Selected Regulatory Developments: Governmental Plans. Terry A.M. Mumford Mary Beth Braitman Ice Miller LLP Indianapolis, Indiana

Transcription

1 81 ALI-ABA Course of Study Retirement, Deferred Compensation, and Welfare Plans of Tax-Exempt and Governmental Employers September 4-6, 2008 Washington, D.C. Selected Regulatory Developments: Governmental Plans By Terry A.M. Mumford Mary Beth Braitman Ice Miller LLP Indianapolis, Indiana With the assistance of Gregory D. Wolf, Paralegal

2 82 TABLE OF CONTENTS Page A. Employee Benefit Plans (General)...1 B. 414(d) Governmental Plans...6 C. 457(b) Governmental Plans (General)...6 D. 403(b) Plans (General)...6 E. Governmental Instrumentality Rulings...7 F. IRAs (Roth; Deemed IRAs; Nonbank Trustees)...7 G. IRC 415 Limits...10 H. Non-Qualified Plans (457(f), 409A)...10 I. Distribution Rules Including IRC 72, 104, 402, and 401(a)(9)...11 J. Line of Duty Disability and Death Benefits 104(a)(1)...15 K. Procedural Rules...15 L. Form 1099-R, Form W-2 Filings, and Form W-4's...17 M. Health Care (including Retiree Health) and Other Benefits...18 N. Listed Transactions...24 ADDENDUM I Department of Labor Guidance...I-1 ADDENDUM II Cumulative List...II-1 - i -

3 83 Selected Regulatory Developments: Governmental Plans July 1, 2007 through July 17, 2008 by Terry A.M. Mumford and Mary Beth Braitman Ice Miller LLP with the assistance of Gregory D. Wolf, Paralegal The purpose of this outline is to summarize selected regulatory developments that may be of interest to practitioners who work with governmental employers and governmental retirement and certain benefit plans. The period covered in this outline is July 1, 2007 through July 17, These materials also include Addendum I that deals with Department of Labor guidance and Addendum II that contains the 2007 Cumulative List of Changes in Plan Qualification Requirements for Cycle C. The summaries are provided in reverse chronological order by topic. The Employee Plans News, which can be found at is a periodic newsletter from Employee Plans (Tax Exempt and Governmental Entities at the Internal Revenue Service), which provides retirement plan information for retirement plan practitioners. The IRS introduced a governmental plan webpage, which can be found at IRS webpage on Recent Guidance That May Require Interim or Discretionary Amendments can be found at IRS webpage on 2007 Interim and Discretionary Amendments can be found at A. Employee Benefit Plans (General) IRS Proposed Rules on Postponement of Certain Tax-Related Deadlines by Reason of Presidentially Declared Disaster or Terroristic or Military Actions [REG ] (73 FR 40471), July 15, This document contains a proposed regulation that proposes to amend existing regulations issued under Code Sec. 7508A. The purpose of the proposed regulation is to clarify rules relating to the postponement of certain tax-related acts by reason of a Presidentially declared disaster or terroristic or military action. The proposed regulation clarifies the scope of relief under Code Sec. 7508A and specifies that interest may be suspended during the postponement period. These changes are necessary to reflect changes in the law made by the Victims of Terrorism Tax Relief Act and current IRS practice. PLR , July 11, Person worked for employer and was an active participant in its pension plan from 1977 to From 1977 through 1988, person was a nonresident alien. During that time, person's employee contributions to Y were tax deferred under the laws of Country N. Person moved to the United States and eventually became a US resident. From 1989 through person made contributions. These contributions were subject to US income tax and included in income for those years. The contributions held by Y were transferred from Y to X in an exchange transferring the obligation to pay your pension annuity. In addition to the employee contributions person made to the plan, person's employer made contributions, none of which was includible in person's gross income while he was employed. Person's pension payments from X

4 84 originate as a fixed amount computed in Euros. Accordingly, person's gross income for 2007 excludes $' received as an annuity, and the rest of person's pension is includible in gross income. For future years in which person receives 12 payments, $ will be excludable from gross income. This dollar amount excludable will remain fixed even though the gross amount payable will fluctuate due to changes in values between Euros and US dollars. If person's spouse survives him, she will exclude from gross income the same dollar amounts that would have been excludable from person's income. These amounts are excludable each year until the total amount so excluded under the contract equals the investment in the contract of $. Thereafter all amounts received under the contract are includible in gross income. If both person and his spouse should die before the total amount excluded equals the investment in the contract, a miscellaneous deduction for the remaining balance of the investment in the contract may be taken by the last annuitant for his or her last taxable year. IRS Rev. Proc , IRB, June 30, This Rev. Proc. provides a procedure by which an issuer of a variable contract may remedy an inadvertent failure of a variable contract to satisfy the diversification requirements of Code Sec. 817(h). Rev. Rul , C.B. 190, is amplified; Rev. Proc , C.B. 741, is superseded; Notice , C.B. 449, is obsolete. IRS Rev. Proc , IRB, June 30, This Rev. Proc. provides a procedure by which an issuer of a life insurance contract may remedy a failure to account for charges for qualified additional benefits under the expense charge rule of Code Sec. 7702(c)(3)(B)(ii). Rev. Rul , C.B. 471, is amplified. IRS Proposed Rules on Accrual Rules for Defined Benefit Plans [REG ] (73 FR 34665), June 18, This document contains proposed regulations providing guidance on the application of the accrual rule for defined benefit plans under Code Sec. 411(b)(1)(B) in cases where plan benefits are determined on the basis of the greatest of two or more separate formulas. This document also provides a notice of a public hearing on these proposed regulations. IRS Rev. Rul , IRB 1149, June 12, This Rev. Rul. provides guidance with respect to income tax withholding in nine different situations involving the payment of supplemental wages. Rev. Rul and are obsoleted. IRS News Release , May 29, The Advisory Committee on TE/GE will hold a public meeting on June 11, 2008 to present to the IRS recommendations on ways to improve operations regarding employee retirement plans, tax-exempt organizations, tax-exempt bonds and federal, state, local and Indian tribal governments. IRS Notice , IRB, April 17, The Department of Treasury and IRS invite public comment on recommendations for items that should be included on the Guidance Priority List. See also News Release , April 18, Notice , IRB 748, March 26, This Notice provides guidance to practitioners concerning contingent fees under Circular 230. Specifically, this Notice - 2 -

5 85 provides interim guidance clarifying when a practitioner may charge a contingent fee under section 10.27(b)(2) of Circular 230 for services rendered in connection with any matter before the IRS. The Treasury Department and the IRS intend to revise section to reflect the clarifications described in this Notice. The IRS will follow the interim rules in this Notice for purposes of enforcing section until further guidance is provided. Notice , IRB, March 11, This notice invites public comments regarding guidance to be provided to Government entities, Federal, State and local, required to withhold on payments made by the Government entities or their paying agents for services and property. See Code Sec. 3401(d) and 3402(t)(3). The new withholding is required by Code Sec. 3402(t), which was added by section 511 of the Tax Increase Prevention and Reconciliation Act of 2005, Pub. L. No (TIPRA). Section 511 of TIPRA is effective for payments made after December 31, The Department of the Treasury and IRS propose to issue guidance on compliance with the withholding requirements of Code Sec. 3402(t). The Treasury and Service are requesting comments from all affected entities. The information collected will assist the Treasury and Service in drafting guidance under Code Sec. 3402(t). IRS Final Regulations on Diversification Requirements for Variable Annuity, Endowment, and Life Insurance Contracts [TD 9385] (73 FR 12263), March 7, This document contains final regulations concerning the diversification requirements of Code Sec. 817(h). The regulations expand the list of holders whose beneficial interests in an investment company, partnership, or trust do not prevent a segregated asset account from looking through to the assets of the investment company, partnership, or trust, to satisfy the requirements of Code Sec. 817(h). IRS Rev. Rul , IRB 518, February 21, Issue: Is compensation payable by a publicly held corporation to a covered employee (within the meaning of Code Sec. 162(m)(3)) considered "remuneration payable solely on account of attainment of one or more performance goals" under Code Sec. 162(m)(4)(C) if the plan or agreement under which the covered employee is paid provides that the compensation will be paid upon attainment of a performance goal and also provides that the compensation will be paid without regard to whether the performance goal is attained in either of the following situations: (i) the covered employee's employment is involuntarily terminated by the corporation without cause or the covered employee terminates his or her employment for good reason, or (ii) the covered employee retires. Holding: for both situation, the Award is not qualified performance-based compensation under Code Sec. 162(m)(4)(C) and (e)(2). IRS Rev. Rul , IRB 419, February 1, Issue: Does the defined benefit plan described that was converted from a traditional benefit formula to a lump sum-based benefit formula satisfy the accrual rules of Code Sec. 411(b)(1)(A), (B), and (C) for the 2002 plan year? Holding: Plan A satisfies the 133 1/3% rule of Code Sec. 411(b)(1)(B) for 2002 for all participants except the grandfathered participants who are at least age 50, but not yet age 55, on January 1, Under the facts, the class of grandfathered participants who are at least age 50, but not yet age 55, on January 1, 2002, - 3 -