Is your plan "Governmental"? If so , it might not be subject to the reporting and fiduciary rules of Title I of ERISA. You may not be subject to PBGC. And you may not be facing economic disaster as a result of PPA '06 accelerated funding mandates.

From 2000 to 2005, DOL issued a series of advisory opinions ("AO") that pretty much concluded a plan could be governmental even if it covered a de minimus number of nongovernmental participants. The DOL, however, limited that conclusion to Title I of ERISA; it gave no assurances as to how IRS and PBGC would view the issue. And in the last five years, you could not even get DOL to rule on a particular plan’s status under Title I.

But wait! A new IRS proposal could surprise a lot of plans that thought they were governmental.

 In November 2010, a hint of movement. The IRS and Treasury published an advance notice of proposed rulemaking which seeks to define "governmental plan," and proposes added rules related to Indian Tribal Government (ITG) govenmental plans.

If adopted as proposed, many plans that believed they were governmental could lose that status; most troubling, plans that covered a de minimus number of nongovernmental employees would no longer be treated as governmental plans.

The Internal Revenue Code defines a governmental plan as "a plan established and maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing." Of these, defining agency or instrumentality is less clear.

Major factors to consider:

-The entity''s governing board or body is controlled by a State or political subdivision;

·The members of the governing board or body are publicly nominated and elected;

·The entity''s employees are treated in the same manner as employees of the State (or political subdivision thereof) for purposes other than providing employee benefits (for example, the entity''s employees are granted civil service protection);

·A State (or political subdivision thereof) has fiscal responsibility for the general debts and other liabilities of the entity (including funding responsibility for the employee benefits under the entity''s plans); and

·In the case of an entity that is not a political subdivision, the entity is delegated, pursuant to a statute of a State or political subdivision, the authority to exercise sovereign powers of the State or political subdivision (such as, the power of taxation, the power of eminent domain, and the police power).

Other factors would include:

·The entity's operations are controlled by a State (or political subdivision thereof);

·The entity is directly funded through tax revenues or other public sources, not including state or federla rants or contractual services;

·The entity is created by a State government or political subdivision of a State pursuant to a specific enabling statute that prescribes the purposes, powers, and manners in which the entity is to be established and operated., not including a nonprofit corporation that is incorporated under a State''s general corporation laws.;

·The entity is treated as a governmental entity for Federal employment tax or income tax purposes;

·The entity is determined to be an agency or instrumentality of a State (or political subdivision thereof) for purposes of State laws. For example, the entity is subject to open meetings laws or the requirement to maintain public records that apply only to governmental entities, or the State attorney general represents the entity in court under a State statute that only permits representation of State entities;

·The entity is determined to be an agency or instrumentality of a State (or political subdivision thereof) by a State or Federal court;

·A State (or political subdivision thereof) has the ownership interest in the entity and no private interests are involved; and

·The entity serves a governmental purpose.

The second test requires determining whether a governmental entity has established and maintained a governmental plan. The proposed regulations include the following requirements:

-The plan is established and maintained by an employer within the meaning of pension regulations;

·The employer is a governmental entity; and

·The only participants covered by the plan are employees of the governmental entity.

In practice, employers can change to or from governmental entities. The proposal acknowledges that this could lead to changes in plan status. If a private entity employer becomes a governmental entity, or a governmental employer becomes a private entity, the underlying plan can change too.

The proposed regulations do not include special rules addressing existing practices under which a small number of private employees participate in a plan that would otherwise constitute a governmental plan, such as when a governmental plan continues to cover private employees who were formerly governmental employees. Thus, it would appear that, as currently drafted, a governmental plan that includes a small percentage of non-governmental employees could no longer still qualify as a governmental plan -- unless these employees were employees or employee representatives of a union or employees of the plan itself, in which case they are to be treated as employees of the governmental plan sponsor.

The IRS knows this last provision could be a serious problem. It anticipates that the effective date of any final rule would have to consider the time needed for amending state and local governmental plans to comply with such rule, and it anticipates some form of transition relief for entities that previously operated as governmental plans, but fail to meet the new definition.

The full text of the notice is available on the IRS website. The ITG proposal is also available there. The IRS has asked for comments on the proposals, including whether some de minimus rule should be recognized. Comments are due 2/6/12.