Could IRS Dialogue With Governmental Plans Lead to More Draconian Retirement Plan Guidance?

The IRS and Treasury Department want to “initiate a dialogue” with the governmental plan community about how to better define when a retirement plan becomes a government plan, but while dialogue is good, will it result in burdensome regulatory requirements?

On Nov. 8, the IRS and Treasury Department issued proposed rules on determining governmental plan status in order to help fix a long-standing quandary: What exactly is a government plan? They are seeking comments from the governmental plan community to help answer that question.

Section 414(d) of the Internal Revenue Code does generally define a governmental plan as “a plan established and maintained for its employees by the government of the United States, the government of any State or political subdivision thereof, or by any of their agencies or instrumentalities,” according to the IRS.

However, there aren’t any regulations to flesh out that term — and such ambiguity can affect a plan’s compliance obligations, as explained by the IRS:

Governmental plans are exempt from certain qualification requirements and are deemed to satisfy certain other qualification requirements. In addition, titles I and IV [ERISA] (within the jurisdiction of the Department of Labor (DOL) and the Pension Benefit Guaranty Corporation (PBGC), respectively) do not apply to governmental plans. Thus, these plans are also exempt from requirements relating to certain participant protections, fiduciary requirements, and PBGC termination insurance.

The IRS, DOL and PBGC do share “almost identical” definitions of the term “governmental plan” and try to coordinate their guidance to “achieve a level of conformity among governmental plan determinations.” But here’s the problem:

The Agencies have become increasingly concerned with the growing number of requests for governmental plan determinations from plan sponsors whose relationships to government entities are increasingly remote. These relationships raise novel issues.

So to resolve this problem, the IRS has issued two sets of proposed rules:

1. guidance on how to determine whether a retirement plan is a governmental plan (General Notice); and
2. additional rules on the definition of an Indian Tribal Government (ITG) governmental plan (ITG Notice).

We’ll just be focusing on the General Notice rules in this post. Here’s what the IRS and  Treasury say is “under consideration”:

• defining the terms “United States,” “State” and “political subdivision of the State”;
• describing multiple factors for determining whether an entity is an agency or instrumentality of either the United States or a state or political subdivision;
• proposing a facts-and-circumstances test to determine whether an entity is an agency or instrumentality of a governmental entity;
• helping to determine whether a governmental entity has established and maintained a governmental plan for purposes of section 414(d); and
• establishing rules to apply when a plan sponsor changes its status from a governmental entity to a private entity or vice versa.

Again, Treasury and the IRS are inviting comments on “this guidance under consideration, other possible approaches, and other issues that should be taken into account” through Feb. 6, 2012, and will be engaging in various forms of outreach.

And they noted any final rules may: (1) provide for transition relief; (2) consider the state legislative process for amending a state or local retirement plan; and (3) not go into effect any earlier than plan years beginning after the publication of final rules.

Well, even though there is new rulemaking, the retirement plan community has seen from the fiduciary definition debate that input can force change.

If you want to keep better track of the implications of this and other retirement plan compliance issues, see The 403(b)/457 Plan Requirements Handbook and The 401(k) Handbook.