A reader asks: “Is the 403(b) plan for the pre-school teachers subject to ERISA? What if it were separately incorporated?”
David Powell, Groom Law Group, answers:
First, keep in mind that the IRS, DoL and PBGC are currently studying the church plan definition and may in the future issue guidance in the area, including both the making of 410(d) elections and qualified and non-qualified church-controlled organizations. Under the prevailing current interpretation of the definition of church plan, though, if the pre-school is not separately incorporated, a plan maintained by the church for employees of the pre-school should be a church plan under the Internal Revenue Code and ERISA definitions unless the church made the election under Code section 410(d) to be subject to ERISA.
If the pre-school were separately incorporated, the analysis would be a little different. The pre-school could maintain a church plan for its employees if the plan is maintained by an organization, the principal purpose or function of which is the administration or funding of the plan, if both the pre-school and the organization are controlled by or associated with a church or convention or association of churches. See Code section 414(e)(3). This language has a very specific meaning, and though a somewhat convoluted determination, it is often satisfied if the church controls the school by having the power to appoint or remove 80% or more of the board of the school. See IRS Notice 89-23.
“Association with” a church is inherently factual, and if relying on association rather than clear control for church plan status, the school may wish to consult with counsel to review the various rulings in this area and perhaps seek their own ruling (subject to the fact that the IRS currently has this area under study and put a hold on such rulings for the time being).
Even though the plan may be a church plan, we would point out that if the school is separately incorporated, you would need to consider whether it is a church or qualified church-controlled organization. If it is not, nondiscrimination rules would still apply to its 403(b) plan. See Code section 403(b)(12)(B) and the definitions in Code section 3121(w)(3)(A) and (B). Code section 3121(w)(3)(A) provides that elementary and secondary schools controlled, operated or principally supported by a church or a convention or association of churches are considered “churches,” and thus their 403(b) plans would not be subject to nondiscrimination requirements. It is generally understood that this was intended to result in 403(b) plans of colleges and universities being subject to the nondiscrimination requirements even though church plans, so presumably a separately incorporated church-controlled or associated pre-school would instead be treated the same as an elementary school and not subject to nondiscrimination rules.
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.
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