Congressional and Regulatory Activities in the Pension and Benefits Arena
Berger, Barrie Tabin, Government Finance Review
Since the enactment of the Pension Protection Act of 2006 (PPA, PL. 109-280), the tide of federal legislation affecting pension and benefits in the public sector has slowed considerably To be sure, Congress continues to work on related issues, including a PPA technical corrections measure, fee disclosure legislation currently directed at defined contribution plans that are covered by the Employee Retirement Income Security Act (ERISA), and genetic non-discrimination legislation, just to name a few. But much more of the recent activity affecting public pension systems and state and local governments on the pension and benefits front has come in the form of federal regulations or other initiatives initiated by the Internal Revenue Service (IRS) and the Department of Labor (DOL).
INTERNAL REVENUE SERVICE ACTIVITY
High on the list of regulatory activity that is of interest to GFOA and others in the public-sector community are the IRS regulations defining normal retirement age (Treasury Regulations Section 1.401(a)-1(b), which can be found at http://www.cokala.com/Phased_Retirement_Regulations_TD_9325.pdf). Of particular concern is that the regulations may require governmental plans to establish a normal retirement age, just as private-sector plans are required to do under ERISA, rather than basing retirement benefits on years of service, which is common in public plans. There is no precedent for requiring public plans to establish a normal retirement age. Moreover, establishing such a requirement could have serious implications in the public sector--for instance, most public safety retirees would not be able to take advantage of the new $3,000 income-tax exclusion the PPA sets forth for distributions that are used to directly pay for health insurance and long-term care premiums--as well as interfering with implementation of return-to-work policies, vesting rules, and other areas.
In December 2007,some members of the Public Pension Network (PPN)--a coalition of national organizations representing state and local governments, public retirement systems, public employee unions, and active and retired state and local government employees--submitted joint comments to the IRS requesting that the agency "refrain from creating standardized definitions for early or normal retirement age with regard to governmental plans, and instead defer to the applicable state or local laws, regulations, and policies governing the plan: In April 2008, the PPN sent a follow-up letter to the IRS, reiterating its concerns and urging the IRS to extend the effective date of the regulations for governmental plans (currently January 1, 2009) while the agency reviews and considers the merit of the PPN's arguments. (Both letters are available on the federal government relations page at www.gfoa.org.)
The IRS is also increasing its focus on making sure governmental plans comply with the tax-qualification requirements of Internal Revenue Code section 401(a) to ensure favorable tax treatment for plan participants. The IRS held a roundtable discussion on April 22, 2008, with approximately 50 representatives from governmental plans and national associations to discuss the significant steps the agency is taking in this regard. According to IRS presenters, the purpose of the roundtable was to make governmental plans aware of the new IRS initiative and to discuss how the agency could work with governmental plans to learn more about them and ultimately help address compliance problems.
Over the course of the day, IRS staff and officials made it clear that there will be a "significant increase in enforcement presence" surrounding state and local government employee benefit plans because the agency has not had a "meaningful presence" when it comes to governmental plans. Another message was that the IRS wants all governmental plans to obtain favorable determination letters on their tax-qualified status during the Cycle C remedial amendment period, the cycle period from January 31,2008, through February 1, 2009, during which governmental plans will receive priority responses to their requests for determination letters. …