GM 11-132

IRS Requests Comments on Guidance to Clarify Governmental Status for Tribal Retirement Plans

On November 8, 2011, the Internal Revenue Service (IRS) issued an Advance Notice of Proposed Rule Making (ANPRM) seeking comments on new regulations that would clarify what constitutes “essential governmental functions” and “commercial activities” in determining whether a tribal government’s retirement plan qualifies for treatment as a government plan under Section 414(d) of the Internal Revenue Code. 76 Fed. Reg. 69188 (2011) (attached). The ANPRM sets forth the proposed regulations that would define conditions under which tribal plans would qualify as government plans and requests comments by February 6, 2012.


Under Section 414(d), government plans receive more advantageous tax treatment than the retirement plans of private, non-governmental retirement plans. Government plans are exempt from titles I and IV of the Employee Retirement Income Security Act (ERISA) and are exempt from certain qualification requirements, such as minimum participation requirements and minimum funding requirements applicable to non-governmental plans. Until Congress enacted the Pension Protection Act (PPA) in 2006, pension plans operated by tribal governments had not been explicitly identified as among the governmental entities whose retirement plans were eligible for treatment as government plans under Section 414(d).

When Congress enacted the PPA to explicitly enable tribes to enjoy the benefits provided to state and local government pension plans under Section 414(d), however, it created two categories of tribal government employee retirement plans: a government plan for those tribal employees who are performing “essential government functions”; and a commercial plan for those who are performing “commercial activities” (which includes tribal employees who work in hotels, casinos, gas stations, convenience stores or marinas). The tribal government’s “commercial plan” would not be afforded the tax benefits of a government plan.

Moreover, the distinction between tribal governmental and commercial activities was significantly more limiting than those applicable to state and local governments. State and local government employees enjoy the status of government plan benefits when they are engaged in commercial activities related to the development of stadiums, arenas, municipal golf courses and other real estate developments, as well as those related to lottery ticket sales and city-owned liquor stores – so long as the activities are carried out by the government and revenues generated from those activities benefit the public.

Tribes sought legislation to repeal the commercial activities clause in the PPA and in consultation with IRS demanded delays in the implementation of the two-tiered approach. Although legislative efforts never gained the requisite support, the IRS issued two notices in 2007 providing “transitional relief” to tribes that suspended compliance requirements pending further guidance for implementing the two-tiered plans.

Key Elements of the Advanced Notice of Proposed Rule Making

The ANPRM states that the IRS has taken into account the comments received through tribal consultation in 2007 in developing the proposed rule that is published and distributed as part of the ANPRM. The proposed rule contains provisions that explicitly identify certain types of activities that would be deemed “governmental” or “commercial” activity and establishes a “facts and circumstances test” for determining whether other types of activities fall within the governmental or commercial category. The proposed rule also provides a “location, payroll and duties test” as guidance as to whether a tribal employee substantially performs services to a governmental or commercial activity. The rule also offers examples illustrating how these various tests might be applied to particular facts.

Among the specific activities the proposed rule would deem to be “governmental” are the building and maintaining of public roads and sidewalks; activities related to water, sewer and public works projects; activities related to public utilities and public services, such as police and fire departments and public hospitals and health clinics; and activities related to treaty or trust resources. Meanwhile, activities the rule would deem to be “commercial” are those related to hotels, casinos, gas stations, convenience stores and marinas.

The “facts and circumstances test” for “commercial” activities includes three factors:

• Whether the activity is operated to earn profits
• Whether the activity is one typically carried out by private businesses
• Whether the customers are substantially from outside the Indian community and whether the activity is on or outside the tribe’s Indian lands

The “facts and circumstances test” for “governmental” activities is simply whether the activities provides a public benefit to members of the tribe and whether there is an absence of the factors set forth in the test for “commercial” activities. The proposed rule does not seek to distinguish “essential governmental functions” from commercial activities consistent with the way they are differentiated for the purpose of state and local government plans. When state and local governments conduct commercial activities that generate revenues for the public benefit, they are deemed governmental, not commercial.

The proposed rule’s guidance as to whether a tribal employee substantially performs governmental or commercial activities depends on a “location, payroll and duties test”.

• Location: Does the employee work in a government or commercial building?
• Payroll: Does the government or a commercial entity pay the employee?
• Duties: How do an employee’s duties and responsibilities compare to the government and commercial activities tests?

Thus, the proposed rule illustrates that an employee who works as an attorney at the Attorney General’s office of an Indian tribal government and is paid by the tribal government to review operations of boat operators at a tribal marina to ensure they comply with tribal law is a “governmental” employee. Meanwhile, a cashier at a tribal convenience store is a “commercial” employee.

The proposed rule provides useful guidance on defining what constitutes governmental and commercial activities that will be useful for establishing or consolidating tribal pension plans eligible for treatment as government plans. It does not address other issues related to the PPA on which tribes have requested guidance, such as the potential jurisdictional conflicts or confusion among the three federal agencies with pension plan oversight roles (the IRS, Department of Labor and the Pension Benefit Guarantee Corporation) or the applicability of local law (tribal law) to pension-related matters.

The ANPRM deadline for written comments is February 6, 2012. Upon publication of a proposed rule, a public hearing will be scheduled.

Please contact us if you would like further information or assistance preparing comments.