Using Church Plan Status to
Enhance Your Employee
Benefits
James T. Herod, J.D., LL.M. (Tax), CEBS
General Counsel & Corporate Secretary
The Pension Boards – United Church of Christ, Inc.
475 Riverside Drive, Room 1020
New York, NY 10115
212.729.2830
jherod@pbucc.org
Using Church Plan Status to Enhance Your Employee Benefits
• Retirement plans for ministries of the church enjoy
special advantages under the Internal Revenue Code.
• Utilizing church plan status can
– Free-up budget dollars for the ministry,
– Make the plan’s design a better “fit” for the ministry,
– Streamline administration, and
– Retain more dollars for employees’ retirement.
2
Using Church Plan Status to Enhance Your Employee Benefits
• Using the Pension Boards for your employee benefit programs can
save you and your employees a significant amount of money
• Retirement Plans
– The Pension Boards can administer your 403(b) retirement plan
and/or your deferred compensation plans (457(b) and/or 457(f)
plans)
– The Pension Boards’ expense for administering your 403(b) plan
is about 50 basis points (one-half of 1%) of assets under
management. Investment management fees for competing
plans are often 1.5% to 3% (or more) of plan assets under
management.
3
Using Church Plan Status to Enhance Your Employee Benefits
• Retirement Plans (cont.)
– In addition to investment management fees, competing plans
often make additional charges for recordkeeping and providing
informational material to plan participants. The Pension Boards
does not charge extra for its recordkeeping and providing
informational material to plan participants.
– Reduced fees and expenses not only saves employers money
but it also enhances the investment return of plan participants.
4
Using Church Plan Status to Enhance Your Employee Benefits
• Health insurance programs – The Pension Boards can provide two
different types of health insurance programs for you and your
employees
– Fully insured arrangements
– Self-funded arrangements
• In appropriate situations, the Pension Boards is willing to
share risk with UCC-related organizations that provide a selffunded health insurance arrangement through the Pension
Boards
5
Using Church Plan Status to Enhance Your Employee Benefits
• Health insurance programs (cont.)
– The Pension Boards has a long-term relationship with Buck
Consultants. The Pension Boards’ actuaries work with Buck
Consultants’ actuaries to analyze your claims experience and to
establish appropriate rates to support your self-funded health
insurance plan.
– The Pension Boards, as part of a multi-denominational coalition,
provides health insurance through Highmark Blue Cross Blue
Shield and provides retail and mail order prescription drug
services through Medco.
– By working through the multi-denominational coalition, the
Pension Boards and the other participating denominations are
able to leverage their buying power and pass the favorable costs
on to the church-related institutions they serve.
6
Using Church Plan Status to Enhance Your Employee Benefits
• Dental Insurance
– The Pension Boards can provide dental insurance to your
organization through either an insured or a self-insured
arrangement
• Life and Disability Insurance Programs
– The Pension Boards can work with you and your organization to
design and provide a life and/or disability program for your
employees.
• Benefit programs can be “carved out” – For example, you may want
only health insurance or only prescription drug coverage from the
Pension Boards. The Pension Boards can accommodate “carve
out” programs and provide stand alone programs for your
employees.
7
Using Church Plan Status to Enhance Your Employee Benefits
Cost Savings Example – Adapted From “A Look at 401(k) Plan Fees” from
the U.S. Department of Labor Website
Pension Boards’ Plan
•
•
•
•
•
•
Pension Boards’ 403(b) Account
$25,000 account balance
Participant is 35 years from retirement
Investment return over next 35 years
averages 7%
Fees and expenses (investment costs
and administrative costs) for Pension
Boards’ services are about .50% (i.e.,
one-half of one percent or 50 basis
points)
Over the next 35 years, the $25,000
account (with no further investments)
will grow to $227,000 – that amount is
about 28% ($64,000) greater than the
growth under the competitor’s 403(b)
account
Competitor’s Plan
•
•
•
•
•
•
Competitor’s 403(b) Account
$25,000 account balance
Participant is 35 years from retirement
Investment return over next 35 years
averages 7%
Fees and expenses (investment costs
and administrative costs) for
Competitor’s services are 1.50% (i.e.,
150 basis points)
Over the next 35 years, the $25,000
account (with no further investments)
will grow to $163,000 – that amount is
about 28% ($64,000) less than the
growth under the Pension Boards’
403(b) account
8
Using Church Plan Status to Enhance Your Employee Benefits
Types and Amounts of Plan Fees and Expenses
Pension Boards’ Plan
•
There is an “all in” fee of approximately
.50% (i.e., one-half of one percent or 50
basis points) for both investment
management and plan administration [i.e.,
plan recordkeeping, accounting, legal and
trustee services and for customer service,
educational seminars and material,
electronic access to plan information, etc.]
Competitor’s Plan
•
•
The types of fees and expenses can vary
depending on the nature of the provider and
the number of people and dollars in the plan
– Plan administration fees
– Investment fees
– Individual service fees (loans, QDROs,
etc.)
– Sales charges (also called “loads” or
“commissions”)
– Charges for a variable annuity “wrap”
around investment options such as
mutual funds
Average total plan costs range from 1.59 %
(159 basis points) for plans with 25
participants to 1.07% (107 basis points) for
plans with 5,000 participants [Source: HR
Investment Consultants, quoted in A Primer
on Plan Fees (Oct. 18, 2007), American
Bankers Association, et al.]
9
Using Church Plan Status to Enhance Your Employee Benefits
• A “church plan” is much more flexibility in design and operation than
other types of plans
– Because a church plan is exempt from many of the federal laws
and regulations with which most other private sector plans must
comply.
• Church plans are not just for traditional churches. The retirement
plans of service ministries associated with a religious denomination
like the UCC – such as hospitals and communities that provide
services to the aging, children, youth and family, and persons with
developmental disabilities – may also be church plans.
• In fact, under the law, the retirement plan of a service ministry
associated with the United Church of Christ is a church plan unless
the plan has consciously made a written election under the Code to
be subject to the federal laws from which it would otherwise be
exempt.
10
Using Church Plan Status to Enhance Your Employee Benefits
“Church Plan” Definition
• Before 1980, the term "church plan" was limited to a plan
established and maintained by a church, a convention or association
of churches – it was crucial that the entity maintaining the plan be a
church.
• In 1980, the limitation on the scope of the term "church plan" as
originally enacted was removed by the Multiemployer Pension Plan
Amendment Act of 1980 (MEPPA).
11
Using Church Plan Status to Enhance Your Employee Benefits
“Church Plan” Definition (cont.)
• Code § 414(e)(3) now provides that even if the organization
maintaining a plan (for example, a church pension board or
retirement committee of a church-related ministry) is not itself a
church, the plan may still be treated as a church plan if
– the organization is controlled by or associated with a church, and
– the principal purpose of the organization is to fund or administer
the plan or program and the plan is for the employees of a
church or of a convention or association of churches.
12
Using Church Plan Status to Enhance Your Employee Benefits
“Church Plan” Definition (cont.)
•
An organization is “associated with a church” if it shares common religious bonds
and convictions with the church or convention or association of churches. [Code §
414(e)(3)(D); PLR 200313019 (hospital organization associated with church)]
•
Generally, such commonality of belief is demonstrated when members of the
organization are appointed by, or are members of, the church or convention or
association of churches.
– Examples include
• PLR 8734033 (committee administering plan appointed by board of religious
order shares common religious bonds with order and, thus, with church)
• PLR 8326165 (common bonds existed where two of three members of
retirement committee must be members of religious order)
• DOL Adv. Ops. 86-19A and 86-04A (association with church assured
because order appoints and removes committee members, who are required
to be members of order which is part of church)
13
Using Church Plan Status to Enhance Your Employee Benefits
“Church Plan” Definition (cont.)
• It is not necessary for the individuals who administer the plan to do
so on a full-time basis or for that role with the organization to be their
principal activity or responsibility, provided that the organization itself
has the administration of the plan as its principal purpose.
– This is normally satisfied by having the plan administered by a
special committee, made up of persons who are appointed by
and may be removed by the organization. [GCM 39007; PLR
199951050]
14
Using Church Plan Status to Enhance Your Employee Benefits
“Church Plan” Definition (cont.)
•
Code § 414(e)(3)(B)(ii) provides that the term "employee of a church or a convention
or association of churches" includes "an employee of an organization, whether a civil
law corporation or otherwise, which is exempt from tax under §501 and which is
controlled by or associated with a church or a convention or association of churches."
– It is not necessary for the actual employer to be a church, provided that the
employing organization is
• Exempt from tax under §501 and
• “Controlled by or associated with a church."
– Examples include
• GCM 39793 (employees of tax-exempt private college controlled by
association of churches deemed to be employees of such association)
• PLRs 200305031 and 200313019 (employees of church-affiliated hospitals
deemed church employees pursuant to Code § 414(e)(3)(B) and (C))
15
Using Church Plan Status to Enhance Your Employee Benefits
“Church Plan” Definition (cont.)
• What does it mean for an organization to be “controlled by” or
“associated with” a church or a convention or association of
churches?
– An organization will be deemed “controlled by a church” if a
majority of the officers and directors are appointed by the
church's governing board or by officials of a church. Treas.
Reg. § 1.414(e)-1(d)(2).
– An organization will be deemed “associated with a church” if
it is shown to share common religious convictions and
bonds. Treas. Reg. § 1.414(e)-1(d)(2).
16
Using Church Plan Status to Enhance Your Employee Benefits
“Church Plan” Definition (cont.)
•
The listing of an organization in the denomination’s year book is a
significant (but not conclusive) factor indicating the sharing of common
religious bonds and convictions and, therefore, “association with” the
denomination
•
For organizations under the auspices of the Catholic church, common
religious bonds and convictions may be demonstrated by showing that the
organization is listed in the Official Catholic Directory.
– Many religious denominations, including the United Church of Christ,
publish similar directories.
– See, e.g., PLRs 8734033, 8606038, 8326165, and 8919066. See also
GCM 39007; DOL Adv. Ops. 86-19A and 86-04A.
17
Using Church Plan Status to Enhance Your Employee Benefits
Significance of Listing in a Denomination’s Year Book (cont.)
• The IRS Chief Counsel's Office has noted that different religions
grant different levels of autonomy to their constituent organizations
[GCM 39832 (10/12/90), underlying PLR 9038057].
– Although an entity's listing in an annual directory of churches
signifies a strong association, that listing alone, without further
showing of affiliation or association, will not support a conclusion
that the entity is associated with the convention or association of
churches under §414(e).
– Rather, the statutory test for association is based on the
facts and circumstances of each case [PLR 8606038].
18
Using Church Plan Status to Enhance Your Employee Benefits
Significance of Listing in a Denomination’s Year Book (cont.)
• Examples of where listing in the denomination’s official directory was
found to be significant include
– PLR 8734033 (where organization establishing plan and all
participating employers were listed in official directories, all
employees should be treated as employees of church)
– PLRs 200236046 and 200236048 (plans maintained by churchcontrolled §501(c)(3) charities listed in official church directories
qualified as church plans)
19
Using Church Plan Status to Enhance Your Employee Benefits
•
The IRS concluded (in PLR 9645007) that
– The required associational nexus can be found in the institutional
connections between the church and the organizations that maintain the
church plans, and includes the existence of common religious beliefs,
and
– A proposed restructuring of these supporting organizations (done in
connection with registration of the funds under the 1940 Investment
Company Act) will not alter this associational nexus (and also will not
subject the plan to Code § 501(m), relating to the provision of
commercial-type insurance).
•
A church or convention or association of churches will be treated as the
employer of an individual who is employed by a tax-exempt organization
that is controlled by or associated with such church.
•
The Pension Boards may maintain a plan covering employees of a
CHHSM organization since CHSSM organizations are associated with
the UCC.
20
Using Church Plan Status to Enhance Your Employee Benefits
•
There are two bases upon which a plan may be considered as a
church plan:
(1) If the plan is established and maintained for its employees (or
their beneficiaries) by a church or by a convention or
association of churches that is tax-exempt under §501.
(2) If the plan covers persons who may be deemed employees of a
church, or a convention or association of churches, because the
plan is maintained by an organization that is controlled by or
associated with a church or convention or association of
churches and that has as its principal function the administration
of retirement or welfare benefits to church employees.
21
Using Church Plan Status to Enhance Your Employee Benefits
• Convention or Association of Churches
– The phrase "convention or association of churches" is not
defined in the Code or regulations. The IRS has interpreted the
phrase "convention of churches" to be a statewide, regional or
national group of churches of the same denomination that
engages in cooperative efforts. An example would be a UCC
Conference. [PLR 8309092]
– An "association of churches" has been described as a group
of churches organized on less than a statewide level. An
example would be a UCC Association. [PLR 830902]
22
Using Church Plan Status to Enhance Your Employee Benefits
•
Convention or Association of Churches (cont.)
– The IRS has ruled that an organization was qualified as an association
of churches even though it was comprised of churches of different
denominations.
• Rev. Rul. 74-224, 1974-1 C.B. 61 (membership comprised of
Catholic and Protestant churches of various denominations;
governing board consisted of two voting members from each
church). See also PLR 200235032.
– The IRS also seems to have taken a less restrictive view where groups
of churches operate hospitals and nursing homes.
• PLR 199904041 (hospital controlled by two different churches was
controlled by association of churches)
• PLR 9853053 (preschool and homes for aged controlled by two
different churches were controlled by association of churches).
23
Using Church Plan Status to Enhance Your Employee Benefits
• The term "church plan" does not include:
– A plan that is established and maintained primarily for
the benefit of employees (or their beneficiaries) of
such church who are employed in connection with
one or more unrelated trades or businesses within the
meaning of Code § 513; or
– A plan whose participants are not substantially
comprised of employees defined in Code § 414(e)(1)
or (e)(3)(B).
24
Using Church Plan Status to Enhance Your Employee Benefits
• The term “employees" generally includes:
– Ministers, regardless of the source of their compensation;
– Employees of a tax-exempt organization controlled by or
associated with a church; or
– Employees (1) who have separated from service and whose
account balance or accrued benefit remains in the plan, or (2) on
whose behalf contributions are made for a period of up to five
years after separation.
25
Using Church Plan Status to Enhance Your Employee Benefits
• It can be very advantageous for your retirement plan to be a church
plan. Reasons why include:
– A church defined benefit retirement plan is not subject to the
Pension Benefit Guaranty Corporation (“PBGC”) requirements
and is not required to pay PBGC premiums.
– A church plan is not subject to many of the complex federal laws
that govern most private sector retirement plans. For example, a
church plan is not subject to federal law requirements relating to:
• Joint and survivor annuities,
• Mergers and transfers of assets and liabilities,
• Commencement of benefits,
• Reductions in benefits due to Social Security increases, and
• Forfeiture of mandatory contributions.
26
Using Church Plan Status to Enhance Your Employee Benefits
• Even more importantly, church plans are not subject to the reporting,
disclosure, participation, vesting and funding requirements imposed
on most private sector retirement plans by the Employee Retirement
Income Security Act of 1974, as amended (“ERISA”).
• For example, a church plan is not required to:
– File Form 5500s with the government, or
– Develop and distribute to plan participants:
• Summary plan descriptions (“SPDs”),
• Summaries of material modifications (“SMMs”), or
• Summary annual reports (“SARs”)
27
Using Church Plan Status to Enhance Your Employee Benefits
Nondiscrimination Testing Exemptions
• Some church plans are also exempt from the nondiscrimination
testing requirements for retirement plans found in the Internal
Revenue Code.
• Only church 403(b) plans maintained by employers that are not
classified as a Church or a Qualified Church-Controlled
Organization (QCCO) are subject to the nondiscrimination testing
requirements of the Code.
28
Using Church Plan Status to Enhance Your Employee Benefits
Nondiscrimination Testing Exemptions (cont.)
• The determination of an entity’s status as a Church or a QCCO is a
critical determination.
– Code section 3121(w)(3)(A) defines the term “church” to mean
“… a church, a convention or association of churches, or an
elementary or secondary school which is controlled, operated, or
principally supported by a church or by a convention or
association of churches.” Thus, 403(b) plans maintained by an
entity traditionally viewed as a church, and elementary and
secondary schools controlled, operated or principally supported
by such an entity, are not subject to the nondiscrimination testing
requirements of the Code.
29
Using Church Plan Status to Enhance Your Employee Benefits
Nondiscrimination Testing Exemptions (cont.)
•
Status as a Church or a QCCO (cont.)
– Code section 3121(w)(3)(B) defines the term “qualified church-controlled
organization” to mean “any church-controlled tax-exempt organization
described in section 501(c)(3), other than an organization which
• Offers goods, services, or facilities for sale, other than on an incidental
basis, to the general public, other than goods, services, or facilities which
are sold at a nominal charge which is substantially less than the cost of
providing such goods, services, or facilities; and
• Normally receives more than 25 percent of its support from either
– Governmental sources, or
– Receipts from admissions, sales of merchandise, performance of
services, or furnishing of facilities, in activities which are not unrelated
trades or businesses, or both.”
30
Using Church Plan Status to Enhance Your Employee Benefits
Nondiscrimination Testing Exemptions (cont.)
• Generally, a 403(b) plan is subject to the nondiscrimination testing
requirements of the Code if the entity maintaining the plan receives
more than 25% of its support from fees or receipts resulting from the
sale of goods, services or facilities to the general public or from a
governmental source.
• Many UCC-related CHHSM organizations such as hospitals,
educational institutions and communities that provide services to the
aging, children, youth and family, and persons with developmental
disabilities cannot meet the QCCO definition (because they
receive more than 25% of their support from fees or governmental
sources), and, therefore, the 403(b) plans of those organizations
are subject to the nondiscrimination testing requirements of
the Code.
31
Using Church Plan Status to Enhance Your Employee Benefits
Church Plan Failures and Corrections
•
A plan that fails any of the church plan requirements may correct that failure and be
deemed to meet the requirements for the year of the correction and for all prior years
if the correction is made by the latest of the following dates:
– The period ending 270 days after the date the Secretary of the Treasury mails a
notice of default with respect to the plan's failure to meet the requirements.
– Any period set by a court of competent jurisdiction after rendering a final
determination that the plan fails to meet the requirements. If the court fails to
specify the period, such period shall be any reasonable time set by the Secretary
of the Treasury, not to be less than 270 days from the date the determination
becomes final.
– Any additional period deemed reasonable and necessary by the Secretary of the
Treasury for correcting the default. A plan that does not correct deficiencies
within the appropriate correction period will be deemed to have failed the church
plan requirements beginning with the date on which the earliest failure to meet
any requirement occurred. Once a plan has failed to meet the church plan
requirements, and has not corrected any failure within the remedial period, it
cannot thereafter become a church plan.
32
Using Church Plan Status to Enhance Your Employee Benefits
Electing to Give Up Church Plan Status
•
The sponsor of a church plan can choose to be subject to the same laws
with which non-church plans must comply if the church plan sponsor is
willing to forever forego the benefits afforded church plans under federal
law.
– Code § 410(d) and 26 C.F.R. § 1.410(d)-1 provide a process for a
church plan sponsor to elect to have the rules that are applicable to
non-church plans be applicable to the sponsor’s church plan.
• A very specific election process must be followed and the election,
once made, is irrevocable.
• It is unclear whether such an election may be made with respect to
a church health or welfare plan, but at least one court has ruled that
an election for a church health or welfare plan may be made.
33
Using Church Plan Status to Enhance Your Employee Benefits
Electing to Give Up Church Plan Status (cont.)
If the sponsor of a church plan has not made the statutory
election to be treated as a non-church plan, then the plan is a
church plan regardless of how the sponsor treats the plan.
For example, simply filing Form 5500s for a church plan does
not cause the plan to lose its church plan status
Loss of church plan status can be achieved only by making a
Code § 410(d) election in accordance with the Code and the
IRS regulations.
34
Using Church Plan Status to Enhance Your Employee Benefits
• The church plan exemptions in the Code and ERISA are also
applicable to church health plans and most church welfare plans.
– For example, church health plans are not required to
• File Form 5500s with the government. or
• Provide summary plan descriptions (“SPDs”), summaries of
material modifications (“SMMs”), or summary annual reports
(“SARs”) to health plan participants.
• Also, church health plans are not subject to federal law health
continuation coverage requirements (often called “COBRA”).
35
Using Church Plan Status to Enhance Your Employee Benefits
Legal Basis for Church Plan Status
•
Church plans sound too good to be true because of the potential cost
savings and flexibility they offer, but they are solidly grounded in federal law.
– Code § 414(e)(1) defines “church plan” as a plan established and
maintained for its employees (or their beneficiaries) by a church or by a
convention or association of churches which is exempt from tax under
Code § 501.
– The church plan definition is given expansive application by Code
section 414(e)(3)(B)(ii) which provides that the term “employee of a
church or a convention or association of churches” shall include “an
employee of an organization, whether a civil law corporation or
otherwise,
• “Which is exempt from tax under Code § 501, and
• “Which is controlled by or associated with a church or a convention
or association of churches.”
36
Using Church Plan Status to Enhance Your Employee Benefits
Legal Basis for Church Plan Status (cont.)
– The expansive definition means that church plans are not limited
to traditional church entities, but include all entities controlled by
or associated with a religious denomination such as the UCC.
– Therefore, UCC-related hospitals, educational institutions
and communities that provide services to the aging,
children, youth and family, and persons with developmental
disabilities may sponsor church plans.
37
Using Church Plan Status to Enhance Your Employee Benefits
Legal Basis for Church Plan Status (cont.)
– Substantially similar provisions are found in Section 3(33) of
ERISA. In addition,
• ERISA § 4(b)(2) exempts church plans from most ERISA
requirements.
• ERISA § 4021(b)(3) provides that the PBGC’s insurance provisions
for defined benefit plans are not applicable to church plans.
– IRS regulations concerning church plans may be found at 26
C.F.R. § 1.414(e)-1.
– In addition to the Code, ERISA and regulatory provisions cited in
the preceding paragraphs, there are many IRS rulings, U.S.
Department of Labor rulings, PBGC rulings and court decisions
that recognize church plan status under federal law.
38
Using Church Plan Status to Enhance Your Employee Benefits
Church 403(b) Plans
• A Code § 403(b) plan may be a church plan if it also meets the
definition of Code section 414(e). Generally, church § 403(b) plans
come within the definition of a "retirement income account"
described in § 403(b)(9).
• Section 403(b)(9) defines a retirement income account to mean a
defined contribution program
– Established or maintained by a church, a convention or an
association of churches, including an organization described in §
414(e)(3)(A),
– To provide benefits under § 403(b) to an employee of an
employer described in § 501(c)(3) or a minister described in §
414(e)(5)(A).
39
Using Church Plan Status to Enhance Your Employee Benefits
Church 403(b) Plans
•
Unlike other Code § 403(b) plans, retirement income accounts under section
403(b)(9) need not be invested exclusively in annuity contracts or mutual funds held
in a custodial account.
– The assets of the accounts may be commingled in a common fund made up of
such accounts, and the part of the common fund which equitably belongs to any
account must be separately accounted for
• It must be possible at all times to determine the account's interest in the
fund, and
• The assets cannot be used for, or directed to, any purposes other than the
exclusive benefit of such employees and beneficiaries.
– If these requirements are met, the assets of the § 403(b)(9) account may be
commingled with tax-qualified plan assets without adversely affecting the status
of the account or the qualification of the plan.
•
Church § 403(b) plans have certain special contribution limits and rules intended to
increase the amount that may be contributed under the limit on annual additions
under § 415(c).
40
Using Church Plan Status to Enhance Your Employee Benefits
IRS Issues Final 403(b) Regulations
• In July 2007, the IRS finalized 403(b) regulations that were
proposed almost three years earlier.
• The 403(b) regulations govern the taxability and operation of
retirement plans subject to Code section 403(b).
• Many non-profit organizations and churches, including the United
Church of Christ and UCC-related ministries that are CHHSM
members, sponsor and maintain 403(b) plans for their employees.
• It is very important for CHHSM members that sponsor 403(b) plans
to be aware of and fully comply with the final 403(b) regulations so
that their retirement plans may continue to experience tax-favored
treatment.
41
Using Church Plan Status to Enhance Your Employee Benefits
Highlights of the final 403(b) regulations include:
•
Written Plan Requirement – For the first time, there is a tax law
requirement that a 403(b) plan have a written plan document and that the
plan be operated in accordance with that document.
– The written plan document must include all material provisions,
including eligibility, benefits, limitations, investments available under the
plan and distributions.
– The plan document must allocate responsibilities between the employer,
the service providers and the participants. Other documents (such as
annuity contracts) may be incorporated into the document by reference.
– The plan document for a church retirement income account under Code
section 403(b)(9) must state the intent to constitute a retirement income
account.
42
Using Church Plan Status to Enhance Your Employee Benefits
Highlights of the final 403(b) regulations include:
Exclusive Benefit Requirement –
All 403(b) plans, including church retirement income accounts, are
subject to the exclusive benefit rule.
The exclusive benefit rule provides that assets held in the account
cannot be used for, or diverted to, purposes other than for the
exclusive benefit of plan participants or their beneficiaries. Assets
are treated as diverted to the employer if the employer borrows
assets from the account.
43
Using Church Plan Status to Enhance Your Employee Benefits
Highlights from Final 403(b) Regulations (Cont.)
• Nondiscrimination Rules – For 403(b) plan sponsors that are
subject to nondiscrimination rules, the final regulations make clear
that nondiscrimination rules similar to those governing profit-sharing
plans are applicable except for elective deferrals which are
governed by the universal availability requirement, discussed below.
• While churches are generally exempt, the nondiscrimination rules
apply to many church-related ministries.
– For example, a UCC-related ministry that sponsors a 403(b) plan
is subject to the nondiscrimination rules if the ministry offers
goods, services, or facilities for sale, other than on an incidental
basis, to the general public and normally receives more than 25
percent of its support from either (i) governmental sources, or (ii)
receipts from admissions, sales of merchandise, performance of
services, or furnishing of facilities, or both.
44
Using Church Plan Status to Enhance Your Employee Benefits
Highlights from Final 403(b) Regulations (Cont.)
• Universal Availability – Elective deferrals are not subject to
nondiscrimination rules if the right to make elective deferrals of at
least $200 per year is effectively available to all employees.
– The final regulations permit geographically and functionally
distinct units to apply the universal availability requirement
separately.
• The employer may exclude certain types of employees (e.g.,
employees who normally work fewer than 20 hours per week; nonresident alien employees) from the 403(b) plan in determining
whether the universal availability requirement is met.
– To meet the universal availability requirement, the employer
must annually notify all eligible employees of the right to make
elective deferrals under the 403(b) plan.
45
Using Church Plan Status to Enhance Your Employee Benefits
Highlights from Final 403(b) Regulations (Cont.)
•
Controlled Group Rules – The final regulations issued at the same time as
the final 403(b) regulations introduce, for the first time, controlled-group
rules for tax-exempt entities. The ability to control 80% or more of the board
of directors or trustees of a tax-exempt entity will result in the application of
the controlled-group rules.
•
In-service Transfers – In-service transfers (formerly governed by Revenue
Ruling 90-24) will continue to be allowed only if there is a written agreement
between the employer and the vendor that permits the sharing of employee
information so that the eligibility and distribution rules of the plan may be
followed.
•
Catch-up Coordination – Some 403(b) plan participants are eligible for two
separate catch-up contributions and the final regulations address the
coordination of those catch-up provisions. The final regulations specify that
the special 15-years of service catch-up (which is available to the UCC and
to certain UCC-related ministries) must be applied before the age 50 catchup is applied.
46
Using Church Plan Status to Enhance Your Employee Benefits
Highlights from Final 403(b) Regulations (Cont.)
• Plan Termination – A 403(b) plan may terminate if certain rules
similar to the 401(k) successor rules are followed. Before the final
403(b) regulations, there were questions with respect to whether
and how a 403(b) plan could terminate.
• Effective Date – The final regulations are generally applicable for
plan years beginning after December 31, 2008 (i.e., January 1, 2009
for most 403(b) plans), however, the new rules for in-service
transfers apply to transfers occurring after September 24, 2007.
403(b) plan sponsors may operate under the final regulations before
the effective date if the final rules are applied on a consistent and
reasonable basis.
47
Using Church Plan Status to Enhance Your Employee Benefits
Exemptions from Securities Laws
• Church plans and the investment pools maintained by church benefit
programs in connection with such plans are exempt from federal and
state securities laws.
• Church plans utilizing these securities laws exemptions are required
to inform plan participants that they will not be afforded the
protection of the securities laws. This notice is to be given to new
participants as soon as practicable after beginning participation and
to all participants annually.
48
Using Church Plan Status to Enhance Your Employee Benefits
Health and Welfare Plans
•
Church health care plans are exempt from Code provisions imposing an
excise tax upon failure to provide continuation coverage under a group
health plan under the Consolidated Omnibus Budget Reconciliation Act of
1985 (COBRA). [Code § 4980B(d)(2),(3)]
•
Many states have continuation coverage rules similar to COBRA under their
insurance laws, and many such provisions do not exempt employers with
fewer than 20 employees as under the federal provision, so that medical
insurance contracts purchased by churches may nevertheless include such
provisions.
•
Many church plans voluntarily follow the federal or state COBRA rules.
•
The Uniformed Services Employment and Reemployment Rights Act of
1994 (USERRA) also imposes continuation coverage requirements for
participants serving in the uniformed services. USERRA does not exempt
church plans from its rules.
49
Using Church Plan Status to Enhance Your Employee Benefits
Church Plan Parity and Entanglement Prevention Act of 1999
•
Whether a denominational church welfare plan is a single-employer plan or a multiple
employer welfare arrangement (“MEWA”) is unclear. MEWAs are often subject to
onerous state law requirements. To address this issue, Congress enacted the Church
Plan Parity and Entanglement Prevention Act of 1999.
•
A church plan that is a welfare plan is deemed to be a plan sponsored by a single
employer that reimburses costs from general church assets or purchases insurance
coverage with general church assets, or both.
– Such church plans would not be treated as MEWAs.
– Such church plans are also exempt from state licensing, solvency and insolvency
requirements.
• The exemption does not extend to insurers doing business with the church
plan.
• In addition, the act provides that for purposes of enforcing provisions of state
insurance laws that apply to a church welfare plan, the plan will be subject to
state enforcement as if the church plan were an insurer licensed by the
state.
50
Using Church Plan Status to Enhance Your Employee Benefits
Church Group Term Life Insurance
• Church group term life insurance plans are not subject to the
nondiscrimination requirements of Code § 79(d).
• For purposes of this exemption, a plan is a church plan if it meets
the requirements of Code § 414(e) but excludes employees of
certain church-related universities and colleges, hospitals and
medical nonprofit organizations.
• For this purpose and for purposes of treatment as life insurance for
the purpose of the death benefit exclusion of Code § 101, selffunded church death benefit plans are treated as life insurance. The
provision of such a death benefit under a church plan does not,
however, cause the sponsor to be taxed as an insurance company.
51
Using Church Plan Status to Enhance Your Employee Benefits
Reporting and Disclosure Requirements
• Qualified § 401(a) and § 403(b) church plans are subject to certain
withholding, deposit, and information reporting requirements. For
example, these plans must
– Report lump sum or total distributions to participants on Form
1099-R
– Make periodic deposits of withheld taxes using federal tax
deposit coupons (Form 8109) or electronically through the
Electronic Federal Tax Payment System (EFTPS)
– Annually report non-payroll taxes on Form 945
• Church plans must indicate on Form W-2 whether an employee was
an active participant in a pension plan for the calendar year being
reported.
52
Using Church Plan Status to Enhance Your Employee Benefits
Reporting and Disclosure Requirements (Cont.)
• Church plans are exempt from the reporting and disclosure
requirements of ERISA and, therefore, are not required to
– To file Form 5500 or other reports specified in ERISA to be filed
with the U.S. Department of Labor, or
– To distribute to participants, summary plan descriptions,
summary annual reports or any other reports to plan participants
• Church plans are exempt from PBGC reporting requirements and
are not required to file PBGC Form 10 or any other reports with the
agency.
53
Using Church Plan Status to Enhance Your Employee Benefits
Reporting and Disclosure Requirements (Cont.)
• Church plans are not generally subject to the participant disclosure
requirements under ERISA.
• For example, church plans are not required to furnish participants
with summary plan descriptions, although many church plans do so
voluntarily (but they do not include the ERISA required legal
provisions that include advising the plan participants of their right to
sue the plan administrator).
• A §401(a) church plan must be communicated to employees in order
to be qualified.
54
Using Church Plan Status to Enhance Your Employee Benefits
Reporting and Disclosure Requirements (Cont.)
•
Church plans that are §401(a) or § 403(b) plans must provide plan
participants or beneficiaries who receive certain plan distributions with notice
of their right to elect not to have federal income tax withheld.
•
Church plans must also provide recipients of certain distributions with
rollover eligibility information.
•
If such notices are not provided, the church plan administrator may be
subject to a penalty of $100 for each such failure, up to a maximum $50,000
in a calendar year.
•
Church plans must provide copies of Form 1099-R to persons receiving
distributions.
•
Dependent care reimbursement plans also have certain notice requirements
imposed by the Code that do not provide exemptions for church plans.
55