Dual Status

[Guest wjr]

I have a group that has a 501©(3) designation and has a 403(B) program. They told me they also are a Governmental organization and are interested in establishing a 457(B) plan next year since the coordination between the 2 plans go away. How or what should I ask for or look at to determine if they are truly a Gov't org before trying to implement.

[Carol V. Calhoun]

Revenue Ruling 57-128, 1957-1 C.B. 311, set forth a 6-factor test for distinguishing between governmental and nongovernmental entities, as follows:

[*]whether it is used for a governmental purpose and performs and governmental function;

[*]whether performance of its function is on behal of one or more states or political subdivisions;

[*]whether there are any private interests involved, or whether the states or political subdivisions involved have the powers and interests of an owner;

[*]whether control and supervision of the organization is vested in public authority or authorities;

[*]if express or implied statutory or other authority is necessary for the creation and/or use of such an instrumentality, and whether such authority exists; and

[*]the degree of financial autonomy and the source of its operating expenses.[/list=1] Another factor we have seen used (although it is not set forth in the revenue ruling) include whether the entity has ever been found to be exempt from unemployment taxes as a governmental entity.

To the extent that the application of these rules is unclear, you may want to review advisory opinions from the Department of Labor, or perhaps even consider requesting your own advisory opinion. The Department of Labor has issued quite a few such advisory opinions in recent years. One factor that it looks at quite intensively is the source of funding for the entity. The theory is that governmental entities are not subject to as strict funding requirements as other entities because they are assumed to be able to raise taxes if plan assets are insufficient to pay benefits. Thus, an entity that does not have power to impose taxes may have a hard time showing that it is governmental. (Ironically, the rules are of course the opposite in the case of 457 plans; a governmental entity must fund them, and a private entity is effectively forbidden from doing so.)

The IRS and the PBGC also issue private rulings or opinions on the issue of whether a plan is a governmental plan. However, historically, the IRS has not cared, because either a tax-exempt or governmental entity can maintain a 457 plan as far as the Internal Revenue Code is concerned. This may have changed some with the passage of 457(g), but it still seems as though the Department of Labor has gotten more involved in these issues. And the PBGC will not care, because the plan is not a defined benefit plan. What you really want to know is whether the plan will be subject to ERISA Title I requirements, so the Department of Labor is probably the best agency to ask.