(b)lines Ask the Expert – Church Plan Issues

A plan adviser explains: We have been asked by a church organization to help them comply with the 403(b) document requirements as a non-electing church plan.  This organization oversees hundreds of community churches, schools, nursing homes and relief services.  In order to save each these entities from the administrative burden of drafting their own separate document, it is the desire of the main church organization to draft an umbrella document that each of the sub-organizations may adopt.

The adviser asks: Are you aware of any other church organizations who are taking this approach?

Document and Universal Availability Requirements forPlans

Actually, that is similar to what congregational denominations do.  If you look at the definition of church plan in section 414(e) the Internal Revenue Code (there is a similar definition in ERISA), it includes plans established and maintained by a “convention or association of churches” as well as 501(c)(3) entities “controlled by or associated with” such conventions or associations of churches.  “Associated with” includes “sharing common religious bonds and convictions.”  That is a facts and circumstances determination, but, for example, inclusion in an authoritative denominational directory (like the Official Catholic Directory) will often be dispositive.  It is certainly a two-way street – both the association of churches and the 501(c)(3) entity must recognize that they share common religious bonds and convictions.  At any rate, this is the basis on which associations of churches and related 501(c)(3) entities may participate in a single church plan. 

Because of the facts and circumstances nature of the determination, it is often advisable to seek a private letter ruling on the church plan status.  The IRS has issued many such rulings in the past, but currently has a moratorium on them while it and the DoL and PBGC are contemplating issuing additional guidance on the church and governmental plan definitions (with the governmental plan guidance likely to come out first).

Note that this does not mean that all of the churches and 501(c)(3) entities are in the same controlled group for tax purposes.  They may still be separate employers for purposes of applying IRC rules to the church plan.  Or they may, depending on the facts, be in a controlled group for tax purposes (though the new controlled group regulations, at Reg. §1.414(c)-5, with some exceptions discussed below, do not apply to churches).  This can result in a number of drafting questions.  For example, will or can distributions be allowed when moving from one participating employer to another?  Can self-employed clergy and chaplains participate?  If so, when will clergy be considered retired?  What if an employer wants to cease participating?  And so on.  These are definitely not “off-the shelf” 403(b) plans, and usually require knowledgeable advice.

The adviser also notes: In April 2008, Robert J. Architect of the IRS hosted a 403(b) phone forum where he mentioned that IRC Sec. 3121(w) "steeple churches" do not need to comply with the written document or "universal availability" requirements.  IRC Section 3121(w)(3)(A) reads: "For purposes of this subsection, the term "church" means 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." 

He asks: Does this mean that the community churches, and elementary and secondary schools sponsored by these churches, are exempt from the universal availability and document requirements, but the other organizations (nursing homes and relief services) must comply?

Secondary Schools

This question provides an opportunity to expand on the differences in the final 403(b) regulations between the narrow definition of "steeple" churches and qualified church controlled organizations (or QCCOs) under 3121(w) and the broader definition of religious organizations under 414(e) that includes those that don't meet the steeple or QCCO definition (often referred to as nonqualified church-controlled organizations, or non-QCCOs).  Reg. §1.403(b)-5(d) of the final regulations specifically exempts churches from the written plan requirement and the nondiscrimination rules, including the universal availability requirement. However, a church is defined under Reg. §1.403(b)-2(b)(5) as a steeple church or QCCO under 3121(w), which means that only the churches themselves and QCCOs such as church elementary and secondary schools are exempt from the written plan and nondiscrimination requirements.

Church hospitals, colleges, nursing homes, and other religious organizations under 414(e) that fall out of the definition of QCCO (i.e., are non-QCCOs) must maintain a written plan document and satisfy the nondiscrimination rules, including the universal availability requirements. Note that many legal counsel caution that it can be advisable to have a written plan document even if not required, as it may otherwise be very difficult for an employer to prove the terms of the plan should there be a dispute with other employers or participants, and the document can be drafted to include many rules helpful to the plan sponsor. 

And, though it is confusing, there is another scenario under which a 3121(w) steeple church/QCCO would be required to maintain a written plan document. Reg. §1.403(b)(9)-(a)(2)(ii) requires a plan document for steeple churches/QCCOs whose plans are "retirement income accounts" under 403(b)(9).  Many church plans are designated as 403(b)(9) not in order to maintain special investments (that are neither 403(b)(1) annuities nor 403(b)(7) custodial accounts/mutual funds), but in order to allow self-employed clergy and chaplains to participate on a pre-tax basis, which is only available for 403(b)(9) plans (see IRC §404(a)(10)).

For purposes of the issue of a multiple employer versus single (controlled group) employer plan, there is a similar distinction between 3121(w) steeple churches/QCCOs and non-QCCOs. Reg. §1.414(c)-5(a), included in the publication of the final 403(b) regs, specifically exempts 3121(w) steeple churches and QCCOs. Thus, non-QCCOs are subject to the controlled group rules described in Reg. §1.414(c)-5. Though the regulation provides that the nondiscrimination rules for the non-QCCOs are applied separately from any steeple churches and QCCOs (and don't "infect" the entire plan, which is helpful), that suggests that it may be necessary to determine whether any non-QCCOs in the plan are in the same controlled group for applying the nondiscrimination rules to them separately.  That is difficult to apply in many church plan situations, though, and is a controversial issue that we understand some churches are designing around or seeking further clarification on. 

-David Powell, Groom Law Group, Chartered

-  Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.