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Suspending Social Security retirement benefits

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My client who is 68 heard that he could suspend his Social Security retirement benefit and earn delayed retirement credits. Is that true and, if so, what are the details?

ERISA consultants at the Retirement Learning Center (RLC) 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 a financial advisor from Oklahoma is representative of a common inquiry related to Social Security benefits.

Highlights of the Discussion
Suspending Social Security benefits is an important tax question for which your client should seek professional tax advice based on his personal situation. Based on guidance available on the Social Security’s website (www.ssa.gov), since your client has reached full retirement age, but is not yet age 70, it appears he can ask the Social Security Administration (SSA) to suspend his retirement benefit payments. By doing this, he will earn delayed retirement credits for each month his benefits are suspended, which will result in a higher benefit payment when he resumes them.

If your client makes the decision to suspend benefit payments after consulting with a financial advisor, he can make a request to suspend payments by calling the SSA or sending a written request. The SSA will suspend benefit payments beginning the month after an individual makes the request. If your client suspends benefit payments, they will automatically start again the month he reaches age 70—or sooner if he requests they restart prior to age 70.

There are several factors to consider when contemplating a suspension of retiree benefits, including, but not limited to, the following.

  1. If a retiree voluntarily suspends his/her retirement benefit and he/she has others who receive benefits on their record, the others will not be able to receive benefits for the same period that the retiree’s benefits are suspended. An exception applies for divorced spouses.
  2. If a retiree voluntarily suspends his/her retirement benefit, any benefits he/she receives on someone else’s record will also be suspended.
  3. Medicare Part B premiums cannot be deducted from suspended benefits. Therefore, a person who suspends his/her retirement benefit will be billed for such premiums.

Conclusion
The rules related to suspending Social Security retiree benefits are complex. It is possible to earn delayed retirement credits by suspending benefits, but other issues such as the availability of family benefits and Medicare considerations may come into play when making the decision. Anyone contemplating a suspension of retiree benefits should seek expert advice from a tax and/or legal advisor.

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SIMPLE IRA Plan Termination and Two-Year Rollover Rule

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“One of my clients terminated his SIMPLE IRA plan at the end of 2023 and established a 401(k) plan beginning 2024. He’s worried about the two-year waiting period for distributing assets held in the now terminated SIMPLE IRA plan. Is there any leeway with the waiting period for a terminated SIMPLE IRA plan?”

ERISA consultants at the Retirement Learning Center (RLC) 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 a financial advisor in Ohio is representative of a common inquiry involving a savings incentive match plan for employees SIMPLE IRA plan.

Highlights of Discussion
Yes, there is, and we just received more clarification on this issue in IRS Notice 2024-02. You are aware that a distribution from a SIMPLE IRA within the first two years of an individual’s participation in the SIMPLE IRA plan, potentially, is subject to a 25 percent early distribution penalty tax unless the amount is being moved to another SIMPLE IRA plan or a penalty exception applies.

Section 332(b) of the SECURE Act 2.0 adds Internal Revenue Code (IRC) Sec. 72(t)(6)(B) to the IRC and amends IRC Sec. 408(d)(3)(G). Under the addition and amendment, if an employer terminates a SIMPLE IRA plan and establishes a 401(k) plan [or 403(b)] plan that limits distributions (as described next), then the two-year waiting period on rollovers from the terminated SIMPLE IRA to the 401(k) [or 403(b)] does not apply, provided the rollover contribution is subject to the receiving plan’s distribution restrictions (Q&A G4 of Notice 2024-02).

In the case of a 401(k) plan, distributions must be limited to those triggers listed in IRC Sec. 401(k)(2)(B):
• Severance from employment,
• Death,
• Disability,
• Plan termination,
• Attainment of age 59½,
• Hardship,
• As a qualified reservist distribution,
• For certain lifetime income investments and
• As qualified long-term care distributions.

Further, amounts may not be distributable by reason of the completion of a stated period of participation or the lapse of a fixed number of years (e.g., no in-service distributions prior to age 59 ½). Be sure to check the 401(k) plan document for its treatment of rollover contributions. Some plans allow distributions of rollover amounts at any time.

For 403(b) plans, rollover contributions from the terminated SIMPLE IRA plan must be limited to those triggers listed in IRC Sec. 403(b)(11), which are similar to those listed above.

Conclusion
Under SECURE Act 2.0, with clarification by Notice 2024-02, if an employer terminates a SIMPLE IRA plan and establishes a 401(k) plan [or 403(b)] plan that limits distributions as prescribed, then the two-year waiting period on rollovers from the terminated SIMPLE IRA to the 401(k) [or 403(b)] does not apply, provided the rollover contribution is subject to the receiving plan’s distribution restrictions. An in-service distribution provision before age 59 ½ would not align with the necessary distribution restrictions for the waiver.

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Reducing PBGC Premium Costs

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“One of my plan sponsor clients with a defined benefit plan asked me about ways to reduce the Pension Benefit Guaranty Corporation (PBGC) premiums the company pays. Do you have any ideas to help save on costs?”

ERISA consultants at the Retirement Learning Center (RLC) 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 a financial advisor in Illinois is representative of a common inquiry involving PBGC premiums.

Highlights of Discussion
The 2024 PBGC premium rate per participant is $101 and could be even higher for underfunded plans. Therefore, decreasing the participant count in a plan can help reduce PBGC premiums.

After reviewing the plan details, RLC’s consultants noted the plan had many former employees with small benefit amounts and a number of retirees taking benefits. Several strategies are available that can reduce the number of participants and thus the PBGC premium costs, including the following.

First, SECURE Act 2.0 has increased the cash-out amount limit from $5,000 to $7,000, and this feature would allow the plan sponsor to require separated participants with benefits under this threshold to take distributions. (See a prior Case of the Week New Cash Out Limit-Mandatory or Not?) This tactic removes the former participants from the plan and, consequently, the number of participants for which PBCG premiums are due. To illustrate how this is applied, reducing the participant count by 10 could reflect $1,010 in savings (10 x $101) in premiums. The PBGC premium rates are also indexed each year, so savings for future years would be higher.

Next, for participants currently taking benefits, a “lift out” strategy could be used whereby an insurance carrier essentially buys these participants out of the plan and the carrier takes on the obligation to pay benefits. Once the transaction is completed the participants are no longer in the plan and PBGC premium savings are realized.

Conclusion
Depending on the circumstances of the plan, there may be ways for defined benefit plan sponsors to reduce their PBGC premiums, including utilizing enhanced cash-out provisions and lift-out strategies. Of course, one must ensure the language of the governing plan document allows for such actions.

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New Cash Out Limit—Mandatory or Not?

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“SECURE Act 2.0 increased the plan cash-out limit to $7,000. Are plans required to apply the new limit?”

ERISA consultants at the Retirement Learning Center (RLC) 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 a financial advisor in Utah is representative of a common inquiry involving plan cash outs.

Highlights of Discussion
This is a great question because there are several areas of confusion related to plan cash-out provisions. The following addresses the dollar thresholds associated with cash-outs or “mandatory distributions.”

First, qualified retirement plans are not required to have cash-out provisions at all. Internal Revenue Code (IRC) sections 411(a)(11) and 417(e) permit—but do not require—qualified plans to include provisions allowing for the immediate distribution of a separated participant’s vested benefit without the participant’s consent where the present value of the benefit is less than the statutory limit.

Plan sponsors can elect to add a provision to their plans to cash out small, vested benefit amounts up to the statutory limit when a participant terminates. These mandatory distributions can be paid out without the consent of the participant or his/her spouse, if applicable. The statutory limit in recent years has been up to $5,000, but Section 304 of the SECURE Act 2.0 increased the statutory limit to $7,000, effective for 2024 and later years.

Each plan has the option to set its own cash-out threshold within the prescribed limit (anywhere from $0 to $7,000 for 2024 and later years).The threshold must be written into the plan document. So, if a plan has a cash-out provision, the threshold could be any amount up to $7,000. Moreover, the anti-cutback rules do not apply to amendments adding or changing a plan’s cash-out threshold [Treas. Reg. §1.411(d)-4, Q&A-2(b)(2)(v)].

Plans with a cash-out level of less than $1,000 can issue a check for the amount to the participant. Plans that have a cash-out threshold of between $1,000 and the statutory maximum (now $7,000) must automatically roll over the distribution to an IRA established for the former employee, if the former employee does not make an affirmative election to have the amount paid in a direct rollover to an eligible retirement plan or to receive the distribution directly. Notice requirements apply. For additional information please see Notice 2005-5.

Conclusion
Qualified plans are not required to have cash-out provisions, but if they do, the details must be specified in the plan document. Each plan has the option to set its own cash-out threshold within the prescribed limit (anywhere from $0 to $7,000 for 2024 and later years).

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Year-End Tax Reminders

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A recent call with a financial advisor in Pennsylvania is representative of a common inquiry involving year-end tax-related deadlines. The advisor asked: “Of what year-end tax deadlines should I remind my clients?”

ERISA consultants at the Retirement Learning Center (RLC) 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.

Highlights of the Discussion
There are several December 31, 2023, deadlines of which employers, retirement plan participants, IRA owners and other savers should be aware. The list below includes several but is by no means exhaustive. And—because December 31 falls on a Sunday this year, conservatively these actions should be completed by Friday December 29th to ensure they are completed no later than December 31st. 1

  • 2023 Roth conversion: In order for a taxpayer to consider either a Roth IRA or Roth 401(k) in-plan conversion for 2023 tax purposes, he or she must complete the conversion no later than December 31, 2023. (Don’t confuse the 2023 conversion deadline with the deadline for making a 2023 Roth IRA contribution, which is April 15, 2024.)
  • 2023 Qualified Charitable IRA Distribution: No later than December 31st, IRA owners and beneficiaries age 70½ or over can transfer up to $100,000 from their IRAs to an eligible charity, and exclude the amount from gross income. The excluded amount also can be used to satisfy any required minimum distributions that are due from their IRAs for 2023. New for 2023 and for later years, a QCD also can include a one-time gift of up to $50,000 (adjusted for inflation) to a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity. See a prior Case of the Week “There’s More to Love About QCDs” for other enhancements to QCDs as a result of SECURE Act 2.0.
  • 2023 Required minimum distributions for second or subsequent distribution years: Plan participants and IRA owners who have begun their required minimum distributions must take their second or subsequent years’ RMDs no later than December 31, 2023—or, potentially, face a 25% penalty on the amount not taken.
  • Discretionary Plan Amendments: Plan sponsors with calendar-year plans that made discretionary operational changes to their retirement plans during the year must generally amend their plan documents to reflect such changes no later than December 31, 2023.
  • Deferral Election: Though not a requirement, plan participants will want to make sure their employee salary deferral elections are properly set for the beginning of 2024.
  • Beneficiary Audits: Although there is no prescribed deadline, plan participants and IRA owners should make it a habit to review their beneficiary elections at least annual to ensure they are up to date.
  • 529 Plan Contribution: Although contribution rules vary by states, many states have a contribution deadline of the end of the calendar year (December 31) to qualify for a 529 education savings plan tax deduction on their tax returns for the tax year.

Conclusion
Before the New Year’s Eve celebration begins, individuals should check with their tax advisors to see if December 31, 2023, marks the deadline for important 2023 tax-related actions like those listed above. Happy Holidays!

1 When a particular act is tied to a prescribed IRS filing deadline there is an exception. In that circumstance, if the due date falls on a Saturday, Sunday, or legal holiday, then the due date is the next business day (IRC Sec. 7503).

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New Annual Reminder Notice for Unenrolled Participants

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“The recordkeeper for my client’s retirement plan announced that it would be incorporating a new notice into its plan notice distribution process as a result of SECURE 2.0. What is the “Unenrolled Participant Annual Reminder Notice?”

ERISA consultants at the Retirement Learning Center (RLC) 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 a financial advisor from California is representative of a common inquiry related to a plan notices.

Highlights of the Discussion
Some employees, although they may meet their retirement plan’s eligibility requirements to participate, choose not to. Prior to SECURE 2.0 (Public Law 117-328), plan sponsors were required to continue to provide these otherwise eligible but nonparticipants with all the same IRS and DOL plan notices as required for active participants. This task is often completed by a plan’s recordkeeper. Effective for 2023 and later years, SECURE 2.0 allows for a simpler way to satisfy plan notice requirements for these nonparticipants.

Pursuant to section 320 of SECURE 2.0, after the initial year of eligibility, sponsors of defined contribution, 401(k) and 403(b) plans may choose to give an otherwise eligible employee that elects not to participate a single “Unenrolled Participant Annual Reminder Notice” for a year in lieu of myriad other DOL and IRS notices typically required. Under the rule, the plan must provide

  1. An annual reminder notice of the employee’s eligibility to participate in the plan and any applicable election deadlines, and
  2. Any otherwise required document requested at any time by the otherwise eligible employee.

During the initial year of eligibility, all participants must receive all required notices related to initial eligibility, including the plan’s Summary Plan Description (SPD).

Beginning in 2024, it is possible that an eligible, nonparticipant who received the Unenrolled Participant Annual Reminder Notice timely (within a reasonable period before the beginning of the plan year) will no longer receive the following, unless requested:

• SPD
• Summary of Material Modifications (SMM)
• Safe Harbor, EACA and QACA notices
• Fund Changes
• Annual Participant Fee Disclosure
• Summary Annual Report

Depending on the plan’s recordkeeper, plan sponsors may see a reduction in their mailing volume and associated fees for the above-listed notices. Plan sponsors and their advisors should understand how their recordkeepers will be addressing this issue and be prepared to answer participant questions should they arise.

In its request for information (RFI) in August of 2023, the DOL inquired what additional guidance plan administrators may need to implement this simplified disclosure process, including whether the notice should include additional information and whether a model notice would be helpful. The DOL also asked whether it should provide additional criteria for determining if participants are unenrolled. Comments were due October 10, 2023, and we are still awaiting the outcome.

Conclusion
Effective for 2023 and later years, SECURE 2.0 allows for a simpler way to satisfy plan notice requirements for otherwise eligible participants who choose NOT to participate by providing a single Unenrolled Participant Annual Reminder Notice. Plan sponsors and their advisors should understand how their recordkeepers will be addressing this issue and be prepared to answer participant questions should they arise.

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Special Notice Requirements for 401(k) Discretionary Matching Contributions

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“Can you explain the special written disclosure rules that apply to certain 401(k) plans that use a discretionary matching contribution formula?”

ERISA consultants at the Retirement Learning Center (RLC) 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 a financial advisor from Minnesota is representative of a common inquiry related to a discretionary matching contribution in a 401(k) plan.

Highlights of the Discussion

Sponsors using pre-approved plan documents for their 401(k) plans that apply a discretionary matching contribution formula must satisfy special notice requirements in years a match is provided. This requirement came about as a result of the Cycle 3 Restatement in 2022.

For businesses that elect to apply a fully discretionary matching contribution formula (i.e., where the rate or period of the matching contribution is not pre-selected) in their pre-approved plans, the IRS has made it clear that such plans still must satisfy the “definitely determinable benefits” requirement of Treasury Regulation Section 1.401-1(b)(1)(I). According to the regulation, a plan must provide a definite predetermined formula for allocating the contributions made to the plan. Consequently, any pre-approved document with discretionary matching contributions will have to have language that complies with the definitely determinable mandate, and adopting employers will have to

1. Provide the plan administrator or trustee written instructions no later than the date on which the discretionary match is made to the plan describing

  • How the discretionary match formula will be allocated to participants (e.g., a uniform percentage of elective deferrals or a flat dollar amount),
  • The computation period(s) to which the discretionary matching formula applies; and, if applicable,
  • A description of each business location or business classification subject to separate discretionary match formulas.

2. Provide a summary of these instructions to plan participants who receive an allocation of the discretionary match no later than 60 days following the date on which the last discretionary match is made to the plan for the plan year.

Example:

ABC Inc., has a calendar year, pre-approved 401(k) plan with a completely discretionary matching formula. For the 2023 plan year, ABC has decided to make a fully discretionary matching contribution on April 1, 2024. In this case, if ABC carries through with its intended matching contribution, the deadline to notify the plan administrator is April 1, 2024, and then the deadline to provide the participant communication is May 30, 2024.

Note that these requirements do not apply to pre-approved 403(b) plans as they are subject to a separate pre-approval process (Cycle 2) (See Q&A 11 of Q&As for 2nd Cycle Preapproved 403(b) Plan Providers).

As part of a prudent governance process, plan sponsors should work with their pre-approved document providers and recordkeepers to review their procedures surrounding their plans’ matching contributions to ensure compliance with these requirements. Some pre-approved document providers have sample communication language available for plan sponsors who give discretionary matching contributions.

Conclusion

Employers that use a pre-approved 401(k) plan and give discretionary matching contributions must satisfy additional administrator and participant communication requirements to satisfy the definitely determinable benefit requirement of treasury regulations.

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There’s More to Love about Qualified Charitable Distributions in 2023

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“Can you summarize the rules and changes to qualified charitable distributions (QCDs)?”

ERISA consultants at the Retirement Learning Center (RLC) 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 a financial advisor from California is representative of a common inquiry related to charitable giving.

Highlights of the Discussion
• I’d love to. As you have likely heard the SECURE Act of 2022 made changes to the rules for QCDs, making more opportunities for gifting. Let’s review the existing rules, enhancements that took effect in 2023 and the change that will happen next year and going forward.
• To review, a QCD is any otherwise taxable distribution (up to $100,000 for 2023) that an “eligible IRA owner or beneficiary” directly transfers from an IRA to a “qualifying charitable organization.” The deadline to complete the transfer for 2023 tax purposes is December 31, 2023. For 2024 and later years, the $100,000 will be adjusted for inflation. In fact, the 2024 maximum increased to $105,000 as announced in IRS Notice 23-75.
• An eligible IRA owner or beneficiary for QCD purposes is a person who has attained age 70 ½ or older, and has assets in traditional IRAs, Roth IRAs, or “inactive” Simplified Employee Pension (SEP) IRAs or Savings Incentive Match Plans for Employees (SIMPLE) IRAs. Inactive means there are no ongoing employer contributions to the SEP IRA or SIMPLE IRA. A SEP IRA or a SIMPLE IRA is treated as ongoing if the sponsoring employer makes an employer contribution for the plan year ending with or within the IRA owner’s taxable year in which the charitable contribution would be made (see IRS Notice 2007-7, Q&A 36).
• Beginning in 2023 and for later years, a QCD also can include a one-time gift of up to $50,000 (adjusted for inflation) to a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity. The $50,000 limit will increase to $53,000 for 2024

• Charitable remainder trusts and gift annuities provide current income to a beneficiary and when the beneficiary passes on, the remaining amount in the trust or annuity goes to a named charitable cause. According to the rules, up to 90% of the value of the initial gift ($45,000 in this case) can be paid to the beneficiary over a maximum of 20 years, with at least 10% of the initial gift going to the named charity after that.
• What are the benefits of making a QCD? Generally, IRA owners/beneficiaries must include any distributions of pre-tax amounts from their IRAs in their taxable income for the year. A QCD

 Is excludable from taxable income,
 May count towards the individual’s RMD for the year,
 May lower taxable income enough for the person to avoid paying additional Medicare premiums;
 Is a philanthropic way to support a favored charity; and
 May provide income to a beneficiary of a charitable remainder trust or gift annuity during his or her lifetime and a gift to a charitable cause thereafter.

• Note that making a QCD does not entitle the individual to an additional itemized tax deduction for a charitable contribution.
• Generally, qualifying charitable organizations include those described in §170(b)(1)(A) of the Internal Revenue Code (IRC) (e.g., churches, educational organizations, hospitals and medical facilities, foundations, etc.) other than supporting organizations described in IRC § 509(a)(3) or donor advised funds that are described in IRC § 4966(d)(2). The IRS has a handy online tool Exempt Organization Select Check, which can help taxpayers identify organizations eligible to receive tax-deductible charitable contributions.
• Where an individual has made nondeductible contributions to his or her traditional IRAs, a special rule treats amounts distributed to charities as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions.
• Be aware there are special IRS Form 1040 reporting steps that apply to QCDs.
• Section IX of IRS Notice 2007-7 contains additional compliance details regarding QCDs. For example, QCDs are not subject to federal tax withholding because an IRA owner that requests such a distribution is deemed to have elected out of withholding under IRC § 3405(a)(2) (see IRS Notice 2007-7, Q&A 40 ).
Conclusion
Eligible IRA owners and beneficiaries age 70 ½ and over, including those with inactive SEP or SIMPLE IRAs, should be aware of the benefits of directing QCDs to their favorite charitable organizations. And with the SECURE Act 2.0 changes, there’s more to love about QCD gifting.

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Cash Balance Plan Amendment for Market Value Return

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“My client wants to stabilize his company’s employer contributions to its cash balance plan by switching the interest rate used in the allocation from a fixed-rate to a market-rate return. The actuary is telling my client that if a cash balance plan is amended to use a market-rate approach the plan document must be submitted to the IRS for approval to be valid. Must the plan be sent to the IRS for approval if the plan is amended to use a market-rate allocation method?

A recent call with an advisor in New Jersey focused on a plan amendment.

Highlights of the Discussion
In most cases, no, it would not be necessary to submit the amended plan for IRS approval. The market-rate allocation option is available in many IRS pre-approved cash balance plan documents and no additional IRS filing or approval would be necessary when amending to a pre-approved plan with a market-rate option.

An employer that adopts a pre-approved plan may rely on the document provider’s IRS-issued opinion letter for the plan if the employer’s plan is identical to the provider’s pre-approved plan (Revenue Procedure 2017-41). The employer cannot have added any terms to the pre-approved plan or modified or deleted any terms of the plan other than by choosing options permitted under the plan.

Older plan documents may not include a market-rate return provision. Perhaps the actuary is using an older plan document with an outdated design.

Conclusion
When using a pre-approved plan document to amend a cash balance plan to include a market-rate allocation option, the plan sponsor can rely on the original IRS approval letter issued to the document provider. Therefore, no additional IRS filing for approval would be required.

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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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