Rehired retirees do not create a cash-or-deferred arrangement

Plain-English summary

A governmental defined-benefit plan permitted certain retirees to return for one-year teaching contracts as special employees while continuing to receive retirement benefits. These rehired retirees earned no additional plan benefits, made no plan contributions, and could not elect to move from the special position into a regular benefits-eligible position. The employing school board, not the retiree, determined the available job. The IRS ruled that the arrangement gave the retiree no direct or indirect choice between current cash and plan contributions or benefit accruals. The amended plan therefore did not create a cash-or-deferred arrangement under Section 401(k), which would otherwise be impermissible in the defined-benefit plan.

Ruling snapshot

• Question: Did the special-employee rehiring program give retirees an election that constituted a cash-or-deferred arrangement under Section 401(k)?
• Outcome: Approved: the plan amendment did not create such an arrangement.
• Key authorities: IRC §§ 401(a) and (k), and 414(d) and (h); Treas. Reg. § 1.401(k)-1

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202126001 Third Party Communication: None
Release Date: 7/2/2021 Date of Communication: Not Applicable
Index Number: 401.29-00, 414.09-00
Person To Contact:
------------------------------------------------------------ -----------------, ID No. -----------------
---------------------------------------------------- Telephone Number:
---------------------------- --------------------
------------------------- Refer Reply To:
---------------------------------------- CC:EEE:EB:QP1
In Re: --------------------------------------------------- PLR-101025-21
------------------------------------------------------------ Date:
---------------------------------------------------- April 09, 2021

Taxpayer = -------------------------------------------------------------------------------------

Plan = -------------------------------------------------------------------------------------

State = -------------------
Special Employee = ------------------------------------
Date 1 = ------------------
Date 2 = --------------------------
Date 3 = -----------------------

Dear -------------------:

This is in response to your request dated December 22, 2020, in which you request a
private letter ruling regarding Taxpayer’s administration of its retirement plan.

The following facts and representations have been submitted under penalties of perjury
in support of the rulings requested:

Taxpayer is the sponsor of Plan, a defined benefit plan, which is a governmental plan
within the meaning of § 414(d) of the Internal Revenue Code and a qualified plan within
the meaning of § 401(a). Plan provides for mandatory employee contributions that are
picked up by the employer in accordance with § 414(h)(2).

On Date 1, State legislature enacted legislation to amend Plan to provide that certain
retirees who are receiving benefits from Plan may be rehired by a school system as a
Special Employee. Under the legislation, which was clarified by additional legislation
PLR-101025-21 2

enacted on Date 2, such a retiree is a beneficiary of Plan who retired on or before Date
3 after becoming eligible for normal retirement under Plan. Plan provides that normal
retirement occurs at age --- with ----- years of creditable service, age --- with --- years of
creditable service, or --- years of creditable service with no minimum age. To qualify to
be a Special Employee, the retiree must be reemployed by a local board of education to
provide classroom instruction as a teacher, as defined under State law, employed on an
annual contract to provide classroom instruction at a certain category of school or
schools. In order to be eligible to be a Special Employee, a retiree must have retired on
or before Date 3, prior to the passage of the legislation. Thus, any retiree who is eligible
to be hired as a Special Employee could not have had a prearrangement to return to
employment in that role at the time of his or her retirement.

The legislation provides salary limitations for a retiree hired as a Special Employee.
Also, a Special Employee is limited to a contract term of one school year, although the
language does not provide a limit on recurring contracts. A participant who has been
retired for at least six months and who is hired as a Special Employee will not have his
or her earnings counted for purposes of determining whether Plan’s suspension of
benefit provisions apply and will not earn additional benefits during such employment.
Therefore, a retiree who is hired as a Special Employee will continue to receive benefits
under Plan.

A retiree hired to be a Special Employee may not elect to transfer from a Special
Employee position into a regular benefits-eligible position that is subject to Plan’s
contribution requirements. Rather, the available job is determined by the employer.
Each local board must inform Taxpayer annually if it will not employ anyone as a
Special Employee for that school year, and if the local board employs anyone as a
Special Employee, the local board is responsible for ensuring compliance with the
prohibition on a Special Employee electing into a benefits-eligible position.

Ruling Requested

Taxpayer requests a ruling that the amended Plan language will not create an employee
election that would constitute a cash or deferred arrangement within the meaning of
§ 401(k).

Applicable Law

Section 401(k)(1) provides that a profit-sharing or stock bonus plan, a pre-ERISA
money purchase plan, or a rural cooperative plan shall not be considered as not
satisfying the requirements of § 401(a) merely because the plan includes a qualified
cash or deferred arrangement as defined in § 401(k)(2).

Section 401(k)(2)(A) defines a cash or deferred arrangement as any arrangement which
is part of a profit-sharing or stock bonus plan, a pre-ERISA money purchase plan, or a
rural cooperative plan which meets the requirements of § 401(a), under which a covered
PLR-101025-21 3

employee may elect to have the employer make payments as contributions to a trust
under the plan on behalf of the employee, or to the employee directly in cash.

Section 1.401(k)-1(a)(1) provides that a plan, other than a profit-sharing, stock bonus,
pre-ERISA money purchase pension, or rural cooperative plan, does not satisfy the
requirements of § 401(a) if the plan includes a cash or deferred arrangement. For this
purpose, a cash or deferred arrangement is part of a plan if any contributions to the
plan, or accruals or other benefits under the plan, are made or provided pursuant to the
cash or deferred arrangement. Because a defined benefit plan is not a profit-sharing,
stock bonus, pre-ERISA money purchase pension, or rural cooperative plan, if a defined
benefit plan includes a cash or deferred arrangement, it does not satisfy the
requirements of § 401(a).

Section 1.401(k)-1(a)(2) provides that, subject to certain exceptions, which are
inapplicable in this case, a cash or deferred arrangement is an arrangement under
which an eligible employee may make a cash or deferred election with respect to
contributions to, or accruals or other benefits under, a plan that is intended to satisfy the
requirements of § 401(a).

Section 1.401(k)-1(a)(3)(i) defines a cash or deferred election as any direct or indirect
election (or modification of an earlier election) by an employee to have the employer
either: (A) provide an amount to the employee in the form of cash (or some other
taxable benefit) that is not currently available, or (B) contribute an amount to a trust, or
provide an accrual or other benefit under, a plan deferring the receipt of compensation.

Section 414(h)(1) provides that any amount contributed to an employees' trust
described in § 401(a), or under a plan described in § 403(a), shall not be treated as
having been made by the employer if it is designated as an employee contribution.

Section 414(h)(2) provides that, for purposes of § 414(h)(1), in the case of any plan
established by the government of any State or political subdivision thereof, or by any
agency or instrumentality of any of the foregoing, or a governmental plan described in
the last sentence of § 414(d) (relating to plans of Indian tribal governments), where the
contributions of employing units are designated as employee contributions but where
any employing unit picks up the contributions, the contributions so picked up shall be
treated as employer contributions.

Analysis

In order for there to be a cash or deferred election, a retiree who is rehired as a Special
Employee must have a direct or indirect election (or modification of an earlier election)
to have the Taxpayer either provide an amount to the employee in the form of cash (or
some other taxable benefit) that is not currently available, or contribute an amount to a
trust, or provide an accrual or other benefit under a plan deferring the receipt of
compensation. Such an election would occur if an employee was given an election
PLR-101025-21 4

whether to accrue benefits under Plan (and have contributions to Plan paid from the
employee’s compensation) or not accrue benefits (and therefore receive compensation
unreduced by contributions).

In this case, a retiree under Plan who is rehired as a Special Employee in connection
with the amended Plan makes no election as to whether to receive cash or to make a
contribution to Plan. A Special Employee is not eligible to accrue further benefits under
Plan and is not eligible to elect a position that would result in eligibility for further benefit
accruals (and therefore require contributions to Plan). Instead, a rehired retiree
continues to receive retirement benefits from Plan. Moreover, the terms of full-time
regular employment differ significantly from being hired as a Special Employee; for
example, being a Special Employee involves a one-year contract under which the
employer controls whether the retiree is hired as a Special Employee, and whether that
retiree is hired for the following year. A retiree hired as a Special Employee cannot
elect to be hired into a traditional role while working as a Special Employee. Therefore,
we rule that the amended Plan language permitting the hiring of a retiree to be a Special
Employee does not create an employee election that could constitute a cash or deferred
arrangement within the meaning of § 401(k).

The ruling contained in this letter is based upon information and representations
submitted by your authorized representatives and accompanied by a penalties of
perjury statement executed by an appropriate party, as specified in Rev. Proc. 2021-1,
2021-1 I.R.B. 1, § 7.01(16)(b). This office has not verified any of the material submitted
in support of the request for ruling, and such material is subject to verification on
examination. The Associate office will revoke or modify a letter ruling and apply the
revocation retroactively if there has been a misstatement or omission of controlling
facts; the facts at the time of the transaction are materially different from the controlling
facts on which the ruling was based; or, in the case of a transaction involving a
continuing action or series of actions, the controlling facts change during the course of
the transaction. See Rev. Proc. 2021-1, § 11.05.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides
that it may not be used or cited as precedent.
PLR-101025-21 5

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to each of your authorized representatives.

Sincerely,

Laura B. Warshawsky
Chief, Qualified Plans Branch 1
Office of Associate Chief Counsel
(Employee Benefits, Exempt Organizations, and
Employment Taxes)

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