IRS and Treasury Propose Possible Approaches to Governmental Plan Guidance


To initiate a dialogue with the governmental plan community, the Internal Revenue Service (IRS) has published two advance notices of proposed rulemaking relating to the definition of the term “governmental plan” under section 414(d) of the Internal Revenue Code. The first notice describes guidance under consideration on how to determine whether a retirement plan is a governmental plan (General Notice). The second notice applies additional rules to the definition of an Indian Tribal Government (ITG) governmental plan (ITG Notice). Each notice contains an appendix setting forth a draft of possible proposed regulations. The Department of Treasury (Treasury) and the IRS invite comments on this guidance under consideration, other possible approaches, and other issues that should be taken into account. Please see the notices for deadlines and procedures for submitting comments. In addition to soliciting comments, the IRS will engage in outreach, including meetings in different geographical locations, in order to receive input from the governmental plan and ITG communities.


Governmental plans are exempt from certain qualification requirements and are deemed to satisfy certain other qualification requirements. In addition, titles I and IV of Employee Retirement Income Security Act of 1974 (ERISA) (within the jurisdiction of the Department of Labor (DOL) and the Pension Benefit Guaranty Corporation (PBGC), respectively) do not apply to governmental plans. Thus, these plans are also exempt from requirements relating to certain participant protections, fiduciary requirements, and PBGC termination insurance. 

Currently, there are no regulations defining the term “governmental plan” under section 414(d). The IRS, DOL, and the PBGC (the Agencies) share almost identical definitions of the term “governmental plan.” As a result, the Agencies have historically attempted to coordinate their ruling and opinion letters to achieve a level of conformity among governmental plan determinations. The Agencies have become increasingly concerned with the growing number of requests for governmental plan determinations from plan sponsors whose relationships to government entities are increasingly remote. These relationships raise novel issues. Although the guidance under consideration only applies for purposes of section 414(d), DOL and the PBGC were consulted in developing this proposal. Any comments received by the IRS will also be forwarded to DOL and the PBGC.

Additionally, the ITG Notice is intended to describe the IRS’ approaches to guidance under consideration and requests comments from the ITG communities on how the IRS should implement the changes made to section 414(d) by the Pension Protection Act of 2006 (PPA ’06).     

Key Provisions under the General Notice

Section 414(d) generally defines the term “governmental plan” as a plan established and maintained for its employees by the government of the United States, the government of any State or political subdivision thereof, or by any of their agencies or instrumentalities. 

  • Definitions of key terms under section 414(d) -- The guidance under consideration:
    • defines the terms United States, State, and political subdivision of the State;
    • describes the multiple factors under consideration for determining whether an entity is an agency or instrumentality of the United States or an agency or instrumentality of a State or political subdivision; and
    • proposes a facts and circumstances test to determine whether an entity is an agency or instrumentality of a governmental entity.
  • Rules relating to established and maintained -- The guidance under consideration also describes proposed rules that:
    • would help determine whether a governmental entity has established and maintained a governmental plan for purposes of section 414(d); and
    • would apply when a plan sponsor changes its status from a governmental entity to a private entity or from a private entity to a governmental entity.
  • Request for comments – The IRS and Treasury request comments on:
    • all aspects of the guidance under consideration;
    • the ordering and the application of the factors relating to the determination of an agency or instrumentality of a State or political subdivision of a State; and
    • whether there should be distinctions between major and other factors.
  • Effective date -- The IRS and Treasury anticipate that:
    • the guidance resulting from this process will not be effective any earlier than plan years beginning after publication of final regulations;
    • the time required to complete the State legislative process for amending a State or local retirement plan will be taken into consideration when determining an effective date; and
    • transition relief may apply for entities that previously operated as if they were governmental entities eligible to participate or sponsor governmental plans but later were determined to be private entities under the guidance under consideration.

Key Provisions under the ITG Notice

The term “governmental plan,” as amended by PPA ’06, includes a plan which is established and maintained by an ITG, a subdivision of an ITG or an agency or instrumentality of either, and all the participants of which are employees of such entity substantially all of whose services as such an employee are in the performance of essential governmental functions but not in the performance of commercial activities (whether or not an essential governmental function). The ITG guidance under consideration describes whether a plan of an ITG is a governmental plan within the meaning of section 414(d). 

The broader issue of whether a retirement plan is a governmental plan under section 414(d) is not addressed in the ITG guidance under consideration; instead, it is considered under the General Notice. 

The ITG Notice describes the following guidance under consideration:

  • Determination whether activities of an entity are commercial or governmental -- Under the rules under consideration in the ITG Notice:
    • commercial activities would be operations involving a hotel, casino, service station, convenience store, or marina. These activities are examples that were identified as commercial activities in Notices 2006-89 (2006-2 C.B. 772) and 2007-67 (2007-2 C.B. 467), as well as in the Joint Committee on Taxation Technical Explanation of section 906 of PPA ’06.
    • in addition to listing certain specific activities, a facts and circumstances test would be used to determine whether an activity is a governmental or commercial activity.
  • Determination of the activities of an employee -- The ITG guidance under consideration would describe rules for determining whether:
    • employees covered by an ITG plan perform substantial services in activities that are governmental or commercial; and
    • such services would generally be based on the employee’s assigned duties and responsibilities.
  • Request for comments – The IRS and Treasury request comments on:
    • all aspects of the guidance under consideration in the ITG Notice; and
    • possible correction options.
  • Effective date – The IRS and Treasury anticipate that the potential guidance under consideration relating to ITG plans would not be effective any earlier than six months after publication of final regulations. A reasonable, good faith standard would apply until the effective date. See Notice 2007-67. Pursuant to the transitional relief provided in section III.B of Notice 2006-89, current ITG plans are permitted to provide benefits to commercial employees and governmental employees. However, such a mixed ITG plan would need to take corrective action, including retroactively establishing a separate plan for commercial employees.

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