Regulatory guidance and fix-it guides have addressed the “how’s” of operating a retirement plan, but the IRS has now identified the need to address the “who’s” sponsoring these plans.
Administering a retirement plan can be complex. This is further complicated by the need to understand which categories of employers are eligible to sponsor a particular type of plan. A change to the employer’s status may ultimately impact the retirement plan offered to its employees.
Are You A Tax-Exempt Organization?
Most non-profit organizations (with some limited exceptions) must file a tax return (Form 990) with the IRS. Failing to file this form for three consecutive years will cause a non-profit organization to automatically lose its federal tax-exempt status. Once this occurs, the only way an organization can have that status reinstated is to apply for reinstatement with the IRS (see “How to Regain Tax-Exempt Status”). Even then, the IRS will consider retroactive reinstatement only if there is reasonable cause for not filing the Form 990 for the three-year period.
If a non-profit organization’s tax-exempt status is automatically revoked, the ripple effect extends beyond the employer to the retirement plan offered to its employees. If that employer has a 403(b) plan, that 403(b) plan can no longer accept contributions, and participants can only withdraw amounts in accordance with the 403(b) rules. An employer sponsoring a 457(b) deferred compensation plan has two choices – either treat the plan as a 457(f) non-qualified deferred compensation plan or terminate the plan altogether. Both of these options can dramatically affect plan administration and the ability for employees to continue to make contributions on a tax-deferred basis.
In March 2012, the IRS launched Exempt Organizations Select Check, a website that enables users to determine whether an organization is eligible to receive tax-deductible contributions or if its federal tax-exempt status has been revoked (see “IRS Launches Online Search Tool for Tax-Exempts”).
Are You a Church-Related Employer?
Church-related organizations have certain advantages regarding the retirement plans they establish (generally called “church plans”). Unless the plan administrator has elected that the plan be covered by the Employee Retirement Income Security Act (ERISA), the church plan is exempt from ERISA’s participation, vesting, funding, fiduciary, and reporting and disclosure requirements.
However, not everyone believes that this favorable treatment should be extended beyond houses of worship. In a letter dated February 14, 2011, to Treasury Secretary Geithner and IRS Commissioner Shulman, Senators Bingaman, Harkin, Kohl, and Baucus suggested that plans which “are neither established by a church nor maintained by a church pension board-type organization” should not be eligible to rely on these exceptions permitted under the Internal Revenue Code or ERISA.
The IRS remained unpersuaded, replying on April 25, 2011, that the definition of church plan was broad enough to include “organizations controlled by or associated with a church or convention or association of churches.” As a result, both houses of worship and church-related employers can continue to offer their employees “church plans” with simplified administration rules.Yet, the IRS has acknowledged that plan participants must be notified about the impact those simplified rules have on the plan. As of September 26, 2011, employers who are seeking an IRS ruling that their plan is to be treated as a church plan will need to notify plan participants that their plan may not provide the same level of participant protections as do other private-sector retirement plans (see “IRS Issues Revised Procedure for Church Plans”). These include eligibility, vesting schedules, protection of benefits already accrued and ERISA–required disclosure.
Are You a Governmental Employer?
There are also special rules for retirement plans sponsored by governmental employers. These plans are exempt from certain qualification, non-discrimination testing and disclosure requirements. As such, the IRS is seeing an increased number of determination requests for governmental plan status. Obtaining this status is becoming increasingly challenging, given that regulations defining the term “governmental plan” do not currently exist.
It was not until November 2011 that the IRS took steps toward defining these plan types by issuing draft proposed regulations. This rulemaking provides general guidance on what types of employers are considered governmental employers, and thus, able to sponsor a governmental plan (see “IRS to Hold Meetings on Change in Governmental Plan Definition”).
While this rule is not yet effective, it does provide an indication of the IRS’ position. If this guidance were to go into effect, an entity would be considered a governmental employer based on a number of factors, including:
• Who controls that employer’s governing board?
• Are members of the employer’s governing board publicly nominated and elected?
• Are the employer’s employees treated as governmental employees for other purposes beyond employee benefits?
• Does the state or a political subdivision have fiscal responsibility for that employer’s debt and liabilities?
Since the Internal Revenue Code and IRS rules dictate which employers can sponsor a particular type of retirement plan, being able to accurately classify the type of employer removes one level of complexity from plan compliance and administration. If that layer of complexity is eliminated, employers will be able to avoid experiencing an identity crisis.
Linda Segal Blinn, J.D.*, is vice president of Technical Services for ING U.S. Retirement. In this capacity, Blinn supervises the provision of legislative, regulatory, and compliance information to assist employers in operating their retirement plans.
This material was created to provide accurate information on the subjects covered. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. These materials are not intended to be used to avoid tax penalties, and were prepared to support the promotion or marketing of the matters addressed in this document. The taxpayer should seek advice from an independent tax adviser.* Linda is not a practicing attorney.