Section 336 of the Protecting Americans from Tax Hikes (PATH) Act (S. 2029), which was passed as part of the recent budget deal signed into law by President Obama on December 18, 2015, contains a number of significant provisions affecting church plans, according to a Groom Law Group Benefits Brief.
The measure addresses each of the five issues in bills previously introduced to Congress by lawmakers, including controlled group rules, grandfathered defined benefit (DB) plans, automatic enrollment in church defined contribution (DC) plans, transfers between 403(b) and 401(a) plans, and investing in collective trusts.
Previously, the controlled group rules for tax-exempt employers may have required certain church-affiliated employers to be included in one controlled group (i.e., treated as a single employer), even though they have little relation to one another. Groom Law Group explains that the PATH Act adds further clarification in the form of a general rule that an organization that is otherwise eligible to participate in a church plan shall not be aggregated with another such organization and treated as a single employer with such other organization for a plan year beginning in a taxable year unless (i) one such organization provides (directly or indirectly) at least 80% of the operating funds for the other organization during the preceding taxable year of the recipient organization, and (ii) there is a degree of common management or supervision between the organizations such that the organization providing the operating funds is directly involved in the day-to-day operations of the other organization. There are two exceptions to this rule, explained in the Benefits Brief.
Groom notes that the legislative history of the act includes commentary that none of the new legislation is intended to have, or appears to have, any impact on the ongoing litigation against church-related hospitals over the church plan definition.NEXT: More new legislation for church plans
Changing the current provision of the Internal Revenue Code Section 415 regulations, the act provides that grandfathered defined benefit church retirement income accounts under section 403(b)(9) will be subject to the defined benefit limitations of code section 415(b), and not the defined contribution limitations of code section 415(c). This applies to years beginning before, on, or after the date of the enactment of the legislation.
According to Groom Law Group, a new Code section 414(z) has been added by the act which will permit tax-deferred transfers of all or a portion of the accrued benefit of a participant or beneficiary, whether or not vested, from a church plan that is a plan described in section 401(a) or an annuity contract described in section 403(b) (which includes 403(b)(7) custodial accounts and 403(b)(9) retirement income accounts) to an annuity contract described in section 403(b), if such plan and annuity contract are both maintained by the same church or convention or association of churches, and similarly from an annuity contract described in section 403(b) to a church plan that is a plan described in section 401(a), again if such plan and annuity contract are both maintained by the same church or convention or association of churches. The provision also permits a merger of a church plan that is a plan described in section 401(a), or an annuity contract described in section 403(b), with an annuity contract described in section 403(b), if such plan and annuity contract are both maintained by the same church or convention or association of churches.
The act provides availability of automatic enrollment for church DC retirement plans by preempting any state laws that may be inconsistent with including auto-enrollment features in church DC retirement plans.Finally, the act has added a provision that church plan investment boards may invest assets in a group trust described in Internal Revenue Service Revenue Ruling 81–100 (often called “collective trusts”), without adversely affecting the tax status of the group trust, the plan, account, investment board organization, or any other plan or trust that invests in the group trust. This provision applies to investments made after the date of enactment of the new legislation.