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New IRS proposed rules on tribal retirement plans

published in McAfee & Taft EmployerLINC Employee Benefits Update | March 9, 2012

By John Papahronis

The Internal Revenue Service (IRS) has recently given notice that it intends to issue long-awaited proposed rules relating to retirement plans of Indian tribal governments (ITG). Hearings on the proposed rulemaking are set for July 10, 2012, and written comments may be submitted through June 18, 2012.

The proposed rules would provide ITGs with guidance in determining whether an ITG retirement plan is a “governmental” ITG retirement plan or a “commercial” ITG retirement plan. This distinction is significant because governmental retirement plans receive special favorable treatment under the Internal Revenue Code. The Pension Protection Act of 2006 made clear that a governmental plan includes any plan which is established and maintained by an ITG and all the participants of which are employees of the ITG whose services are in the performance of essential governmental functions, but not in the performance of commercial activities. Recognizing that many ITGs have substantial and complex commercial activities, the IRS has been struggling to establish rules that would prevent commercial ITG employees from being covered by a governmental ITG retirement plan.

The proposed rules provide for a two-step analysis. Under the first step, there would be guidance for determining whether an activity operated by an ITC is a governmental activity or a commercial activity. This would be a facts and circumstances determination, but certain activities would be deemed to be commercial (e.g., hotels, casinos and convenience stores), and certain activities would be deemed to be governmental (e.g., activities related to public infrastructure).

The second step would be to determine whether employees covered by the ITG retirement plan are employees who perform substantially all of their services in activities that are governmental. The key considerations for this determination would include the employee’s assigned duties and responsibilities, the location of the employee’s services, and who pays the employee.

The proposed rules would make clear that a plan is not a governmental ITG plan if it covers any commercial employee, and there would not be a de minimus exception to this rule. The rules provide that an ITG plan would not be treated as failing the rules under a standard that constitutes a reasonable, good faith interpretation of the statute and the rules, provided that the benefit levels for governmental and commercial plans are uniform.

Until the final regulations are issued, governmental ITG retirement plans may rely on the transitional relief in IRS Notices 2006-89 and 2009-67. In general, such transitional relief is conditioned on the retirement plan involved not being amended to reduce benefits unless the reduction does not distinguish between commercial and governmental employees.

While the IRS is proceeding very carefully in developing their rules, it is clear that the IRS continues to have significant interest and concerns about governmental ITG retirement plans. We will continue to monitor the developments on this topic. In the meantime, we recommend that ITGs consider the following steps:

  • Check the structure of their existing retirement plans for governmental and commercial employees to verify that they qualify for the transitional relief of IRS Notices 2006-89 and 2009-67, if necessary.
  • Ensure that the plan documents for their governmental and commercial retirement plans follow the applicable Internal Revenue Code requirements applicable for such plans.
  • Take into consideration the proposed IRS rules when planning additional commercial activities.

If you should have any questions regarding ITG retirement plans, please call any member of the McAfee & Taft Employee Benefits Group.