401(a) Governmental Plan

[Guest JEP]

What kind of document can you put a governmental plan on? We don't deal with 457/government plans and the agent keeps referring to 401(a) plans, which all of our k plans are as well. I have found some conflicting information that a gov't plan could have a 401(a) plan on a prototype and that they can't. Can one be placed on a volume submitter?

Any insight would be greatly appreciated.

[Carol V. Calhoun]

Many governmental entities use standard form 401(a) plan documents (volume submitter or otherwise) that were developed for nongovernmental entities. There are, however, a couple of problems with this approach. One is that governmental 401(a) plans are exempt from all of ERISA other than the Internal Revenue Code rules, and are even exempted from many of the Code 401(a) rules that would apply to private plans. (You can click here for a chart describing the differences.) Thus, if a governmental entity adopts a 401(a) plan intended for private employers, it is probably taking on obligations from which it would otherwise be exempt. In some instances, it can be difficult to figure out later how these obligations could be fulfilled. For example, because governmental plans are not subject to prohibited transaction rules administered by the Department of Labor, they cannot get exemptions from such rules. If a plan document obligates a governmental entity to comply with ERISA prohibited transaction rules unless it obtains an exemption, the governmental entity may actually end up more restricted in its investments than a private plan would be, because it has subjected itself to the ERISA prohibited transaction restrictions without being able to get an ERISA exemption from those restrictions.

Second, state and local law are not preempted by ERISA in the case of governmental plans. Thus, a plan intended for adoption by private plans may fail to comply with applicable state and local law rules.

It's a tough choice for many smaller governments. For a small governmental unit, adopting a standard form document may in some instances be the only way to have a plan at any reasonable cost. However, there are obvious risks associated with this approach.

[david rigby]

As usual, Carol's comments are thorough and correct.

There is also a practical side, where the governmental sponsor may want the plan to look similar to prevailing plans in the private sector. For example, use a 5-year vesting schedule, or offer joint&survivor options, etc. These are issues of design philosophy and competitive position.

[Guest KCW]

From the perspective of a state or local governmental entity, what is far worse than adopting a standard (ERISA) form 401(a) plan document is relying on someone who is unfamiliar with state and local governmental plans to draw up one's document and subsequent amendments.

If the sponsor and participants of the local governmental plan are lucky they'll end up with an ERISA plan and be subject to the types of problems Carol correctly points out, which would be unfortunate enough.

What is far worse is when the ERISA expert does a little research on the IRC as it applies to local governmental plans, and decides to give advice specific to them as well.

In that event the unfortunate plan stake holders may find that they've relied on half-baked advice from the "local governmental plan expert" that is really harmful.

Here are some samples of that kind of harmful advice:

"You must not obey that domestic relations order. The order does not qualify as a QDRO. I don't care if your plan was joined and that the order was signed by a judge. The order is not a QDRO under IRC Section 414(p), so state law can't touch you."

or

(Rewind to 1993) "You don't have to amend your plan to comply with the new 401(a)(17) $150,000 limitation on compensation taken into account for purposes of contributions or benefit accruals. Governmental employees hired before 1996 are exempt from the new limits and are grandfathered in to the old $200,000 limit."

This advice has actually been given.

If you don't know why the above advice is harmful (and I don't mean you, Carol or pax), you might want to do a little research.

Oh, and don't stop with federal laws and regulations, research the applicable state and local ordinances, laws, and regulations: in our state they are often more strict regarding state and local governmental employer plans than federal laws, and they often take precedence (Example: Think IRC anti-cutback rules are tough? Ha! Under our state law, you'd better not try to reduce a state or local government employee's future accrual rate, early retirement subsidy, payment options, or do anything else that could be interpreted as less beneficial under the plan--"just my opinion, I could be wrong.").

Before you render advice about something that is not really within your area of expertise, take some advice from someone who is an end user of both a state and local governmental plan document and of expert advice:

"Do the Right Thing."

[Carol V. Calhoun]

My favorite story was the one I was told by staff of a governmental retirement system when they were discussing my doing some work for them. They said that they had also considered another firm. To try to figure out which firm would be best, they had posed a hypothetical question of law. They were able to rule out the other firm when its representative's answer started with, "The first thing you would have to consider is whether the employer would get a tax deduction for its contributions to the plan." Yikes!

[QDROphile]

We have enjoyed reading letters from lawyers to public school districts in which the lawyers threaten to take various actions, including reporting to the Department of Labor, because of procedures and policies under the districts' 403(B) plans that are not permitted by ERISA.

By the way, these are not just the usual plantiff's type lawyers who get by on bluster and bravado. The lawyers are from firms that purport to have ERISA expertise and advise clients about retirement plans.