IRS officials at a July 9 hearing on an advanced notice of proposed rulemaking concerning the determination of government plan status under Code Sec. 414(d) (ANPRM REG-157714-06 ; TAXDAY 2011/11/08, I.2 ) received numerous recommendations on how to revise the proposed rules. IRS officials heard comments and asked numerous questions of 16 representatives, most from public charter schools, retirement systems and utility companies. In most cases, the representatives predicted that affected employees would lose their ability to participate in government retirement plans under the rules as currently drafted. They generally recommended that the IRS expand application of the definition of governmental plan status by creating safe harbors or grandfathering certain entities.
The IRS and Treasury anticipate issuing regulations under Code Sec. 414(d) on how to define a “governmental plan” for retirement benefits purposes. Governmental plans are subject to different rules than nongovernmental plans and, in some cases, receive special treatment under the Tax Code. Generally, Code Sec. 414(d) provides that “governmental plan” means a plan established and maintained by the U.S. government for its employees, by the government of any state or political subdivision thereof or by any agency or instrumentality of any of the foregoing.
Cynthia Rougeou, vice-president, National Association of State Retirement Administrators, recommended that the IRS provide that an entity that satisfies any one of seven safe harbors with respect to the definition of an “agency or instrumentality of a State or political subdivision of a State,” could establish and maintain a governmental plan for purposes of Code Sec. 414(d) for its employees and/or could participate in a multiple-employer governmental plan without consideration of any other factors.
Rougeou listed seven safe harbors the IRS should consider. These included several of the “factors” described in the ANPRM, such as the fiscal responsibility factor. She suggested that entities would fall under the safe harbor of governmental plan status if the state (or political subdivision) had a fiscal responsibility for the entity’s general debts and other liabilities. Rougeou also discussed an elected board safe harbor, which would provide that an entity could qualify for governmental plan status if a majority of the members of its governing board are either controlled by a state or political subdivision. This could mean that the state or political subdivision had the power to appoint and/or remove a majority of the governing body, or the governing body was elected through periodic, publicly held elections.
Other safe harbors Rougeou mentioned were the sovereign powers safe harbor for an entity that had been delegated one or more sovereign powers of a state or a political subdivision. The definition of sovereign powers, she noted, would include not only taxation, police and eminent domain, but would also include sovereign powers as defined by a state constitution.
Samuel Lieberman, attorney, American Federation of Teachers, Washington, D.C., stated that proposed regulations should not change the existing arrangements under state law that allow eligible charter school employees to participate in government plans. He recommended that the IRS create a special exemption for state charter schools. In the alternative, the IRS could give more weight to the purpose and funding of an entity in drafting its factors. A third option, according to Lieberman, would be to allow a certain amount of de minimis participation by nongovernmental employees in governmental plans.
David Dunn, executive director, Texas Charter Schools Association, stated that over 90 percent of the employees of charter schools across the country could be affected by the proposed regulations. “We believe that this announced notice of proposed rulemaking will affect virtually every employee of charter schools in Texas,” Dunn stated.
Dunn recommended that the IRS treat charter schools as state public schools. “The same academic, financial and fiscal accountability measures apply to charter schools in Texas as do the traditional school districts,” Dunn said, adding that state funding went into charter schools.
Kathy Ferguson, attorney, Electronic Classroom of Tomorrow, stated that her entity did not possess the sovereign powers (such as eminent domain and taxing power) that are a factor in favor of finding an entity is a political subdivision. She stated that the Ohio state supreme court had already extensively analyzed the status of charter schools as instrumentalities of the state, and she supported a safe harbor for entities that were covered under previous judicial determinations regarding governmental status.
IRS officials on the hearing panel asked Ferguson whether providing an example in the proposed regulations based on the fact pattern on her particular entity would satisfy her concerns. She replied that she believed a safe harbor would allay her concerns.
Rougeou also recommend that the IRS grandfather certain entities so that they may continue to establish and maintain government plans. She listed entities such as:
Those with a favorable private letter ruling under Rev. Rul. 89-49 , 1989-1 CB 117, or Rev. Rul. 57-128 , 1957-1 CB 311;
Those participating in the governmental plan pursuant to the specific terms of state or local law as of the effective date of the final regulations; and
Regarding multiple employer plans, those entities participating in the plan as of the effective date of the final regulations, pursuant to a procedure provided for in the plan document.
Meredith Williams, executive director, National Council on Teacher Retirement, reported that the majority of the members of his organization would prefer to see “fairly strict rules limiting the inclusion of quasi-public entities and/or nongovernmental entities and governmental plans.” Williams stated that the variety of entities, facts, and circumstances necessitated a flexible approach. Williams suggested that grandfathering be permissive, not mandatory, in order to provide maximum flexibility. He added, “We feel that grandfathering should extend to both current as well as future employees of the grandfathered entity. To do otherwise would force the grandfathered entity to maintain two plans at great expense, create difficulties in the workforce with two different classes of employees.” He provided an example of a municipal hospital system that is currently being privatized.
IRS officials asked Williams whether he believed that employees of the newly privatized, formerly municipal hospital should be able to participate in the government plan through grandfathering or if the IRS should establish a liberal transition period. In response, Williams stated, “I believe that we would prefer grandfathering.”
By Jennifer J. Rodibaugh, CCH News Staff