Deemed IRAs in Kentucky governmental retirement plan

U.S. Department of Labor, Employee Benefits Security Administration
Advisory Opinion 2003-01A
January 24, 2003

[Recipient address omitted]

Dear Mr. Pauw:

This responds to your request for an advisory opinion from the Department of Labor (Department) concerning the applicability of Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA), to the Kentucky Public Employees' 401(k) Deferred Compensation Plan (Plan). You ask whether the addition of "deemed IRAs," within the meaning of § 408(q) of the Internal Revenue Code (Code), to the Plan would result in such "deemed IRAs" being treated as one or more pension plans subject to Title I of ERISA, or would otherwise adversely affect the status of the Plan as a "governmental plan" within the meaning of ERISA § 3(32).

You represent that the Plan was established and is maintained by the Kentucky Public Employees' Deferred Compensation Authority (Authority) on behalf of the Commonwealth of Kentucky for employees of the state, the state university system, public school districts and certain other local governmental entities. The Authority is amending the Plan in accordance with Ky. Rev. Stat. Ann. § 18A.245, which you describe as authorizing "deemed IRAs," within the meaning of Code § 408(q), to be added to the Plan. Section 408(q) of the Code provides that, if a qualified employer plan elects to allow employees to make voluntary employee contributions to a separate account or annuity established under the plan, and under the terms of the qualified employer plan such account or annuity meets the applicable requirements of § 408 or § 408A for an individual retirement account or annuity, then such account or annuity shall be treated for purposes of the Code in the same manner as an individual retirement plan rather than as a qualified employer plan. Section 408(q) further provides that contributions to such a "deemed IRA" shall be treated as contributions to the "deemed IRA" rather than to the qualified employer plan. You represent, and we assume for purposes of this letter and without examining the issues involved, that the Plan, as it is currently structured and operated, is a "governmental plan" excluded from Title I coverage by § 4(b)(1) ERISA and that any "deemed IRAs" established in connection with the Plan would meet all applicable requirements of the Code.

Section 4(c) of ERISA, which is effective for plan years beginning after December 31, 2002, provides that if a pension plan allows an employee to make voluntary employee contributions to a "deemed IRA" under Code § 408(q), then the "deemed IRA" shall not be treated as part of such plan (or as a separate pension plan) for purposes of any provision of Title I of ERISA "other than section 403(c), 404, or 405 (relating to exclusive benefit, and fiduciary and co-fiduciary responsibilities) and part 5 (relating to administration and enforcement)." Section 4(c) further provides that those ERISA provisions shall apply in a manner similar to their application to a simplified employee pension (SEP) under § 408(k) of the Code.

Section 4(b)(1) of ERISA provides that Title I of ERISA does not apply to a "governmental plan" as defined in ERISA § 3(32). Section 3(32) of 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.

The Department construes ERISA § 4(c) together with the exclusions from Title I in § 4(b). In the case of the exclusion for "governmental plans" in § 4(b)(1), it is the view of the Department that establishing "deemed IRAs" as part of a plan would not subject the "deemed IRAs" or the plan to any provisions of Title I of ERISA if the plan, taking into account the "deemed IRAs," continues to meet the definition of a "governmental plan." As noted above, we assume the Plan meets the definition of a "governmental plan" in ERISA § 3(32) as it is currently structured and operated. We further understand your proposal to involve governmental employees eligible to participate in the Plan being allowed to establish "deemed IRAs," within the meaning of § 408(q) of the Code, in connection with the Plan. Based on those understandings, it is the Department's view that amending the Plan to authorize such "deemed IRAs" would not subject either the Plan or any "deemed IRA" established in connection with the Plan to Title I of ERISA.

This letter relates solely to the application of provisions of Title I of ERISA to the Plan. It is not determinative of any particular tax treatment under the Internal Revenue Code. For example, this letter should not be read as expressing any views regarding whether the Plan is a "qualified employer plan" for purposes of Code § 408(q) or whether any "deemed IRAs" established in connection with the Plan otherwise comply with the applicable requirements of the Code.

This letter constitutes an advisory opinion under ERISA Procedure 76-1, and is issued subject to the provisions of that procedure, including 10 thereof, concerning the effect of advisory opinions.

Sincerely,

John J. Canary
Chief, Division of Coverage, Reporting and Disclosure
Office of Regulations and Interpretations