Determination Letters for Governmental Plans Don’t Address Pick- up Contributions and Excess Benefit Arrangements
Governmental plan sponsors who apply for determination letter can’t rely on a favorable letter for whether:
- contributions made to the plan are the employer’s “pick-up contributions,” or
- the plan has a qualified governmental excess benefit arrangement.
Sponsors may, however, apply for a private letter ruling from the IRS for these matters.
To be “pick-up contributions,” the:
- employer must make the contributions but designate them as employee contributions (Internal Revenue Code Section 414(h)(2)), and
- employees must not have the option to receive the contributions directly instead of having their employer pay these to the plan (Revenue Rulings 81-35 and 81-36).
For a governmental plan to have a valid “pick-up contributions” arrangement, the employer’s duly authorized person must state in writing that the:
- employer will make the contributions to the plan but designate them as employee contributions (IRC Section 414(h)(2)), and
- employees must not have the option to receive the contributions directly in cash or by an election to defer them either before or after the date the employer pays them to the plan (Revenue Ruling 2006-43).
Qualified governmental excess benefit arrangement
The plan benefits under a qualified governmental excess benefit arrangement aren’t considered in determining whether it meets the general annual IRC Section 415 limits (IRC Section 415(m)(3)).
For a governmental plan to have a qualified governmental excess benefit arrangement, it must:
- maintain a portion of the plan to solely provide participants with annual plan benefits that exceed IRC Section 415 limits,
- not provide the participants an election to directly or indirectly defer compensation to this portion of the plan, and
- pay these benefits from a trust solely maintained to pay these benefits (IRC Section 415(m)(3)).
Private letter rulings
Governmental plan sponsors may request a PLR from the IRS for a:
- determination that their plan has a valid “pick-up contributions” arrangement under IRC Section 414(h)(2) and all related revenue rulings, or
- ruling that their plan’s excess benefit arrangement is a qualified governmental excess benefit arrangement under IRC Section 415(m)(3).
A PLR is a written statement in which the IRS interprets and applies tax laws to the taxpayer’s specific set of facts. See Rev. Proc. 2013-4 on how to obtain a PLR and Rev. Proc. 2013-8 for PLR user fees.