Governmental Plans: An Overview andAnalysis of Retirement Program Options

Rodney W. Stortenbecker, CPC, QPAAssistant Vice President, Compliance

Lincoln Financial GroupRod.Stortenbecker@lfg.com

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Overview and History

• What options does a governmental employer have for retirement plans/benefits

• Not subject to ERISA – what does this mean for the plan document, operation, etc.

• Specific rules/requirements in certain states

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Today’s Focus

• Gain an understanding of what Code sections apply to governmental plans

• Review the definition of a governmental entity and plan types available

• Examine how State laws impact governmental plans

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POLL QUESTION

• Do you work with governmental employers/plans on a daily or weekly basis?

❑ Yes

❑ No

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WHO IS AGOVERNMENTAL

EMPLOYER?

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Governmental Employer

Who is considered a governmental employer?

• A governmental employer is a State (including the District of Columbia), political subdivision of a State, and any agency or instrumentality of a State or political subdivision of a State.

• Specific types - agency/district, hospitals, etc.

• Dual status organizations (501(c)(3) and governmental)

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What “Governs” a Governmental Plan

There are certain rules and requirements for a governmental plan:

• Non-ERISA

• Still subject to certain requirements (Internal Revenue Qualification Requirements)

• State laws

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Types of Governmental Plans

What plans may a governmental employer sponsor?

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Defined Benefit 401(a) Plan

401(k) Plan403(b) Plan

(if 501(c)(3) dual status )

457(b) Plan 457(f) Plan

415(m) Plan Others?

POLL QUESTION

• Can a governmental employer sponsor both a 401(k) and a 457(b) plan?

❑ Yes

❑ No

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Applicable Code Sections and Limits

Governmental Plans

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Code Section/Provision Applies or Does not apply

410(b) Minimum Coverage Does not apply

401(a)(4) General Test Does not apply

401(k) Nondiscrimination Rules Does not apply

401(m) Nondiscrimination Rules Does not apply

401(a)(7) and 411 Minimum Vesting Standards - 411

Pre-ERISA rules apply

401(a)(9) Minimum Required Distributions Applies

401(a)(10) – 416 Top Heavy Requirements Does not apply

401(a)(11) – 417 Joint and Survivor Annuity Does not apply

Applicable Code Sections and Limits

Governmental Plans (cont’d)

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Code Section/Provision Applies or Does not apply

401(a)(26) Minimum Participation Does not apply

401(n) and 414(p) QDROs Govt. plans cannot claim ERISA preemption –state and local laws need to be considered

411(d)(6) Protected Benefits Does not apply – Keep in mind State and contractual laws

412 ERISA funding requirements Does not apply

414(h) “pick-up” rules Special rules apply to Govt. plans

415 – 401(a)(16) Annual limits Applies

Plan “Filings” andDisclosure Requirements

What is required for a governmental plan? (Y/N)

• Plan Document

• Summary Plan Description (SPD)

• Employee Notices and Disclosures

– Fee disclosure, investment changes, etc.

• Form 5500

• Audit

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DEFINED BENEFIT STILL VIABLE FOR GOVERNMENTAL

EMPLOYERS?

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Defined Benefit Plans

• Funding requirements

• State requirements (Police and Fire)

• Mandatory employee contributions

• Trends

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POLL QUESTION

• Does the Pension Benefit Guaranty Corporation (PBGC) cover a defined benefit plan sponsored by governmental employer if they elect coverage?

❑ Yes

❑ No

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401(a) Plans

While 457(b) plans are the most common DC type of plan for a governmental entity to sponsor – the 2nd most popular today is most likely the 401(a) plan. A governmental entity may use a 401(a) plan for a variety of purposes (greater flexibility for a governmental employer).

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401(a) Plan Design

Contribution Comments

Money Purchase (MP) In the past many Govt. 401(a) plans were MP

Employer Discretionary A number of Govt. MP plans have restated to “Profit Sharing” plans. Allows flexibility. Eligibility or allocation formula can be “discriminatory” – not subject to 410(b) minimum coverage or 401(a)(4).

Rollovers Rollovers from any “eligible” plan may be allowed. Some governmental employers restrict rollovers to similar plan type (do not allow governmental 457(b) rollovers).

Employer Match Normally this is “tied” to the employee 457(b) salary deferrals. Govt. plan not subject to 401m test (may “skew” benefits).

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Contribution Types

401(a) Plan Design

Contribution Comments

Employer Non-Elective Stated employer contribution

Mandatory Employee Contributions (after-tax or pre-tax)

Condition of employment. For a pre-tax basis, 414(h) pick-up plan is only option (unless governmental entity had 401(k) provision/plan in place before May 6, 1986.

Roth (employee contributions) Allowed in 457(b) governmental or grandfathered 401(k) plan

Employee Voluntary (after-tax) Employee can contribute on an after-tax basis. Similar to ERISA plans – 415 limit applies.

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Contribution Types (cont’d)

Employee Deferral/Saving Plans

Plan Types for Employee Contributions/Salary Deferrals

• 457(b) - Main plan for salary deferrals

• 401(k) - An eligible governmental organization may sponsor a 401(k) plan if they adopted the 401(k) plan/provision prior to May 6, 1986

• 403(b) - Dual status required – governmental entity must also have non-profit status - 501(c)(3) organization

Note: The above plans may offer similar provisions and contribution structures as an ERISA 401(k) or 403(b) plan (for example – salary deferrals, Roth, employer match and non-elective, etc.)

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Other Retirement Plan Options

• 457(f) – Non-qualified plan (other options should typically be used/maximized first)

• FICA/Social Security Replacement Plans– 1990 – Omnibus Budget Reconciliation Act. Governmental employers who exercised

their Social Security Section 218 exclusion allowance were provided the option to give part-time, temporary and seasonal employees a defined contribution retirement plan as an alternative to Social Security

– Eliminates Social Security contributions for part-time, temporary and seasonal employees. Employer contributes the $ to the plan.

– Employee contributes pre-tax employee contributions

– 457(b) plan is typically used for the SS Replacement Plan

• 415(m)– Non-qualified plan (excess benefit plan)

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AUTOMATIC ENROLLMENTIN GOVERNMENTAL

PLANS

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POLL QUESTION

• Can a governmental employer adopt an automatic enrollment provision in a 457(b) or grandfathered 401(k) plan?

❑ Yes

❑ No

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Automatic Enrollment

Can a governmental employer adopt Automatic Enrollment in a 457(b) or grandfathered 401(k) plans?

• Pension Protection Act (PPA) provided for an ERISA federal preemption of state laws that have anti-garnishment wage laws in place. Before the enactment of PPA, automatic contribution arrangements created a conflict between the individual state laws and the ability for an employer to adopt automatic enrollment provisions since some states prohibit payroll reduction without the employee’s consent.

→ A governmental employer must rely on their individual state legislation and collective bargaining agreements for guidance on the ability to adopt automatic contribution arrangements.

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Automatic Enrollment

Automatic enrollment may be:

• Specifically permitted by state law

• Permitted because federal government allows

• Possible (further guidance needed)

• Prohibited by state law

Note : A governmental employer needs to discuss with their legal counsel.

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QJSA, Spousal Consent,Beneficiary Designations

QJSA and Spousal Consent Rules – Non-ERISA and State Laws

Beneficiary Designations

• ERISA plan – protects spouse’s rights/benefits under the plan (must waive right)

• Non-ERISA plan – surviving spouse may have rights to a non-ERISA plan as elective-share rights or community-property rights under state law. In community property states (such as Arizona, California, Texas), the surviving spouse is generally entitled to be the primary beneficiary for at least 50% of the participant’s account unless the spouse waives the right (notary public).

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Distribution Requirementsand Options

• Normal Retirement Age (NRA)

• In-service - Age 62, hardships/unforeseen emergency, loans

• Retired public safety office (police, firefighter, chaplain, rescue squad, ambulance crew) – exclude from income up to $3,000 for payment of premiums for accident, health or long-term care insurance.

• Required Minimum Distributions (RMDs)

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POLL QUESTION

• Can a participant in a 457(b) governmental plan elect an in-service distribution upon attainment of age 59 ½?

❑ Yes

❑ No

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Distribution Requirementsand Options

• Small Amounts Force Out (SAFO)

• Qualified Reservist distribution

• Transfer to purchase service credits in a defined benefit plan

• 10% early withdrawal penalty – does not apply to 457 plans

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Plan Design Considerations

For all types of plans sponsored by a governmental employer, greater flexibility (than ERISA/non-governmental plans)

• Eligibility/Exclusions

• Non-Discrimination rules

• Executive Benefits

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FIDUCIARY DUTIESGOVERNMENT PLANS

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Fiduciary Duties –Non-ERISA Governmental

In general, an individual is a plan fiduciary (if any of the following):

• Assumes discretionary authority or control over the administration of the plan

• Exercises any authority or control over the management or disposition of plan assets

• Renders investment advice to the plan or its participants

Best practice for Non-ERISA governmental plans → Follow fiduciary oversight and roles associated with an ERISA plan.

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Fiduciary Duties –Non-ERISA Governmental

The fiduciary duties/responsibilities for a governmental employer mainly fall under the following:

• State common law trusts

• State common law of agency

• State statutes of enabling for retirement plans

• State statutes enacting ERISA standards

• State statutes enacting the Uniform Trust Code

• State statutes enacting the Uniform Prudent Investor Act

• State statutes enacting the Uniform Fiduciaries Act

• State statutes enacting the Uniform Commercial Code

• State statutes enacting prohibited transaction rules for retirement plans

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Common Errors inGovernmental Plans

• Eligibility/Exclusions

• Compensation definition

• Compensation limit

• Plan document (still needs to match/address operation)

• Employment contracts/agreements

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Trends and Hot Topics inGovernmental Plans

• Move away from Money Purchase to Profit Sharing design (flexibility)

• Ability to “convert” PTO/leave to ER contribution

• DC plan to replace DB plan

• Multiple plan approach – maximize benefits

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Best Practices

• Operate plan similar to ERISA plan

• Employee notices/disclosures

• Fiduciary duties, oversight and delegation of duties

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Summary

Questions?

Thank you.

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