Parallel or Parallax? ERISA and the Internal Revenue Code

• Published in: Journal of pension planning and compliance Vol. 50; no. 1; pp. 10 - 32
• Main Author: Schwallie, Daniel
• Format: Journal Article
• Language: English
• Published: New York Aspen Publishers, Inc 01.04.2024
• Subjects: Beneficiaries; Charter schools; Employees; Employers; ERISA; Preemption; Retirement plans; Wages & salaries; United States > US
• ISSN: 0148-2181

MANY RETIREMENT PLANS ARE NOT SUBJECT TO ERISA The following retirement plans are not subject to ERISA: * A retirement plan that is a governmental plan (as defined below), * Certain Code Section 403(b) plans (as described below), and * A retirement plan that is a church plan (as defined below). Because the plans listed above do not have the benefit of ERISA preemption,2 they are subject to state laws. Governmental Plan ERISA Section 4(b)(1) provides that Title I of ERISA does not apply to an employee benefit plan that is a governmental plan as defined in ERISA Section 3(32).5 Code Section 414(d) and ERISA Section 3(32) define a governmental plan as "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. "6 There are currently no regulations defining governmental plans.7 A 1989 revenue ruling8 issued by the Internal Revenue Service (IRS) provided some guidance as to whether a retirement plan is a governmental plan, using a facts and circumstances analysis, and has been the basis for subsequent private letter rulings on the subject.9 The U.S. Treasury Department (Treasury) and IRS published an advance notice of proposed rulemaking (ANPRM) in the Federal Register to further define governmental plan under Code Section 414(d).10 The ANPRM was a preview of regulations that may be proposed, for which the comments have been sought, and which currently have no effect. Essentially, such an excepted 403(b) plan is not "established or maintained by an employer" if all of the following apply: (1) Participation of employees is completely voluntary, (2) All rights under the annuity contract or custodial account are enforceable solely by the employee or beneficiary of such employee, or by an authorized representative of such employee or beneficiary, (3) The involvement of the employer is limited to certain specified activities, and (4) The employer receives no direct or indirect consideration or compensation in cash or otherwise other than reasonable reimbursement to cover expenses properly and actually incurred in performing the employer's duties pursuant to the salary reduction agreements.16 Although the DOL has indicated that tax-exempt employers can comply with the requirements of the 403(b) Treasury regulations and remain within the DOL regulations exception from ERISA,17 the DOL has provided guidance as to certain actions that would remove the 403(b) plan from the ERISA exception.