Amendment to IRC Code Helps NY Volunteers

An important conflict between the NY State Law and the Internal Revenue Code has been resolved.

When Article 11-A was first added to the General Municipal Law (GML), certain provisions of the GML  conflicted with the requirements of §457 of the Internal Revenue Code (IRC), which governs deferred compensation plans sponsored by municipalities. 

This conflict was largely resolved by a 1996 amendment to the IRC that added §457(e)(11). This new section of the Code essentially exempted LOSAPs from §457, provided the LOSAP met certain requirements. One of these requirements was a $3,000 limitation on the value of the benefit that could be accrued in a year by a participating volunteer. Although there was no guidance as to how this limitation was to be applied to defined benefit (DB) plans, it was reasonable to conclude that most DB plans met those requirements.

Since §457(e)(11) became effective January 1, 1997, the generally accepted method of determining whether or not a DB plan complied with the $3,000 limitation is to test that the actuarial present value of the service award earned in any year by a volunteer did not exceed this amount.  For the most part, all NYS DB LOSAPs complied with this interpretation in the years immediately following January 1, 1997 using the actuarial assumptions commonly applied at that time. This included volunteer ambulance DB programs provided under Article 11-AAA, which was added to the GML in 1998. However, as interest rates have declined and life expectancies have increased, the assumptions used to calculate actuarial present values changed, resulting in higher present values. This meant more and more NYS DB LOSAPs appeared to have compliance issues with the $3,000 limitation. Furthermore, when the GML was amended in 2004 to allow a $30 monthly service award, LOSAPs that were amended to provide this level of benefit almost certainly exceeded the $3,000 limitation using reasonable actuarial assumptions. A new conflict between the GML and the IRC had emerged.

For the past 12 years, Ed Holohan of Penflex, Inc. has been working with the National Volunteer Fire Council (NVFC) and other dedicated individuals to change §457(e)(11) in order to address these new conflicts, as well as the shortcomings in the original language. Through these combined efforts, the IRC was amended effective January 1, 2018 to increase the limitation from $3,000 to $6,000, with a mechanism to automatically increase this amount in the future (i.e., a cost of living adjustment). This essentially eliminates the issue created by the $30 service award, historically low interest rates, and longer life expectancies.

In addition, language was added to the IRC that formally states that generally accepted method of testing DB compliance with the Code is the method that should be used. This corrected one of the major shortcomings in the original language.

This amendment to the IRC is a tremendous victory for the volunteer emergency service in general, but specifically in New York, as it allows municipalities to increase the level of benefit that can be provided in a DB plan as authorized by the GML without some of these long-standing IRC compliance issues. Unfortunately, not all goals have been accomplished. The GML still restricts the amount that can be contributed to a defined contribution (DC) plan to only $700. It is our opinion that this amount should be increased to match the level of benefit that can be provided in a DB plan. In addition, there is still no specific tax guidance on how to report payments from a LOSAP (1099-MISC, 1099-R or W-2).

A second bill that was not included in the 2017 IRC amendment would have allowed municipalities to treat a LOSAP like an eligible §457 plan, which would clarify the tax reporting issue (1099-R), as well as provide additional protections for the plan assets and make features like roll-overs a possibility.

Finally, we are aware that some programs are designed to limit certain benefits to $3,000 in order to comply with the original version of the IRC. Now that the limit has been increased to $6,000, it triggers an automatic increase the payments due from the program, which will then lead to an increase in the annual program contribution. Penflex has already contacted our clients that sponsor programs with such a feature.

Penflex will continue to work with the NVFC to improve the IRC, and look forward to working with the State government and associations to educate the Legislature on the need to increase the DC plan contribution limits. This is not the only time there was conflict between the State and Federal laws (like the age discrimination issue with post-entitlement age participation), and you can count on Penflex to keep you informed on how all of these issues impact your municipality, volunteer department, and volunteers.