On June 15, 2011, the Advisory Committee on Tax Exempt and Government Entities (the Committee) released a report entitled, “Indian Tribal Governments: Survey of Issues Requiring Administrative Guidance in the Wake of Enactment of Section 906 of the Pension Protection Act of 2006“ (the ACT Report). It describes tribal pension issues that require administrative guidance or the formulation of policy. Of particular import is the distinction between commercial employees and employees performing essential governmental functions, a distinction Section 906 of the Pension Protection Act (the PPA) requires tribal employers to make.

We summarize here the three approaches considered by the Committee for distinguishing between governmental and commercial plans, and its ultimate recommendation regarding how the IRS should approach the issuance of administrative guidance. In our view, however, the IRS has been handed an impossible task of fixing a broken statute, one that Congress should ultimately amend.

Legislative Background

As noted in the ACT Report, “[t]he applicability of the law of employee benefit plans to tribes has never been clear.” While the law of employee benefit plans evolved over the 20th century, its failure to reference tribes remained constant until the 1980s.

In 1982, the Indian Tribal Governmental Tax Status Act authorized tribes to sponsor 403(b) plans (annuities purchased by 501(c)(3) organizations and public schools). In 1996, the Small Business Jobs Protection Act allowed tribal governments to sponsor 401(k) plans even though such treatment has never been accorded to state and local governments. In 2003, the Governmental Pension Plan Equalization Act clarified that tribes, like state and local governments, could establish 457(b) arrangements (deferred compensation plans of state and local governments and exempt organizations).

In 2006, the PPA was enacted. Section 906 of the PPA amended Internal Revenue Code (the “Code”) Section 414(d) and ERISA (Employee Retirement Income Security Act) Section 3(32) to include, as a governmental plan, any pension plan “established and maintained by an Indian tribal government . . . [or] a subdivision of an Indian tribal government.” However, Section 906 added that a participant is eligible only if substantially all of the services performed as an employee “are in the performance of essential governmental functions but not in performance of commercial activities (whether or not an essential governmental function).

The legislative history to Section 906 of PPA provided little guidance on the scope of the provision. The staff of the Joint Committee on Taxation (the JCT Staff) offered its view that a tribal governmental plan would include a plan in which “all of the participants are teachers in tribal schools.” The JCT Staff also noted that a commercial plan, by contrast, would include a plan covering “tribal employees who are employed by a hotel, casino, service station, convenience store, or marina.”

IRS Guidance

The IRS has released two notices relating to Section 906 of the PPA. IRS Notice 2006-89 (Oct. 2, 2006) was issued to provide transitional relief for tribal government plans that provided benefits for commercial and essential governmental service employees if a plan operated reasonably and in good faith. To satisfy the reasonable and good faith compliance standard, a tribal government was required to take the following steps:

  • adopt a separate ERISA-compliant plan covering commercial employees
  • freeze benefit accruals under the mixed plan for commercial employees
  • not reduce the benefit formula for the continuing commercial plan

Under Notice 2006-89, these steps needed to be taken no later than September 30, 2007.

IRS Notice 2007-67 (Aug. 9, 2007) extended the transitional relief by eliminating the September 30, 2007 deadline and replaced it with “the date that is six months after guidance is issued.” That guidance has not been issued to date.

Recommended Approaches

The Report states that was “the primary issue for substantive guidance is defining governmental and commercial plans.” It notes that distinguishing between governmental and commercial plans will be “difficult.” The legislative history provides no bright lines.

The Report considered three approaches for distinguishing between governmental and commercial plans: (1) adopting the rules applied to state and local governments, (2) applying pre-enactment legal precedent, or (3) referencing the rules employed in Code Section 7871 for tribal government bonds.

Adopting Rules Applicable to State and Local Governments

State and local governments frequently sponsor activities that appear to be commercial. The Report notes that from 2000 through 2004, state municipalities issued almost $61 billion on tax-exempt bonds for “park and recreation facilities” including theatres, stadiums and areas. Further, state and local governments financed 2,400 municipal golf courses in 2005, and many included resorts or real estate developments. In addition, state and local governments regularly engage in “commercial” activities, including lumber purchases, and selling lottery tickets or liquor. The Report concludes that adopting this approach would “significantly discount the distinction between governmental and commercial plans.” This result, however, is contrary to the statute, as the distinction between governmental and commercial employees was included in the PPA so that Indian tribal governments would be treated differently than state and local governments.

Relying on Pre-enactment Legal Precedent

At the time that the PPA was enacted, there was some legal precedent addressing whether tribal plans should be treated as governmental or commercial plans. The distinction was based on the following:

  • whether the plan covered predominantly tribal employees
  • whether the covered employees’ activities were on- or off-reservation
  • whether the activity was similar to the activities of a “non-profit” or “for-profit” organization

The Report concludes, however, that the pre-enactment legal precedent “is not well suited to serve as a source of guidance because the many cases that distinguish between governmental functions and commercial functions are very difficult to reconcile.”

Section 7871 – Tribal Government Bonds’ Definition of Governmental versus Commercial

Code Section 7871(c) authorizes Indian tribal governments to issue tax-exempt bonds for essential governmental services (but not for commercial activities). The legislative history of the PPA suggests that the distinction between commercial and governmental employee plans is analogous to the distinction in Code Section 7871(c), which limits tribal government use of tax-exempt bond proceeds to “essential governmental function[s].” Treasury Regulations Section 305.7871-1(d) states that an “essential governmental function” is a function of a type which is

  • an eligible expenditure by the Bureau of Indian Affairs for the benefit, care and assistance of Indians
  • eligible for a self-determination contract – or a grant from the Secretary of the Interior for tribal government for contracting or program planning activities, or a grant from the Secretary of Health and Human Services for the development or maintenance of health facilities or services
  • an essential governmental function when conducted by a state or local government

However, these expansive regulations were almost immediately rejected by Congress as contrary to legislative intent and Congress further tightened the statute. Thus, the IRS has interpreted the “essential governmental function” standard to mean that tribes are required to show that the essential governmental function conducted is customarily performed by a state or local government, which is very restrictive. The result is that relatively few tribal governments issue tax-exempt bonds for economic development purposes, and using the same test would likely result in very few employees being eligible for participation in a governmental plan.


The Report, however, does not recommend any of these three options. Instead, it notes that there are several “reasonable interpretations” of Section 906 of the PPA and recommends that the IRS select one that puts Indian tribal governments on a level playing field with other governments.

We question whether a level playing field can ever be achieved under Section 906 – even if the IRS were to issue the most favorable administrative guidance imaginable. Instead, it appears that a statutory amendment is needed to accomplish the intended goal.

Note: The Report is available on the IRS website; see pages 257–290.