From Defined Benefit to Defined Contribution and Other 2001 Trends in Governmental Plans (Posted on December 7, 2001 by )


Carol V. Calhoun, Counsel
Venable LLP
575 7th Street, NW
Washington, DC 20004
Phone: (202) 344-4715
Fax: (202) 344-8300
Mobile: (202) 441-5592
E-mail: Click here to send e-mail.
Carol V. Calhoun


  1. Defined benefit/defined contribution issues


    1. Examples:


      1. Gain-sharing plans (e.g., Washington State, Idaho).


      2. Statewide 401(k) (PLR 200028042 (April 19, 2000)).


      3. Statewide other defined contribution plan (PLR 200130057 (May 4, 2001)).


    2. Economic Growth and Tax Relief Reconciliation Act of 2001, Public Law 107-16 (“EGTRRA”) changes may make defined contribution plans more popular


      1. Repeal of 415(e) combined limits on contributions and benefits (pre-EGTRRA).

      2. EGTRRA changes are raising limits on elective contributions (see chart)

      3. Multiple defined contribution plans more attractive in light of EGTRRA.

      4. Elimination of maximum exclusion allowance may make 403(b) plans simpler to administer on a statewide level.

      5. Elimination of coordination between 401(k)/403(b) plans and 457(b) plans may make 457(b) plans simpler to administer on a statewide level.

      6. Ability to use 403(b) and 457 money to purchase service credit in defined benefit plans may encourage statewide systems to see such plans as a way of enabling employees to save to purchase credit over time, without creating problems engendered when employees purchase some credit but then are unable to continue purchases enough to create anticipated benefits under defined benefit plans.

      7. Lobbying by vendors for defined contribution plans has led many statewide retirement systems to see defined contribution plans as inevitable, and to focus efforts on:

        1. Lowering costs through investments more like those of existing defined benefit plans.
        2. Better coordination of plans through common administration.
        3. Allowing in-service transfers from plans to defined benefit plans to purchase service credit, without incurring early withdrawal penalties.



  2. Uniformed Services Employment and Reemployment Rights Act (“USERRA”), 38 U.S.C. §§ 4301 et seq., assumes greater importance due to build-up in forces to counteract terrorism


    1. Who is eligible for USERRA rights?


      1. The individual must hold or have applied for a civilian job. (Note: Jobs employers can show to be held for a brief, nonrecurrent period with no reasonable expectation of continuing for a significant period do not qualify for protection.)

      2. The individual must have given written or verbal notice to the civilian employer prior to leaving the job for military training or service except when precluded by military necessity.

      3. With limited exceptions, the individual must not have exceeded a 5-year cumulative limit on periods of service.

      4. The individual must have been released from service under conditions other than dishonorable.

      5. The individual must report back to the civilian job or submit a timely application for reemployment within limits set forth in the statute. The limits are as follows:

        1. Less than 31 days service: The employee must return by the beginning of the first regularly scheduled work period after the end of the last calendar day of duty, plus time required to return home safely. If this is impossible or unreasonable, then as soon as possible.

        2. 31 to 180 days: Application for reemployment must be submitted no later than 14 days after completion of a person’s service. If this is impossible or unreasonable through no fault of the person, then as soon as possible.

        3. 181 days or more: Application for reemployment must be submitted no later than 90 days after completion of a person’s military service.

        4. Service-connected injury or illness: Reporting or application deadlines can be extended for up to two years for persons with service-connected injuries or illnesses.

      6. USERRA applies to voluntary as well as involuntary military service, in peacetime as well as wartime.

      7. USERRA does not apply to state call-ups of the National Guard for disaster relief, riots, etc., although state law may provide certain rights in such situations. However, it does apply to federal law call-ups of the National Guard.

      8. The employer is entitled to proof that military duty of 31 days or more for which an employee was granted a leave of absence was actually performed, upon the employer’s request.

    2. Employee benefits guaranteed by USERRA during military leave


      1. USERRA gives an employee the right to elect continued health insurance coverage, for himself or herself and his or her dependents, during periods of military service. For periods of up to 30 days of training or service, the employer can require the person to pay only the normal employee share, if any, of the cost of such coverage. For longer tours, the employer is permitted to charge the person up to 102 percent of the entire premium. If the employee elects coverage, the right to that coverage ends on the day after the deadline for him or her to apply for reemployment or 18 months after the absence from the civilian job began, whichever comes first

      2. To the extent that an employer offers other non-seniority benefits (e.g., life insurance coverage) to employees on furlough or a leave of absence, the employer is required to provide those same benefits to an employee during a period of service in the uniformed services.


    3. Employee benefits guaranteed by USERRA upon reemployment


      1. The right to immediate reinstatement of civilian health insurance coverage for the employee and previously covered dependents. The health plan cannot impose a waiting period and cannot exclude the returning employee based on preexisting conditions (other than for those conditions determined by the Federal government to be service-connected). This right is not contingent on an election to continue coverage during the period of service.

      2. Credit for the period of military service for purposes of vesting, under either a defined benefit or defined contribution plan.

      3. Credit for the period of military service for purposes of benefit computations under a defined benefit plan, contingent on the individual making any contributions that would have been required if s/he had remained employed.

      4. Make-up employer contributions for the period of military service under a defined contribution plan. However, earnings and forfeitures need not be made up. Moreover, to the extent that employer contributions are contingent on employee contributions, the employee would need to make the employee contributions in order to get the employer contributions.

      5. The repayment period for purposes of employee contributions or deferrals under the two preceding paragraphs is the period beginning with the date of reemployment and whose duration is three times the period of the person’s service in the uniformed services, such payment period not to exceed five years.

    4. Issues


      1. Benefits for period of military leave can be made contingent on employee’s making the contributions that would have been due during the period for which service is to be credited. However, are picked-up contributions treated as employer or employee contributions for this purpose? Note that the statute refers to “employee contributions” and “elective deferrals”; can this be considered to include nonelective picked up contributions, which are treated as employer contributions for federal income tax purposes?

      2. The “employer” is required to make up the employer contributions that would have been made during the period of military service. However, the definition of “employer” in the context of a governmental plan is often unclear. The plan language, and applicable state and local law, must be examined to determine whether the increase in contributions generated by USERRA results in a corresponding increase in the contributions of all employers (because all of the contributing employers are treated as a single employer) or of the specific one which reemployed the individual, or of the specific one which employed the individual before the military service (if different).

      3. For periods of 30 days or less, employer can charge employee only normal employee’s premium for health insurance, not employer’s share. Are premiums paid under a pretax premium plan or flexible benefit plan “employer” or “employee” premiums for this purpose?

      4. Does the answer to the above question vary depending on whether the plan is salary reduction, or involves a bonus which can be applied to health insurance and/or flexible benefits in lieu of taking the cash?



  3. Vermont Civil Unions Law, and other provisions of state and local law or plans permitting domestic relations orders between same-sex partners


    1. Is an order dividing property between parties to a civil union even a “domestic relations order” for Internal Revenue Code purposes?

      1. Code defines domestic relations order to be one for the benefit of a spouse, child, or dependent.

      2. Due to federal Defense of Marriage Act, a party to a civil union, even though considered a “spouse” under Vermont law, is not treated as a spouse for Code purposes. See (Private Letter Ruling 200108010 (November 17, 2000).

      3. Even if one party is financially dependent on another, relationship in violation of applicable local law precludes dependency status.


        1. Can validity of applicable law be challenged?


          1. See Williams v. State, 1998 Extra LEXIS 260, Baltimore City Circuit Court, January 14, 1999, in which Maryland sodomy law, previously found unconstitutional as to heterosexuals, was also found unconstitutional as to homosexuals. This was followed by a settlement in which the Maryland Attorney General agreed not to enforce the state’s sodomy laws.

          2. Could individual in a domestic partnership therefore argue that “relationship” is not in violation of local law, because law is unconstitutional as to private, consensual relationship?

        2. Under what circumstances is “relationship” illegal? For example, if parties are merely roommates, presumably relationship is legal. To take an extreme example, would a single instance of sexual contact cause the entire relationship to be considered to be in violation of local law?

      4. Providing health insurance for domestic partners normally results in adverse tax consequences only to the employee involved. And because governmental entities are not subject to Internal Revenue Code limitations on assignment or alienation of benefits, the mere distribution to a domestic partner at a time that the participant was entitled to a distribution would normally have adverse tax consequences only to the participant whose partner received the distribution. But because distribution limitations are often requirements for maintenance of the plan’s tax-favored (401(a), 403(b), or 457(b)) status, complying with an order in favor of a domestic partner could in theory create tax problems for all participants and contributing employers.

      5. Does the combination of the Defense of Marriage Act and applicable state law mean that in some instances, a plan can comply with both federal and state law requirements only by taking rights away from opposite-sex married couples, to the extent that federal law does not permit such rights to be granted to parties to a domestic partnership?