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 on 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 Office of the Associate Chief Counsel (Tax Exempt and Government Entities):
- 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 “letter ruling” is a written determination, issued in response to the taxpayer’s written inquiry, that interprets the tax laws and applies them to the taxpayer’s specific set of facts. See Revenue Procedure 2020-1 on how to obtain a PLR; user fees for these requests are listed in Appendix A.