Both CUNA and NAFCU have offered feedback to the IRS onclarification in determining the definition of “governmental plan”as it relates to nonqualified deferred compensation plans atfederal credit unions.

At issue is IRS efforts to establish rules that would providegeneral guidance relating to the determination of whether aretirement plan is a governmental plan within the meaning ofsection 414(d) of the Internal Revenue Code. There are currentlyare no regulations interpreting this section of the tax code.

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, state,and local tax, or receives financial assistance from thegovernment, among other questions.

For the sake of federal credit unions, NAFCU said one of thepurposes of the regulations is to address whether they aregovernmental entities for purposes of determining whether they canmaintain an eligible nonqualified deferred compensation program.NAFCU said clarity is needed on whether FCUS can maintain suchplans.

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 add a question addressing how agiven entity's trustees or operating board are selected to thetest

The issue was first raised in 2004 when the IRS issued a private letter ruling, which statedthat a FCU was not an eligible employer under Section 457 becauseit was a federal government instrumentality. Regulations under thesection define an eligible employer as an entity that is a state ortax-exempt organization that establishes a plan. Not included wasthe federal government or any agency or instrumentalitythereof.

Dave Fowler, lead attorney for CUNA Mutual Group's retirementplan services, told Credit Union Times in December thatassuming that the regulations are finalized as is and the IRS doesnot change its conclusion that FCUs are not instrumentalities ofthe United States for retirement plan purposes, FCUs will beconsidered eligible employers under section 457 of the IRS code andwill be able to maintain executive deferred compensation plans inaccordance with the section 457 rules.