Do you know whether an ordinance enacted by a special district applying only to its employees in a state with such a statute qualifies as such a "law"?

Read Notice 89-23 Part III. ("Individuals, who are excludable employees (see Part V for definition of excludable employees), may be excluded in determining whether a 403(B) annuity plan satisfies this safe harbor."); Notice 89-23 Part V.B.3.d.(ii) ("employees who are eligible to participate in . . . another 403(B) annuity plan sponsored or maintained by the employer which provides for contributions pursuant to a salary reduction agreement"); and Notice 96-64 Part VI. ("As provided in Announcement 95-48, until further guidance is issued, employers maintaining 403(B) plans may continue to rely on Notice 89-23.")

As a follow-up on my posting of yesterday, Revenue Rulings 54-52 and 56-634 strongly suggest that life insurance protection under a 457 plan should be currently taxable. However, Section 72 gives the participant basis for the current taxation of life insurance protection under a qualified plan, see 1.72-16(B)(1) and ©(3) Example (1), but Section 457 has no clear rules for giving basis (but 1.457-1(B)(2) Examples (5) and (6) suggest that basis is possible). More important, Section 72 allows the Section 101(a) exclusion to apply to a portion of the death benefit under a qualified plan, see 1.72-16(B)(2)(ii), but Section 457 does not, see 1.457-1© and PLR 9008043 (11/28/89). The assumption underlying Section 457 is that benefits payments are wages. See 35.3405-1 A-23 ("amounts paid from a deferred compensation plan described in section 457 are wages under section 3401(a)"); 1998 Instructions for Forms 1099, 1098, 5498, and W-2G, at 29 ("Report distributions to plan participants from nonqualified deferred compensation plans, including section 457 plans, on Form W-2, not on Form 1099-R."). If the above rules survive the trust requirement, which I assume they do until Section 457(a) is amended to tax distributions under Section 72, then the cost of current life insurance protection under a 457 plan should not be taxable. This seems to be confirmed by Section 457(g)(2)(B) ("notwithstanding any other provision of this title, amounts in the trust shall be includible in the gross income of participants and beneficiaries only to the extent, and at the time, provided in this section"), discussed at H.R. Rep. No. 104-586 at 118; S. Rep. No. 104-281 at 86 & n.70; H. R. Rep. No. 104-737 at 251; and Joint Committee General Explanation at 163 (JCS-12-96).

I question whether life insurance protection under a trusteed 457(a) is currently taxable. Unlike qualified plans, participants in 457(a) plans are not taxable under Section 72. See Internal Revenue Code §§ 72(m)(3), 402(a), 403(a)(1), 403(B)(1), and 457(a); Treasury Regulation §§ 1.61-2(d)(2)(ii)(a), 1.403(a)-1(d), 1.403(B)-1©(3), 1.404(a)(3)(a), and 1.457-1(B)(2) Example (7). See also 1998 CCH Standard Federal Tax Reporter ¶ 6140.032, stating that Section 72(m)(3) was needed to overrule the provision in Sections 402(a) and 403(a)(1) that amounts are not taxable until distributed.

Do you know of any court decisions on whether a contract retroactively integrating a local government retirement plan into a state retirement system can reduce or impair the benefits of current employees under the local plan? Our state statute governing integration states that benefits of retired employees may not be reduced or impaired in the integration, creating an implication that benefits of current employees may be reduced and impaired.