We solve employee benefits problems for public agencies. Our attorneys have the specialized law expertise to help public agency or “governmental” plan providers develop excellent and compliant benefits plans. We also have the unique expertise to minimize your fiduciary exposure while lowering plan costs.
These plans are generally not subject to the Employee Retirement Income Security Act of 1974 (ERISA), but they remain subject to a complicated combination of federal and state statutes, constitutional provisions, and case law. We work closely with public agencies and their labor, human resources, and legal teams to deliver clarity and help you manage and control employee benefits.
Issues with a Section 125 Cafeteria Plan or paid time off? We can help.
We’re the go-to resource for many California cities and special districts. They count on us to analyze the tax and compliance impacts of the various employee benefit proposals put forth by union bargaining partners or by elected leaders.
414(h) Pick-ups
Section 414(h) of the Internal Revenue Code enables governmental employers to “pick up” certain employee contributions to retirement plans and thereby make them pre-tax contributions (and, in some cases, a payment by the employer). Despite considerable IRS guidance on pick-up contributions, employers often fall into noncompliance.
We help you stay compliant by determining:
- Whether “pre-tax” employee contributions were properly picked up
- Whether plan designs that use or rely on pick-ups comply with current IRS guidance
- Whether certain provisions involving pick-ups may create tax problems
- If special timing rules apply to employee contributions that will be picked up
457(b) and 457(f) Plans
Governmental and select tax-exempt employers may want to consider a 457(b) or 457(f) plan instead of a 401(k) or 403(b) plan. Unlike 401(k) and 403(b) plans, a 457 plan allows independent contractors to participate.
For 457(b) and 457(f) plans (as well as other individually sponsored retirement plans, such as money purchase pension plans, defined benefit pension plans and 403(b) tax-sheltered annuities), we help with design, documentation, implementation, tax qualification, plan administration issues, fiduciary responsibility, termination, and defect correction under the Employee Plans Compliance Resolution System (EPCRS).
CalPERS and ‘37 Act Employers
Many California local governments and public agencies participating in either CalPERS or one of dozens of county-based retirement systems that must follow the ’37 Act do not fully understand how the Act works. These systems are statutory, but have very elaborate and complex administrative structures. Among many other services, we help clients determine:
- If their agency leaves the system and what will it cost if they do
- If they are in compliance with the system’s rules and how to fix compliance issues
- If the plan is up to speed on new rules and requirements regarding rehired annuitants and what constitutes “retirement”
- How to calculate plan liability and how various costing factors will affect future contributions
- The impact of the Public Employees’ Pension Reform Act of 2013
- If they can negotiate different cost-sharing arrangements with employees to lower costs
These are challenging issues that even a public agency’s general legal counsel or outside labor/employment counsel may not be comfortable addressing. We guide you through the regulatory maze and deliver the best retirement results for your agency and your employees.
PEPRA
Virtually all California public employers are subject to the California Public Employees’ Pension Reform Act (PEPRA). It’s no surprise that public agencies all need help understanding PEPRA because no state agency is responsible for issuing comprehensive regulations or guidance on PEPRA compliance. CalPERS has issued some rules for its own administration, but these do not adequately address many of the PEPRA requirements and grandfathering rules.
We help you understand how PEPRA impacts retirement plans, labor negotiations, and ongoing plan operations, and how to comply with the requirements. We understand the tricky aspects of PEPRA compliance, especially with respect to the “standalone” pension plans and defined contribution plans of California public agencies. This is particularly important for plans that are provided by national vendors that may not concern themselves with State-by-State legislative mandates.
Retiree Health and OPEB
There are options available to help control retiree health liabilities. Whether you offer retiree health benefits either on your own or through the CalPERS health insurance system, we find ways for you to reduce expenses and meet commitments.
We can also ease the financial burden of Other Post-Employment Benefits (OPEB) and retiree health plans for many public sector employers. Although these benefits may be subject to California’s “vested rights” doctrine, we can help you find way to:
- Substantially reduce or eliminate OPEB liability
- Fund liabilities
- Comply with the “equal contribution rule” under the Public Employees’ Medical and Hospital Care Act (PEMHCA) while establishing varying rates of employee and retiree cost-sharing for OPEB and health benefits
- Better negotiate with unions to obtain and maintain flexibility with respect to OPEB
Union bargaining partners come to the table with many different proposals on how best to provide their members with affordable and sustainable OPEB. Our specialized employee benefits counsel covers all the bases with benefits. We can help you negotiate with unions and we know what does and doesn’t work because we’ve seen just about all of these proposals.
Social Security and Replacement Plans
Many public employers do not participate in the OASDI portion of Social Security. We can help with all aspects of so-called “Social Security replacement plans” and guide you through the extensive IRS rules and conditions that must be satisfied for Social Security exemption. We’ll determine if your agency:
- Is subject to a 218 Agreement and, if so, what it means
- Qualifies as an “instrumentality” of government that is eligible for exemption from Social Security
- Can “opt out” of Social Security and, if so, how this is done
- Has an existing Social Security replacement plan that complies with IRS requirements
- Is following best practices for its Social Security replacement plan investments, service contracts and plan design
What California Governmental Employers Need to Know About Their Plans
The information in this FAQ relates to plans sponsored by:
- State and local government units, such as counties and cities
- School districts and municipal and public corporations
- State and local commissions
- Public water, irrigation, and other special districts
A governmental retirement plan provides pension or other deferred compensation benefits to the employees of the state or local government, including any of their subdivisions, agencies, or instrumentalities. In contrast, a non-governmental retirement plan provides benefits to the employees of a private employer, including most tax-exempt entities.
Governmental retirement plans in California are subject to California statutory law, mostly under the Government Code, as well as certain federal and state tax requirements that apply to plans that are intended to provide tax-favored benefits.
No. Governmental plans are exempt from the requirements of ERISA, although many of the ERISA requirements (e.g., responsibilities of plan fiduciaries) are incorporated into California statutory law and thus made applicable to California-based governmental plans.
Several plans are sponsored either by the state or another governmental entity within California. The largest of such plans is the California Public Employees’ Retirement System (CalPERS), which provides both retirement and welfare benefits to various categories of employees, including both safety (e.g., police and fire) and miscellaneous employees of the state and those local governmental entities, such as cities, counties, and special districts, that enter into a contract for CalPERS to provide such benefits.
Other state or local government sponsored plans include among others: (1) the State Teachers’ Retirement System (CalSTRS), which provides retirement and certain other benefits to primary, secondary, community college and adult education school teachers within the state, (2) the University of California Retirement System, (3) various county retirement systems established under the County Employees Retirement Law of 1937, and (4) systems established under the Legislators’ Retirement Law and the Judges’ Retirement Law.
Most California state employees are required to participate in the applicable state retirement system. However, local government entities, such as cities, counties, commissions, and special districts, can elect to participate either in the applicable state retirement system (generally, CalPERS) or in an individual system that is established specifically for such an entity. In addition, if certain requirements are met, a local governmental entity can participate in both the state system and an individually-sponsored plan.
CalPERS and the other government-sponsored retirement systems generally provide a well-defined system that can work well as an agency’s primary retirement plan for all of its eligible employees. In addition, most of the administrative duties and obligations involved with maintaining a retirement plan are managed and overseen by CalPERS.
On the other hand, our experience is that a governmental employer will generally come out ahead both in terms of benefit flexibility and employer cost by adopting its own properly designed plan. This is especially true in cases where the employer wants to provide supplemental benefits to a particular group of employees, such as those who are nearing retirement age.
Governmental employers can maintain tax-qualified plans of two basic types outside of CalPERS, either as a supplement to or a replacement for CalPERS. First, a defined benefit pension plan provides a stated benefit for employees upon retirement, usually based on a percentage of compensation multiplied by the number of years of employment. A defined contribution plan generally provides that the employer will contribute a stated percentage of employees’ compensation to the plan during their years of employment, and the employees’ benefit will be whatever those contributions and earnings add up to when the employees retire. In addition, a governmental employer can establish a 457(b) plan, with public schools also able to adopt a 403(b) tax-sheltered annuity program.
Yes. In general, qualified governmental plans are subject to the tax qualification rules that existed prior to the enactment of ERISA. Therefore, many of ERISA’s and subsequent legislation’s tax-qualification requirements, including a prohibition on discrimination in favor of highly compensated employees, accelerated vesting, etc., do not apply to governmental plans. This fact makes such plans an ideal vehicle for providing either a broad-based plan for all employees or enhanced benefits for targeted employees or groups of employees with maximum flexibility in plan design and a minimum of cost.
California governmental employers are prohibited from impairing the contract rights of public employees to their retirement and certain other benefits. The California Supreme Court and other courts in California, as well as the applicable state agencies, have interpreted this constitutional requirement as prohibiting a governmental employer, in most cases, from reducing or eliminating the most valuable benefit that is offered at any time during an employee’s public employment. However, the full impact of this requirement can be avoided, and a governmental entity’s flexibility to amend or terminate its benefits can be preserved, if certain legal steps are taken as early as possible.
With the exception of a few special and grandfathered situations, governmental employers cannot sponsor 401(k) plans. However, governmental employers and their employees can enjoy similar benefit rights through adoption of a properly designed 457(b), or a 403(b) arrangement (schools only).
Section 457 of the Internal Revenue Code provides the requirements that apply to virtually all non-tax-qualified deferred compensation plans that are adopted by governmental entities. If such an entity adopts an “eligible deferred compensation plan” under section 457(b), and its requirements are met, then amounts deferred under the plan and accumulated net income will not be taxed until the particular employee terminates employment and actually receives a distribution of such amounts.
The maximum annual amount that can be deferred under such a plan either by or for any employee is $18,000 for 2017, $18,500 for 2018, or 100% of the employee’s compensation. Such an amount may be increased for inflation by the IRS in $500 increments. In addition, catch-up contributions can be made either during the last three years prior to attaining normal retirement age under the plan or after attainment of age 50.
Section 457(b) imposes limits on the circumstances in which benefits can be paid to employees, such as upon employment termination or in the event of an unforeseeable emergency, and all plan assets must be held “in trust” for the exclusive benefit of the plan’s participants and beneficiaries.
Most governmental 457(b) plans are designed to permit participants to direct the investment of their accounts. This right must be spelled out in the plan documents.
In general, the trustee and named fiduciaries of the plan are legally responsible for the prudent investment of all plan assets. In the case of a participant-directed 457(b) plan, maintained by a California public agency, these individuals or entities may be relieved of their fiduciary duties for plan investments if the agency complies with the rules described in ERISA section 404(c), even though ERISA is not applicable to the plan.