“The locations make payroll deductions for each employee`s voluntary monthly contribution to their chosen provider, and also remit their contributions to the provider. Each location also makes a 100% match of up to 2% of the employees contribution, which it also remits. However, in discussing this with the Diocesan CFO, he is of the view that neither the Diocese nor the locations have a ‘plan’. They believe that each employee has an individual contract with their chosen provider. What do the experts think?”
David Powell, Groom Law Group, answers:
It is understandable that the CFO does not really think of the arrangements as a plan. After all, the church’s involvement, or lack thereof, is very similar to the Department of Labor (DOL) “safe harbor,” under which the lack of an employer’s involvement with a tax sheltered annuity means that it will not be considered an employee pension plan subject to the Employee Retirement Income Security Act (ERISA). Here, though, of course, ERISA does not apply anyway, assuming that the Diocese has not made an election under Code section 410(d). But it is really more complicated than that. While ERISA does not apply, Internal Revenue Code section 403(b) does. After all, there has to be some Code section to keep the contributions from being taxable to the employee, and in this case that is 403(b). So there is a plan (or plans) under Code section 403(b) here.
Before the 2007 final 403(b) regulations, employers did not have much in the way of responsibilities with respect to such plans to keep them qualified under Code section 403(b), so the question of whether there was a plan or not was not very important. Now, of course, under the final 403(b) regulations, there are questions of compliance with the loan rules, hardship rules, distribution rules, coordination of limits and so forth, for which there needs to be a written document (with an exception for 403(b)(1) church plans) and an assignment of responsibility, and if there are any non-qualified church controlled organizations involved, there might be nondiscrimination testing.
Now, as to whether this arrangement constitutes one plan or multiple plans for purposes of Code section 403(b) depends on the facts and circumstances. But compliance with the Code requirements by the employer or the vendors in the aggregate is important – failure to comply can result in substantial liabilities for failure to withhold income taxes and for FICA, as has been seen in a number of IRS audits.
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.