My name is Terry Mumford. I'm a partner with Ice Miller LLP. We work with governmental pension plans across the country – single employer, multiple employer, multiemployer. We have been and will continue to be assisting our clients in preparing written comments on the ANPRM.1 And as a firm we will file a formal comment letter. I appreciate very much the opportunity to speak to you today.
At the Town Hall meeting in Oakland, I presented you with an overview of many issues that our clients are facing with regard to the definition of a governmental agency or instrumentality. My goal today is to focus on issues that our clients are facing with respect to the participation of non-profit entities in governmental plans. At the outset, I would note that I have read ERISA Advisory Opinion 2012-01A2 . I do not believe that my comments are inconsistent with that letter, but I'd be happy to provide any clarification on that point.
- Our clients believe that the final regulations should clearly recognize that a non-profit corporation can be a participant in a governmental plan if it is also treated as a governmental entity. The examples in the draft proposed regulations paint a pretty bleak picture for non-profit entities' participating in a governmental plan. Our clients believe that the final regulations should provide more examples of when a dual status entity may participate in a governmental plan.
Our clients have observed that a number of truly governmental functions are being performed by non-profit entities. The Service has heard and received extensive testimony on behalf of charter schools. In addition to the education field, non-profits in many states perform governmental functions in other fields. Also, many legislatures, governors, local governing bodies, and mayors have provided for participation in governmental plans by these non-profits that perform governmental functions. It seems that the draft proposed regulations do not fully recognize the current relationship between non-profits and governmental entities, which has evolved over the decades. We view this as part of the modernization that Ms. Kinard3 referenced. We would suggest the following revisions for the proposed regulations to achieve that recognition.
- 1. We believe that because policy makers focus primarily on the question – does the entity serve a governmental purpose? – that should be a Main Factor. Under the draft proposed regulations governmental purpose is Other Factor H.
- The current version of the draft proposed regulations focuses on control in both the Main and the Other Factors. With regard to non-profit entities, our experience is that the control comes from the contract or the charter between the non-profit entity and the state or political subdivision. Contrary to what the draft proposed regulations currently provide, we believe that the final regulations should recognize that a contract or a charter can be the equivalent of the control that is described in the current version. Therefore, we would ask that the Main Factors A and B and Other Factor A be modified to recognize this broadened definition of control. Our clients do not take the position that any contract is sufficient to meet the control requirement, but that certain contracts should be sufficient.
- The current draft proposed regulations (Main Factor D) ask whether employees of the non-profit entity are treated as public employees for purposes other than employee benefits. In states or political subdivisions where there is no civil service system, being treated as a public employee may boil down to eligibility for employee benefits. Therefore, we would suggest that that question be refined to ask whether the employees of the non-profit are treated as public employees for purposes other than the governmental retirement plan.
- In Main Factor E, the Service has quite appropriately focused on sovereign powers and the delegation of sovereign powers. Education and the health and welfare of children, the disabled, and senior citizens are paramount governmental purposes. It would seem that entities that perform these functions on behalf of state or local government should be viewed in the same light as entities that have been delegated taxing or police powers. Therefore, we would ask that the Main Factor on delegation of sovereign powers be broadened and perhaps combined with the Other Factor on governmental purpose. We believe that this approach would recognize the modern realities of state and local government and the role that non-profit entities play in providing governmental services.
- We would recommend that a change be made to the funding factor (Other Factor B). If a non-profit entity is primarily funded by tax dollars via a contract or charter, we believe that factor should weigh in favor of governmental status. The draft proposed regulations imply that funding via contract or charter is not enough. We believe that is an area for substantial revision. Again, we are not saying that public funding via contract on charter should be an automatic "passing" factor – but neither should it be an automatic "fail."
- The current version of the draft proposed regulations leaves the impression that a non-profit entity that is established under a general statutory provision as opposed to a specific statute will have a "failing mark" in the "Other Factor" category. (This is Other Factor C.) Instead we would ask the Service to make it clear that this is not the case. Having a "special" incorporation statute may provide a clear legislative determination that an entity is performing a governmental function. But the absence of such a statute should not be viewed as a legislative determination that an entity is not performing a governmental function.
- We also want to raise with you an issue that we do not believe is addressed in the draft proposed regulations – the issue of affiliated non-profit entities. Treas. Reg. §1.414(c)-5(b) provides that, if a 501 entity's employees participate in a plan, then the employer with respect to the plan includes "any other organization that is under common control with that exempt organization." This is required aggregation. Permissive aggregation is described in Treas. Reg. §1.414(c)-5(c), which allows aggregation of non-profit entities that regularly coordinate their day-to-day exempt activities. In each case (required and permissive aggregation), governmental plans would need guidance as to whether the decision to categorize a non-profit entity as a governmental entity would mean that all aggregated entities would also be required to be treated as governmental entities for purposes of plan participation or whether they could permissively be treated as governmental entities.
In closing, I would like to reiterate what are probably the most consistent requests from our clients:
- Please open a ruling program as soon as possible after the regulatory process.
- If the final regulations are not modified as suggested above to allow flexibility in the participation of non-profit entities in governmental plans, then the final regulations should provide grandfathering for non-profit entities that participate in a governmental plan as of the effective date of the final regulations if those entities were participating in the governmental plan pursuant to state or local law and the terms of the plan document.
1. On May 3, 2012, the Internal Revenue Service conducted the second of two scheduled town hall meetings to allow public testimony and Q&A with regard to the Advanced Notice of Proposed Rulemaking (ANPRM) that was issued November 8, 2011 regarding the definition of governmental plans under IRC Section 414(d). Reg. 157714-06, 76 Fed. Reg. 69172, https://federalregister.gov/a/2011-28853. At this town hall meeting, held in Cleveland, OH, Terry Mumford presented these remarks. Presenters were limited to 8 minutes each, so Terry focused her remarks on client concerns regarding non-profit entities. Ice Miller will be filing more detailed, complete comments prior to the deadline for comments – June 18, 2012.
2. This advisory opinion, issued by the Department of Labor's Employee Benefits Security Administration on April 27, 2012, found that participation by private, nonprofit employers in Connecticut's state group health plan would adversely affect its status as a governmental plan under ERISA Section 3(32).
3. Pamela Kinard, Senior Technician Reviewer, Qualified Plans Branch 2, Office of Division Counsel/Associate Chief Counsel (Tax-Exempt and Governmental Entities).