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Determining Governmental Entities

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“I’m working with a special district within my local county that is inquiring about a retirement plan. I believe they qualify as governmental entity, but is there any way to be sure? I want to make sure I suggest appropriate plans for them.

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in New York focused on governmental status.

Highlights of the Discussion

Reviewing the definitions of “governmental entities,” would be a place to start. But if you want documentation, the special district may want to file for a ruling from the IRS. According to governing.com there are over 90,000 governmental entities in the U.S.

Section 3(32) of the Employee Retirement Income Security Act of 1974 (ERISA) defines the term “governmental plan,” in pertinent part, as “a plan established or 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.”  We can find a similar definition in the Internal Revenue Code at Section 414(d). The federal government and states are pretty clear. But a political subdivision of a state or agency or instrumentality thereof remains murky.

Generally, a political subdivision is a separate legal entity of a State which usually has specific governmental functions (e.g., the ability to tax).  The term ordinarily includes a county, city, town, village, or school district, and, in many States, a sanitation, utility, reclamation, drainage, flood control, or similar district.[1] If the special district is not addressed in state statute it could ask the state administrator and/or attorney general to weigh in on the matter (see New York Consolidated Laws, State Finance Law Section 139-j).

In addition to the federal government and the 50 state governments, the Census Bureau recognizes five basic types of local governments: Municipality, township, special district and school district. Of these five types, three are categorized as general purpose governments: County, municipality and township. However, legislative provisions for school district and special district governments are diverse. These two types are categorized as Special Purpose governments. Numerous single-function and multiple-function districts, authorities, commissions, boards and other entities exist in the U.S. The basic pattern of these  entities varies widely from state to state. Moreover, various classes of local governments within a particular state also differ in their characteristics. Refer to the Individual State Descriptions report for an overview of all government entities authorized by state.

Finally, the special district could seek a determination from the IRS as to whether it qualifies as a governmental entity by following the process in Revenue Procedure 2018-1. The filing has a $2,400 fee.

Conclusion

There are a surprising number of special purpose units within a state that qualify as governmental entities. State laws may provide guidance, but a decision from a state attorney general or a determination letter from the IRS would be the most conservative route to go.

[1] How to Determine an Entity’s Legal Status

 

 

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Secondment Employment Agreements

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“My client is being offered a Secondment Agreement for working overseas.  What is that and how will it affect his ability to continue to participate in his 401(k) plan?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in New Jersey focused on employee status. 

Highlights of the Discussion

Let me first say that because secondment agreements involve very important and intricate tax and legal questions, your client should seek guidance from a tax professional and/or attorney that specialize in this area for his/her particular case.

In very general terms, a secondment is a written, legal agreement that allows an employer to assign an employee to work for another organization, usually outside the U.S. In a secondment arrangement, the outbound employee is loaned (or “seconded”) to a foreign entity, but remains the common law employee of the U.S. employer. It is not unusual for a U.S.-based company with international affiliates to temporarily transfer its U.S. workers to a foreign subsidiary (or other affiliate) pursuant to a secondment agreement. Generally, the foreign entity is obligated to reimburse the U.S. employer for the compensation the U.S. employer pays to the overseas employee under the secondment agreement.

In many cases, the employee with a secondment arrangement is considered an “expatriate,” a U.S. employee who works overseas on a foreign assignment. The expatriate assignment can be structured in several different ways and may be for a fixed or indefinite duration.

The secondment agreement should identify who will manage the day-to-day activities of the seconded employee as well as a multitude of other employee compensation and benefit issues, including whether the loaned employee will be able to continue to participate in the U.S. employer’s tax-qualified retirement plan, a foreign retirement arrangement or both and what compensation will be used to determine contributions.

Typically, but not always, a secondment agreement provides that a seconded employee

  • Remains on the U.S. company’s payroll,
  • Receives compensation that is subject to U.S. federal employment taxes,
  • Is the common-law employee of the U.S. company, and
  • Continues to be covered under both the U.S. company’s benefit plans and the U.S. Social Security system.

But keep in mind that that there are always exceptions, so a thorough review of the written agreement is imperative. Plus, your client may have a say in what terms are incorporated. [1]

Conclusion

Secondment employment agreements involve very important and intricate tax and legal questions, which should be reviewed by the employee’s tax and/or legal counsel. The written secondment agreement should address employee compensation and benefit issues, and the types of retirement arrangements in which the employee can participate.

[1] SHRM, Structuring Expatriate Assignments and the Value of Secondment, 2020

 

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Delaying a Plan Audit

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“My client started a 401(k) plan for her business last year on July 1. The plan operates on a calendar year basis. The recordkeeper just told my client that because her plan covered more than 100 participants last year, she has to include an auditor’s report with the plan’s Form 5500 filing. She has an extension to file, but time is running out. Is there any relief available for her?”  

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in New York focused on Form 5500 and plan audits.

Highlights of the Discussion

A little-known rule could buy your client some extra time to complete a plan audit. She should check with her tax advisor or accountant, but, generally, when a plan has a short plan year of seven months or less for either the prior plan year or the plan year being reported, an election can be made to defer filing the Independent Qualified Public Accountant (IQPA) report with the Form 5500 (see Form 5500, Schedule H Instructions).

In your client’s case, because the prior year (2022) was a short plan year with fewer than seven months, your client can delay filing an IQPA until the 2023 Form 5500 filing is due (i.e., in 2024). According to the 2022 Schedule H Form 5500 instructions, she should check the box on Line 3d(2) indicating the plan has elected to defer attaching the IQPA’s opinion until the following year’s filing. The 2023 Form 5500 should be completed following the requirements for a large plan, including the attachment of the Schedule H and the IQPA report which covers the short plan year in 2022 and the 2023 plan year.

Conclusion

A qualified retirement plan with a short plan year of fewer than seven months can catch a break regarding when it needs to include an IQPA report for the plan with its Form 5500 filing. Always be sure to check the complete Form 5500 filing instructions for a particular year, and confer with a tax professional for specific guidance.

 

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