Because of the significance of the governmental plan determination, it is recommended that the IRS issue guidance clarifying the scope of the governmental plan definition for Internal Revenue Code purposes. Guidance on the criteria for being a governmental plan exists, but there are several areas where it is unclear whether a plan is a governmental plan for purposes of the Code. This comment addresses some of those areas, particularly the scope of the "established and maintained" standard, and the application of governmental plan status to plans not maintained by governmental employers or plans benefiting both governmental and private employees. Additionally, the comment addresses the need for guidance on the definition of controlled group for governmental employers and the scope of the nondiscrimination moratorium with regard to testing matching and employee contributions.
Section 414(d) defines a governmental plan as a plan "established and maintained" 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 (hereinafter, a "governmental employer").
The application of this standard is unclear when the status of the plan sponsor changes, either from private employer to governmental employer or from governmental employer to private employer. A private employer is most likely to convert to a governmental employer upon the acquisition of the private employer by a government agency or instrumentality. A governmental employer is most likely to convert to a private employer upon the privatization of a function or service or disposition of an operating unit to a private employer.
When a private employer converts to a governmental employer, governmental plan status may turn on whether the plan, which may have been initiated by the private employer, meets the "established" prong of the test. When a governmental employer converts to a private employer, governmental plan status may turn on whether the plan is "maintained" by a governmental employer.
The definition of governmental plan in the Code is slightly different from the definition in Title I of ERISA, which uses the words "established or maintained" by a governmental employer. 3 Title IV of ERISA uses the "established and maintained" standard for determining whether a plan is exempt from Pension Benefit Guaranty Corporation (PBGC) coverage. 4
The governmental plan standard for Title I is obviously more amenable to a determination that a plan established by a private employer is a governmental plan upon the purchase of the employer by a governmental employer, and the Department of Labor has given an advisory opinion to that effect. 5 That advisory opinion was based on the determination that, at all times since the enactment of ERISA, a governmental employer maintained the plan, with no discussion at all of the "established" prong of the governmental plan standard.
Applying the same language as appears in the Code, the PBGC has opined that strict construction of the terms of the statute would frustrate Congressional intent concerning plans sponsored by governmental employers, so that pension plans taken over from a private business by a governmental employer are governmental plans excluded from the provisions of Title IV of ERISA. 6
The IRS’ interpretation of the established or maintained language remains largely a mystery. In the only ruling to date concerning the acquisition of a private employer and its plan by a governmental employer, the IRS ruled without discussion that such a plan is a governmental plan. 7
The status of a plan established by a government entity and subsequently privatized and taken over by a private employer has not been ruled on. The legislative history of the governmental plan provision indicates that such a plan should not be considered a governmental plan, since a significant reason for exempting governmental plans from ERISA was "the ability of the governmental entities to fulfill their obligations to employees through their taxing powers." 8 If the plan is no longer sponsored and maintained by a governmental employer, the security provided by the government’s taxing authority is no longer available to the plan.
Strict construction of §414(d) would require that a plan be both established by a governmental employer and maintained by a governmental employer in order to enjoy governmental plan status. However, strict construction is not only unnecessary in this instance, but contrary to Congressional intent. A recognized treatise on statutory construction indicates the significance of Congressional intent in interpreting such provisions:
Where two or more requirements are provided in a section and it is the legislative intent that all of the requirements must be fulfilled in order to comply with the statute, the conjunctive "and" should be used. Where a failure to comply with any requirement imposes liability, the disjunctive "or" should be used . There has been, however, so great laxity in the use of these terms that courts have generally said that the words are interchangeable and that one may substituted for the other, if consistent with the legislative intent. 9 [emphasis added.]
A significant body of case law illustrates and confirms this principle. 10 Thus, the use of the "established and maintained" phrase in §414(d) does not necessarily mandate that a plan meet both criteria in order to be considered a governmental plan subject to the nondiscrimination moratorium. Both the legislative history of the definition of governmental plan and the actual text of the moratorium provisions indicate that current sponsorship of a plan by a governmental employer is the single criterion for determining governmental plan treatment.
The legislative history of ERISA indicates that the special rules concerning vesting, participation and funding are for "plans sponsored by State and local governments." 11
Additionally, the new sections of the Code exempt "a governmental plan (within the meaning of section 414(d)) maintained by a State or local government or political subdivision thereof (or agency or instrumentality thereof)" from various nondiscrimination requirements. 12 So the ERISA legislative history focuses on the current sponsorship of the plan, and the Code’s nondiscrimination provisions use a maintenance requirement for determining whether a plan falls under the moratorium.
The IRS should issue guidance consistent with the clear Congressional intent that plans currently maintained by governmental employers are considered governmental plans and exempt from the nondiscrimination requirements. Accordingly, plans initiated by private employers but currently sponsored by governmental employers should be considered governmental plans exempt from the nondiscrimination requirements, and plans initiated by governmental employers but currently sponsored by private employers are not governmental plans and are not exempt from the nondiscrimination requirements. Such a position would not only follow the congressional intent, but also provide a unified policy and definition of governmental plan for all purposes of ERISA and the Code.