Compliance July 27, 2005

IRS: We're Working On Governmental Plan Definition

July 27, 2005 (PLANSPONSOR.com) - Federal credit union employees recently got some encouraging news regarding their deferred compensation programs.
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An issue has existed concerning the ability of a federal credit union to establish and maintain a deferred compensation plan under Section 457(b) of the Internal Revenue Code, and therefore not subject to Section 409A.  

The issue arose after a private letter ruling issued last year in which the IRS said that a credit union did not qualify as an employer that could sponsor such an arrangement.   Although the private letter ruling was only directed to the credit union that requested it, this ruling caused a great concern among other federal credit unions that believed they had the authority to establish a deferred compensation plan under this provision of Section 457.  

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However, the IRS recently released  Notice 2005-58 that gives some guidance to credit unions.   The Notice recognizes that the IRS is currently working on providing guidance concerning what is a “governmental plan.”   Until that guidance is released, the Notice provides certain conditions that are necessary for the federal credit union’s deferred compensation plan to avoid being subject to Section 409A.

Conditions

First, the federal credit union must have maintained the plan and intended for the plan to qualify as a 457(b) plan as of

August 15, 2005, the date the Notice is scheduled to be published in the Internal Revnue Bulletin.   Additionally, the credit union must have consistently claimed the status of a non-governmental tax organization for purposes of all of its benefit plans.

The Notice further provides that if future guidance were to be issued that would prohibit federal credit unions from maintaining the plan as being subject to Section 457(b), they would be permitted a reasonable transition period to amend their plans to prevent adverse tax consequences to the participants.   The Notice goes on to state again that Section 409A does apply to a Section 457(f) plan.

– John N. Smith III 

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Compliance July 26, 2005

Pension Bill Gets by US Senate Finance Panel

July 26, 2005 (PLANSPONSOR.com) - The US Senate Finance Committee has approved a pension reform proposal requiring companies to fully fund their defined benefit pension plans and giving airlines 14 years to pay off their pension obligations.
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The legislation now goes to the full Senate for a vote. The Senate Committee on Health, Education, Labor and Pensions has also held hearings and is working on a parallel pension measure, and a similar pension proposal is under consideration by the House Ways and Means Committee, Bloomberg reported.

“The fragile state of our nation’s pension plans has caught the attention of Americans everywhere,” said US Senator Charles Grassley (R-Iowa), Finance Committee chairman. The Congressional Budget Office estimates that companies underfunded their pensions last year by as much as $600 billion.

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An amendment added to the legislation Tuesday gives airlines 14 years to pay overdue pension obligations. Delta Air Lines Inc. and Northwest Airlines Corp., the third-and fourth-largest US carriers had asked for 25 years (See  Senate Pension Reforms Won’t Give Airlines Enough Time ). The rest of the 29,651 companies that offer defined-benefit pensions would have seven years to catch up on any backlog, according to the news report.

Also added to the measure Tuesday is a plan that would allow companies to offer cash-balance plans as long as they don’t discriminate against older employees. The 1,700 cash-balance plans already in existence have been in legal limbo since a 2003 federal court ruling that deemed International Business Machine Corp.’s plan illegal because benefits for younger workers exceeded those of older workers for the same employment period (See  IBM Strikes a Deal on Cash Balance Suit ).

The House version of the legislation, which is before the Ways and Means Committee, eliminates the use of credit balances for companies that are less than 80 percent funded.

The Senate measure approved Tuesday, the National Employee Savings and Trust Equity Guarantee Act, (NESTEG), would require companies to fully fund their plans or face increased penalties (See  Senate Bill Takes On Private Pension Pickle  ). The bill would also increase premiums that companies pay to the PBGC for insurance to $30 per plan participant per year from $17.

More information about the US House Republican pension plan is  here .

More information about the Bush Administration’s pension proposal is  here .

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