“It Just Keeps On Going:” The Problem with a Money Purchase Pension Plan that a Public Agency Just Sets Aside

By Jeff Chang

Like the Energizer Bunny, some retirement plans continue to “run,” even though the employer believes they are “no longer in use.” This problem is particularly prevalent with public agencies that have a tendency to switch from one provider to another without merging the prior provider’s plan into the new one. This frequently occurs in the context of public agency 457(b) plans, where it is common to see an agency with two or three 457(b) plans – all operating at the same time with different providers.

The problem is more important when you are talking about a money purchase pension plan, which generally requires a set employer contribution (e.g., 5 percent of pay) and possibly a mandatory employee contribution. If you have one plan that requires a 5 percent employer contribution and a 5 percent employee contribution, and you establish another plan with a 5 percent employer contribution and a 5 percent employee contribution, what do you get? That’s right – two sets of required contributions.

How does this occur? We often see situations where a city or special district maintains this type of money purchase pension plan with an insurance company provider/recordkeeper. As mentioned in a previous blog post about group variable annuity contracts, such contracts often utilize investment and funding arrangements that contain provisions that discourage or prevent employers from switching providers and moving all of their plan assets from one provider to another. As a result, we have seen numerous occasions where a public agency is so desperate to move to a new provider that it simply sets up a new plan or plans with the new provider and leaves the original plan(s) in place.

As you’ve guessed, the problem is that the employer forgot to “turn off” the old plan it is no longer using. Consequently, it is still operational and requires the specified contributions to be made – in addition to those required for the new plan. Surprise!

The problem can easily be avoided by properly “freezing” or “terminating” the old plan prior to activating the new plan. This generally will require action by your governing body, so you will need to strategize accordingly. In many instances, this problem can also be remedied on a retroactive basis if you have sufficient documentation and proof of an intent to stop all contributions to the old plan and that the changes were timely communicated to all plan participants. Unfortunately, you may also need to submit the retroactive correction to the IRS for approval. This, of course, takes time and money. But, isn’t that better than accumulating an obligation to make two sets of contributions?

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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