A detailed discussion of the unique features of church plans would be too lengthy to address in our Ask the Experts column, though in our last column we do delve into detail on some distinctive church plan features (see (b)lines Ask the Expert – Church Plan Issues ). In addition, there are distinctions between qualified plans for churches (such as 401(a)/401(k) plans) and 403(b) plans, which would be well beyond the scope of this column. Thus, we will focus on a summary of some of the major features that differentiate church 403(b) plans from the 403(b) plans of other types of organizations.
Applicability of ERISA:church plans are subject to ERISA only in the rare event that they affirmatively elect ERISA by attaching a statement of such election to a Form 5500 filing. Thus, the vast majority of church organizations are not required to file a Form 5500 or satisfy other requirements of ERISA such as providing plan participants with a Summary Plan Description or a Summary Annual Report. In addition, the ERISA fiduciary rules do not apply to the operation of church plans; church plans would be subject to state law, which may or may not be analogous to ERISA in this regard. It should also be noted, that public school districts and public higher education institutions are also not subject to ERISA.
Plan Document Requirement:The plan document requirement applies to some types of church plans and organizations, but not others. If the organization is a steeple church (the actual church itself) or QCCO (e.g. a church elementary or secondary school) under 3121(w), such an organization is NOT required to maintain a written plan UNLESS the plan is a “retirement income account” under 403(b)(9). A church would generally wish to maintain a 403(b)(9) retirement income account to allow self-employed clergy and chaplains to participate on a pre-tax basis, which is only permitted under that section of the Code. Other church plans (e.g., a church 403(b)(1) or 403(b)(7) plan) and plans, whether 403(b)(9) or not, of types of religious organizations, such as church hospitals, colleges, and nursing homes, fall under a broader definition of church plans as defined in Code Section 414(e). Such plans MUST maintain a written plan document. It should be noted that, though steeple churches/QCCOs are not technically required to maintain a written plan document, it may be advisable for such organizations to do so, since it is helpful in addressing any disputes between plan sponsor and participants as to plan terms.
Nondiscrimination testing:Again, the nondiscrimination testing rules apply to some types of church plans, but not others in the same fashion as the plan document requirement. Steeple churches/QCCOs are not subject to nondiscrimination rules of any type; literally, if a steeple church/QCCO wishes to establish a 403(b) plan that covers only the priest/minister/rabbi, they could do so, though most churches choose to cover additional groups of employees. Non-QCCO 414(e) religious organizations, however, are subject to all of the nondiscrimination rules of 403(b), including a “universal availability” requirement that generally prohibits the exclusion of employees from the right to make an elective deferral to a 403(b) plan, with limited exceptions.
Contribution limits:There are special contribution limits that apply only to church plans, such as the ability for foreign missionaries to contribute the greater of $3,000 or their includible compensation under Section 403(b)(3). In addition, there is a special election, subject to a $40,000 lifetime maximum, under which church employees can exceed their 415 percentage limit (generally, 100% of compensation), up to an annual maximum of $10,000. This limit is helpful, for example, to individuals who have taken a vow of poverty and thus receive little or no compensation from the church; even if such an individual receives zero compensation, $10,000 may be contributed to a 403(b) on that individual’s behalf for a period of four years ($10,000 x 4 = $40,000 lifetime limit). Furthermore, all years of church service, regardless of whether such service was performed for the current church plan sponsor, are aggregated for purposes of determining whether an individual has completed the years of service necessary to qualify for the 15-year catch-up election in Code section 402(g)(7).
Self Employed Clergy:Normally, participation in a 403(b) plan is limited to employees of the plan sponsor. However, as indicated above, if a 403(b)(9) retirement income account is maintained, self-employed clergy and those engaged in other specialized ministry who may not be directly employed by the church plan sponsor (e.g. chaplains) may participate in the church-sponsored 403(b) plan. Since there is no employment relationship, any contributions made to the 403(b) would be deductible on the minister's/chaplain's individual income tax return.
Clergy Housing Allowance:A minister may be eligible to exclude all or a portion of his or her compensation, including qualifying 403(b) plan distributions such as those from a national retirement program of a church, from income to the extent that the compensation is eligible to be treated as a housing allowance under Code Section 107. However, such housing allowance CANNOT be counted as includible compensation for purposes of calculating the 415 contribution limit (generally 100% of includible compensation), though the special contribution limit rules described above could be utilized to offset this impact on the contribution limit.
Effective date of Final 403(b) regulations:IF the authority to amend a church plan is held by a convention or association of churches, the effective date of the final 403(b) regulations is delayed until January 1, 2010, while for all other entities it was January 1, 2009.
For more details on these and other church plan distinctions, David Powell, Groom Law Group, has written an excellent chapter on church plans in the 403(b) Answer Book.
- 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.