TO: Providers of Deferred Compensation Services
FROM Matthew U. Watkins, Director
Division of Local Government Services
RE: Deferred Compensation Plans and Recent Amendments to Regulations of the
Internal Revenue
Service under U.S.C.A. §401(a)(9) of the Internal Revenue Code
DATE: 3 April 2003
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The provisions of N.J.S.A. 43:15B-1 et seq.
that authorize the establishment and govern the administration and
implementation of deferred compensation plans for municipal, county and local
authority employees provide that such plans shall be established and
administered in accordance with the requirements of the federal Internal
Revenue Code. More specifically, N.J.S.A. 43:15B-10 requires that no
agreement between an employer and an employee for the deferral of compensation
pursuant to that statute may be executed until the named fiduciary for the plan
shall have determined that the plan and any related implementing rules and
regulations are consistent with the requirements of the United States Internal
Revenue Service. Similarly, N.J.S.A. 43:15B-3(f) requires that the named
fiduciary for each such plan shall provide for the distribution of any
investment earnings, gains or losses in a manner consistent with the
requirements of the federal Internal Revenue Code.
On April 17, 2002, notice was published in the Federal
Register at 74 FR 18987 of the final adoption of amendments to the regulations
promulgated by the Internal Revenue Service pursuant to U.S.C.A.
§401(a)(9) of the Internal Revenue Code. These regulations affect deferred
compensation plans established by municipalities, counties and local authorities
pursuant to N.J.S.A. 43:15B-1 et seq. The changes made to the Federal regulations
as a result of the amendments adopted on April 17, 2002 may require
modifications of existing municipal deferred compensation plans that have
previously been approved by the Director of the Division of Local Government
Services pursuant to N.J.S.A. 43:15B-1 et seq. and N.J.A.C.
5:37-1 et seq. In
addition, plan documents being provided to local units that are establishing
deferred compensation programs for their employees pursuant to N.J.S.A.
43:15B-1 et seq. and N.J.A.C. 5:37-1 et seq.
for the first time may have to be revised.
CONTRACTOR PLAN DOCUMENTS
The Division’s Deferred Compensation Rules, and more
specifically N.J.A.C. 5:37-2.1(a), require approval by the Director of “any deferred
compensation plan or service agreement or amendment thereto prior to its
implementation by an employer.” Further, the Division’s Deferred Compensation
Rules, and more specifically N.J.A.C. 5:37-3.1(a), require
approval by the Director of “... a
prototypical plan or service agreement and any amendment thereto to be made
available to employers.”
In light of the recent revisions adopted by the
Internal Revenue Service to its regulations with regard to deferred compensation
plans, contractors which have previously secured approval from the Director of
prototypical deferred compensation plans pursuant to N.J.S.A. 43:15B-1 et
seq. and N.J.A.C. 5:37-1 et seq. must provide the
Director with a copy of any revisions that have been made to their previously
approved plan documents for local employers with which they have existing
service agreements as a result of the rule amendments recently adopted by the
Internal Revenue Service. Additionally, if the deferred compensation plan
documents that will be offered to new client local employers are different from
the plan documents previously approved by the Director as a result of the
recent amendment of the Internal Revenue Service’s regulations, a copy of the
deferred compensation plan documents that will be offered to new client local
employers must also be submitted to the Director for approval.
For local employers that have previously established
deferred compensation plans for their employees, the recent revisions adopted
by the Internal Revenue Service to its regulations with regard to deferred
compensation plans may require the amendment of their deferred compensation
plans. The Division’s Deferred Compensation Rules, and more specifically N.J.A.C.
5:37-4.3, require that local employers must adopt amendments to existing
deferred compensation plans by resolution and further that the amendments and
the resolution must be forwarded to the Director for review and approval.
The Division has prepared a sample resolution for use
in adopting amendments to previously established deferred compensation plans in
light of the recent revisions adopted by the Internal Revenue Service to its
regulations. A copy of the resolution and explanatory narrative is attached and
will be posted at the Division’s web site: www.nj.gov/dca/lgs
For local employers establishing deferred compensation
plans for the first time, the “Compliance with the Internal Revenue Service”
element of the standard form of resolution, should be revised through the
addition of the highlighted language as follows:
The [identify
local governmental unit] is adopting a deferred compensation plan
substantially similar to one on which a favorable Private Letter Ruling has
been previously obtained from the federal Internal Revenue Service except for
provisions added by reason of the Small Business Job Protection Act of 1996
(United States Public Law No. 104-188); the Economic Growth and Tax Relief
Reconciliation Act of 2001 (United States Public Law No. 107-16); and §401(a)(9) of the Internal Revenue Code
and all such provisions are stated in the plan in terms substantially similar
to the text of those provisions in the Internal Revenue Code Section 457. The use of the Ruling is for guidance only
and acknowledges that for Internal Revenue Service purposes, the Ruling of
another employer is not to be considered precedent.
Should you have any questions, please contact Colleen
Kelly at 609-292-0827 or by e-mail at ckelly@dca.state.nj.us.