exclusive plan

[jlea]

Client is terminating a Simple IRA plan and instituting a standardized prototype 401(k) plan. In putting together plan documents, I learned that one of the related employers that has been a co-sponsor of the Simple IRA participates in the railroad retirement plan.

In its exclusive plan rule, Section 408(p) uses the term "qualified plan."

What little I've learned in a quick bit of research about railroad retirement benefits is that there are two tiers of benefits: tier 1 which is a social security-like benefit and tier 2. Tier 2 is what concerns me. IRS Publication 575 states, "Treat this category of benefits . . . as an amount received from a qualified employee plan."

Anyone addressed this question before or have experience with it?

[ERISAnut]

Yes,

It is IRC Section 72® that treats certain tier 2 amounts as if they are either employee or employer contributions to a plan under 401(a). A qualified plan is just that, a plan that meets the requirements of Section 401(a). Doesn't look good.

The client is speeding 90/70. Wonder if they can get it back under the limit before being clocked by the highway patrol?

Another measure of risk.

[Guest Sieve]

-nut --

I've never dealt with Railroad Retirement Act benefits before, so bear with me--I am in uncharted territory.

As I read it, IRC Section 72®(1) provides that "any benefit provided under [the RRR Act] shall be treated . . . as a benefit provided under [a qualified plan]" (my emphasis), but does not mandate that the RRRA arrangement itself be treated as a qualified plan. IRC Section 72®(2) then describes which contributions are treated as employer contributions (and therefore taxable when paid as benefits) and which are treated as employee contributions (and therefore presumably treated as an investment in the contract under IRC Section 72 and not taxable when paid as benefits). Still, though, no statement that the arrangement is treated as a qualified plan.

Under that anaylsis, a RRRA arrangement does not rise to the level of a qualified plan. Furthermore, IRC Section 408(p)(2)(D)(ii) refers to the arrangements described in IRC Section 219(g)(5) for purposes of determining whether another "qualified plan" is maintained by the employer, and that list does not include RRRA arrangements.

If you've dealt with this sisue before, then I defer to you. But, where's the hole in my reasoning (be kind, please . . . )?

[ERISAnut]

Your reasoning is air tight. The difference here is that the 72® explicitly reference section 401(a) which effectively deems the tier 2 benefits as Qualified Plan Contributions.

Remember, the SIMPLE IRA rule is not whether such other plan exists, but whether the employee actually receives a contribution or accrues a benefit under another qualified plan during the year.

In such case, regardless of what the RR plan is, the employee is considered to have received contributions under a 401(a) plan.

I would actually stand corrected, but had to make such call only one before. So, I would not qualify as an authority on this one. I merely formulated my approach to deal with actual contributions being made. That served as the tie breaker, because I did initially take the approach that the RR plan may not be a qualified plan.

[Guest Sieve]

That explanation works for me.

[jlea]

Well, my analysis was running along the lines of Sieve's but my concern was that voiced by ERISAnut.

But, IRC 408(p)(2)(D)(i) states in pertinent part:

"An arrangement shall not be treated as a qualified salary reduction arrangement for any year if the employer . . . maintained a qualified plan with respect to which contributions were made, or benefits were accrued . . . "

Parsing this, my argument is that the employer here did not maintain a qualified plan. As you stated, ERISAnut, a qualified plan is a plan that is qualified under IRC 401(a). Here, the employer paid contributions into a statutory arrangement whose benefits are TREATED as if they were paid out of a qualified plan. But the employer did not maintain a qualified plan.

Turning to IRC 72®(1), it states in pertinent part:

"[a]ny benefit provided under the [RRA] (other than a tier 1 railroad retirement benefit) shall be treated for purposes of this title as a benefit provided under an employer plan which meets the requirements of 401(a)."

IRC 72®(2) goes on to address how contributions are treated. These provisions address the separate but related issue of how to handle the contributions and benefits related to railroad retirement benefits. Further, their statement that they are "treated . . . as" benefits provided under a qualified plan inherently means that they are not ACTUALLY paid into or out of a qualified plan.

As with Sieve, this is my first encounter with parsing and applying RRA benefits and, particularly, their interaction with the maintenance of a Simple IRA. And, as with him, I welcome your response to my reasoning.

[ERISAnut]

It does come down to a judgement call. The question posed by the SIMPLE IRA is did any employees receive a contribution or accrue a benefit under a qualified plan. Based on the reading of 72®, the answer would be yes.

Now, had 72® stated that they are not treated as contributions, but are counted against the 415 limit of other plans offered by the employer, then you could make an argument that they are not contributions. In such event, an argument would be how can you have a 415 addition without it being a contribution. But, that argument could be addressed by looking at other types of programs (such as certain health & welfare plans where benefits to Key Employees are treated as annual additions) where these would not constitute employer contributions; and the SIMPLE IRA remains unaffected because the 415 limits do not apply. Again, this is merely an observation of an alternative that could have been written within the rules, but wasn't.

The rule states that they are treated as employee and employer contributions to a qualified plan. Without an additional caveat, this would imply for all purposes; including 415 limits and exclusive plan provisions for other plans.

Hope this helps.

[Gary Lesser]

Coverage under the railroad retirement plan is NOT treated as coverage ("active participation") under an employer's retirement plan for puposes of determining IRA contribution deductibilty. Therefore it is not the type of plan that would violate the SIMPLE exclusive plan rule. [see IRC Sec. 408(p)(2)(D)(ii) which define the term "qualified plan" by reference to the active participant rules of IRC Sec 219(g)(5)(A) and (B)]

Publication 17 (at page 118) regarding "situations in which you are not covered" by a retirement plan states that "Coverage under social security or railroad retirement is not coverage under an employer retirement plan."

Code Section 72® regarding the tax treatment of benefits (distributions) from such plan would not appear to be relevant to this discussion.

[ERISAnut]

I stand corrected. The 'benefit' in the header with the term 'contribution' withing the text threw me off. I do see the interpretation that 72(r ) is prescribing these amounts as 'benefits' that are derived from employee and employer contributions.

Thanks, Gary Lesser, for this insight.