With some recent suggestions from both CUNA and NAFCU, theIRS may be one step closer to providing guidance on determiningwhether a retirement plan offered by federal credit unions areconsidered a governmental plan under the Internal RevenueCode.

More than seven years in the making, the issue first came tolight in 2004 when the IRS issued a private letter ruling thatstated that a FCU was not an eligible employer under Section 457 ofthe IRC because it was a federal governmentinstrumentality.

The letter ruling, however, failed to say which section of thecode would apply to FCUs, leaving them under a cloud of uncertaintywith respect to their existing 457 plans that they had establishedmany years before. To address the concerns of FCUs, the IRS issueda notice that gave relief to any FCU that had a 457 plan in effecton Aug. 15, 2005. While the notice may have been helpful to FCUswith existing 457 plans, it did not address whether a FCU could setup a new 457 plan.

Since the notice was published in 2005, many FCUs havecautiously established new 457 plans, knowing that the IRS wouldeventually issue guidance.

In November 2011, the IRS released a notice announcing that itwould be issuing proposed regulations that would define the termgovernmental plan under Section 414(d) of the code. The IRS pointedout that the principles set out in the 414(d) regulations wouldgenerally also apply for purposes of section 457.

Under the IRS proposal, a governmental retirement plan would bea plan that is established and maintained for its employees by thegovernment, an agency of the government, or a governmentalinstrumentality.

The IRS has recommended a facts and circumstances test that askswhether an entity offering a given retirement plan performs orassists in a governmental function is exempt from federal, stateand local tax or receives financial assistance from the government,among other questions.

CUNA said while it generally agrees with the IRS’ proposed test,it suggested that some of the terminology in the test questionscould be sharpened and the IRS could add a question addressing howa given entity's trustees or operating board are selected, wroteCUNA Associate General Counsel Luke Martone in a Feb. 6 commentletter.

Meanwhile, NAFCU said because FCUs are restricted in theirability to offer competitive compensation packages to qualifiedexecutives, it supports clarification that would determine if theyare eligible to maintain them.

“While we support the general conclusion that FCUs are eligibleemployers, we do not agree with the IRS’s analysis and conclusionthat FCUs are not federal instrumentalities,” wrote TessemaTefferi, NAFCU regulatory affairs counsel, in a Feb. 6 commentletter.

The IRS had previously said that a FCU is not an agency orinstrumentality of the U.S. because its board of directors areelected by its own members and the directors are not responsible tothe U.S., except to the limited extent set forth in the FederalCredit Union Act and regulated by the NCUA.”

However, NAFCU cited a 1988 court case that apparently affirmedthat FCUs are federal instrumentalities. Tefferi said their statusdoes not disqualify them from being eligible employers able tomaintain 457(b) plans but they are eligible because they are exemptfrom taxation.