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840 CMR 3: Internal Revenue Code Compliance Provisions

Summary

840 CMR 3.00 incorporates federal Internal Revenue Code qualification requirements into Massachusetts public retirement systems, ensuring they maintain their status as governmental qualified plans under IRC § 401. The regulation addresses requirements including the exclusive benefit rule (IRC § 401(a)(1),(2)), forfeiture restrictions, required minimum distributions (IRC § 401(a)(9)), annual compensation limits (IRC § 401(a)(17)), and rollover provisions. These provisions became effective January 1, 1989, and apply to all Chapter 32 retirement systems regardless of other Massachusetts law, including the compensation cap of $200,000 (adjusted for cost-of-living) for members who joined on or after January 1, 2002, and 64% of that cap for members joining after January 1, 2011.

Full Text

Ch. 32, § 21(4) provides that PERAC "shall promulgate such rules and regulations as he may deem necessary from time to time to effectuate the purposes of this chapter, and he or his agent shall approve any by-laws, rules, regulations, prescribed forms or determinations of any board in order to effectuate such purposes." These rules are necessary to incorporate updated Internal Revenue Code compliance requirements.

3.01 Internal Revenue Code Compliance Provisions

Effective as of January 1, 1989, any retirement system subject to Chapter 32 will satisfy the qualification requirements in Internal Revenue Code Section 401, as applicable, as a governmental plan within the meaning of Internal Revenue Code Section 414(d). In order to meet those requirements, the retirement system is subject to the following provisions, notwithstanding any other provision of Massachusetts law.

3.02 Internal Revenue Code Section 401(a)(1),(2)

Effective as of September 1, 1974, the assets of any retirement system subject to Chapter 32 are held in trust and may not be used for or diverted to any purpose other than for the exclusive benefit of the members and their beneficiaries and for paying the retirement system's reasonable administrative expenses.

3.03 Internal Revenue Code Section 401(a)(8)

Effective as of September 1, 1974, and to confirm existing procedures, any retirement system subject to Chapter 32 will not use forfeitures that arise for any reason, including from termination of employment or death, to increase the benefits of any member.

3.04 Internal Revenue Code Section 401(a)(9)

Effective as of January 1, 1989, any retirement system subject to Chapter 32 will pay all benefits in accordance with a good faith interpretation of the requirements of Internal Revenue Code Section 401(a)(9) and the regulations in effect under that section, as applicable to a governmental plan within the meaning of Internal Revenue Code Section 414(d).

Effective on and after January 1, 2003:

  • (a) Members must apply for benefits by completing all required forms and benefits must begin by the required beginning date, which is the later of April 1 of the calendar year following the calendar year in which the member reaches 70½ years of age or April 1 of the calendar year following the calendar year in which the member terminates employment.
  • (b) The member's entire interest must be distributed over the member's life or the lives of the member and a designated beneficiary, or over a period not extending beyond the life expectancy of the member or of the member and a designated beneficiary.
  • (c) If a member dies after the required distribution of benefits has begun, the remaining portion of the member's interest must be distributed at least as rapidly as under the method of distribution before the member's death.
  • (d) If a member dies before required distribution of the member's benefits has begun, the member's entire interest must be either distributed over the life or life expectancy of the designated beneficiary beginning no later than December 31 of the calendar year following the year of the member's death, or distributed within five years of the member's death.

3.05 Internal Revenue Code Section 401(a)(17)

In compliance with the provisions of Section 1 of Chapter 32 and in furtherance of the application of the compensation limitations set forth in that Section 1, the annual compensation any retirement system subject to Chapter 32 takes into account for any purpose, including contributions or benefits, may not exceed the amount allowed by Internal Revenue Code Section 401(a)(17) as of the first day of the plan year.

The annual compensation of each member taken into account for plan years beginning on or after January 1, 2002, may not exceed $200,000, as adjusted for cost-of-living increases in accordance with Internal Revenue Code Section 401(a)(17)(B).

For any person who becomes a member after January 1, 2011, annual compensation may not exceed 64% of the applicable annual limitation under IRC § 401(a)(17).

3.07 Internal Revenue Code Section 401(a)(31)

Effective January 1, 2002, any retirement system subject to Chapter 32 shall allow any member or beneficiary to elect, at the time and in the manner prescribed by the system, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the member or beneficiary in a direct rollover.

REGULATORY AUTHORITY: 840 CMR 3.00: M.G.L. c. 32, § 21(4).