The question is a key component of a 2-year-old federal investigation into whether the multibillion-dollar hospital system must comply with a federal benefits law that regulates private companies.
Carolinas HealthCare contends it is a government entity not covered by the law.
The result of the Labor Department’s probe could have broad implications, a source said, possibly affecting the hospital system’s federal tax-exempt status.
In an email to county officials this week, Mecklenburg Commissioner Bill James outlined the issues raised by an investigator with the Labor Department’s Employee Benefits Security Administration, including:
• How much supervision, if any, the county has over the hospital authority.
• How authority board members are chosen.
• Whether the authority provides management and audit reports to the county.
• What property tax exemptions and other subsidies Carolinas HealthCare receives as a government entity.
• Why the hospital system has a political action committee.
• Why it pays top executives so much more than government salaries.
Both James and Jennifer Roberts, former Mecklenburg board chair, said the investigator never divulged the purpose behind her questions.
“She asked … about the county’s roles and responsibilities, the hospital’s roles and responsibilities, and how do those intersect,” said Roberts, who declined to be more specific for fear of jeopardizing the investigation.
Sources said the investigator also talked with attorney Dan Bishop, a former commissioner, who represented the county after the board voted to stop paying CHS to care for psychiatric and low-income patients. Bishop declined to comment.
Exempt from federal law?
The Observer reported in March 2011 that the Labor Department was investigating a possible conflict of interest between Carolinas HealthCare and a company it owns called MedCost, which provides benefits to an estimated 30,000 CHS employees.
The federal Employee Retirement Income Security Act prohibits employers from using companies they own to provide health benefits – unless the employers show they are putting the interests of employees first. The law does not apply to government employers and, because of that exemption, CHS has said the law does not apply to the hospital system.
Carolinas HealthCare System is a public, tax-exempt hospital authority created by a 1943 state law.
Some Mecklenburg officials have complained that the hospital chain doesn’t operate like a government entity and should be more accountable. By law, the chairman of the board of county commissioners must approve all board members, but can appoint only people nominated by the board itself.
CHS co-owns MedCost with Wake Forest Baptist Health in Winston-Salem.
Employees at the Baptist hospital filed a lawsuit in 2009, alleging that the hospital did not look out for their best interests when it chose MedCost to provide medical benefits. MedCost is supposed to negotiate with hospitals and doctors offices for discounts on treatment, but the lawsuit alleged that the hospital chose MedCost so it could charge higher prices.
Wake Forest Baptist settled the suit, admitting no wrongdoing, but agreeing to lower medical costs for employees. Unlike Carolinas HealthCare System, Wake Forest Baptist is a private hospital.
CHS has said its MedCost health plan offers good benefits at a competitive price.
Contesting the case
The Labor Department investigates thousands of alleged violations of ERISA every year.
If an employer refuses to comply voluntarily, the agency sometimes files a lawsuit.
The Observer obtained a government letter responding to a citizen’s request for information about the current investigation. In the letter, a federal solicitor suggests that investigators believe Carolinas HealthCare is not a governmental entity. The September 2012 letter indicates that the hospital system is contesting the finding.
A Labor Department representative declined to comment.
Kevin McCarthy, a hospital spokesman, said Carolinas HealthCare System also would have no comment.
From: William F. James, Jr. [mailto:firstname.lastname@example.org
Sent: Wednesday, May 15, 2013 4:11 PM
Dena R.; Lancaster, Michelle (Michelle.Lancaster@
'Marvin A. Bethune'; 'Tyrone Wade' (TyroneC.Wade@
Subject: Carolinas Healthcare DOL investigation
To Commissioners, County Attorneys and Management:
I met this AM with Ms. Christine A. Mobley, JD, GBA, an investigator with the Department of Labor in Atlanta in the 11th floor 'library' at the CMGC. This e-mail is a summary of that discussion. I wanted to insure that the entire Commission and senior management were aware of the discussion I had with her. Jennifer Roberts met with her separately earlier.
Ms. Mobley had a gold investigators badge (akin to a detectives police badge) and indicated that she wanted to ask some questions about the County's relationship with Carolinas Healthcare (CMC). She had previously contacted Dan Bishop (attorney for the County on the CMC litigation) and Tyrone Wade who set up today's appointment with her.
Her central questions seem to center around whether Carolinas Healthcare was a 'government'.
We discussed the appointment process and in particular the way that CMC selected its own members. The process (which I discussed with Marvin beforehand) revolves around CMC management selecting individuals to serve on their board and then the Chairman of the County Commission 'approving' those names. The statute says that the Commission Chair 'shall' approve, though it does provide some options if a candidate is rejected by the Chairman of the County Commission. The Chair has no real input into the names selected. The
County Commission has zero input or involvement in the approval process as no applications, in the traditional sense, are taken.
We also discussed whether the County received any reports or other information (such as detailed internal audit reports, management reports or other information) that a normal oversight body might receive. I indicated that I was not aware that we ever received any detail reports though we had received some generic reports when we provided money for indigent care. I pointed out to her that the Library board was an independent board but that the County Commission could replace them (we cannot replace the CMC board), the County's subsidy of the library is in our budget, and the library is required to comply with county rules and regulations. The same can be said of the MTC.
We discussed whether CMC was required to comply with County policies and procedures. I indicated that I did not believe so and had no knowledge whether CMC's policies and procedures complied with Mecklenburg County's existing policies and procedures.
We discussed subsidies for CMC and I indicated that I thought that due to the lawsuit a number of subsidies would end. She asked if CMC received any other 'breaks' and I indicated that I thought as a 'government' they were exempt from 'property taxes' and received refunds on their sales taxes.
We discussed CMC's political action committee and she indicated that governments don't have PACs but that CMC did. She stumped me on that one as I believe she is correct. She asked if the County has a PAC and I said no. I pointed out that CMC's PAC provided money to a variety of candidates (including most elected officials in Mecklenburg). I found this link to a federal PAC (the treasure is Mary Ann Rouse):
She asked me whether Harry Jones was terminated as a result of the CMC litigation and I said no (as far as I was concerned). I indicated that I thought Harry had done a good job negotiating the transition from CMC subsidy to the current state of affairs.
She asked me whether Mecklenburg County discloses salaries for those that work for County government and I said that I believed the answer was 'yes'.
She mentioned that CMC had refused until recently to disclose salaries of staff.
She also discussed the level of CMC's salaries for top management and indicated that governments don't offer such salary levels.
Since the investigator is an ERISA lawyer/investigator it would seem that her focus is on the employment benefits plans of CMC.
Officials: Taxpayers need say on CHS
Mecklenburg manager, commissioners say Carolinas HealthCare needs to become more accountable to public
Modified: Saturday, Dec. 15, 2012
Hospital system’s statement
• On county officials asking for more input on the hospital system: “The North Carolina General Assembly, in 1943, recognized that the hospital authority structure, which removes hospital governance from local politics, would provide the stability and structure to foster a strong hospital and quality healthcare for the community. In Charlotte, The Charlotte-Mecklenburg Hospital Authority has served the community extremely well for nearly 70 years.”
• On the hospital’s role in politics: “Regarding the question on political action committees, like many other organizations across the country that have realized the value of having knowledgeable people hold elected office, CHS created a political action committee in 2006. The PAC provides our employees, on an entirely voluntary basis, the opportunity to make coordinated and transparent contributions to candidates who understand healthcare, the mission of Carolinas Healthcare System, and the healthcare needs of our patients and the communities we serve.”
Calling Carolinas HealthCare System a public organization that often behaves like a private one, top Mecklenburg County officials say the multibillion-dollar hospital chain ought to be more accountable to taxpayers.
The system is run by a self-chosen board, gets substantial tax breaks, and exerts its influence through powerful lobbyists and a political action committee that contributes to candidates.
But while it’s legally a governmental agency, the Charlotte-based hospital system gives the public little say in its decisions, some county officials contend. County Manager Harry Jones – and at least five county commissioners – say it’s time for that to change.
One example, Jones said, is that Carolinas HealthCare holds its quarterly board meetings at 7 a.m. and doesn’t invite the public to speak at them.
“At 7 a.m., you’re not going to have many citizens there,” Jones told the Observer last week. “…You’re a governmental entity, so you should shine a light on the people’s business.”
Commissioners Chairman Harold Cogdell is among those who agree.
“Considering the many benefits (CHS) receives by being a governmental not-for-profit, there is a reasonable expectation that the public would have a say-so in the policy making of that organization,” said Cogdell, a former Democrat who is now unaffiliated..
County officials were responding to the Observer’s questions about its recent investigation into the region’s nonprofit hospitals, which found, among other things, that Carolinas HealthCare is not as open and transparent as other governmental agencies.
Jones said that an organization he considers comparable – the Charlotte Housing Authority, another public agency that provides a crucial service – gives citizens a time to speak at its meetings.
That doesn’t happen at the hospital system’s meetings. Few people know when the board meets. State law requires public agencies with websites to post meeting times. Carolinas HealthCare didn’t do that until April, after an Observer reporter asked about it.
County commissioners Jennifer Roberts, Bill James, Neil Cooksey and Vilma Leake also say they believe the public deserves more input.
“All the things that allowed CMC to become what it is started with government money,” said James, a Republican, noting that the Charlotte City Council issued bonds more than seven decades ago to help construct what later became Carolinas Medical Center. “…But to me, there’s no government oversight.”
Carolinas HealthCare, which runs Carolinas Medical Center and about 30 other hospitals, is the nation’s second-largest public hospital system, with nearly $7 billion in annual revenue.
System officials say the existing setup has served the community “extremely well.”
“The North Carolina General Assembly, in 1943, recognized that the hospital authority structure, which removes hospital governance from local politics, would provide the stability and structure to foster a strong hospital and quality healthcare,” the system said in a statement.
Concerns about Carolinas HealthCare’s transparency triggered a dispute between the hospital system and Mecklenburg County last year.
County officials contended that CHS failed to provide requested information about patients at a psychiatric hospital that the system has run under contract with the county – and about plans for a new psychiatric hospital in Huntersville. (The system now plans to build that hospital in Davidson.)
The dispute ultimately erupted into a lawsuit, which was settled earlier this month. Jones had deferred comment on the Observer’s hospital investigation until the dispute was resolved.
Until recently, the county paid Carolinas HealthCare about $60 million annually for running a psychiatric hospital, caring for the indigent and providing public health services. But county commissioners voted last year to end those payments and contracts.
Commissioner Dumont Clarke, a Democrat, says that leaves the county with less leverage to change how the hospital system is run.
“The argument for what the manager is saying was a lot stronger when the county was still providing them millions of dollars,” Clarke said.
Health care politics
Carolinas HealthCare’s self-perpetuating board includes top community and business leaders whose nominations get approval from the county commissioners’ chairman. Their votes on multimillion-dollar decisions are almost always unanimous. Questions are worked out in private discussions or closed-door meetings.
Jones believes that all the county commissioners – not just the chair – should vote on the nominees for the hospital board. They should also be able to nominate board members, he said. Several commissioners agreed.
But only the state legislature can change that arrangement.
Jordan Shaw, a spokesman for N.C. House Speaker Thom Tillis, said he understands the issue is important to the region’s citizens.
“We will carefully consider the opinions of all stakeholders –including local officials – as we look at this issue moving forward,” Shaw said.
System officials say the 1943 state law that established the hospital authority was designed to minimize political influence on the board.
The architect of that law, a Union County lawyer named Fred Helms, said he considered it his mission to “get the Hospital out of and keep it out of politics,” according to a book about Carolinas Medical Center written by Jerry Shinn, a former Observer journalist.
While the law was designed to keep politics out of Carolinas HealthCare, it hasn’t kept the hospital system out of politics.
CHS has a federal political action committee that had more than $230,000 on hand at the end of 2011. That was more than any other PAC representing a company without stock, federal records show.
Jones questioned why the system needs its own PAC. Most governmental agencies don’t have one, he said.
“I point this out as yet another example of a governmental entity behaving like a private entity,” he said.
CHS said, in a written statement, that it created the PAC in 2006 to give its employees “the opportunity to make coordinated and transparent contributions to candidates who understand healthcare, the mission of Carolinas Healthcare System, and the healthcare needs of our patients and the communities we serve.”
Giving as much as they get?
Nonprofit hospitals are exempt from property, sales and income taxes. In return, they are expected to give back to their communities, largely by providing care to those who can’t afford it.
The Observer’s investigation found that most N.C. hospitals appear to be getting more in tax breaks than they are returning to the community in the form of charity care. In 2010, most of the state’s hospitals spent less than 3 percent of their budgets on charity care – the practice of forgiving all or part of a patient’s bill.
Public officials in Forsyth County, concerned about slumping tax revenue, have been studying whether nonprofit medical facilities there are providing enough community benefits to earn their tax exemptions, Jones noted.
Mecklenburg County’s hospitals are more charitable than most, with all spending more than 4 percent of their budgets on charity care. All the county’s hospitals are owned by Carolinas HealthCare and by Novant Health, another large nonprofit hospital chain.
“We’re very, very fortunate to have two great hospital systems,” said Jones, who in recent months has been receiving treatment for pancreatic cancer at Carolinas HealthCare’s Levine Cancer Institute. “They’ve shown themselves to be very charitable.”
Jones said that while local hospitals provide considerable benefits to the community, he doesn’t have enough data to determine whether they are earning their tax exemptions.
Carolinas HealthCare’s hospitals in Mecklenburg, Cabarrus and Lincoln counties, which form the heart of its operation, spent about $150 million on charity care last year.
But critics contend the system could afford to do more. In recent years, the system’s core operation has turned an average annual profit of more than $250 million – even after its charitable expenses.
Carolinas HealthCare hospitals in its three core counties get tax exemptions worth more than $100 million a year, the Observer estimated. The system owns more than $1 billion in tax-exempt property, pays no corporate income taxes and got about $40 million in sales-tax rebates last year.
CHS says charity care is just one of many ways it helps the community. The system said it spent more than $700 million last year to cover losses from treating Medicare and Medicaid patients, as well as patients who don’t pay their bills.
Jones said he’ll ask his staff how much tax revenue the county would receive if property and buildings owned by nonprofit hospitals were taxed at half the usual rate.
But county officials aren’t in a position to change much. Only state and federal lawmakers can alter the tax breaks that hospitals receive.
Last year, Republican state Rep. Dale Folwell proposed capping refunds to some of the largest and most profitable hospitals, a move that would have provided state and local governments millions in additional tax revenue.
The hospital industry used its clout to kill the proposal, Folwell said.
The Observer’s investigation also found that hospitals owned by Carolinas HealthCare are among those that regularly sue patients who don’t pay their bills. Novant, which owns the three Presbyterian hospitals in Mecklenburg, does not file such lawsuits.
Carolinas HealthCare officials say they offer financial help to those who show need, and file suit only after patients refuse to answer multiple requests for payment. The system puts liens on the houses of many of those patients, but officials say they do not force people from their homes.
Prohibiting hospital lawsuits might drive up the costs for other patients, commissioner James said.
But Democratic commissioner Vilma Leake said the hospitals appeared to be suing people “who don’t even have enough money to meet their weekly responsibilities.”
“That bothers me,” she said.
Carolinas HealthCare System's evolution: Public hospital with private attitude
Modified: Sunday, Apr. 22, 20
Carolinas HealthCare System wasn’t always the sprawling, profitable giant it is today.
Only 30 years ago, it was a charity hospital called Charlotte Memorial – a crowded, dreary place that lost money every year because most of its patients couldn’t pay their bills.
Today, the nonprofit system owns or manages about 30 hospitals, has nearly $7 billion in revenue and pays top executives millions of dollars. It’s the largest employer in Mecklenburg County and the nation’s second-largest public hospital system.
The transformation amazes even hospital leaders who decided that, to survive, they needed to attract paying patients as well as the uninsured.
“We have so far overachieved our vision of 30 years ago, it’s hard for me to comprehend,” said board chairman Jim Hynes.
Mecklenburg County officials watched in amazement, too. They wondered why they should continue to subsidize indigent care for a hospital system that was making plenty of money on its own.
Finally, last June, county commissioners voted to stop paying Carolinas HealthCare $16 million a year to care for the uninsured. With a profit of $428 million in 2010 and nearly $2 billion in reserves, the system no longer needed taxpayers’ help, commissioners concluded.
County Manager Harry Jones said the subsidy was important at one time, “but circumstances have changed.” He cited a 1994 county committee report that raised this question:
“Given the current profitability of the hospitals, is it not reasonable to suggest that the hospitals become marginally less profitable by absorbing greater indigent care costs?”
Lack of transparency
With the growth of Carolinas HealthCare has come swagger.
It’s a public organization with a private attitude – open to “all God’s children,” as hospital officials like to say, but not as open and transparent as other government agencies.
It is not county-owned, as many people think. It is a public, tax-exempt entity called a hospital authority, created by state law in 1943. It has the power of eminent domain, which means it can force property owners to sell at a fair market value to make room for hospital projects. But officials say they’ve never used it.
As a hospital authority, Carolinas HealthCare is unlike any other public institution. State law gives its employees more privacy protection than those of other public agencies.
For example, salaries of all state, county and city government employees are public. That’s not true for public hospital employees.
Until a 2009 change in state law, Carolinas HealthCare had for years refused to make public the total compensation for top executives. They said state law precluded them from disclosing more than basic salary.
As a result, the public hospital system wasn’t disclosing as much detail as its private counterpart, Novant Health, does in publicly available reports to the IRS.
At the urging of the Observer and other state newspapers, legislators broadened the law in 2009 to require disclosure of total compensation for top executives at public hospitals. In a compromise, the new law permitted public hospitals to keep private the salaries of all other employees.
Basic facts about the hospital system can be hard to get.
For this series, Observer reporters asked Carolinas HealthCare to disclose total administrative expenses for 2010. A corresponding figure was publicly available from Novant through audited financial statements.
Several months after the question was posed, Carolinas HealthCare spokeswoman Gail Rosenberg responded: “We do not have the information … on a system-wide basis.”
Mecklenburg officials have criticized the system for lack of transparency.
Last year, Jones declared the system in breach of contract because it failed to share data about the county-owned psychiatric hospital that is managed by Carolinas HealthCare.
“As a governmental entity, (the hospital system) should be more than willing to account to the taxpayers on how they spend … its money,” Jones wrote to Michael Tarwater, the hospital system’s CEO.
Hospital officials say they have satisfied the request. But Commissioner Jennifer Roberts said the hospital wasn’t as open “as we’d hope for with a public health system.”
About that same time, Carolinas HealthCare officials had asked the county to support its plan to build a new psychiatric hospital in Huntersville. County officials delayed, waiting for the requested data.
Hospital officials did an end-run, appealing to state legislators, who quickly passed a law circumventing the need for county approval.
Jones accused the hospital of “sneaking” through the legislation.
“This willful disregard for open and transparent communication appears to have been a furtive action to capitalize on our trust and the 70-plus-year relationship,” Jones wrote to Tarwater.
County Commissioner Bill James called it an example of the system’s “raw political power.” “From a political standpoint, they’re the most powerful entity in Mecklenburg County,” James said.
Unanimous board votes
Last year’s dispute between Jones and Tarwater was uncharacteristically public.
Most hospital business gets done quietly – until there is a well-planned announcement.
The system’s self-perpetuating board includes top community and business leaders whose nominations get approval from the Mecklenburg commissioners’ chairman.
Quarterly hospital system board meetings, at 7 a.m., are polite and scripted. Votes are unanimous on everything from building new hospitals to borrowing millions of dollars. Questions are worked out in private discussions, closed-door committee meetings or executive sessions.
Meetings aren’t widely publicized. Except for a couple of newspaper reporters, only board members and hospital officials attend. Future meeting dates are provided to those who attend board meetings or call the system’s main office.
State law requires public organizations with websites to post meeting times. Carolinas HealthCare had not been doing that until last week, after an Observer reporter asked about it.
The board’s agenda sets no time for public comment.
“It’s much more run like a company or a corporation than a public enterprise where you give every member of the public three minutes to talk,” said Ed Brown, a member of the executive committee.
Bishop George Battle, a board member for two decades, said he doesn’t recall any split votes or any speakers other than hospital officials and board members. “I don’t think there’s any intent to be secretive,” he said.
The 1943 hospital authority law intentionally kept elected officials and politics out of operations. The link is that the commissioners’ chairman must sign off on hospital board nominees.
It has been a rubber stamp.
County officials remember once in 30 years that a proposed board member was rejected. That was in 2008 when nominees included Gloria Pace King, who had been ousted as CEO of the United Way of the Central Carolinas because of public outcry over her $2 million pension package.
In December 2008, the board renominated King for a new term. But hospital officials say Roberts, then commissioners’ chairwoman, objected, and King wasn’t reappointed.
Over the years, the board has included city leaders, such as bank CEOs Hugh McColl and Ed Crutchfield, and Stuart Dickson, the retired head of the company that owns Harris Teeter. His father, Rush S. Dickson, was an original board member whose name is on the entrance to what is now Carolinas Medical Center.
Today’s board – which includes Rush S. Dickson III and several former bank executives – supports Tarwater’s aggressive growth strategy.
Revamping the image
As CEO, Tarwater is following in the footsteps of his mentor, the late Harry Nurkin.
The board hired Nurkin in 1981 to revamp Charlotte Memorial’s image, attract paying patients and avoid the fate of struggling public hospitals in Atlanta and Chicago.
Until then, patients with insurance mostly chose Presbyterian Hospital or Mercy Hospital, with stately buildings at the edge of Myers Park.
With a vision of building one of the Southeast’s finest medical centers, Nurkin paid attention to details, such as wallpaper, plants and furniture. And he put the hospital in the black by improving collections from patients and insurers.
In 1983, when Nurkin unveiled the hospital’s first long-range plan, some board members sat in wonder at a slide show that accompanied his bold outline, according to “A Great Public Compassion,” a book by writer Jerry Shinn.
The plan called for a heart institute, a doctors’ building and an 11-story, $40 million tower that would replace a 1940s wing. All of that came true – and more.
Expanding in two states
In 2002, Tarwater assumed the top job.
By then, the Charlotte-Mecklenburg Hospital Authority had taken the name Carolinas HealthCare System to more accurately reflect its footprint. It had become a two-state system, with hospitals, doctors’ offices and outpatient centers from the North Carolina mountains to the South Carolina coast.
Hospital leaders say they will absorb the loss of the county’s subsidy. But they say it’s only possible because they’re financially secure.
“We are delivering on our mission to take care of all citizens with outstanding health care,” said chairman Hynes.
“We have worked to improve the quality and to improve the margins so we can do all the things we’re doing. And it is frustrating that we are criticized because we do it well.”
Judicial Determinations of Governmental Entity Status
Historically, courts have used the test in NLRB v. Natural Gas Utility District of Hawkins County, Tennessee, 402 U.S. 600 (1971), in determining whether an entity is an agency or instrumentality of a State or a political subdivision of a State. In Hawkins County, the Supreme Court interpreted the term “political subdivision” for purposes of 29 U.S.C. 152(2) (section 2(2) of the National Labor Relations Act (NLRA), as amended by the Labor-Management Relations Act).[9 ] Although the Supreme Court in Hawkins County analyzed whether the employer at issue was a political subdivision for purposes of the NLRA, courts use the same analysis for determining whether an entity is an agency or instrumentality of a State or a political subdivision of a State for purposes of ERISA.[10 ] The two-prong test in Hawkins County analyzes whether the entity has been “(1) created directly by the state, so as to constitute departments or administrative arms of the government, or (2) administered by individuals who are responsible to public officials or to the general electorate.” Hawkins County, 402 U.S. at 604-05. In addition to this two-prong test, the Supreme Court also analyzed other factors, including: whether the utility had broad powers to accomplish its public purpose; whether the utility’s property and revenue were exempt from state and local taxes (as well as whether its bonds were tax-exempt); whether the utility had the power of eminent domain; whether the utility was required to maintain public records; whether the utility’s commissioners were appointed by an elected county judge; and whether the commissioners could be removed by the State of Tennessee pursuant to State procedures for removal of public officials. Many of these factors are similar to the factors used in determining whether an entity is an agency or instrumentality of a State or a political subdivision of a State under these proposed regulations.
Agency Guidance Regarding Governmental Entity Status
Revenue Ruling 57-128 provides guidance on when an entity is a governmental instrumentality for purposes of the exemption from employment taxes under sections 3121(b)(7) and 3306(c)(7). The revenue ruling lists the following factors to be considered in determining whether an organization is an instrumentality of one or more States or political subdivisions thereof: (1) whether the organization is used for a governmental purpose and performs a governmental function; (2) whether performance of its function is on behalf of one or more States or political subdivisions; (3) whether there are any private interests involved, or whether the States or political subdivisions involved have the powers and interests of an owner; (4) whether control and supervision of the organization is vested in public authority or authorities; (5) whether express or implied statutory authority or other authority is necessary for the creation and/or use of such an instrumentality, and whether such authority exists; and (6) the degree of the organization’s financial autonomy and the source of its operating expenses.
Revenue Ruling 89-49, 1989-1 C.B. 117, see §601.601(d)(2), provides guidance for determining whether a retirement plan maintained by an organization is a governmental plan within the meaning of section 414(d). The revenue ruling lists several factors for determining whether a sponsoring organization is an agency or instrumentality of the United States or any State or political subdivision thereof. While the factors in Rev. Rul. 89-49 are similar to the factors listed in Rev. Rul. 57-128, Rev. Rul. 89-49 focuses more on the degree of control that the Federal or State government has over the organization’s everyday operations. Other factors considered include: whether there is specific legislation creating the organization; the source of funds for the organization; the manner in which the organization’s trustees or operating board are selected; and whether the applicable government unit considers the employees of the organization to be employees of the applicable government unit. Rev. Rul. 89-49 provides that satisfaction of one or all of the factors is not necessarily determinative of whether an organization is a governmental entity. See §601.601(d)(2)(ii)(b).
In Rev. Rul. 89-49, citizens of a municipality organized a volunteer fire company. The company was incorporated under its State laws as a nonprofit corporation, and the company was managed under the exclusive control of a board of trustees elected by the volunteer firefighters. Area municipalities, including the municipality that created the company, entered into contracts with the company to receive fire protection services. Under the contracts, it was agreed that the operations of the volunteer fire company would be under the exclusive control of the board of trustees. While the municipalities made payments for fire protection services to the volunteer fire company pursuant to these contracts, the municipalities did not contribute to the company’s retirement plan, and the employees of the company were not considered employees of the State or any of the participating municipalities. The ruling concludes that the retirement plan established and maintained by the volunteer fire company is not a governmental plan within the meaning of section 414(d) because the degree of control that the participating municipalities exert over the volunteer fire company is minimal.
Exemption of Governmental Plans from Certain Qualified Plan Rules
In addition to the nondiscrimination requirements, the Code provides other exemptions for governmental plans:
Section 401(a)(10)(B)(iii), which provides that the top heavy requirements of section 416 do not apply to a governmental plan.
Section 410(c)(1)(A), which provides that the minimum participation provisions of section 410 do not apply to a governmental plan.
Section 411(e), which provides that a governmental plan is treated as satisfying the requirements of section 411 if the plan meets
the pre-ERISA vesting requirements.
Section 412(e)(2)(C), which provides that the minimum funding standards of section 412 do not apply to a governmental plan.
Section 417, which provides rules relating to qualified joint and survivor annuities and qualified preretirement survivor annuities.
Section 415 also provides a number of special rules for governmental plans. The special rules include section 415(b)(11) (the 100 percent of a participant’s average high 3 compensation limitation does not apply), section 415(b)(2)(C) (the reduced limitation to the annual benefit payable beginning before age 62 and the reduction in the dollar limitation to the annual benefit payable for participation or services of less than 10 years do not apply to disability or survivor benefits received from a governmental plan), section 415(m) (benefits provided under a qualified governmental excess benefit arrangement are not taken into account in determining the section 415 benefit limitations under a section 414(d) governmental plan), and section 415(n) (permissive service credit).[18 ]