For years, the City of Troy has justified eliminating the former firefighter incentive plan by pointing to an IRS determination letter that allegedly required the plan to go away.
It’s a powerful claim:
- Federal mandate.
- No discretion.
- Hands tied.
There’s just one problem… when you actually examine what the IRS said, how vesting works under tax law, and what options were available, the story stops adding up. Not emotionally. Logically.
The Letter Everyone Talks About, and What It Actually Says
The only IRS letter that has ever been publicly produced in connection with Troy’s firefighter incentive plan is a 2015 IRS Private Letter Ruling (PLR-145218-14). I’ve attached it here so anyone can read it directly. It is important to be precise about what this document is, and what it is not. A Private Letter Ruling is a response by the IRS to specific questions submitted by a taxpayer, based solely on the facts and representations the taxpayer provides. It is not a general enforcement action. It is not a finding of illegality. And it is not a mandate to terminate a plan.
- This particular ruling does not order the VFIP to be eliminated.
- It does not declare the plan unlawful.
- It does not prohibit municipalities from offering firefighter incentive plans.
What it does say is far less dramatic, and far more manageable. First, the IRS Explicitly Affirms the Plan’s Legitimacy. The ruling begins by confirming that providing firefighter incentive benefits constitutes an essential governmental function. On that basis, the IRS concludes that the VFIP trust’s income qualifies for exclusion from gross income under Internal Revenue Code §115(1). This matters.
Section 115(1) applies only when:
- the activity is governmental in nature, and
- the income accrues to a state or political subdivision.
By affirming §115 treatment, the IRS is explicitly recognizing that the plan’s core purpose, incentivizing and retaining volunteer firefighters, is lawful, appropriate, and governmental. That alone undermines the narrative that the plan was somehow invalid or unsustainable as a matter of federal law
The letter addresses tax timing, not whether the plan can exist. The core issue discussed in the ruling is how and when benefits might be taxed, not whether benefits may be offered at all.
Specifically, the IRS explains that the plan does not qualify for a narrow deferred-compensation exception under the Internal Revenue Code. As a result, the timing of taxation depends on:
- when benefits vest, and
- whether they remain subject to a substantial risk of forfeiture.
This is a tax-timing and plan-design issue. The IRS is not saying benefits must be eliminated. It is saying that if benefits become non-forfeitable at a certain point, tax consequences may arise at that point rather than later. That distinction is critical.
Tax consequences are something governments manage every day through:
- vesting rules,
- eligibility conditions,
- plan amendments,
- withholding,
- reporting,
- and, if necessary, tax reimbursement.
Nothing in the letter suggests that termination of the plan was required or inevitable. The IRS carefully limits the scope of its opinion. The ruling explicitly states that it is:
- based solely on the facts presented by the City,
- limited to the questions asked,
- and not an opinion on other federal tax consequences.
The IRS does not opine on:
- whether the plan should be reduced,
- whether benefit levels are appropriate,
- whether the City should discontinue the program,
- or how the City should address funding or retention.
In other words, the IRS answered the question it was asked, and stopped there. That is standard IRS practice, and it is why this letter cannot reasonably be cited as a directive to dismantle the plan.
Timing Matters, and This Letter Predates Elimination by Years
Finally, the timeline matters. This letter was issued in 2015. The plan was eliminated years later. Standing alone, a 2015 Private Letter Ruling that:
- affirms the plan’s governmental purpose,
- discusses only tax treatment mechanics,
- and issues no directive to terminate
cannot support the claim that “the IRS made us do it.”
If the City is relying on some later IRS communication to justify that assertion, then that document, not this one, is the relevant authority. And it should be released. Absent that, this 2015 letter simply does not do the work it has been asked to do in public debate.
What “Vesting” Actually Means (and Why the Word Gets Misused)
Much of the confusion, and frankly, much of the rhetorical sleight of hand, revolves around the word “vested.” In IRS terms, a benefit is vested when it is:
- earned,
- legally guaranteed,
- and no longer subject to being taken away.
Vesting does not mean paid.
Vesting does not depend on age.
Vesting means no substantial risk of forfeiture.
The IRS does not ask, “When do you get the check?”. It asks, “Can this benefit still disappear?” Could Firefighters Have Been Taxed Before Receiving Benefits? Possibly, but only under very specific conditions.
Early taxation generally requires all of the following:
- the service requirement is met,
- the benefit is non-forfeitable, and
- the benefit is funded or secured in a way that gives the participant an unconditional right.
Miss any one of those, and taxation is typically deferred. Age alone does not trigger taxation. Delayed payout alone does not protect against taxation. What matters is control and forfeiture risk.
The Inconvenient Fact the City Can’t Get Around
The plan was revoked.
- Not threatened.
- Not tweaked.
- Revoked.
That fact matters more than any abstract IRS discussion. A benefit that the City can revoke is, by definition:
- not irrevocable,
- not guaranteed,
- and not free from forfeiture risk.
And a benefit subject to forfeiture risk is not vested in the way required to trigger unavoidable IRS taxation. The City cannot credibly argue that the plan was so locked-in that federal tax law forced its elimination, while simultaneously demonstrating that it had the power to eliminate it outright. Those positions cannot coexist.
The Tax Issue Was Real, but Entirely Solvable
Even assuming taxation concerns existed, the City had multiple lawful, well-understood options. This is where the conversation usually stops, conveniently, but it shouldn’t.
Option 1: Redesign Vesting (Common and Boring)
Municipal plans routinely:
- tie vesting to both age and service,
- delay non-forfeitable status until payout eligibility,
- or keep benefits contingent until retirement.
This preserves forfeiture risk and avoids early taxation.
Summary: design fix, no IRS drama.
Option 2: Treat the Benefit as Taxable, and Handle the Tax
This is where gross-ups come in. A gross-up means the City pays the tax owed on a taxable benefit so the firefighter is not out-of-pocket. Here’s how that works in practice:
- The benefit is treated as taxable income
- The City calculates the tax owed (federal, state, FICA as applicable)
- The City pays an additional amount to cover that tax
- The income and tax are reported on a W-2
- Taxes are withheld and remitted like any other compensation
Yes, the tax payment itself is taxable, which is why the gross-up is calculated slightly higher so the employee is made whole. This is not exotic. It is standard compensation practice in both public and private sectors. The IRS letter itself discusses withholding and reporting, which only makes sense if the plan continues to exist.
Summary: costs more, but perfectly legal.
Option 3: Do a Hybrid Approach
Many municipalities mix approaches:
- partial vesting,
- delayed accruals,
- capped benefits,
- or shared tax responsibility.
Again, design and budget choices, not federal mandates.
Why Gross-Ups Are Unpopular (But Still an Option)
Let’s be honest. Gross-ups:
- increase total compensation cost,
- increase actuarial liabilities,
- and show up clearly in budgets.
That makes them politically uncomfortable. But “politically uncomfortable” is not the same as “illegal.” Choosing not to pay the tax is a policy decision, not an IRS order.
Follow the Money (Because It Explains a Lot)
The actuarial context matters. As of 2021, the plan was approximately 56% funded, with an estimated $11.6 million unfunded liability. That is a real financial problem.
It is entirely plausible that the City decided it could not, or would not, absorb:
- higher contributions,
- gross-ups,
- or long-term funding obligations.
If that’s the case, say so. That’s a hard conversation, but an honest one. What erodes trust is blaming an invisible IRS letter for what appears to be a budgetary choice.
And About That Letter No One Is Allowed to See
The City continues to insist that “the IRS made us eliminate the plan.” Yet:
- FOIA requests were denied
- Retired firefighters sued and lost
- Additional requests went nowhere
- The city attorney suggested the letter may not exist
- The City fought to prevent even in-camera judicial review
That is not normal behavior for routine federal correspondence. If the letter exists, publish it. If it doesn’t, say so. Federal letters used to justify major public policy decisions should not be treated like Cold War secrets.
Why This Still Matters
The new plan provides only a fraction of the old plan’s value. Retention remains an issue. Morale has suffered. And trust has eroded. Understanding why the old plan was eliminated matters, not to relitigate the past, but to evaluate whether current policies are honest, sustainable, and fair.
- Tax complexity is not a mandate.
- Design challenges are not prohibitions.
- And choices should be explained as choices.
The Reasonable Ask
If the IRS letter exists, release it. If it doesn’t, say so plainly. Either answer would be better than years of deflection.
Because transparency isn’t radical. It isn’t political. And it isn’t optional. It’s the minimum standard for accountable local government.
