Code section 401(a)(4) and plans sponsored by Federal government agenc

[Guest slt]

It appears that Code section 401(a)(4)'s "nondiscrimination in availability of plan benefits" test is of limited applicability to qualified plans maintained by Federal government agencies. Code section 410©(1) (which provides that 410(B) does not apply to ANY 414(d) plan) indirectly renders the current availability test inapplicable. As such, it seems that only the "effectively available" test is applicable. It would be nice if the 401(a)(4) test didn't apply at all, but there is nothing out there that renders that Code section inapplicable to federal plans (state and local governmental plans, however, are exempt from this test). Is it everyone's understanding that just the "effective availability" test applies to plans sponsored by federal government agencies under 401(a)(4)? Am I missing anything? Thanks in advance for your help!

[Carol V. Calhoun]

There is at least a strong argument to be made that federal governmental plans are not subject to Code section 401(a)(4) at all, not even the pre-ERISA version. Brief history lesson:

Soon after ERISA passed, the IRS began auditing a governmental retirement plan, and threatened to disqualify it based on a failure to comply with the pre-ERISA nondiscrimination rules. This caused such an outcry that the IRS reconsidered. In a 1977 Internal Revenue Service News Release, IR-1869 (August 10, 1977), the IRS announced a moratorium on imposing the nondiscrimination rules on state and local government plans until the IRS had a chance to study the issues involved. Although IR-1869 by its terms applied only to state and local governmental plans, in practice IRS forms (such as the Form 5300, used to apply for a determination as to whether a plan is qualified) exempted all governmental plans from the nondiscrimination rules.

In the years after 1977, Congress gradually tightened the nondiscrimination rules further. Because of the moratorium, the nondiscrimination rules theoretically applicable to governmental plans were not an issue. Thus, unlike ERISA, much of the later nondiscrimination legislation did not contain specific exceptions for governmental plans.

Beginning in 1989, the IRS began suggesting that it would begin imposing nondiscrimination rules on governmental plans. The exact rules which would apply were never clear, inasmuch as the statute by then included a patchwork in which governmental plans were subject to some pre-ERISA nondiscrimination rules and some post-ERISA rules-and the rules often conflicted with each other.

After several years of uncertainty, Congress resolved the issue, at least for state and local government plans, by legislative changes to exempt governmental plans from the nondiscrimination rules. It added Code sections 401(a)(5)(G) (exempting such plans from Code section 401(a)(4) and (m)) and 401(a)(26)(H) (exempting them from 401(a)(26)). It also amended Code section 410© to exempt them from the minimum coverage requirements. All of these provisions were included in the Small Business Jobs Protection Act of 1997. They were theoretically effective as of August 5, 1997, but a special effective date in section 1505(d)(2) provided that state and local plans would be deemed to be in compliance with all of the rules for all taxable years before that.

By their terms, the statutory changes did not explicitly cover plans of the federal government or international organizations. Although the Code treats such plans as governmental, they are obviously not plans of state or local governments.

Nevertheless, as discussed above, the 1997 statutory moratorium tracked the language of the 1977 moratorium, and the 1977 moratorium had previously been extended informally to governmental plans other than state and local government plans. It appears that the IRS is taking the same position with respect to the statutory moratorium that it did with respect to the earlier moratorium, namely, that it will informally be applied to all governmental plans, not just those of state and local governments. See, for example, the instructions to the Form 5300, which state that all governmental plans (not just those of state and local governments) are exempt from filing the Schedule Q. Because that schedule is the one used to determine whether a plan has complied with the nondiscrimination requirements, the implication is that no governmental plan need comply with such requirements.

Hope this helps!

[Guest slt]

Thank you so much for your detailed answer! I think Notice 99-40 further supports your conclusion that the IRS is reticent to apply the discrimination rules to Federal government plans. The IRS keeps on "upping" the moratorium with respect to Federal Plans. Hopefully, by 2001, they will have amended 401(a)(4), (a)(26), (k)(3) and (m) to apply to all 414(d) plans!!!!

[david rigby]

Excellent history lesson from Carol.

It may be worth adding (with respect to her 4th paragraph) that the IRS was not alone in discussing these issues. There were a number of public statements, and even some proposed legislation, that were "trial balloons" in the political sense.

My recollection is that the issue of a law covering govt. plans ("PERISA" was the most common acronym) had some supporters and detractors, but that the sheer volume of plans and potential problems contributed to the lack of legislation. The IRS and DOL are already overwhelmed. Why spread their resources even further?

[Carol V. Calhoun]

You're right about that. Here, for anyone who is interested, is the text of Notice 99-40:

Extension of Relief Relating to Application of Nondiscrimination Rules for Certain Governmental Plans

Notice 99-40

I. PURPOSE

This notice provides that certain governmental plans shall be deemed to satisfy § 401(a)(4), 401(a)(26), 401(k)(3), and 401(m) of the Internal Revenue Code until the first day of the first plan year beginning on or after January 1, 2001. In accordance with this relief, the regulations relating to these provisions do not apply until plan years beginning after that date. This relief is available with respect to governmental plans within the meaning of § 414(d) other than plans of State and local governments or political subdivisions, agencies or instrumentalities thereof. This relief is provided in light of difficulties, which are unique to the governmental employers that maintain these plans, in determining compliance with the nondiscrimination requirements. See § 3.07 of Rev. Proc. 99-23, 1999-16 I.R.B. 5, for the remedial amendment period for disqualifying provisions of these plans relating to these nondiscrimination and other requirements.

II. BACKGROUND

A. Governmental Plans

Section 414(d) of the Code provides that the term "governmental plan" means a plan established and maintained for its employees by the government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing. The term "governmental plan" also includes any plan to which the Railroad Retirement Act of 1935 or 1937 (the "Act") applies and which is financed by contributions under that Act and any plan of an international organization which is exempt from taxation by reason of the International Organizations Immunities Act (59 Stat. 669). Section 1505 of the Taxpayer Relief Act of 1997 ("TRA '97") generally provides that the nondiscrimination rules do not apply to State and local governmental plans. In particular, § 1505 amended the Code to provide that § 401(a)(3), 401(a)(4), and 401(a)(26) shall not apply to such plans. Section 1505 of TRA '97 amended § 401(k) of the Code to provide that State and local governmental plans shall be treated as meeting the requirements of § 401(k)(3). In addition, § 1505(a)(3) of TRA '97 amended § 410© of the Code to provide that governmental plans shall be treated as meeting the requirements of § 410 for purposes of § 401(a). This amendment to § 410©, by its terms, is not limited to State and local governmental plans but applies to all governmental plans within the meaning of § 414(d).

B. Administrative Guidance

The nondiscrimination requirements under the Code were substantially changed by the Tax Reform Act of 1986 (TRA '86). Announcement 95-48, 1995-23 I.R.B. 13, and Notice 96-64, 1996-2 C.B. 229, provided that the regulations under §§ 401(a)(4), 401(a)(26), 410(B) and 414(s) apply, in the case of governmental plans described in § 414(d), to plan years beginning on or after the later of January 1, 1999, or 90 days after the opening of the first legislative session beginning on or after January 1, 1999, of the governing body with authority to amend the plan, if that body does not meet continuously ("1999 legislative date"). Notice 96-64 also provided that the regulations under § 401(k) and (m) apply to governmental plans only for plan years beginning on or after the later of October 1, 1997, or 90 days after the opening of the first legislative session beginning on or after October 1, 1997, of the governing body with authority to amend the plan, if that body does not meet continuously. For plan years beginning before the applicable effective date, governmental plans are deemed to satisfy §§ 401(a)(4), 401(a)(26), 401(k), 401(m), 410(B), and 414(s). Section 3.07 of Rev. Proc. 99-23 extended, in the case of

governmental plans described in § 414(d), the remedial amendment period under § 401(B) for certain amendments ("TRA '86 remedial amendment period") until the date described in Rev. Proc. 98-14, 1998-4 I.R.B. 22: the later of (i) the last day of the last plan year beginning before January 1, 2001, or (ii) the last day of the first plan year beginning on or after the 1999 legislative date. The amendments to which the TRA '86 remedial amendment period applies are those required to comply with TRA '86 and subsequent legislation through the Omnibus Budget Reconciliation Act of 1993.

III. EXTENSION OF RELIEF RELATING TO APPLICATION OF NONDISCRIMINATION RULES FOR CERTAIN GOVERNMENTAL PLANS

Under the relief provided by this notice, governmental plans within the meaning of § 414(d), other than those maintained by State or local governments or political subdivisions, agencies or instrumentalities thereof, shall be treated as satisfying the requirements of § 401(a)(4), 401(a)(26), 401(k)(3), and 401(m) until the first plan year beginning on or after January 1, 2001. In accordance with this relief, the regulations under §§ 401(a)(4), 401(a)(26), 401(m), 410(B) and 414(s), and the regulations implementing § 401(k)(3), apply to governmental plans described in this part only for plan years beginning on or after January 1, 2001.

IV. COMMENTS

Comments or suggestions regarding this notice should be addressed to CC:DOM:CORP:R (Notice 99-40), Room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Alternatively, taxpayers may hand deliver comments between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (Notice 99-40), Courier's desk, Internal Revenue Service, 1111 Constitution Ave., NW, Washington, DC, or may submit comments electronically by using the following site: cynthia.grigsby@m1.irscounsel.treas.gov

V. EFFECT ON OTHER DOCUMENTS

Notice 96-64 is modified.

DRAFTING INFORMATION

The principal author of this notice is Diane S. Bloom of the Employee Plans Division. For further information regarding this notice, please contact the Employee Plans Division's taxpayer assistance telephone service at (202) 622-6074 or (202) 622-6075, between the hours of 1:30 p.m. and 3:30 p.m. Eastern Time, Monday through Thursday. Ms. Bloom may be reached at (202) 622-6214. These telephone numbers are not toll-free.