PLR 200410018: Consolidated municipal pension plan qualifies as a governmental plan

Plain-English summary

A state created a defined benefit plan that consolidated retirement plans for municipal employees. The IRS ruled that the consolidated plan was a governmental plan under section 414(d). State law created the plan as a state instrumentality, made the state responsible for it, and gave a board oversight and reporting duties, while municipalities and a share of state insurance premium taxes supplied funding. The ruling assumes the plan is qualified under section 401(a) and its trust is tax exempt under section 501(a). It does not decide whether the plan's employee contribution pickup arrangement is valid.

Ruling snapshot

• Question: Is the state-created retirement plan for municipal employees a governmental plan?
• Outcome: Approved: the plan qualifies under section 414(d) on the stated facts.
• Key authorities: IRC § 414(d); Rev. Rul. 89-49.

Full text (IRS public release)

200410018

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

DEC 9 2003
U.I.L. 0414.0-00

XXXXXXXXXXX
XXXXXXXXXXX
XXXXXXXXXXX
[illegible]

Attn: XXXXXXX

Legend:
State A = ***

Plan X = ***
Group B Employees = ***
Board C = ***
Director D = ***
Commissioner E = ***
Statute M = ***

Dear ***:

This letter is in response to your request for a private letter ruling dated , as supplemented by correspondence dated , *** and ***, submitted on your behalf by your authorized representative, concerning whether Plan X is a governmental plan under section 414(d) of the Internal Revenue Code (“Code”).

The following facts and representations were made in support of your ruling request.

Plan X is a defined benefit plan created by State A pursuant to Statute M. Plan X was created effective *** in order to consolidate the various existing retirement plans of State A municipalities that were established for the benefit of Group B Employees. The consolidation was mandated by Section 50-106.3C of Statute M. Section 50-102.1 of Statute M provides that Plan X shall be a body corporate and an instrumentality of State A, and that Plan X shall be the responsibility of State A and not that of the participating

200410018

Page -2-

municipalities. Plan X received its most recent determination as to its qualified status under section 401(a) of the Code in a favorable determination letter dated ***.

The purpose of Plan X was to streamline and provide various economic efficiencies to the administration of the separate retirement plans maintained by various State A municipalities for Group B Employees. Statute M required the consolidation of these separate retirement plans and the transfer of those assets to Plan X. All aspects of Plan X are found in Statute M.

Section 50-103.1 of Statute M provides that the overall responsibility for the administration of Plan X resides in Board C. Section 50-103.1 A provides that Board C shall be composed of thirteen members: seven members shall be elected, with six of those elected by active members of Plan X from various geographic areas of State A (with the members in each area electing an active member from that area) and one elected by the retired members of Plan X from State A (with the retired members electing a retired member); one member shall be appointed by the Speaker of the House of Representatives of State A; one member shall be appointed by the President Pro Tempore of the State A Senate; one member shall be appointed by the Governor of State A; one member shall be appointed by the President of the State A Municipal League; one member shall be the State A Insurance Commissioner or his designee; and one member shall be the Director of State A Finance or his designee.

Section 50-104.2 of Statute M provides that Board C shall keep a record of all of its proceedings, which shall be open for inspection at all reasonable hours. A report including such information as the operation of Plan X for the past fiscal year, including income, disbursements, and the financial condition of Plan X at the end of each fiscal year and showing the valuation of Plan X assets, investments, and liabilities, shall be delivered to the Governor of State A after the end of each fiscal year. The State A Auditor and State A Inspector shall make an annual audit of the accounts of Plan X in accordance with State A statutes. Further, Section 50-105.4 G provides that Board C shall compile a quarterly financial report which shall be distributed to the Governor of State A, the Pension Committee of State A, the Legislative Service Bureau of State A, the Speaker of the House of Representatives of State A, and the President Pro Tempore of the State A Senate.

Among its many responsibilities, Board C is responsible for the policies and rules for the general administration of Plan X. Section 50-105.1 of Statute M provides that Board C shall appoint an executive director, Director D. Subject to the policy direction of Board C, Director D shall be the managing and the administrative officer of Plan X, and as such shall have charge of the office, records, supervision and direction of the employees of Plan X.

Section 50-134 of Statute M provides that Director D, with his staff and consultants, shall be responsible to Board C for the day-to-day operation of Plan X and other duties, which are assigned by Board C. Director D shall be responsible to Board C. Board C

200410018

Page -3-

must also discharge its duties solely in the interest and for the exclusive benefit of the Group B Employees and their beneficiaries.

Section 50-105.2 of Statute M provides that Board C shall be responsible for the policies and rules for the general administration of Plan X and for the transaction of its business consistent with law, which rules and regulations shall be filed with the Secretary of State of State A.

Section 50-105.4 of Statute M provides that Board C shall discharge its duties with respect to Plan X solely in the interest of the participants of Plan X and their beneficiaries.

The primary source of contributions to Plan X is from the participating State A municipalities in the form of Group B Employees' contributions which are picked up by the State A municipal employer under section 414(h) of the Code, as well as State A municipal employer contributions on behalf of such employees. In addition, 14% of State A taxes collected by Commissioner E on insurance premiums are contributed to Plan X.

Section 50-101 of Statute M, in general, defines a Group B Employee to mean an eligible officer of a participating municipality. Any municipality with a municipal police department is considered an eligible employer under Plan X. An eligible employer that elects to become a member of Plan X and as such makes contributions to Plan X on behalf of its Group B Employees is considered a participating municipality under Section 50-101 of Statute M.

The only beneficiaries of Plan X are Group B Employees and their beneficiaries as defined in Statute M.

Based on the aforementioned facts, you have asked for a ruling that Plan X is a governmental plan under section 414(d) of the Code.

Section 414(d) of the Code provides that a “governmental plan” means a plan established and 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.

Revenue Ruling 89-49, 1989-1 C.B. 117, provides that a plan will not be considered a governmental plan merely because the sponsoring organization has a relationship with a governmental unit or some quasi-governmental power. One of the most important factors to be considered in determining whether an organization is an agency or instrumentality of the United States or any state or political subdivision is the degree of control that the federal or state government has over the organization’s everyday operations. Other facts include: (1) whether there is specific legislation creating the organization; (2) the source of funds for the organization; (3) the manner in which the organization's trustees or operating board are selected; and (4) whether the applicable

200410018

Page -4-

governmental unit considers the employees of the organization to be employees of the applicable governmental unit. Although all of the above factors are considered in determining whether an organization is an agency or instrumentality of a government, the mere satisfaction of one or all of the factors is not necessarily determinative.

With respect to the first factor of Rev. Rul. 89-49, Section 50-102.1 of Statute M, which created Plan X, specifically states that Plan X is an instrumentality of State A. Thus, there is specific legislation creating Plan X and specifically identifying it as an instrumentality of State A.

With respect to the second factor of Rev. Rul. 89-49, Plan X does not receive specific funding from State A. Plan X is a contributory pension plan and is funded with Group B Employees' contributions that are picked up by State A municipal employers under section 414(h) of the Code, as well as State A municipal employer contributions made on behalf of the Group B Employees. Further, Plan X receives fourteen percent of State A taxes collected on insurance premiums by Commissioner E.

With respect to the third factor of Rev. Rul. 89-49, State A exercises considerable control over Plan X. Section 50-102.1 of Statute M provides that the maintenance of Plan X is the responsibility of State A and not that of the participating State A municipalities. State A also exercises control over Plan X through Board C. Board C is charged with the general administration and management of Plan X. Board C consists of thirteen members, seven of whom are elected with six of those elected from various geographic areas of State A and one elected from the entire State A retired Plan X membership. The other six members of the Board C are appointed by various elected State A government officials, including the Governor of State A, the Speaker of the House of Representatives of State A, and the President Pro Tempore of the State A Senate, and the directors of other State A departments. Board C also appoints Director D who is the managing and administrative officer of Plan X and who is responsible for the day-to-day operation of Plan X. Board C, under the direction of Director D, is required by Section 50-105.4 G of Statute M to make quarterly and annual financial reports on the financial condition of Plan X and to submit such reports to the Governor of State A and other State A officials. Further, State A exercises oversight authority over Plan X's operations pursuant to Section 50-104.2 of Statute M, which provides that the State A Auditor and the State A Inspector shall perform an annual audit of the accounts of Plan X in accordance with State A statutes.

With respect to the fourth factor of Rev. Rul. 89-49, Group B Employees are not considered to be direct employees of State A. Rather, a participating municipality that has elected to participate in Plan X and that makes contributions to Plan X on behalf of its Group B Employees is considered to be the direct employer of a Group B Employee. A participating municipality that participates in Plan X is then subject to all of the rules, regulations, and policies enacted by Board C. As mentioned earlier, Board C is responsible for the policies and rules for the general administration of Plan X, which pursuant to Section 50-102.1 of Statute M is the responsibility of State A.

Page -5- 200410018

In view of the foregoing, we conclude that Plan X is a governmental plan for purposes of section 414(d) of the Code.

This ruling is based on the assumption that Plan X is qualified within the meaning of section 401(a) of the Code, and its related trust is tax-exempt under section 501(a) at all times relevant to this ruling.

No opinion is expressed as to the federal tax consequences of the transaction described above under any other provision of the Code. No opinion is expressed as to the validity of the pick up arrangement of Plan X under section 414(h) of the Code.

A copy of this ruling is being sent to your authorized representative in accordance with a power of attorney on file with this office.

If you have any questions, please contact

SE:T:EP:RA:T:2
Sincerely yours,
(signed) JOYCE E. FLOYD
Joyce E. Floyd, Manager
Employee Plans Technical Group 2
Enclosures:

Deleted Copy of Letter
Notice 437