All new employees have a choice between the DB and the hybrid plan, but executives also wanted to give existing employees a one-time, irrevocable chance to switch to the hybrid from the DB plan (Pensions & Investments, June 28).
However, a 2006 IRS revenue ruling discouraged the county from allowing existing employees to switch. Representatives of the county and the union have been talking to the IRS since 2009.
This ruling “stopped us in our tracks with respect to existing employees,” said Carl Crown, Orange County human resources director, based in Santa Ana, Calif.
“We've been able to negotiate real pension reform that will save money,” said Jennifer Muir, communications director for the Orange County Employees Association. “It's frustrating. We're stuck here waiting.”
Now it looks like a decision on the Orange County plan might come soon. In December, the IRS issued its latest “priority guidance plan,” a report on issues “that are priorities for allocation of the resources of our offices during the 12-month period from July 2010 through June 2011.” The report listed 310 priorities; one was guidance on section 414(h)(2) of the Internal Revenue Code — the section affecting the Orange County hybrid.
In an e-mail, an IRS spokesman would only say that “federal law prohibits the IRS from discussing or commenting on any particular taxpayer situation or case.”
Because this is a question of tax policy, rather than plan design, an IRS ruling might have implications beyond Orange County. Last year, for example, several municipalities and government associations asked the agency to change its policy. Representatives from Contra Costa County (Calif.) and the city of San Diego wrote said a favorable ruling would encourage their governments to consider flexible pension plans.
“Like Orange County, we have been waiting to see what the IRS might do,” David J. Twa, the Contra Costa County administrator, wrote in an e-mail.
The roadblock is IRS revenue ruling 2006-43, which interprets the “pickup” status of employee contributions under section 414(h)(2). This section “provides that for any plan established by a governmental unit, where the contributions of employing units are designated employee contributions, but the employer "picks up' the contributions, the contributions are treated as employer contributions,” according to the IRS website.
If a contribution is deemed a pickup, it is treated as pre-tax. However, a contribution can lose its pickup status if it fails to meet certain standards.
For example, the IRS “does not permit a participating employee, from and after the date of the "pickup,' to have a cash or deferred election right with respect to designated employee contributions,” the IRS website says. “Participating employees must not be permitted to opt out of the "pickup,' or to receive the contributed amounts directly instead of having them paid by the employing unit to the plan.”
Thus, when applied to Orange County, the ruling interprets the opportunity to elect another lower retirement formula via the hybrid as meaning employees' contributions would no longer be considered “picked up” and would lose their pre-tax status, Mr. Crown said.