Feb. 7, 2012 – NAFCU said Monday it supports an IRS proposal clarifying federal credit unions may offer certain nonqualified deferred compensation plans, but objected to the agency’s determination relating to FCUs’ federal instrumentality status.
In a Feb. 6 letter to the IRS, NAFCU Regulatory Affairs Counsel Tessema Tefferi said that NAFCU is supportive overall of the Advance Notice of Proposed Rulemaking on the definition of “governmental plan” under IRS code § 414(d). The proposal, which makes it clear that FCUs can offer nonqualified deferred compensation plans under 457 (b) plans, will be most welcome to FCUs “as they seek to attract the best available executives and managers,” Tefferi wrote.
But while NAFCU supports this clarification, it disagrees with the IRS’s analysis and conclusion that FCUs are not federal instrumentalities. Tefferi pointed out that the courts have previously affirmed FCUs’ federal instrumentality status, as has the IRS itself, citing United States v. State of Michigan, 851 F.2d 803 (6th Cir. 1988); and Rev. Rul. 89-94, 1989-2 C.B. 233.
Furthermore, the fact that FCUs are “federal instrumentalities” does not disqualify them from being eligible employers able to offer such compensation plans, Tefferi said. “They are eligible because they are exempt from taxation,” he wrote, “thus meeting the second part of the definition of ‘eligible employer’ under § 457(e)(1)(B), which includes ‘any other organization (other than a governmental unit) exempt from tax under this subtitle.’”
Determining whether or not FCUs are federal instrumentalities is not necessary, particularly for the limited and specific purpose of their qualification to maintain 457(b) plans, he said. “Accordingly, we urge the IRS to remove its analysis on FCUs’ federal instrumentality status in this rulemaking.”