Crunch time has come for tribes to review whether their employee benefit plans are “governmental,” in light of the Internal Revenue Service (IRS) “Advance Notice of Proposed Rulemaking” issued November 7.
Five years ago, Congress bit off another chunk of tribal sovereignty in the Pension Protection Act of 2006 (PPA). The act provides that tribal employee benefit plans would not be treated as “governmental” unless all the participants are individuals “substantially all of whose services … are in the performance of essential governmental functions but not in the performance of commercial activities (whether or not an essential government function).” This requires tribal employee benefit plans covering any ”commercial” employees to fully comply with the requirements of the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (IRC) in the same manner as private sector business employer plans.
Although this change was technically effective January 1, 2007, there was little guidance at the time. A Congressional staff technical explanation of the PPA stated that employees of a hotel, casino, service station, convenience store, or marina, are employed in commercial activities. IRS Notices repeated this list of commercial activities that could not be covered in a governmental plan, but allowed reasonable good faith compliance until a date six months after guidance is issued. The “advance notice” of the proposed regulations are now out, along with a request for comments that is due to be filed by February 6, 2010.
As expected, the proposed regulations provide that activities "relating to" the operation of a hotel, casino, service station, convenience store, and marina are commercial activities; and that activities "related to" building and maintenance of public roads, sewer and drainage facilities, public works projects such as schools, public utilities criminal protection services, civil and administrative services, hospitals and health clinics, and "activities subject to a treaty or special rules that pertain to trust land ownership and use," are governmental.
For activities not named, there is a facts and circumstances test based on whether the activity provides a public benefit to the members of the tribe, whether it is operated to earn a profit, whether it is typically performed by private business, and whether it draws customers largely from outside the tribal community. (This last point includes considering whether the activity is located on tribal land).
As to which activity employees are engaged in, the standards are based on the location of the person's place of employment (if is a fixed location), whether the person is on the payroll of a tribal entity that is a commercial activity, and the person's assigned duties and responsibilities.
Tribes are permitted to take a reasonable good faith approach to this issue, but only if the "benefit level" of the "commercial" plan is at least as high as that of the "governmental" plan. This is a new and troubling requirement, since it imposes a mandated level of benefits on tribal commercial plans that is not imposed on any private employer plan under the tax laws or ERISA.
The preamble to the proposed regulations suggests that a tribal CFO is governmental employee even if a significant part of his or her duties is overseeing the financing of the casino. The preamble also indicates that transferred or shared employees may be assigned to either a governmental or a commercial plan based on prorating service credits and allocating compensation.
It is unfortunate that the notice follows slavishly the Congressional staff technical explanation’s listing of commercial activities. This is not in the statute, and staff technical explanations are not even proper legislative history. That listing does not reflect the realities of life in Indian country. If a tribe builds a convenience store for the convenience of its members in a remote corner of Tribal land not otherwise served by commercial grocers, there is no good reason why that has to be considered a “commercial“ activity.
And what is left out of the proposed rule is as significant as what is there. Aside from stating that comments will be shared with the Department of Labor, there is no indication that the agencies are trying, or even interested in, coordinating their definitions of the essentially identical statutory language. ERISA, which gives participants the right to sue the plan and its fiduciaries (potentially including the tribe or its officers) in Federal court, is an even greater threat to Tribal sovereignty than the IRC.
The IRS is also apparently treating the issue as one mainly affecting retirement (pension and 401(k)) plans, ignoring the impact of this rule on health, disability and other welfare plans. For instance, the concept of pro-rating an employee's compensation and service does not seem to practicably apply to allocate his or her health benefits between the "governmental" and "commercial" plan. And the notice is silent on a whole host of technical issues (“controlled group” rules, asset transfers and service credit when employees move between plans, etc.). Failure on these details could disqualify an employee retirement plan, with disastrous tax consequences for the participants.
The IRS asks for comments on how tribes should be allowed to correct inadvertent coverage of a “commercial” employee in a “governmental” plan. The IRS is even asking for comments whether a regulation is necessary, or whether some or all or the positions taken in the proposal should just be issued as further notices with some transitional relief.
The best solution for tribes would be an outright repeal of this PPA requirement. The next best response is for tribes to actively engage in the process of consultation with IRS on the regulation—a process required by executive order. Tribes should review their plans to see how the proposed regulation will affect them.
Sovereignty is the overriding issue. Tribes could maintain a single plan covering all employees, but that plan would be subject to all IRC and ERISA requirements as to all participants. Balancing the inroads on tribal sovereignty this would create, against the costs of complying with the proposed regulation or anything like it, will be the ultimate decision for tribal leadership.
SNR Denton partner Frank VanderPloeg practices in the firm's Chicago office’s Employee Benefits and Executive Compensation practice. He has implemented qualified plans for governmental and tax-exempt employers under the special tax regimes, and for Indian tribes in light of their unique legal status.