Distinguishing church plans under ERISA and the Code.
Church Plans Under Title I of ERISA
Title I of ERISA imposes certain restrictions on employer-sponsored retirement plans, including reporting, disclosure and fiduciary requirements. For example, an ERISA plan must file Form 5500, Annual Return/Report of Employee Benefit Plan (With 100 or more participants), must give participants a summary plan description and must have a written plan document.
Title I applies to all retirement plans, funds or programs (including Sec. 403(b) plans and Sec. 457(a) plans), except those specifically exempted. ERISA Section 4(b)(2) exempts "church plans" from Title I. ERISA Section 3(33)(A) defines a church plan as a plan established or maintained by a church or by a convention or association of churches exempt from tax under Sec. 501.
Under ERISA Section 3 (33) (C), the definition of church plan is construed broadly to include a plan maintained by an organization controlled by or associated with a church or a convention or association of churches. ERISA provides that an organization is associated with a church or a convention or association of churches if it shares common religious bonds and convictions with that church or convention or association of churches. For example, a church-run college or hospital may fit within this definition, if supported by facts, and thus may be exempt from the reporting and fiduciary requirements of Title I.
Church Plans Under the Code
The Code has at least two different definitions relating to the term "church": A fairly broad definition of "church plan" in Sec. 414(e), and a narrower definition of "church" in Sec. 3121 (w) (3). Sec. 414(e), much like the ERISA definition, defines a church plan as a plan maintained by a church or convention or association of churches exempt from tax under Sec. 501, which covers ordained ministers and employees of organizations exempt from tax under Sec. 501 and controlled by or associated with a church; an organization is associated with a church if it shares common religious bonds and convictions with that church. A plan is not a church plan under Sec. 414(e) if it is maintained primarily for employees in connection with an unrelated trade or business. A number of letter rulings have noted that the definition of church plan includes church-run hospitals, retirement homes and other such facilities.
Sec. 3121 (w) (3) (A) applies to churches, conventions of churches, and elementary or secondary schools controlled, operated or principally supported by churches. Under Sec. 3121 (w) (3) (B), a church-controlled tax-exempt organization is qualified if the organization (1) does not offer goods, services or facilities for sale, other than on an incidental basis to the general public and other than at a nominal charge (substantially less than the cost of providing such goods, services or facilities) or (2) does riot normally receive more than 25% of its support from either governmental sources, or receipts from admissions, sales of merchandise, performance of services or furnishing of facilities, and activities related to its tax-exempt purpose.
As a general rule, a large portion of church-run hospitals' and colleges' financial support is derived from Medicare payments, tuition, fees or other sources outside the church; therefore, these organizations are not usually "church-run organizations" for purposes of Sec. 3121 (w) (3).
Sec. 403(b) Plans
The broader definition of church, from Sec. 414(e), is used in Sec. 403(b) plans for the Sec. 403(b) (9) retirement income account rules, certain tracking rules for years of service for maximum exclusion allowance purposes for ministers of churches, and special Sec. 415 limitations. The narrower definition is used for the application of the nondiscrimination rules and for certain minimum required distribution purposes.
The Tax Reform Act of 1986 added Sec. 403(b) (12), which makes many of the Sec. 401 (a) qualified plan nondiscrimination rules apply to Sec. 403 (b) plans. A plan maintained by an organization that fails to satisfy the definition of church in Sec. 3121 (w) (3) is subject to the nondiscrimination rules. Like the Sec. 401 (a) nondiscrimination rules, the Sec. 403(b) (12) rules apply on a controlled group basis (i.e., to all members of the controlled group or group under common control), although the application of ownership and control rules to church organizations is unclear.
Sec. 403(b) (12) (ii) applies to elective deferrals under a Sec. 403(b) plan. As a general rule, all employees of the employer must have the same right to make elective deferrals. Only a few types of employees can be excluded, including (1) employees normally working less than 20 hours a week, (2) collective bargaining employees (if they have bargained away the right), and (3) students working where they attend classes. The Sec. 403(b) examination guidelines state that an employer cannot exclude employees from the right to make elective deferrals under a Sec. 403(b) plan using the minimum age and service rules, because the minimum age and service requirements are not among the listed exclusions.
Thus, for example, a church-run tax-exempt hospital that gives any employee the right to make elective deferrals under a Sec. 403(b) plan must offer that right to almost all employees (including temporary employees, contract nurses, residents and other part-time employees who "normally work" more than 20 hours a week). In addition, under the controlled group rules, if the hospital owns or controls a tax-exempt clinic, the employees of the clinic would have to be given the same right.
Sec. 403(b) (12) (i) applies to nonelective contributions (i.e., contributions other than salary-reduction contributions). Nonsalary reduction contributions to a Sec. 403(b) plan must satisfy the following relevant nondiscrimination provisions: Secs. 401 (a) (4), 401 (a) (5), 401 (a) (17), 401(a)(26), 401(m) and 410(b). Thus, if a church-controlled school or hospital makes matching contributions or other employer contributions (including mandatory pretax employee contributions), those contributions must satisfy the Sec. 401 (m) actual contribution percentage test and the nondiscrimination rules on a controlled group basis. For purposes of the nonelective contributions, the employer can use most of the usual age and service exclusion rules.
The IRS has not yet issued regulations under Sec. 403 (b) (12). Instead, it has provided and extended a "good faith" period during which employers must follow the statute using a good-faith interpretation. Using any of the existing Sec. 401 (a) regulations (Sees. 401 (a) (4), 410(b), 401 (a) (26), etc.) satisfies the definition of good faith. In addition, the employer may use the three safe harbors in Notice 89-23 for: satisfying the good-faith interpretation: (1) the"maximumdisparity" safe harbor, (2) the "lesser disparity" safe harbor and (3) the "no disparity" safe harbor. Each safe harbor compares the benefits being accrued by highly compensated employees to the benefits being accrued by nonhighly compensated employees. In Ann. 9548, the Service stated that until further guidance is issued, sponsors of Sec. 403(b) plans may continue to rely on Notice 89-23 (except that they must comply with the regulations under Sec. 401 (a) (17) as of the effective date of those regulations). The Sec. 401 (m) regulations appear to apply as of the 1992 effective date.
Failing the nondiscrimination requirements is a plan defect, which can cause all amounts contributed to the plan for the year under examination to be immediately taxable. If a plan has a plan defect, the IRS can (1) collect income tax (with penalties and interest) from all employees on all amounts contributed to the plan on their behalf for all open tax years, and (2) collect penalties for failure to withhold, pay over and report employment taxes (where applicable) on those amounts from the employer.
Secs. 457(a) and 3121(w)(3)
A deferred compensation plan maintained by an organization that does not meet the definition of a church in Sec. 3121 (w) (3) is also subject to Sec. 457. Sec. 457 limits the amount of compensation that can be deferred in an eligible nonqualified deferred compensation plan. Under ERISA rules, a tax-exempt organization can offer an eligible Sec. 457(a) plan only to a select group of management or highly compensated employees. Thus, if a church-run hospital or school has a non qualified deferred compensation arrangement, it can be offered only to top people, and must meet the limits of Sec. 457(a) or be subject to a substantial risk of forfeiture under Sec. 457(f).
Sec. 401(a)(9) Distribution Rules and Sec. 3121(w)(3)
Under Sec. 401(a)(9), a plan must begin making distributions to a participant when the participant reaches the required beginning date, generally April 1 of the year after the participant attains age 70 1/2. A government or church plan can delay distributions until the participant retires, even if after age 70 1/2. However, the definition of "church" used here is the narrower Sec. 3121 (w) definition, and thus would not generally include church-run hospitals or schools.
For a church-controlled organization that maintains a Sec. 403(b) plan or a nonqualified deferred compensation plan, the determination of whether the organization is a qualified church-controlled organization is important. If the organization already pays FICA taxes on behalf of its employees because of the rules in Sec. 3121 (w), it should assume the nondiscrimination rules of Sec. 403(b) and the Sec. 457(a) or (0 rules apply, and should provide benefits accordingly.
FROM GARY Q. CVACH, CPA, J.D., LL.M., KAREN M. FIELD, J.D., WASHINGTON, D.C., AND CHRISTINE FARIS, BURLINGTON, VT.
|Printer friendly Cite/link Email Feedback|
|Publication:||The Tax Adviser|
|Date:||Jun 1, 1996|
|Previous Article:||QPRTs - determining the tax-optimal trust term.|
|Next Article:||Acquisition-related compensation not capitalized under INDOPCO.|