Are Tribal Benefit Plans "Governmental"? Comments on the Proposed IRS Standards Due February 6, 2012

Crunch time has come for Tribes to review whether their employee benefit plans are “governmental,” in light of the Internal Revenue Service “Advance Notice of Proposed Rulemaking” issued November 7.


Five years ago, in the Pension Protection Act of 2006, Congress provided 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. IRS Notice 2006-89 therefore called for reasonable good faith compliance” pending guidance, but specified (following Congressional staff’s 2006 technical explanation of the Pension Protection Act) that employees of a hotel, casino, service station, convenience store, or marina, are employed in commercial activities. This means that they must be covered under a separate plan if “governmental” status for the plan covering governmental function employees is to be preserved. IRS Notice 2007-67 extended the compliance deadline to a date six months after guidance is issued.

The “advance notice” of the proposed regulations is now out, along with a request for comments that are due to be filed by February 6, 2012.

The IRS Guidance

The proposed regulations address which activities are “commercial” and which are ”governmental,” and when an employee is considered engaged in a particular activity. 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. They also stipulate 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 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 factor includes consideration of 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 it 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 whether an employee engages in a “commercial” or “governmental” activity, 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 requirement that 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.

Some help is given by the preamble, which indicates that a Tribal CFO is “governmental” employee even if a significant part of his or her duties is overseeing the financing of a casino. The preamble (but not the text of the proposed regulation) 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.

This 2011 notice follows the 2006 Congressional staff technical explanation’s listing of commercial activities, although that is not in the statute.

Also, there is no indication in the notice that the IRS rule for tax purposes is being coordinated with the Department of Labor, which has jurisdiction over the identical language respecting Tribal governmental plans appearing in ERISA. Application of ERISA to Tribal plans that are intended to be “governmental” would have a much greater impact than application of tax requirements for “commercial” plans. The notice asks for comments on how Tribes should be allowed to correct inadvertent coverage of a “commercial” employee in a “governmental” plan. But it is silent on many of the other technical issues that arise when a Tribe maintains both “commercial” and “governmental” plans, such as the rules for treating a controlled group of entities as a single employer for plan purposes.

The IRS itself seems to have qualms whether this regulation is necessary or desirable, since the notice asks for comments on whether, as an alternative to the proposed regulation, the IRS should issue another notice containing some or all of the rules of the proposal, with continued transitional relief.

Action Plan for Tribes

Tribes should actively engage in the process of consultation with the IRS on the proposed regulation -- a process required by executive order when Federal regulations affect Tribes -- that the advance notice of proposed rulemaking is initiating.

Tribes should review their benefit plans and their employees’ activities to determine which are “commercial” and which are “governmental” under the standards of the proposed regulation -- or to identify problems that come up in trying to apply the proposed regulation to that determination. Specific issues raised by the proposal that can be brought to the attention of the IRS may lead to a better regulation, or perhaps to a more fundamental change in approach.

Sovereignty is the overriding issue. There is nothing “wrong” with Tribes maintaining a single plan that covers both commercial and governmental employees. It is just that the entire plan is then subject to all tax and ERISA requirements, respecting the “governmental” employees as well as the “commercial” employees. Balancing impact on Tribal sovereignty against the costs of complying with the proposed regulation will be the ultimate decision for Tribal leadership.