(b)lines Ask the Experts – Church 457(b) Plans

 December 22, 2009 (PLANSPONSOR (b)lines) – A plan provider notes: "If a nonelecting church, non-ERISA 414(e) organization sponsors an eligible 457(b) plan, it appears that this plan can be offered to all employees, rather than limited to a top hat group, since the plan is not subject to ERISA. However, 457(a) requires all non-governmental 457(b) plans assets to be unfunded."

The provider asks: “Since the employer is exempt from ERISA, does this requirement apply to the 414(e) religious organization? Is the plan considered funded or unfunded? In addition, in general, do the 457(b) rules applicable to governmental plans or top hat plans apply – i.e. rollovers, age 50 catch-up, assets protected from the 414(e) organizations, plan loans?”

David Powell, Groom Law Group, answers:

First, note that many church organizations are not employers eligible to maintain a 457(b) plan.  (See Code section 457(e)(13)).  Only tax exempt organizations which are NOT churches or qualified church controlled organizations under Code section 3121(w)(3)(A) and (B) (usually, church hospitals, colleges, universities and nursing homes) may maintain 457(b) plans. 

Because such plans are exempt from ERISA as church plans, they need not be top hat.  But if funded, they will run afoul of the constructive receipt/economic benefit rules and will be immediately taxable to the participants.  Consequently, most use, at most, a rabbi trust where the assets are exposed to creditors of the employer.  And they do not get the benefit of the rules applicable only to governmental plans, so no age 50 catch-up, no loans, and distributions are not eligible rollover distributions.  They are essentially like other tax exempt organization 457(b) plans, just not limited to the top hat group.


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.