August 20, 2015

IRS Issues Private Letter Ruling to Public Sector Plan on Participant Contribution Elections

On August 7, 2015, the Internal Revenue Service (IRS) issued a Private Letter Ruling on several tax issues that were raised in June 2011. The Orange County Defined Benefit Plan is generally understood to be the plan requesting the ruling. Primarily, the IRS ruled that individual elections by participants into different benefit tiers with varying levels of participant contributions would constitute an impermissible cash or deferred arrangement under Internal Revenue Code (IRC) Section 401(k). The IRS determined that such individual elections cannot be considered one-time irrevocable elections because the elections are not being made when employees first become eligible under any plan of the employer. The ruling clarified, however, that mandatory changes to employee contribution levels imposed by the employer to establish a new benefit tier could be a valid pick-up arrangement under IRC §414(h) so that employee contributions are treated as employer contributions for federal income tax purposes.

Public sector defined benefit plans anticipating guidance from the IRS on whether individual member elections into benefit tiers and contributions levels would be permitted now have clarification that such individual elections cannot be made as part of pension plan reform in their jurisdictions.

If you have any questions about this ruling, please contact your Segal consultant or send us a note.

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Serena Simons

Serena Simons

SVP, National Retirement Compliance Practice Leader