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IRC Section 414(d) – Governmental Plans for Tribes

Governmental plans are defined in IRC Section 414(d). Indian tribal governments may maintain governmental plans; however, the IRS has not issued regulations addressing some of the terms and rules provided for Indian Tribal government plans.

IRC Section 401(k)(1) & (4)(B)(iii) – IRC Section 401(a) plans allowed to have a qualified cash or deferred arrangement feature as authorized by IRC Section 401(k)(1) may, under IRC Section 401(k)(4)(B)(iii) be sponsored by an employer who is an Indian tribal government (as defined in Section 7701(a)(40)), subdivision of an Indian tribal government (determined in accordance with Section 7871(d)), agency or instrumentality of an Indian tribal government or subdivision thereof, or a corporation chartered under Federal, State or tribal law which is owned in whole or in part by any of the foregoing.

IRC Section 403(b)(1)(A)(ii) – An employee of a school operated by a State, a political subdivision of a State, or an agency or instrumentality of any one or more of the foregoing, is allowed to participate in a tax-sheltered annuity plan.

IRC Section 414(d) – Governmental plans are defined. The definition includes certain retirement plans established and maintained by an Indian tribe (as defined in IRC Section 7701(a)(4)), a tribal subdivision (determined in accordance with IRC Section 7871(d)), or an agency or instrumentality of either. Plan participants must be employees of the entity substantially all of whose services are in the performance of essential governmental functions but not in the performance of commercial activities (whether or not an essential government function).

IRC Section 457(e)(1) – An “eligible employer” for purposes of certain deferred compensation plans is defined as a State, political subdivision of a State, and any agency or instrumentality of a State or political subdivision of a State, and any other organization (other than a governmental unit) exempt from income tax.

IRC Section 7871 – Indian tribes shall be treated as a State for certain purposes, including Section 403(b)(1)(A)(ii) (relating to the taxation of contributions of certain employers for employee annuities). IRC Section 457(e)(1) isn’t listed as one of the purposes, however.  RC Section and Treas. Regulation.

Resources (Court Cases, Chief Counsel Advice, Revenue Rulings, Internal Resources)

Notice 2006-89 – Notifies the public of a change in the definition of governmental plans under IRC Section 414(d) and provides transitional relief under a reasonable and good faith standard with respect to compliance with the Pension Protection Act of 2006. Governmental plans now include certain plans sponsored by Indian tribal governments, a subdivision of an Indian tribal government, or an agency or instrumentality of either, if all the participants are employees of such entity substantially all of whose services are in the performance of essential governmental functions but not in the performance of commercial activities (whether or not an essential government function).

The notice also provides transitional relief establishing a reasonable and good faith compliance standard to interpret the essential governmental function provision. A tribe may use the definition of essential government function provided under IRC Section 7871(e) for purposes of determining the availability of tax-exempt bond financing of an ITG to meet this standard.

Announcement 2011-79 – Announces an advance notice of proposed rulemaking (ANPRM REG-133233-08) that describes the rules that the Treasury Department and IRS are considering issuing as proposed regulations relating to whether a plan of an Indian tribal government is a governmental plan under IRC Section 414(d). It includes a draft notice of proposed rulemaking in the Appendix.

U.S. Dept. of Labor EBSA v. Administrator of the White Mountain Apache Tribe Retirement Savings and 401(K) Plan – This decision from the Department of Labor, Office of Administrative Law Judges stated that the plain language of the Pension Protection Act specifically excludes plans sponsored by Indian tribal governments if the covered employees engage in the performance of commercial activities (whether or not an essential government function). At least some of the participants engaged in commercial activities while working in the Tribe’s hotels, casino, gaming facility, ski resort, restaurants, supermarket, tire shop, service station and/or convenience store. As a result, the judge ruled that the plan wasn’t a governmental plan.

Dobbs v. Anthem Blue Cross & Blue Shield – Appeals court case that focused on whether all participants in the plan that established and maintained by an Indian tribal government were employees substantially all of whose services were in the performance of essential government functions, not commercial activities.

Analysis

In general, retirement plans are governed by the Employee Retirement Income Security Act of 1974 (ERISA). Governmental plans, on the other hand, are excluded from Titles I and IV of ERISA and receive special treatment under the Internal Revenue Code (IRC). Typically, governmental plans offer employers less burdensome qualification and filing requirements.
A tribe may be eligible for a 401(k) or 403(b) governmental plan. Either plan may qualify as a governmental plan under Section 414(d) if it meets the other requirements and limitations as discussed below. Whether the plan qualifies will depend on the facts and circumstances at hand. If a plan does not qualify as a governmental plan, then it would be presumably non-governmental and subject to the requirements of ERISA.

Indian tribal governments may establish certain plans as either governmental or non-governmental employee retirement plans. For instance, a qualifying 401(k) plan may be either a governmental or non-governmental plan. If it is established as a non-governmental plan, it will be subject to all ERISA regulations. A tribe may also decide to maintain two separate plans, i.e., a 401(k) plan for employees who are governmental, which would require compliance with Section 414(d), and a second 401(k) plan for those employees engaged in commercial activities, which would require compliance with ERISA.

Prior to 2006, a “governmental plan,” as defined in IRC Section 414(d), included a plan established and maintained for its employees by the U.S. Government, a State government or political subdivision thereof, or by any agency or instrumentality of the foregoing but did not include plans established and maintained by an Indian tribe or a tribal subdivision.

As amended by the Pension Protection Act of 2006 (PPA), the definition of “governmental plan” in IRC Section 414(d) now includes a plan established and maintained by an Indian tribal government, a tribal subdivision, or an agency or instrumentality of either, and all of the participants of which are employees of such entity substantially all of whose services are in the performance of essential governmental functions but not in the performance of commercial activities (whether or not an essential government function).

A tribe seeking to establish a qualifying governmental plan under IRC Sections 401(k) or 403(b) must meet the general requirements of those Sections, in addition to the formal definition of a “governmental plan” under Section 414(d).

Notice 2006-89 summarizes the changes made to by the PPA and provides transitional relief for tribal plans, including mixed plans covering both governmental and commercial employees.  Notice 2007-67 extends this transitional relief to “the date that is six months after guidance is issued under Section 414(d) of the Code.” Announcement 2011-79 cites both Notices and sets forth draft language for proposed regulations under IRC Section 414(d).

The 2016 decision, U.S. Dept. of Labor EBSA v. Administrator of the White Mountain Apache Tribe Retirement Savings and 401(K) Plan, Case No. 2015-RIS-00023 (November 30, 2016), held that a tribal plan was not a government plan because the employees were performing commercial activities and thus, the plan was subject to ERISA. The Department of Labor administrative law judge’s opinion noted the importance of Notice 2006-89 and its classification of certain enterprises as commercial, i.e., hotels, casinos, service stations, convenience stores and marinas. This decision stated that the plain language of the Pension Protection Act specifically excludes plans sponsored by Indian tribal governments if the covered employees engage in the performance of commercial activities (whether or not an essential government function). The employees covered by the plan in this case included certain hotel, casino, service station and/or convenience store employees. As a result, the judge ruled the plan was not a governmental plan.

The 10th Circuit Court of Appeals in Dobbs v. Anthem Blue Cross & Blue Shield, 600 F.3d 1275, 48 EBC 2473 (10th Cir, 2010), determined that the district court erred when it held that plaintiff participants’ plan was a “governmental plan” because it was established and maintained by an Indian tribal government and the employee’s job duties related to essential governmental functions. The Tenth Circuit found that the district court applied an erroneous interpretation of 29 U.S.C.S. Section 1002(32). Specifically, the Appeals Court stated that rather than looking to the employee’s job duties, the district court must determine whether all plan participants were employees substantially all of whose services were in performance of essential governmental functions but not in performance of commercial activities (whether or not an essential government function). On second remand, a joint motion to dismiss was entered and on September 29, 2010, an Order of Dismissal filed. The various U.S. District courts that have distinguished themselves from Dobbs have done so on unrelated grounds.

To date, regulations have not been issued under Section 414(d) that further define a governmental plan established and maintained by an Indian tribal government. The Treasury Department and IRS have been, for some time now, considering proposed rules relating to such a determination.

Announcement 2011-79 provides an advance notice of proposed rulemaking and includes a draft of proposed regulations. This provides some insight into what Treasury and the IRS are considering to address how the definition of governmental plan applies to Indian tribal governments. Under the proposed regulations, whether a plan of an ITG is a commercial plan or a governmental plan within the meaning of Section 414(d) is based in part on (1) a determination of which activities are commercial activities and (2) a determination of whether employees of the Indian tribal government covered by the plan are employees who perform substantial services in commercial activities (and are thus commercial employees). The advance notice introduces a “facts and circumstances test” to assist in distinguishing between governmental and non-governmental, or commercial entities. It provides insight into the analysis of commercial vs. governmental in greater detail. Unfortunately, as a proposed rule, this commentary doesn’t carry the weight of a regulation or other formal guidance. Therefore, the definition of a governmental plan in the context of an ITG continues to remain highly dependent on the specific facts and circumstances involved.

The following summarizes IRC Sections 414(d), 401(k), 403(b) and 457(b) plans:

414(d). The term “governmental plan” includes a plan which is established and maintained by an ITG, a subdivision of an ITG, or an agency or instrumentality of either. A tribal “governmental plan” must only cover government employees, and substantially all the services of those employees must be in the performance of essential governmental functions and not in the performance of any commercial activities. A tribe may decide against establishing a governmental plan and instead choose to establish a non-governmental plan that is subject to ERISA mandates. Governmental plans may not include employees of casinos, hotels, convenience stores, and other commercial entities. (Please note: under IRC Section 401(k)(B)(4)(ii), governmental plans sponsored by a State or local government or political subdivision thereof or any agent or instrumentality thereof are not eligible to sponsor a qualified cash or deferred arrangement; the authorization in IRC 401(k)(B)(4)(iii) for an ITG, a subdivision of an ITG, or an agency or instrumentality of either described in this document, however, overrides that general rule that would otherwise disallow governmental 401(k) plans.)

401(k). IRC Section 401(k)(4)(B), as amended in 1996, provides generally that the “employer” may include a qualified cash or deferred arrangement as part of a plan maintained by the employer. An “employer” is defined as an ITG, a subdivision of an ITG, an agency or instrumentality of an ITG or subdivision thereof, or a corporation chartered under Federal, State or tribal law which is owned in whole or in part by any of the foregoing. Thus, if a 401(k) plan meets all the statutory requirements, an employee of an ITG could participate in a 401(k) arrangement that is part of a governmental plan under 414(d). The ability to establish and maintain a governmental plan depends greatly on the specific facts and circumstances involved. As previously noted, an ITG can also maintain a 401(k) arrangement that is part of a non-governmental plan.

403(b) Plan. In general, employer contributions made to an employee’s annuity contract are excludable from the employee’s gross income if the employee works for a qualifying educational organization and the employer is a State or a political subdivision of a State, or an agency or instrumentality thereof. IRC Section 7871(d) provides, in pertinent part, that an Indian tribal government shall be treated as a State for certain purposes, including for purposes of Section 403(b)(1)(A)(ii) which pertains to employees performing services for an educational organization. Treasury Regulation Section 1.403(b)-2(b)(20) provides that an Indian tribal government is treated as a State for purposes of determining whether an individual is an employee performing services for a public school. Thus, employees of a tribal government who perform services for a public school could participate in a Section 403(b) governmental plan. A Section 403(b) plan maintained by an Indian tribal government will generally qualify as a governmental plan since substantially all the services performed by the employees under such a plan will normally be in the performance of an essential governmental function.

457(b) Plan. For purposes of Section 457, an eligible employer includes a State or political subdivision or an agency or instrumentality thereof (See IRC Section 457(e)(1)). It does not, however, make reference to tribes. Nor does IRC Section 7871 specifically include a Section 457(b) plan in its list of qualifying purposes. Thus, we are not aware of any formal guidance stating that an ITG could be considered a “State or Local” government plan under Section 457(b).

Issue Indicators or Audit Tips

Examinations of retirement plans are not part of an ITG specialist’s responsibilities. However, the initial interview should include a question about retirement benefits. Be alert for Indian tribal governments who maintain a retirement plan, but who do not file Form 5500.

Check for the filing of Form 5500 if the employees of tribal casinos or other commercial enterprises are covered by a retirement plan. If no Form 5500 is filed, consider a referral to EP.