163 THE AMERICAN LAW INSTITUTE Continuing Legal Education Retirement, Deferred Compensation, and Welfare Plans of Tax-Exempt and Governmental Employers September 20-21, 2012 Washington, D.C Selected Regulatory Developments: Governmental Plans, including Eligible 457(b) Plans July 31, 2011 through July 31, 2012 By Terry A.M. Mumford Ice Miller LLP Indianapolis, Indiana with the assistance of Gregory D. Wolf, Paralegal
164 TABLE OF CONTENTS Page A. Employee Benefit Plans (General)... 2 B. 457(b) Plans (General)... 6 C. 403(b) Plans (General)... 7 D. Governmental Instrumentality Rulings... 7 E. IRAs (Roth; Deemed IRAs; Nonbank Trustees)... 8 F. IRC 415 (including IRC 415(m))... 10 G. Non-Qualified Plans (including IRC 457(f), 457A, 409A)... 11 H. Pick-Ups (IRC 414(h)(2))... 11 I. Distribution Rules (including IRC 72, 402, and 401(a)(9))... 11 J. Line of Duty Disability and Death Benefits (IRC 104(a)(1))... 13 K. Procedural Rules... 13 L. Form 1099-R, Form W-2 Filings, and Form W-4's... 17 M. Taxation of Health Care (including Retiree Health) and Other Benefits... 18 N. Listed Transactions... 21 O. Foreign Transactions... 21 P. Government Newsletters... 22 ADDENDUM I Department of Labor Guidance... 23 - i -
165 Selected Regulatory Developments: Governmental Plans July 31, 2011 through July 31, 2012 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 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 31, 2011 through July 31, 2012. These materials also include Addendum I that deals with Department of Labor guidance. The summaries are provided in reverse chronological order by topic. The key developments for this time period for governmental plans are the following: IRS Notice 2012-29, 2012-18 IRB 872, April 18, 2012. The IRS and the Treasury Department anticipate issuing guidance relating to the applicability of the normal retirement age rules to governmental plans (as defined in Code Sec. 414(d)). This Notice describes and invites public comment on the guidance under consideration, which (a) would clarify that governmental plans that do not provide for in-service distributions before age 62 do not need to have a definition of normal retirement age and (b) would modify the age-50 safe harbor rule for qualified public safety employees. The Notice also provides that the IRS and Treasury Department intend to extend the effective date of the regulations relating to distributions from a pension plan upon attainment of normal retirement age for governmental plans. Notices 2008-98 and 2009-86 are modified. New Law Repeals 3% Contractor Withholding. On November 21, 2011, the 3% Withholding Repeal and Job Creation Act of 2011 was signed into law, repealing Code Sec. 3402(t). This legislation eliminates the withholding and reporting requirements established under Code Sec. 3402(t) and the accompanying regulations. Code Sec. 3402(t) would have required all Federal and state government entities, and some local government entities, to withhold 3% on certain payments to contractors, beginning on Jan. 1, 2013. The regulations under Code Sec. 3402(t) that required the government entity to report the amount of the payment and the amount withheld on Form 1099-MISC were withdrawn. See http://www.irs.gov/govt/fslg/article/0,,id= 250662,00.html. PLR 201147038, November 18, 2011. IRS concluded that employees who "retire" on one day in order to qualify for a benefit under the Plan, with the explicit understanding between the employee and employer that they are not separating from service with the employer, are not legitimately retired. Accordingly because these employees would not actually separate from service and cease performing services for the employer when they "retire" these "retirements" would not constitute a legitimate basis to allow participants to qualify for early retirement benefits (which are then immediately suspended.) Such "retirements" will violate Code Sec. 401(a) and result in disqualification of the Plan under Code Sec. 401(a). However, in accordance with Code Sec. 401(a)(36), employees who have attained age 62 upon benefit commencement may qualify for and receive an early retirement benefit under the Plan while they continue in employment. IRS Advance Notice of Proposed Rulemaking on Determination of Governmental Plan Status [REG 157714 06] (76 FR 69172), November 8, 2011. The Treasury Department and IRS anticipate issuing regulations under Code Sec. 414(d) to define the term "governmental plan." This document describes the rules that the Treasury Department and IRS are considering proposing relating to the determination of whether a plan is a governmental plan within the - 1 -
166 meaning of Code Sec. 414(d) and contains an appendix that includes a draft notice of proposed rulemaking on which the Treasury Department and IRS invite comments from the public. Written or electronic comments must be received by February 6, 2012. See 76 FR 76633, December 8, 2011 for corrections. See 77 FR 3202, January 23, 2012 for Notice of public hearing on proposed rulemaking scheduled for June 5, 2012. See 77 FR 5442, February 3, 2012 for Notice of public hearing on advanced notice of proposed rulemaking scheduled for July 9, 2012, superseding hearing scheduled for June 5, 2012. See 77 FR 12514, March 1, 2012 for correction. See 77 FR 13996, March 8, 2012 for correction. A. Employee Benefit Plans (General) PLR 201230031, July 27, 2012. IRS concluded that Plan X is and has been a church plan within the meaning of Code Sec. 414(e) since January 1, 1974. In addition, IRS concluded that Plan X has not been maintained primarily for the benefit of employees who are employed in connection with one or more unrelated trades or business as defined in Code Sec. 513. PLR 201228055, July 13, 2012. IRS concluded as follows: (1) that although Amount 4 exists because of a "mistake of fact," Amount 4 arose as the result of two contributions made on two separate occasions Date 8 and Date 9, each of which are more than one year prior to the date of this ruling letter. Consequently Amount 4 may not be returned to the Taxpayer in accordance with section 10.3(a) of the Plan and section 403(c)(2)(A) of ERISA. However Amount 4 is the result of an "erroneous actuarial computation" as described in section 1.401-2 of the regulations (which arose due to a mistake of fact) and accordingly may be returned to the Taxpayer subsequent to the satisfaction of all liabilities with respect to employees and their beneficiaries under the trust in accordance with section 1.401-2 of the regulations and section 14.3 of the Plan; and (2) Code Sec. 4980(c)(2)(B)(ii)(11) provides that the term "employer reversion" does not include, in the case of a plan other than a multiemployer plan, an amount distributed to the employer by reason of mistake of fact. Accordingly Amount 4 is described in Code Sec. 4980(c)(2)(B)(ii)(ll) and thus the return of Amount 4 to the Taxpayer does not constitute an employer reversion under Code Sec. 4980. IRS Notice and Request for Comments on Proposed Collection; Comment Request for the TE/GE Compliance Check Questionnaires (77 FR 38714), June 28, 2012. The IRS is soliciting comments concerning the TE/GE Compliance Check Questionnaires. Written comments should be received on or before August 27, 2012. IRS Rev. Proc. 2012-29, 2012-28 IRB 49, June 26, 2012. This Rev. Proc. contains sample language that may be used (but is not required to be used) for making an election under Code Sec. 83(b). Additionally, this Rev. Proc. provides examples of the income tax consequences of making such an election. This Rev. Proc. is effective June 25, 2012. Notice of Proposed Rulemaking and Notice of Public Hearing on Amendment of Prohibited Payment Option Under Single-Employer Defined Benefit Plan of Plan Sponsor in Bankruptcy [REG 113738 12] (77 FR 37349), June 21, 2012. This document contains proposed regulations that would provide guidance under the anti-cutback rules of Code Sec. 411(d)(6), which generally prohibit plan amendments eliminating or reducing accrued benefits, early retirement benefits, retirement-type subsidies, and optional forms of benefit under qualified retirement plans. These proposed regulations would provide an additional limited exception to the anti-cutback rules to permit a plan sponsor that is a debtor in a bankruptcy proceeding to amend its single-employer defined benefit plan to eliminate a single-sum distribution option (or other optional form of benefit providing for accelerated payments) under the plan if certain specified conditions are satisfied. This document also provides notice of a public hearing on these proposed regulations. Written or electronic comments must be received by August 20, 2012. Outlines of topics to be - 2 -
167 discussed at the public hearing scheduled for August 24, 2012, at 10 a.m. must also be received by August 16, 2012. PLR 201224042, June 15, 2012. IRS concluded that Committee A is an organization that shares common religious bonds and convictions with Society B and is associated with Society B under the rules of Code Sec. 414(e)(3)(D). IRS further concluded that Committee A employees are employees of an organization, whether a civil law corporation or otherwise, which is exempt from tax under Code Sec. 501 and which is associated with a church or convention or association of churches. Under the rules of Code Sec. 414(e)(3)(B), Committee A employees are considered to be church employees for purpose of the church plan rules. In addition, the administration of the Plans satisfies the requirements regarding church plan administration under Code Sec. 414(e)(3)(A). Accordingly, the Plans are maintained by an organization that is associated with a church or convention or association of churches, the principal purpose or function of which is the administration of the Plans for the provision of retirement benefits or welfare benefits, or both, for the deemed employees of a church or convention or association of churches. Based on the foregoing facts and representations, IRS concluded that plans X, Y, and Z are church plans within the meaning of Code Sec. 414(e). PLR 201222052, June 1, 2012. IRS concluded that employees of Entity E are church employees with the meaning of Code Sec. 414(e)(3)(B). IRS concluded that Plan X, maintained by Entity E, is associated with a church and qualifies as a church plan pursuant to Code Sec. 414(e). IRS Notice of Proposed Rulemaking on Property Transferred in Connection With the Performance of Services Under Section 83 [REG 141075 09] (77 FR 31783), May 30, 2012. This document contains proposed regulations relating to property transferred in connection with the performance of services under Code Sec. 83. These proposed regulations affect certain taxpayers who received property transferred in connection with the performance of services. Written or electronic comments must be received by August 28, 2012. See 77 FR 36229, June 18, 2012 for corrections. IRS Withdrawal of Notice of Proposed Rulemaking on Withholding on Payments by Government Entities to Persons Providing Property or Services [REG 151687 10] (77 FR 24660), April 25, 2012. This document withdraws a notice of proposed rulemaking relating to withholding by government entities on payments to persons providing property or services. The proposed regulations are withdrawn because Public Law 112 56, "The 3% Withholding Repeal and Job Creation Act," repealed the provision of the IRC underlying the proposed rules. IRS Final Regulations on Removal of Regulations Requiring 3% Withholding by Government Entities [TD 9586] (77 FR 24611), April 25, 2012. This document provides a Treasury decision that removes the final regulations contained in TD 9524 relating to withholding by government entities on payments to persons providing property or services, and makes conforming amendments to regulations to reflect the removal of these regulations. The final regulations are removed because the 3% Withholding Repeal and Job Creation Act repealed the provision of the IRC underlying the final regulations before the provision became effective. These regulations are effective on April 25, 2012. For dates of applicability, see 31.6011(a) 4(d) and 31.6302 1(n). PLR 201215018, April 13, 2012. IRS concluded that Plan X is a church plan within the meaning of Code Sec. 414(e)(1). Order B is a religious order that is organized under the auspices of Church A. Order B is listed in the official directory of Church A for the United States and is, therefore, an organization that is described in Code Sec. 501(c)(3), and exempt from tax under Code Sec. 501(a). Moreover, as an organization that is listed in the official directory of Church A in the United States, Order B shares common religious bonds and convictions with Church A and is, therefore, associated with Church A within the meaning of Code Sec. 414(e)(3)(D) for purposes of the church plan rules. Moreover, because Order B is an integral part of Church A and - 3 -