New Bill to Simplify LOSAP Federal Tax Status Introduced
July 30, 2019
On July 23, Senators Susan Collins (R-ME) and Ben Cardin (D-MD) introduced S. 2214, the Volunteer Emergency Services Recruitment and Retention Act (VESRRA), which clarifies the tax status of length of service award programs (LOSAP). LOSAP is a retirement account for volunteer emergency responders that can be set up as a defined contribution or a defined benefit plan. VESRRA makes it possible for LOSAP contributions to be guaranteed and portable, and it allows plans sponsored by private, nonprofit departments to be subject to the same reporting requirements as plans sponsored by governmental departments.
“I’d like to thank Senators Collins and Cardin for introducing this bill,” said Steve Hirsch, Chair of the National Volunteer Fire Council. “20 percent of volunteer firefighters participate in some type of LOSAP. S. 2214 will make it easier to administer existing plans and establish new plans.”
Under current law, retirement accounts for employees are set up as “deferred compensation” plans, which means that employers and employees can make contributions into the plans without the money being immediately subject to income tax. Deferred compensation plans are only subject to tax once the beneficiary begins to draw down the funds, typically upon retiring.
LOSAP is currently defined in the tax code as not being a deferred compensation plan, in spite of the fact that plan sponsors often make contributions that are not taxed until the beneficiary draws on the benefit. The catch is that LOSAP contributions are not guaranteed to the beneficiary – the volunteer – until they begin drawing the benefit. Consequently, LOSAP contributions are not portable, and in the event that the department goes bankrupt the funds are vulnerable to creditors. S. 2214 would allow the sponsors of existing plans to elect to have their plan treated as deferred compensation while requiring that any plan established after the law takes effect be treated as deferred compensation.
The federal government maintains different reporting requirements for retirement plans that are sponsored by governmental and private entities. Essentially, private plans are subject to Employee Retirement Income Security Act (ERISA) reporting requirements that governmental plans are exempt from. S. 2214 would make it possible for a LOSAP sponsored by a private, nonprofit fire department to meet the same reporting requirements as a government agency.