Trades Seek Clarity on IRS Retirement Plan Definition
Both CUNA and NAFCU have offered feedback to the IRS on clarification in determining the definition of “governmental plan” as it relates to nonqualified deferred compensation plans at federal credit unions.
At issue is IRS efforts to establish rules that would provide general guidance relating to the determination of whether a retirement plan is a governmental plan within the meaning of section 414(d) of the Internal Revenue Code. There are currently are no regulations interpreting this section of the tax code.
Under the IRS proposal, a governmental retirement plan would be a plan that is established and maintained for its employees by the government, an agency of the government, or a "governmental instrumentality."
The IRS has recommended a facts and circumstances test that asks whether an entity offering a given retirement plan performs or assists in a governmental function, is exempt from federal, state, and local tax, or receives financial assistance from the government, among other questions.
For the sake of federal credit unions, NAFCU said one of the purposes of the regulations is to address whether they are governmental entities for purposes of determining whether they can maintain an eligible nonqualified deferred compensation program. NAFCU said clarity is needed on whether FCUS can maintain such plans.
CUNA said while it generally agrees with the IRS’ proposed test, it suggested that some of the terminology in the test questions could be sharpened and the IRS add a question addressing how a given entity's trustees or operating board are selected to the test
The issue was first raised in 2004 when the IRS issued a private letter ruling, which stated that a FCU was not an eligible employer under Section 457 because it was a federal government instrumentality. Regulations under the section define an eligible employer as an entity that is a state or tax-exempt organization that establishes a plan. Not included was the federal government or any agency or instrumentality thereof.
Dave Fowler, lead attorney for CUNA Mutual Group’s retirement plan services, told Credit Union Times in December that assuming that the regulations are finalized as is and the IRS does not change its conclusion that FCUs are not instrumentalities of the United States for retirement plan purposes, FCUs will be considered eligible employers under section 457 of the IRS code and will be able to maintain executive deferred compensation plans in accordance with the section 457 rules.