(b)lines Ask the Experts – What Type of Nonqualified Plan Is Allowed for a Governmental/Municipal Hospital?

“Would a governmental/municipal hospital be allowed to have a nonqualified plan? If so, what type would be allowed: a governmental or a private-tax exempt 457(b), a 457(f) plan?”

Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

Yes a county or municipal hospital can generally sponsor a nonqualified plan that is a governmental, and NOT a private-tax-exempt, 457(b) plan, even though such employers are generally “dual status” employers that are both governmental employers and 501(c)(3) tax-exempt charitable organizations (if separately incorporated). Such entities may also participate in a 457(b) plan sponsored by another governmental entity, such as a state or the county, provided that the hospital is eligible to participate under the terms of the plan.

Keep in mind, of course, that the IRS has proposed regulations about how to determine whether a plan is a governmental plan—and plaintiffs’ lawyers have filed at least one lawsuit in North Carolina claiming that a hospital was not sufficiently governmental in nature to have governmental plans exempt from the Employee Retirement Income Security Act (ERISA)—so you will want to consider whether a given employer’s plans will be governmental under those regulations or may be subject to those types of claims.

Also, a dual-status county or municipal hospital can also sponsor a 457(f) plan, since both governmental employers and 501(c)(3) tax-exempt charitable organizations are subject to the 457(f) rules (as well as the 409A rules for nonqualified plans). However, as indicated in a prior Ask the Experts column such dual-status entities may also sponsor a 415(m) governmental plan, which may mitigate the need to sponsor a separate 457(f) plan depending on the plan design.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.