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Determination Letter for Governmental Plans?


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Does anyone know if technically a governmental plan could file for a determination letter from the IRS? What would be the advantage since the entity would not have to meet coverage or nondiscrimination requirements (I'm assuming this is a state plan - not federal)? Thanks!

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Yes, a governmental plan can obtain an IRS determination letter on its qualified status. We have obtained determination letters for many governmental plans.

The reason to do this is that if a governmental plan is not qualified under I.R.C. § 401(a), participants are taxed on contributions to the plan as they become vested -- even though benefit distribution would typically not take place for many years after vesting. Moreover, vested employer contributions are also subject to income and FICA tax withholding. The employer is liable for the taxes which should have been withheld, even if the employer was unaware of the need for withholding and therefore did not actually withhold anything from the participant's pay.

Of course, qualified status under 401(a) is available even without a determination letter, if the plan meets the 401(a) requirements. (You can click here for a chart of which IRC requirements do and do not apply to governmental plans.) Thus, a determination letter is just extra insurance that the plan has not made a mistake in interpreting the qualification requirements, and that the plan will not be required to make retroactive modifications if the IRS later changes its mind regarding what a particular provision means. Depending on the circumstances, this protection may or may not be worthwhile.

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Employee benefits legal resource site

Employee benefits legal resource site

The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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Thanks for your reply! I wonder if anyone feels that a state governmental plan requesting a determination letter does not have to provide notice to interested parties?! Section 17 of Rev. Proc. 2000-6 provides the current rules with respect to determination letter procedures, including notice to interested parties. Section 17.01 references 1.7476-1(B). In addition, 301.7476-2 provides that notice should be given to persons who qualify as interested parties under 1.7476-1 with respect to the application. 1.7476-1(B)(7) provides that pargraph (B) (which is entitled "interested parties") applies only where the entity seeks a determination for years to which section 410 applies. This section then references 1.7476-1©(5). 1.7476-1©(5) provides that section 410 will be considered to apply to a plan year for a governmental plan for any plan year to which 410©(2) applies. 410©(2) provides that a 414(d) plan is treated as meeting the requirements of section 410 at all times. Therefore, under 410©(2), 410 would not apply to any plan year. As a result, no notice to state governmental employees is necessary! Anyone agree?

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As an addition to Carol's excellent comments above, also note that the IRS letter process also should permit lump sum distributions to be eligible for IRA rollovers.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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A determination letter for a governmental plan is needed to self-correction "significant Operational Failures" under RP 2000-16:

"n the case of a Qualified Plan that is the subject of a favorable determination letter from the Service or of a 403(B) Plan, the plan sponsor generally may correct even significant Operational Failures within a two-year period without payment of any fee or sanction."

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