(b)lines Ask the Experts – Non-Discrimination Rules for Non-QCCOs

March 1, 2011 (PLANSPONSOR (b)lines) – A 501(c)(3) religious organization maintains a 403(b) plan with an employer matching contribution feature.

It is a church plan within the meaning of Code section 414(e) which has not made the election under Code section 410(d) to be subject to ERISA, but the plan sponsor does not meet the definition of “church” under Code section 4121(w)(3)(A) or “qualified church controlled organization” under Code section 3121(w)(3)(B).   

“What nondiscrimination rules would this plan be subject to?”   

David Powell, Groom Law Group, answers:    

Many plans of hospitals, colleges, universities and nursing homes fall in this category, so this situation is fairly common.  Such a plan would be a church plan, but because the plan sponsor not a “qualified church controlled organization” (often referred to as a non-qualified church controlled organization or “non-QCCO”), the exemption for churches of Code section 403(b)(1)(D) does not apply.  See Code section 403(b)(12)(B), which includes a narrow definition of church for purposes of the nondiscrimination rules.    

The universal availability rule for salary reduction contributions is applicable.    

For contributions not made by salary reduction, the nondiscrimination rules of 401(a)(4) and (5) and 410(b), the compensation limit of 401(a)(17), the minimum participation rule for defined benefit plans of 401(a)(26) (which is presumably not applicable since the 403(b) plan in question is defined contribution), and the ACP test of 401(m) for matching contributions are applicable. These are to apply in the same manner as if such plan were described in section 401(a), and for a church 401(a) plan, the one variation on these nondiscrimination requirements from plans of other plan sponsors is that Code section 410(b) does not apply to a church 401(a) plan if the plan meets the requirements of Code section 401(a)(3) as in effect prior to ERISA.  See Code section 410(c).    

The pre-ERISA 401(a)(3) rules are described in more detail in Part 4 of Rev. Rul. 69-421, but generally required that (1) seventy percent or more of all employees must be covered under the plan, or (2) seventy percent or more of all employees must be eligible to benefit under the plan, and, if so, at least 80 percent of all eligible employees must actually be covered.    

Alternatively, an employer could set up a classification of employees determined under IRS not to discriminate in favor of officers, shareholders, supervisors, or highly compensated employees.  Of course, a number of additional rules apply to those determinations, so if the non-QCCO wishes to apply the pre-ERISA 401(a)(3) coverage rules rather than the current 410(b) rules, it should do so carefully in light of the prior guidance.  In most cases, though, 401(a)(3)/410(b) seems not to be as great a concern as the 401(m) ACP test.  


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.