When “Public” Does Not Refer to “Governmental”

by | Aug 8, 2022 | 401(a), 403(b), Governmental Benefits, Plan Qualification

Recently, a retirement plan advisor asked whether a “public” charity was “governmental” and eligible to maintain a non-ERISA retirement plan. This post explores some of the terminology that is used by the IRS, and in the retirement industry, and how one does not necessarily mean the other.

As many of you know, the term “public agency” is found throughout our federal and state statutes. For example, section 203(x) of the Federal Fair Labor Standards Act states that: “Public agency” means the Government of the United States; the government of a State or political subdivision thereof; any agency of the United States (including the United States Postal Service and Postal Regulatory Commission), a State, or a political subdivision of a State; or any interstate governmental agency.” Similarly, the California Government Code (dealing with the powers of cities and counties) states: “public agency” means the state, or any department or agency thereof, and any county, city, school district, or other local public district, agency, or entity….” Clearly, these definitions and their broad common usage seem to suggest that “public” refers to something governmental.

Interestingly, the Internal Revenue Code (Code) and ERISA provisions that exempt certain plans from many of the Code’s tax qualification rules for retirement plans and from the reporting and fiduciary section of ERISA do not refer to the plans of “public agencies,” but to “governmental plans.” So, if you are trying to determine whether a particular plan is exempt from ERISA, you need to ask if the “plan” is a “governmental plan,” not if the sponsor is a “public” employer.

As suggested earlier, the IRS often uses the term, “public” to mean something other than “governmental.” In the context of nonprofit entities, “public charities” are those that:

  • Are churches, hospitals, qualified medical research organizations affiliated with hospitals, schools, colleges and universities,
  • Have an active program of fundraising and receive contributions from many sources, including the general public, governmental agencies, corporations, private foundations or other public charities,
  • Receive income from the conduct of activities in furtherance of the organization’s exempt purposes, or
  • Actively function in a supporting relationship to one or more existing public charities.

This means that it might be possible for certain entities to be both public charities and governmental organizations. We discussed this in an earlier post where we referred to such entities as “bitaxual.” And, while there are some distinct retirement plan advantages to being bitaxual, there are also some potential retirement plan pitfalls.

If a bitaxual entity, which has established a 403(b) plan, loses its 501(c)(3) status, it may be ineligible to continue or maintain its 403(b) plan. We have also seen numerous governmental entities – specifically public hospital districts – that have previously established 403(b) plans, but did not also have 501(c)(3) status. In such cases, the employer is ineligible to maintain the 403(b), and the plan may lose its tax-favored status, unless it is corrected under EPCRS.

Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at jeff.chang@bbklaw.com or (916) 329-3685.

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