| February 6, 2012
Ms. LaNita Vandyke
Chief, Publications and Regulations Branch
Internal Revenue Service
111 Constitution Avenue, Rm. 5203
PO Box 7604
Washington DC, 20044
Re: ANPR on “governmental plan” under IRC § 414(d)
Dear Ms. Vandyke:
On behalf of the National Association of Federal Credit Unions (NAFCU), the only trade association that exclusively represents federal credit unions (FCU), I am writing to you regarding the Advance Notice of Proposed Rulemaking (ANPR) on the definition of “governmental plan” under the Internal Revenue Code (IRC) § 414(d). This comment letter is restricted to the issue of the ability of FCUs to maintain and offer nonqualified deferred compensation plans.
FCUs have been an important source of financial services to millions of Americans since the enactment of the Federal Credit Union Act (FCU Act) in 1934. Presently, there are approximately 93 million Americans that depend on their credit union to meet their financial needs.
As stated in the preamble of the ANPR, one of the purposes of the regulations is to address whether a FCU is a governmental entity for purposes of determining whether it can maintain an eligible nonqualified deferred compensation program. The IRS states that, “upon issuance of these regulations as final regulations, a Federal credit union can be an eligible employer within the meaning of section 457(e)(1)(B) on the basis that Federal credit unions are non-governmental tax-exempt organizations.” 76 Fed. Reg. 69172, at 69185 (November 8, 2011). It appears, thus, FCUs would be able to offer § 457(b) plans because they would be eligible employers.
NAFCU strongly supports the ANPR’s clarification that FCUs are eligible to maintain nonqualified deferred compensation plans under § 457(b) of the IRC. FCUs are greatly restricted in their ability to offer competitive compensation packages to qualified executives. Thus, the ability to maintain nonqualified deferred compensation plans under § 457(b) would be helpful for FCUs as they seek to attract the best available executives and managers. Unfortunately, since the issuance of Notice 2005-58, it has been unclear as to whether FCUs can maintain such plans.
While we support the general conclusion that FCUs are eligible employers, we do not agree with the IRS’s analysis and conclusion that FCUs are not federal instrumentalities. In an illustrative example in the ANPR, the agency states that a FCU is “not an agency or instrumentality of the United States because its board of directors is elected by its own members and the directors are not responsible to the United States, except to the limited extent set forth in the Federal Credit Union Act and regulated by the NCUA.” 76 Fed. Reg., at 69185.
FCUs’ federal instrumentality status has been affirmed by the courts, and the IRS has also held that FCUs are instrumentalities. See, e.g., United States v. State of Michigan, 851 F.2d 803 (6th Cir. 1988); Rev. Rul. 89-94, 1989-2 C.B. 233. Further, the fact that FCUs are “federal instrumentalities” does not disqualify them from being eligible employers able to maintain 457(b) plans. They are eligible because they are exempt from taxation, thus meeting the second part of the definition of “eligible employer” under § 457(e)(1)(B), which includes “ any other organization (other than a governmental unit) exempt from tax under this subtitle.”
NAFCU does not believe the IRS needs to determine whether FCUs are federal instrumentalities even for the limited and specific purpose of their qualification to maintain 457(b) plans. Accordingly, we urge the IRS to remove its analysis on FCUs’ federal instrumentality status in this rulemaking.
NAFCU appreciates the opportunity to provide comments. Should you have any questions or would like to discuss these issues further, please contact me at ttefferi@nafcu.org or by telephone at (703) 842-2268.
Sincerely,
Tessema Tefferi
Regulatory Affairs Counsel |
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