Burdensome Rules for Public Pension Plans

By Esser, Jeffrey L. | Government Finance Review, August 1996 | Go to article overview

Burdensome Rules for Public Pension Plans


Esser, Jeffrey L., Government Finance Review


Public employee retirement systems have been under a moratorium from the federal pension nondiscrimination rules for almost 20 years, In that time, public pension plans have provided broad, almost universal coverage of full-time employees. These onerous federal rules are scheduled to apply to the public sector in 1999 for most plans, and in 1997 for public-sector 401(k) and 401(m) plans. As the U.S. Treasury Department has been unable to identify any demonstrated abuses in the public sector for these rules to address, GFOA is leading a coalition of nearly 20 public interest organizations in support of legislation creating a permanent moratorium for public employee retirement systems from these rules.

Nondiscrimination rules were created to preclude private-sector firms from adopting pension plans that benefited only highly compensated employees. The Internal Revenue Service (IRS) regulations for the private sector look at the uniformity of benefits across the entire spectrum of a firm's employees. Realizing the difference between public- and private-sector plans, the IRS first placed a moratorium in 1977 on imposing these rules on governmental pension plans. From that time, GFOA and others worked with the IRS in an effort to draft reasonable regulations for public employee retirement systems. The U.S. Treasury does not feel it has the necessary statutory authority to craft special rules for governmental plans. Therefore, the IRS continues to extend the effective date for imposing these rules on the public sector.

In 1990, GFOA adopted strong policy on the application of nondiscrimination rules to public-sector plans. That policy points out that if these laws are applied, public-sector plans could lose their tax-qualified status solely because the plan contains different benefit structures reflecting the broad range of occupations covered by public sector plans - not due to discriminatory practices. The policy states, "GFOA recommends that all parties concerned - Congress, IRS, and the state and local government pension community - work cooperatively to make necessary revisions and modifications to and exemptions from the Internal Revenue Code."

Based on the futile efforts with the IRS to develop a workable solution to a problem that seems not to exist and the strong policy of the association, GFOA is leading a group of nearly 20 public-sector organizations to gain a permanent moratorium from Congress. Making the moratorium from these rules permanent is predicated on the many differences between pension plan structures in the public sector and those in the private sector.

State and Local Government Oversight. Pension plans of state and local governments are established by these governments-adopted by and subject to the oversight of popularly elected governmental bodies.

Broad Coverage. Public employee retirement systems have broad, almost universal coverage with more than 90 percent of full-time employees covered by a defined benefit plan. This compares with only 56 percent in the private sector.

Difference in Benefit Structures. State and local government plans cover a variety of different occupational groups, such as teachers, judges, and fire fighters. Each group's benefit structure is geared to the group's unique work history based on the duties and/or longevity of each position. …

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