January 25, 2012

Deadline Nears to Comment on IRS Governmental Plan Guidance Discussion Draft

Update: On February 3, 2012, the IRS pushed back the comment deadline and the date of the public hearing noted in this Compliance Alert to June 18, 2012 and July 9, 2012, respectively. The IRS must also receive requests to speak at the hearing and outlines of the topics to be discussed by June 18, 2012. This announcement was made in the Federal Register.  Segal has been told informally by an IRS representative that, because the announcement was not clear about the date of the comment deadline extension, the IRS intends to issue a correction notice clarifying that point.

The Internal Revenue Service (IRS) will hold a public hearing on June 5, 2012, on the definition of a “governmental plan” under Section 414(d) of the Internal Revenue Code (IRC).1 The subject of the hearing will be IRS’s discussion draft of a proposed regulation on the definition. Individuals wishing to speak at the hearing must submit written requests and supporting materials by February 6, 2012, which is also the date by which written comments on the discussion draft are due.2


Pension plans sponsored by governmental entities are not subject to Title I of ERISA, which is administered by the Department of Labor (DOL), or the guarantees of Title IV of the Employee Retirement Income Security Act (ERISA), which is administered by the Pension Benefit Guaranty Corporation (PBGC). They are subject to some but not all of the IRC provisions that apply to non-governmental (“private”) pension plans. Thus, whether a pension plan is a “governmental plan” has important design and cost consequences.

Prior to the discussion draft, none of the agencies had issued regulations on the definition of a governmental plan.3 The agencies had issued rulings on specific cases but the outcomes of those rulings were not consistent among the agencies.4 To address this, all three agencies stopped issuing rulings on the question of whether a specific plan was a governmental plan under their definition and established a joint taskforce to look at the interpretive issues. The discussion draft is an outgrowth of that task force. While the discussion draft is not officially a “three-agency” document, the preamble indicates that there was consultation among the agencies.

Key Issues Addressed

Under IRC § 414(d), the basic definition of a governmental plan is a “plan established and maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing.” The discussion draft looks at each element of the definition and sets out a possible definition for that element. IRS also asks for comments on specific key questions including the following:

  • What makes an entity an “agency or instrumentality” of a state or political subdivision?  While it is easy to determine that a plan is sponsored by a government entity if the entity is the U.S., a state, or a political subdivision of a state, it is harder to do so when the sponsor is an agency or instrumentality of one of those entities. A primary focus of the discussion draft, therefore, is the test used to determine if the sponsor is an agency or instrumentality, and because these entities are organized and structured in many different ways (e.g., volunteer fire departments, water districts, sanitation authorities, transit authorities), this test is necessarily very fact-specific.

    Based on tests developed by the courts under non-ERISA labor laws5 and factors identified by the IRS in prior guidance,6 the discussion draft identifies the relevant factors and classifies them as either “major” or “other.” It asks for comments on whether the suggested distinction is appropriate.

    The suggested “major” factors include whether the political subdivision has control over the entity, appoints members of the entity’s governing board, and treats the entity’s employees the same as the political subdivision’s employees. The less meaningful “other” factors include whether the entity receives public funding and whether state “open meeting” and “public records” laws apply to the entity.

    The discussion draft suggests that, even if the entity satisfies some or all of the factors, it is not a government entity if there is any private ownership interests or if the entity does not serve governmental purposes. The discussion draft also raises the question of whether there should be a safe-harbor definition of agency or instrumentality, and discusses possible factors that should be sufficient to show the necessary governmental nature.
  • How can a plan be “established and maintained” by an entity if a different entity now maintains it?  Another question that the discussion draft addresses is how a plan can be “established” by a governmental entity under the “established and maintained” requirement of the §414(d) definition when a plan changes from being a private plan to being a governmental plan (or vice versa). The IRS suggests that when there is a change, the plan is reestablished so that the “establishment” requirement continues to be satisfied. Further, the draft cautions that although there is a new “establishment,” the former sponsor (government or private) may still retain certain legal responsibilities.
  • Can a governmental plan include non-governmental (private) workers?  In the past, in several situations, the DOL treated a plan as a governmental plan even though it permitted a de minimis number of private employees to participate. The IRS and the PBGC were less inclined to provide such treatment, although all the agencies carved out an exception for the participation of employees of the plan and employees of a union representing the governmental employees.

    The discussion draft asks whether there should be a de minimis rule and, if so, what percentage should be considered de minimis and whether the IRS should limit the types of private employees it allows to be included in a governmental plan to certain types. The IRS offers some possible examples of types of employees that could be permitted to participate without changing the governmental nature of the plan, including private employees who were previously employees of the entity and private employees who previously participated in the governmental plan.

    Finally, the draft asks for suggestions for transition rules for plans that would no longer be governmental plans if the final regulations do not include a de minimis rule. The discussion draft implies that the agencies will continue the exception permitting employees of the plan and of the union to participate in a governmental plan even without a de minimis rule.


The IRS is looking for input on the question of what the definition of governmental plan should be. As noted above, comments on the discussion draft are due by February 6, 2012, and a hearing is scheduled for June 5, 2012. In addition, the IRS has indicated that it will be holding town hall meetings, and providing other opportunities for input.

Sponsors of plans that might be affected by this regulation should analyze their specific situations and provide input to the IRS on their specific facts, the arguments for treating their plans as governmental plans, and the issues and difficulties they see if a transition is necessary. Comments should not be limited to IRS issues because the IRS plans to share comments with both the DOL and the PBGC and issues, such as PBGC premiums and coverage, can be significant and complicated.

•  •  •

As with all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for authoritative advice on the IRS discussion draft of possible proposed regulations on the definition of “governmental plan.” The Segal Company can be retained to work with plan sponsors that wish to submit comments.

The announcement, and the discussion draft, are available on the GPO and IRS websites, respectively. (Return to the Compliance Alert.)
At the same time, the IRS announced a hearing with respect to its discussion draft on Indian Tribal Government plans (ITGs). That draft focuses on the definition of “commercial activities” because ITG plans for commercial activity workers are not considered governmental plans. The hearing was originally set for June 5, 2012, with comments and requests to speak at the hearing due February 6, 2012. The hearing date has been changed to July 10, 2012, and comments and requests to speak are now due on June 18, 2012. The extension was announced in the February 3, 2012 Federal Register. The initial announcement and the discussion draft are available on the GPO and IRS websites, respectively. (Return to the Compliance Alert.)
Each agency has its own statutory definition of governmental plan. These definitions are similar, but not identical. The IRC definition is in §414(d); the ERISA Title I definition is in ERISA §3(32), and the ERISA Title IV definition is in ERISA §4021(b)(2). (Return to the Compliance Alert.)
For examples of different interpretations see DOL Advisory Opinion 2005-07A and PBGC Opinion Letter 77-169. (Return to the Compliance Alert.)
For example, see the decisions in NLRB v. National Gas Utility District of Hawkins County Tennessee, 402 U.S. 600 (1971); Rose v. LIRR Pension Plan, 828 F.2d 910 (2nd Cir. 1987); and Berinia v. Federal Reserve Bank of St. Louis, 420 F. Supp.2d 1021 (E.D. Mo. 2005). (Return to the Compliance Alert.)
See Rev. Rul.57-128, 1957-1 C.B. 311 (employment taxes), Rev. Rul. 89-49, 1989-1 C.B. 117 (voluntary fire department), and Notice 2005-58 (federal credit union). (Return to the Compliance Alert.)

Compliance Alert, The Segal Company’s periodic electronic newsletter summarizing important developments affecting benefit plan compliance, is for informational purposes only. It is not intended to provide authoritative guidance and should not be construed as legal advice. Plan sponsors should rely on their attorneys for legal advice on all issues involving the interpretation or application of laws and regulations.


Return to Compliance Alert archives