Selected Statutory and Regulatory Developments: Government Plans August 1, 2008 through August 1, 2009

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1 565 ALI-ABA Course of Study Retirement, Deferred Compensation, and Welfare Plans of Tax-Exempt and Governmental Employers September 10-12, 2009 Washington, D.C. Selected Statutory and Regulatory Developments: Government Plans August 1, 2008 through August 1, 2009 By Terry A.M. Mumford Ice Miller LLP Indianapolis, Indiana with the assistance of Gregory D. Wolf, Paralegal

2 566 TABLE OF CONTENTS Page1 POST-PPA FEDERAL LAW CHANGES APPLICABLE TO GOVERNMENTAL RETIREMENT PLANS...1 A. Heroes Earnings Assistance and Tax Relief Act of 2008 ("HEART")...1 B. Worker, Retiree, and Employee Recovery Act of 2008 ("WRERA")...2 C. American Recovery and Reinvestment Act of 2009 ("ARRA")...3 REGULATORY DEVELOPMENTS...3 A. Employee Benefit Plans (General)...3 B. 457(b) Governmental Plans (General)...9 C. 403(b) Plans (General)...9 D. Governmental Instrumentality Rulings...10 E. IRAs (Roth; Deemed IRAs; Nonbank Trustees)...10 F. IRC 415 Limits...12 G. Non-Qualified Plans (457(f), 457A, 409A)...13 H. Distribution Rules Including IRC 72, 402, and 401(a)(9)...15 I. Line of Duty Disability and Death Benefits 104(a)(1)...17 J. Procedural Rules...18 K. Form 1099-R, Form W-2 Filings, and Form W-4's...21 L. Health Care (including Retiree Health) and Other Benefits...22 M. Listed Transactions...28 ADDENDUM I Department of Labor Guidance Internal Pagination - i -

3 567 Selected Statutory and Regulatory Developments: Governmental Plans August 1, 2008 through August 1, 2009 by Terry A.M. Mumford Ice Miller LLP with the assistance of Gregory D. Wolf, Paralegal The purpose of this outline is to summarize selected statutory and regulatory developments that may be of interest to practitioners who work with governmental employers and governmental retirement and certain benefit plans. POST-PPA FEDERAL LAW CHANGES APPLICABLE TO GOVERNMENTAL RETIREMENT PLANS A. Heroes Earnings Assistance and Tax Relief Act of 2008 ("HEART") 1. Code Section 414(u)(12) Active military service members receiving differential pay must be treated as employees with compensation for retirement plan purposes after Effective Date: For years beginning after December 31, Amendment Deadline: Last day of first plan year beginning on or after January 1, See IRS Rev. Rul , IRB, Apr. 16, 2009, for related guidance on reporting and withholding differential wage payments under Form W Code Section 401(a)(37) New qualification requirement that plan must provide that for a participant who dies while performing qualified military service, the survivors of the participant are entitled to any additional benefits (other than benefit accruals relating to the period of qualified military service) provided under the plan as if the participant had resumed employment the day before death and then terminated employment on account of his death. Thus, if a plan provides for accelerated vesting, ancillary life insurance or lump sum death benefits, or other survivor benefits that are contingent upon a participant's termination of employment on account of death, the plan must provide those same benefits to the beneficiary of a participant who dies during qualified military service. Effective Date: For deaths occurring after December 31, This provision must be operationally observed starting January 1, Amendment Deadline: The plan will be treated as being operated according to terms of the plan if the retroactive amendment is made on or before the last day of the first plan year beginning on or after January 1, 2012, and the plan is operated as if the amendment were in effect from January 1, 2007, and ending on July 30, 2013 (or, if earlier, the date the plan amendment is adopted). 3. Code Section 414(u)(9) For benefit accrual purposes, an employer sponsoring a retirement plan may treat an individual who dies or becomes disabled (as defined under - 1 -

4 568 the terms of the plan) while performing qualified military service with respect to the employer maintaining the plan as if the individual has resumed employment in accordance with the individual's reemployment rights under USERRA on the day preceding death or disability (as the case may be) and terminated employment on the actual date of death or disability. Effective Date: Optional for deaths and disabilities occurring after December 31, Amendment Deadline: The plan will be treated as being operated according to the terms of the plan if a retroactive amendment is made on or before the last day of the first plan year beginning on or after January 1, 2012, and the plan is operated as if the amendment were in effect from January 1, 2007 (or later implementation date). B. Worker, Retiree, and Employee Recovery Act of 2008 ("WRERA") 1. Code Section 415(b)(2)(E)(v) Mortality table required to be used in calculating the minimum value of optional forms of benefit must also be used in adjusting benefits and limits for purposes of applying the Code Section 415 limitation on benefits that may be provided under defined benefit plan. Effective Date: For limitation years beginning after December 31, A plan sponsor may elect to have the WRERA rule apply to any limitation year beginning after December 31, 2007, and before January 1, 2009, or to any portion of any such year. WRERA 103(b)(2)(B)(ii). Amendment Deadline: The WRERA provision is an amendment to PPA 302. For governmental plans the PPA Amendment deadline is the end of the 2011 Plan Year. However, the IRS has not issued guidance on the amendment deadline for this change. 2. Code Section 402(f)(2)(A) Plans required to permit rollovers by non-spousal death beneficiaries. Effective Date: For plan years beginning after December 31, Amendment Deadline: The WRERA provision is a technical change to the original nonspouse rollover provision under PPA 829(a) that was effective for distributions after December 31, PPA 829(b). The PPA Amendment deadline is the end of the 2011 Plan Year. See Notice regarding non-spousal rollovers. 3. Code Sections 401(a)(9)(H) and 402(c)(4) WRERA 201 provides a one-year moratorium on 2009 required minimum distributions from 403(a) plans, 403(b) plans, eligible 457(b) plans, and individual retirement plans. (This moratorium also affects the calculation of the "five-year rule" for payments to beneficiaries.) However, amounts distributed during 2009 which would have been required minimum distributions if not for this moratorium are not treated as eligible rollover distributions for purposes of the direct - 2 -

5 569 rollover requirement, the written notice requirement, and the 20% mandatory withholding. However, a plan may offer a direct rollover for this amount. Effective Date: For 2009 required minimum distributions only. Minimum required distributions for 2008 must still be made even if they are subject to payments in The IRS has informally indicated that this moratorium does not apply to defined benefit plans, including a hybrid defined benefit plan (i.e., Code Section 414(k) hybrid plans). Amendment Deadline: The IRS has (6/15/2009) stated that it is working on flexible guidance for this waiver. 4. ADEA 4(i)(10)(B)(i)(III) WRERA 123 amends ADEA 4(i)(10)(B)(i)(III) to generally treat a rate of return or method of crediting interest established pursuant to any provision of Federal, State, or local law (including any administrative rule or policy adopted in accordance with any such law) as a "market rate of return" for statutory hybrid plans (i.e., defined benefit plans with interest crediting provisions). Effective Date: WRERA 123(b) states, "[t]he amendment made by this section shall take effect as if included in the provisions of the Pension Protection Act of 2006 to which such amendment relates." The corresponding PPA provision is under PPA 701(c), which effective date is "for years beginning after December 31, 2007, unless the plan sponsor elects the application of such requirement for any period after June 29, 2005, and before the first year beginning after December 31, 2007." C. American Recovery and Reinvestment Act of 2009 ("ARRA") Withholding Tables See Publication 15-T and Notice 1036-P. REGULATORY DEVELOPMENTS The period covered in this outline is August 1, 2008 through August 1, These materials also include Addendum I that deals with Department of Labor guidance. The summaries are provided in reverse chronological order by topic. The Employee Plans News, which can be found at article/0,,id=96731,00.html, 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 A. Employee Benefit Plans (General) IRS Notice , August 7, This Notice provides necessary information on the Report of Foreign Bank and Financial Accounts (FBAR) for governmental agencies that may be used in criminal, tax or regulatory investigations or proceedings, or in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism