“I thought that the maximum waiting period that could be imposed was two years, am I missing something?”
Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting, answers:
It is questions such as these that highlight how different the rules that apply to nonelecting church plans (and governmental plans) can be from those that apply to plan of other types of nonprofit employers.Though the question was posed by a governmental rather than a church, our response in an Ask the Experts column back in 2010 (see “Ask the Experts: Eligibility Requirement Restrictions for Dual Status Sponsors”), was applicable to nonelecting churches as well, and is as valid today as it was back in 2010. To summarize, the provision that limits the restrictions that employers may pose with regard to waiting periods in 403(b) plans is an Employee Retirement Income Security Act (ERISA) provision (Section 202(a) of ERISA) and nonelecting church and governmental plans are not subject to ERISA. Thus, nonelecting church plans may impose any waiting period of their choosing, such as the four-year period you describe.
It should also be noted that the universal availability requirement and other nondiscrimination rules, including 401(a)(17), do not apply to nonelecting church plans—so long as it is a plan of a “church” or a “qualified church-controlled organization“ (QCCO). By contrast, the universal availability rule and Code section 401(a)(17) DO apply to governmental plans, and the regular nondiscrimination rules under 403(b) generally apply to a non-ERISA church plan of an employer which is not itself a “church” or “qualified church controlled organization” (often referred to as a “non-QCCO”, which, for example, would generally include church-controlled or associated hospitals, colleges, universities and nursing homes). Code section 403(b)(12)(B). The reason for this exemption is that the 403(b) final regulations specifically exclude nonelecting church plans of churches and QCCOs from the universal availability requirement and nondiscrimination rules, but not in areas where they tend to compete with other nonprofits that provide services or goods for a fee. (Treas. Reg. 1.403(b)(5)-(d)). Thus, churches and QCCOs need not require that essentially all employees have the right to make elective deferrals to the 403(b) plans that they sponsor or meet the nondiscrimination rules. However, as a practical matter, many nonelecting churches do permit all employees the right to make elective deferrals to their 403(b) plans.
Also, a future consideration may be that such non-ERISA vesting rules may not be available under an IRS pre-approved 403(b) plan, once those become available. An individually designed church plan may be necessary. But that is in the future.
As a reminder, there is an extensive archive of Ask the Experts Q&As available online on the PLANSPONSOR website (the Experts researched this archive to respond to this reader question). Simply type “Ask the Experts” in the search box in the upper right-hand corner of the web page, and the Experts’ past Q&As will appear. To refine your search, add a particular search term to the mix, such as “Ask the Experts church”, to easily obtain Q&As on church-related issues.
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.