Category Archives: Governmental Plans

Today in ERISA History

May 31, 2005 – The Dept. of Labor releases Advisory Opinion 2005-13A, addressing whether ERISA section 514(a) preempts the application of certain leave substitution provisions in state law provisions.

Northwest Airlines, Inc. sponsored the Northwest Airlines, Inc. Sick and Occupational Injury Leave Plan for Employees (Sick Leave Plan). It did not allow an employee to use paid sick leave to care for a child or other family member with a health condition or experiencing a health emergency.

At the time, the Washington State Family Care Act (Family Care Act) generally provided that employees entitled to sick leave or other paid time off may use such paid time off to care for certain relatives of the employee who have health conditions or emergency conditions.

ERISA section 514(a) generally preempts any state law which “relates to” an employee benefit plan covered under Title I of ERISA. ERISA section 514(d) provides that “nothing in this title shall be construed to alter, amend, modify, invalidate, impair, or supersede any law of the United States…or any rule or regulation issued under such law.” In the advisory opinion, the DOL states that the Family and Medical Leave Act (FMLA) is a law of the United States whose overall purpose and structure parallel those of the state Family Care Act.

The DOL finds that:

“Because the FMLA does not afford all employees the automatic right to substitute paid sick leave for unpaid leave to care for a relative, we do not address whether ERISA preemption of the Washington Family Care Act providing such a right would “alter, amend, modify, invalidate, . . . or supersede” the FMLA. Rather, this letter addresses only whether ERISA preemption would “impair” the FMLA within the meaning of section 514(d) of ERISA. For the reasons discussed below, it is the view of the Department that the Family Care Act’s leave substitution provision is saved from ERISA preemption by ERISA’s federal savings clause because a determination that ERISA preempts the Family Care Act would “impair” the FMLA, which expressly encourages more generous state family leave rights than the FMLA provides directly.”

Bailout by U.S. Taxpayers May Resolve Northern Mariana Islands Retirement Fund Bankruptcy

There are times when a pension story is one thing for the general public, and a totally different thing for the ERISA community, or in this case the employee benefits community because the plan involved is not truly an ERISA plan, it is a governmental plan, and not really even a governmental plan but a retirement fund for a commonwealth of the United States. The plan in question is the Northern Mariana Islands Retirement Fund, which filed for Chapter 11 bankruptcy protection on April 17, 2012.

The plan has been troubled for years. On May 5, 2006, the Governor of the Commonwealth of the Northern Mariana Islands sent a letter to both the Senate President and the Speaker of the House of Representatives for the Fifteenth Northern Marianas Commonwealth Legislature outlining a plan to resolve the underfunding issue by making changes to the NMI Defined Benefit Plan and establishing a defined contribution plan. Clearly, those efforts have failed.

Some of the stories in the general media are reporting that this as the first public pension to file for bankruptcy protection. I don’t know if this is accurate. I am half-remembering a public pension that may have filed for bankruptcy protection in 1977 or thereabouts, so I’m hoping one of my colleagues will help me out by filling in some of the details. There have also been a slew of public pensions which have been trying to dig themselves out from under severe underfunding over the last 10 years. And then, of course, there is Birmingham (Jefferson County), Alabama which filed for Chapter 9 bankruptcy protection in November of 2011. Birmingham’s filing involved assets and debt of more than $1 billion.

Regardless of whether it is the first or the largest, it is still unusual and noteworthy because most governmental plan sponsors have the ability to tax themselves out of a serious underfunding issue. Instead, the Northern Mariana Islands Retirement Fund has decided to throw in the towel and ask the bankruptcy court to tell them how to solve their underfunding issue.

The bankruptcy petition doesn’t shed much light on how many participants and beneficiaries are involved, and how underfunded the plan is. Because the plan is a governmental plan, there is also no Form 5500 readily available from the Dept. of Labor which can provide this information.

One interesting aspect of this entire situation is whether the federal government will step in to resolve this underfunding issue due to the Northern Mariana Islands commonwealth status. The Northern Mariana Islands became a commonwealth of the United States pursuant to a covenant. The Covenant, Pub. L. 94-241, was signed into law by President Gerald Ford on March 24, 1976. As part of that covenant, the U.S. government maintains and administers the social security retirement fund for the Northern Mariana Islands. While the social security fund is not the same as the Northern Mariana Islands Retirement Fund, you don’t have to be Gumby to connect these dots.

I envy the ERISA attorney who will get to dig into the Northern Mariana Islands Retirement Fund and find the best path forward for the plan, the participants and the beneficiaries. One thing is certain – all of the other severely underfunded governmental plans will be watching this proceeding to see if the path taken by the Northern Mariana Retirement Fund is one that they can also travel.

Today in ERISA History

April 10, 1989 – The IRS releases Revenue Ruling 89-49. It contains the 4 factors which the IRS considers when making a determination that a plan is a governmental plan within the meaning of Code section 414(d). Governmental plans are excluded from provisions of Title I and Title IV of ERISA, are exempt from certain qualification requirements and are deemed to satisfy certain other qualification requirements under certain conditions. As a result, the principal qualification requirements for a tax-qualified governmental plan are that the plan:

  • Be established and maintained by the employer for the exclusive benefit of the employer’s employees or their beneficiaries;
  • Provide definitely determinable benefits;
  • Be operated pursuant to its terms;
  • Satisfy the direct rollover rules fo Code section 401(a)(31);
  • Satisfy the section 401(a)(17) limitation on compensation;
  • Company with the statutory minimum required distribution rules under Code section 401(a)(9);
  • Satisfy the pre-ERISA vesting requirements under Code section 411(e)(2);
  • Satisfy the Code section 415 limitations on benefits, as applicable to governmental plans; and
  • Satisfy the prohibited transaction rules in Code section 503.

Currently, there are no regulations for Code section 414(d).

Rev. Rul. 89-49 remains the standard for governmental plan determinations until Nov. 7, 2011, when the IRS issues proposed rules on the Determination of Governmental Plan Status.

On May 15, 2012, the IRS is holding a phone forum discussing these proposed regulations. To attend, you must pre-register through the IRS website.

Today in ERISA History

March 27, 2000 – the DOL issues Advisory Opinion 2000-03A, deciding that the Employees’ Money Purchase Pension Plan of the Housing Authority of the City of Santa Barbara is a governmental plan within the meaning of ERISA section 3(32) and therefore is excluded from ERISA Title I coverage by ERISA section 4(b)(1). In making that determination, the DOL found that the Housing Authority’s money purchase plan met the definition of “governmental plan” contained in ERISA section 3(32) because it was a public corporation established pursuant to a state statute which could exercise governmental powers, including eminent domain, and its property and revenues were exempt from state and local taxation, and it was controlled and supervised by the mayor and city council of the City of Santa Barbara.

On Nov. 7, 2011, the IRS issued Proposed Regulations on the Determination of Governmental Plan Status within the meaning of Internal Revenue Code section 414(d). Code section 414(d) defines the term “governmental plan” as a plan established and maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing. The definition of governmental plan in ERISA section 3(32) is essentially the same as Code section 414(d) except Code section 414(d) uses the term “established and maintained” and ERISA section 3(32) uses the term “established or maintained”. There are currently no regulations providing guidance about Code section 414(d) other than these new proposed regulations. The IRS has been using the facts and circumstances analysis contained in Rev. Rul. 89-49 to determine whether a retirement plan is a governmental plan within the meaning of Code section 414(d).

On May 15, 2012, the IRS is holding a free phone forum discussing these proposed regulations. To attend, you must pre-register through the IRS’ website here.