Using Church Plan Status to Enhance Your Employee Benefits James T. Herod, J.D., LL.M. (Tax), CEBS...

Using Church Plan Status to Enhance Your Employee

Benefits

James T. Herod, J.D., LL.M. (Tax), CEBSGeneral Counsel & Corporate Secretary

The Pension Boards – United Church of Christ, Inc.475 Riverside Drive, Room 1020

New York, NY 10115212.729.2830

[email protected]

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Using Church Plan Status to Enhance Your Employee Benefits

• Retirement plans for ministries of the church enjoy special advantages under the Internal Revenue Code.

• Utilizing church plan status can

– Free-up budget dollars for the ministry,

– Make the plan’s design a better “fit” for the ministry,

– Streamline administration, and

– Retain more dollars for employees’ retirement.

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• Using the Pension Boards for your employee benefit programs can save you and your employees a significant amount of money

• Retirement Plans

– The Pension Boards can administer your 403(b) retirement plan and/or your deferred compensation plans (457(b) and/or 457(f) plans)

– The Pension Boards’ expense for administering your 403(b) plan is about 50 basis points (one-half of 1%) of assets under management. Investment management fees for competing plans are often 1.5% to 3% (or more) of plan assets under management.

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• Retirement Plans (cont.)

– In addition to investment management fees, competing plans often make additional charges for recordkeeping and providing informational material to plan participants. The Pension Boards does not charge extra for its recordkeeping and providing informational material to plan participants.

– Reduced fees and expenses not only saves employers money but it also enhances the investment return of plan participants.

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• Health insurance programs – The Pension Boards can provide two different types of health insurance programs for you and your employees

– Fully insured arrangements

– Self-funded arrangements

• In appropriate situations, the Pension Boards is willing to share risk with UCC-related organizations that provide a self-funded health insurance arrangement through the Pension Boards

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• Health insurance programs (cont.)

– The Pension Boards has a long-term relationship with Buck Consultants. The Pension Boards’ actuaries work with Buck Consultants’ actuaries to analyze your claims experience and to establish appropriate rates to support your self-funded health insurance plan.

– The Pension Boards, as part of a multi-denominational coalition, provides health insurance through Highmark Blue Cross Blue Shield and provides retail and mail order prescription drug services through Medco.

– By working through the multi-denominational coalition, the

Pension Boards and the other participating denominations are able to leverage their buying power and pass the favorable costs on to the church-related institutions they serve.

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• Dental Insurance

– The Pension Boards can provide dental insurance to your organization through either an insured or a self-insured arrangement

• Life and Disability Insurance Programs

– The Pension Boards can work with you and your organization to design and provide a life and/or disability program for your employees.

• Benefit programs can be “carved out” – For example, you may want only health insurance or only prescription drug coverage from the Pension Boards. The Pension Boards can accommodate “carve out” programs and provide stand alone programs for your employees.

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Cost Savings Example – Adapted From “A Look at 401(k) Plan Fees” from the U.S. Department of Labor Website

Pension Boards’ Plan

• Pension Boards’ 403(b) Account• $25,000 account balance• Participant is 35 years from retirement• Investment return over next 35 years

averages 7%• Fees and expenses (investment costs

and administrative costs) for Pension Boards’ services are about .50% (i.e., one-half of one percent or 50 basis points)

• Over the next 35 years, the $25,000 account (with no further investments) will grow to $227,000 – that amount is about 28% ($64,000) greater than the growth under the competitor’s 403(b) account

Competitor’s Plan

• Competitor’s 403(b) Account• $25,000 account balance• Participant is 35 years from retirement• Investment return over next 35 years

averages 7%• Fees and expenses (investment costs

and administrative costs) for Competitor’s services are 1.50% (i.e., 150 basis points)

• Over the next 35 years, the $25,000 account (with no further investments) will grow to $163,000 – that amount is about 28% ($64,000) less than the growth under the Pension Boards’ 403(b) account

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Types and Amounts of Plan Fees and Expenses

Pension Boards’ Plan

• There is an “all in” fee of approximately .50% (i.e., one-half of one percent or 50 basis points) for both investment management and plan administration [i.e., plan recordkeeping, accounting, legal and trustee services and for customer service, educational seminars and material, electronic access to plan information, etc.]

Competitor’s Plan

• The types of fees and expenses can vary depending on the nature of the provider and the number of people and dollars in the plan

– Plan administration fees

– Investment fees

– Individual service fees (loans, QDROs, etc.)

– Sales charges (also called “loads” or “commissions”)

– Charges for a variable annuity “wrap” around investment options such as mutual funds

• Average total plan costs range from 1.59 % (159 basis points) for plans with 25 participants to 1.07% (107 basis points) for plans with 5,000 participants [Source: HR Investment Consultants, quoted in A Primer on Plan Fees (Oct. 18, 2007), American Bankers Association, et al.]

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• A “church plan” is much more flexibility in design and operation than other types of plans

– Because a church plan is exempt from many of the federal laws and regulations with which most other private sector plans must comply.

• Church plans are not just for traditional churches. The retirement plans of service ministries associated with a religious denomination like the UCC – such as hospitals and communities that provide services to the aging, children, youth and family, and persons with developmental disabilities – may also be church plans.

• In fact, under the law, the retirement plan of a service ministry associated with the United Church of Christ is a church plan unless the plan has consciously made a written election under the Code to be subject to the federal laws from which it would otherwise be exempt.

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“Church Plan” Definition

• Before 1980, the term "church plan" was limited to a plan established and maintained by a church, a convention or association of churches – it was crucial that the entity maintaining the plan be a church.

• In 1980, the limitation on the scope of the term "church plan" as originally enacted was removed by the Multiemployer Pension Plan Amendment Act of 1980 (MEPPA).

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“Church Plan” Definition (cont.)

• Code § 414(e)(3) now provides that even if the organization maintaining a plan (for example, a church pension board or retirement committee of a church-related ministry) is not itself a church, the plan may still be treated as a church plan if

– the organization is controlled by or associated with a church, and

– the principal purpose of the organization is to fund or administer the plan or program and the plan is for the employees of a church or of a convention or association of churches.

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• An organization is “associated with a church” if it shares common religious bonds and convictions with the church or convention or association of churches. [Code § 414(e)(3)(D); PLR 200313019 (hospital organization associated with church)]

• Generally, such commonality of belief is demonstrated when members of the organization are appointed by, or are members of, the church or convention or association of churches.

– Examples include

• PLR 8734033 (committee administering plan appointed by board of religious order shares common religious bonds with order and, thus, with church)

• PLR 8326165 (common bonds existed where two of three members of retirement committee must be members of religious order)

• DOL Adv. Ops. 86-19A and 86-04A (association with church assured because order appoints and removes committee members, who are required to be members of order which is part of church)

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• It is not necessary for the individuals who administer the plan to do so on a full-time basis or for that role with the organization to be their principal activity or responsibility, provided that the organization itself has the administration of the plan as its principal purpose.

– This is normally satisfied by having the plan administered by a special committee, made up of persons who are appointed by and may be removed by the organization. [GCM 39007; PLR 199951050]

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• Code § 414(e)(3)(B)(ii) provides that the term "employee of a church or a convention or association of churches" includes "an employee of an organization, whether a civil law corporation or otherwise, which is exempt from tax under §501 and which is controlled by or associated with a church or a convention or association of churches."

– It is not necessary for the actual employer to be a church, provided that the employing organization is

• Exempt from tax under §501 and

• “Controlled by or associated with a church."

– Examples include

• GCM 39793 (employees of tax-exempt private college controlled by association of churches deemed to be employees of such association)

• PLRs 200305031 and 200313019 (employees of church-affiliated hospitals deemed church employees pursuant to Code § 414(e)(3)(B) and (C))

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• What does it mean for an organization to be “controlled by” or “associated with” a church or a convention or association of churches?

– An organization will be deemed “controlled by a church” if a majority of the officers and directors are appointed by the church's governing board or by officials of a church. Treas. Reg. § 1.414(e)-1(d)(2).

– An organization will be deemed “associated with a church” if it is shown to share common religious convictions and bonds. Treas. Reg. § 1.414(e)-1(d)(2).

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• The listing of an organization in the denomination’s year book is a significant (but not conclusive) factor indicating the sharing of common religious bonds and convictions and, therefore, “association with” the denomination

• For organizations under the auspices of the Catholic church, common religious bonds and convictions may be demonstrated by showing that the organization is listed in the Official Catholic Directory.

– Many religious denominations, including the United Church of Christ, publish similar directories.

– See, e.g., PLRs 8734033, 8606038, 8326165, and 8919066. See also GCM 39007; DOL Adv. Ops. 86-19A and 86-04A.

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Significance of Listing in a Denomination’s Year Book (cont.)

• The IRS Chief Counsel's Office has noted that different religions grant different levels of autonomy to their constituent organizations [GCM 39832 (10/12/90), underlying PLR 9038057].

– Although an entity's listing in an annual directory of churches signifies a strong association, that listing alone, without further showing of affiliation or association, will not support a conclusion that the entity is associated with the convention or association of churches under §414(e).

– Rather, the statutory test for association is based on the facts and circumstances of each case [PLR 8606038].

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Significance of Listing in a Denomination’s Year Book (cont.)

• Examples of where listing in the denomination’s official directory was found to be significant include

– PLR 8734033 (where organization establishing plan and all participating employers were listed in official directories, all employees should be treated as employees of church)

– PLRs 200236046 and 200236048 (plans maintained by church-controlled §501(c)(3) charities listed in official church directories qualified as church plans)

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• The IRS concluded (in PLR 9645007) that

– The required associational nexus can be found in the institutional connections between the church and the organizations that maintain the church plans, and includes the existence of common religious beliefs, and

– A proposed restructuring of these supporting organizations (done in connection with registration of the funds under the 1940 Investment Company Act) will not alter this associational nexus (and also will not subject the plan to Code § 501(m), relating to the provision of commercial-type insurance).

• A church or convention or association of churches will be treated as the employer of an individual who is employed by a tax-exempt organization that is controlled by or associated with such church.

• The Pension Boards may maintain a plan covering employees of a CHHSM organization since CHSSM organizations are associated with the UCC.

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• There are two bases upon which a plan may be considered as a church plan:

(1) If the plan is established and maintained for its employees (or their beneficiaries) by a church or by a convention or association of churches that is tax-exempt under §501.

(2) If the plan covers persons who may be deemed employees of a church, or a convention or association of churches, because the plan is maintained by an organization that is controlled by or associated with a church or convention or association of churches and that has as its principal function the administration of retirement or welfare benefits to church employees.

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• Convention or Association of Churches

– The phrase "convention or association of churches" is not defined in the Code or regulations. The IRS has interpreted the phrase "convention of churches" to be a statewide, regional or national group of churches of the same denomination that engages in cooperative efforts. An example would be a UCC Conference. [PLR 8309092]

– An "association of churches" has been described as a group of churches organized on less than a statewide level. An example would be a UCC Association. [PLR 830902]

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• Convention or Association of Churches (cont.)

– The IRS has ruled that an organization was qualified as an association of churches even though it was comprised of churches of different denominations.

• Rev. Rul. 74-224, 1974-1 C.B. 61 (membership comprised of Catholic and Protestant churches of various denominations; governing board consisted of two voting members from each church). See also PLR 200235032.

– The IRS also seems to have taken a less restrictive view where groups of churches operate hospitals and nursing homes.

• PLR 199904041 (hospital controlled by two different churches was

controlled by association of churches) • PLR 9853053 (preschool and homes for aged controlled by two

different churches were controlled by association of churches).

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• The term "church plan" does not include:

– A plan that is established and maintained primarily for the benefit of employees (or their beneficiaries) of such church who are employed in connection with one or more unrelated trades or businesses within the meaning of Code § 513; or

– A plan whose participants are not substantially comprised of employees defined in Code § 414(e)(1) or (e)(3)(B).

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• The term “employees" generally includes:

– Ministers, regardless of the source of their compensation;

– Employees of a tax-exempt organization controlled by or associated with a church; or

– Employees (1) who have separated from service and whose account balance or accrued benefit remains in the plan, or (2) on whose behalf contributions are made for a period of up to five years after separation.

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• It can be very advantageous for your retirement plan to be a church plan. Reasons why include:

– A church defined benefit retirement plan is not subject to the Pension Benefit Guaranty Corporation (“PBGC”) requirements and is not required to pay PBGC premiums.

– A church plan is not subject to many of the complex federal laws

that govern most private sector retirement plans. For example, a church plan is not subject to federal law requirements relating to:

• Joint and survivor annuities, • Mergers and transfers of assets and liabilities, • Commencement of benefits, • Reductions in benefits due to Social Security increases, and • Forfeiture of mandatory contributions.

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• Even more importantly, church plans are not subject to the reporting, disclosure, participation, vesting and funding requirements imposed on most private sector retirement plans by the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).

• For example, a church plan is not required to:

– File Form 5500s with the government, or

– Develop and distribute to plan participants:• Summary plan descriptions (“SPDs”), • Summaries of material modifications (“SMMs”), or

• Summary annual reports (“SARs”)

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Nondiscrimination Testing Exemptions

• Some church plans are also exempt from the nondiscrimination testing requirements for retirement plans found in the Internal Revenue Code.

• Only church 403(b) plans maintained by employers that are not classified as a Church or a Qualified Church-Controlled Organization (QCCO) are subject to the nondiscrimination testing requirements of the Code.

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Nondiscrimination Testing Exemptions (cont.)

• The determination of an entity’s status as a Church or a QCCO is a critical determination.

– Code section 3121(w)(3)(A) defines the term “church” to mean “… a church, a convention or association of churches, or an elementary or secondary school which is controlled, operated, or principally supported by a church or by a convention or association of churches.” Thus, 403(b) plans maintained by an entity traditionally viewed as a church, and elementary and secondary schools controlled, operated or principally supported by such an entity, are not subject to the nondiscrimination testing requirements of the Code.

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• Status as a Church or a QCCO (cont.)

– Code section 3121(w)(3)(B) defines the term “qualified church-controlled organization” to mean “any church-controlled tax-exempt organization described in section 501(c)(3), other than an organization which

• Offers goods, services, or facilities for sale, other than on an incidental basis, to the general public, other than goods, services, or facilities which are sold at a nominal charge which is substantially less than the cost of providing such goods, services, or facilities; and

• Normally receives more than 25 percent of its support from either

– Governmental sources, or

– Receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities, in activities which are not unrelated trades or businesses, or both.”

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• Generally, a 403(b) plan is subject to the nondiscrimination testing requirements of the Code if the entity maintaining the plan receives more than 25% of its support from fees or receipts resulting from the sale of goods, services or facilities to the general public or from a governmental source.

• Many UCC-related CHHSM organizations such as hospitals,

educational institutions and communities that provide services to the aging, children, youth and family, and persons with developmental disabilities cannot meet the QCCO definition (because they receive more than 25% of their support from fees or governmental sources), and, therefore, the 403(b) plans of those organizations are subject to the nondiscrimination testing requirements of the Code.

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Church Plan Failures and Corrections

• A plan that fails any of the church plan requirements may correct that failure and be deemed to meet the requirements for the year of the correction and for all prior years if the correction is made by the latest of the following dates:

– The period ending 270 days after the date the Secretary of the Treasury mails a notice of default with respect to the plan's failure to meet the requirements.

– Any period set by a court of competent jurisdiction after rendering a final determination that the plan fails to meet the requirements. If the court fails to specify the period, such period shall be any reasonable time set by the Secretary of the Treasury, not to be less than 270 days from the date the determination becomes final.

– Any additional period deemed reasonable and necessary by the Secretary of the Treasury for correcting the default. A plan that does not correct deficiencies within the appropriate correction period will be deemed to have failed the church plan requirements beginning with the date on which the earliest failure to meet any requirement occurred. Once a plan has failed to meet the church plan requirements, and has not corrected any failure within the remedial period, it cannot thereafter become a church plan.

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Electing to Give Up Church Plan Status

• The sponsor of a church plan can choose to be subject to the same laws with which non-church plans must comply if the church plan sponsor is willing to forever forego the benefits afforded church plans under federal law.

– Code § 410(d) and 26 C.F.R. § 1.410(d)-1 provide a process for a church plan sponsor to elect to have the rules that are applicable to non-church plans be applicable to the sponsor’s church plan.

• A very specific election process must be followed and the election, once made, is irrevocable.

• It is unclear whether such an election may be made with respect to a church health or welfare plan, but at least one court has ruled that an election for a church health or welfare plan may be made.

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Electing to Give Up Church Plan Status (cont.)

If the sponsor of a church plan has not made the statutory election to be treated as a non-church plan, then the plan is a church plan regardless of how the sponsor treats the plan.

For example, simply filing Form 5500s for a church plan does not cause the plan to lose its church plan status

Loss of church plan status can be achieved only by making a Code § 410(d) election in accordance with the Code and the IRS regulations.

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• The church plan exemptions in the Code and ERISA are also applicable to church health plans and most church welfare plans.

– For example, church health plans are not required to

• File Form 5500s with the government. or

• Provide summary plan descriptions (“SPDs”), summaries of material modifications (“SMMs”), or summary annual reports (“SARs”) to health plan participants.

• Also, church health plans are not subject to federal law health

continuation coverage requirements (often called “COBRA”).

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Legal Basis for Church Plan Status

• Church plans sound too good to be true because of the potential cost savings and flexibility they offer, but they are solidly grounded in federal law.

– Code § 414(e)(1) defines “church plan” as a plan established and maintained for its employees (or their beneficiaries) by a church or by a convention or association of churches which is exempt from tax under Code § 501.

– The church plan definition is given expansive application by Code

section 414(e)(3)(B)(ii) which provides that the term “employee of a church or a convention or association of churches” shall include “an employee of an organization, whether a civil law corporation or otherwise,

• “Which is exempt from tax under Code § 501, and

• “Which is controlled by or associated with a church or a convention or association of churches.”

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Legal Basis for Church Plan Status (cont.)

– The expansive definition means that church plans are not limited to traditional church entities, but include all entities controlled by or associated with a religious denomination such as the UCC.

– Therefore, UCC-related hospitals, educational institutions

and communities that provide services to the aging, children, youth and family, and persons with developmental disabilities may sponsor church plans.

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Legal Basis for Church Plan Status (cont.)

– Substantially similar provisions are found in Section 3(33) of ERISA. In addition,

• ERISA § 4(b)(2) exempts church plans from most ERISA requirements.

• ERISA § 4021(b)(3) provides that the PBGC’s insurance provisions for defined benefit plans are not applicable to church plans.

– IRS regulations concerning church plans may be found at 26 C.F.R. § 1.414(e)-1.

– In addition to the Code, ERISA and regulatory provisions cited in the preceding paragraphs, there are many IRS rulings, U.S. Department of Labor rulings, PBGC rulings and court decisions that recognize church plan status under federal law.

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Church 403(b) Plans

• A Code § 403(b) plan may be a church plan if it also meets the definition of Code section 414(e). Generally, church § 403(b) plans come within the definition of a "retirement income account" described in § 403(b)(9).

• Section 403(b)(9) defines a retirement income account to mean a defined contribution program

– Established or maintained by a church, a convention or an association of churches, including an organization described in § 414(e)(3)(A),

– To provide benefits under § 403(b) to an employee of an employer described in § 501(c)(3) or a minister described in § 414(e)(5)(A).

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Church 403(b) Plans

• Unlike other Code § 403(b) plans, retirement income accounts under section 403(b)(9) need not be invested exclusively in annuity contracts or mutual funds held in a custodial account.

– The assets of the accounts may be commingled in a common fund made up of such accounts, and the part of the common fund which equitably belongs to any account must be separately accounted for

• It must be possible at all times to determine the account's interest in the fund, and

• The assets cannot be used for, or directed to, any purposes other than the exclusive benefit of such employees and beneficiaries.

– If these requirements are met, the assets of the § 403(b)(9) account may be commingled with tax-qualified plan assets without adversely affecting the status of the account or the qualification of the plan.

• Church § 403(b) plans have certain special contribution limits and rules intended to increase the amount that may be contributed under the limit on annual additions under § 415(c).

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IRS Issues Final 403(b) Regulations

• In July 2007, the IRS finalized 403(b) regulations that were proposed almost three years earlier.

• The 403(b) regulations govern the taxability and operation of retirement plans subject to Code section 403(b).

• Many non-profit organizations and churches, including the United Church of Christ and UCC-related ministries that are CHHSM members, sponsor and maintain 403(b) plans for their employees.

• It is very important for CHHSM members that sponsor 403(b) plans

to be aware of and fully comply with the final 403(b) regulations so that their retirement plans may continue to experience tax-favored treatment.

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Highlights of the final 403(b) regulations include:

• Written Plan Requirement – For the first time, there is a tax law requirement that a 403(b) plan have a written plan document and that the plan be operated in accordance with that document.

– The written plan document must include all material provisions, including eligibility, benefits, limitations, investments available under the plan and distributions.

– The plan document must allocate responsibilities between the employer, the service providers and the participants. Other documents (such as annuity contracts) may be incorporated into the document by reference.

– The plan document for a church retirement income account under Code

section 403(b)(9) must state the intent to constitute a retirement income account.

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Highlights of the final 403(b) regulations include:

Exclusive Benefit Requirement –

All 403(b) plans, including church retirement income accounts, are subject to the exclusive benefit rule.

The exclusive benefit rule provides that assets held in the account cannot be used for, or diverted to, purposes other than for the exclusive benefit of plan participants or their beneficiaries. Assets are treated as diverted to the employer if the employer borrows assets from the account.

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Highlights from Final 403(b) Regulations (Cont.)

• Nondiscrimination Rules – For 403(b) plan sponsors that are subject to nondiscrimination rules, the final regulations make clear that nondiscrimination rules similar to those governing profit-sharing plans are applicable except for elective deferrals which are governed by the universal availability requirement, discussed below.

• While churches are generally exempt, the nondiscrimination rules

apply to many church-related ministries.

– For example, a UCC-related ministry that sponsors a 403(b) plan is subject to the nondiscrimination rules if the ministry offers goods, services, or facilities for sale, other than on an incidental basis, to the general public and normally receives more than 25 percent of its support from either (i) governmental sources, or (ii) receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities, or both.

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• Universal Availability – Elective deferrals are not subject to nondiscrimination rules if the right to make elective deferrals of at least $200 per year is effectively available to all employees.

– The final regulations permit geographically and functionally

distinct units to apply the universal availability requirement separately.

• The employer may exclude certain types of employees (e.g.,

employees who normally work fewer than 20 hours per week; non-resident alien employees) from the 403(b) plan in determining whether the universal availability requirement is met.

– To meet the universal availability requirement, the employer

must annually notify all eligible employees of the right to make elective deferrals under the 403(b) plan.

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• Controlled Group Rules – The final regulations issued at the same time as the final 403(b) regulations introduce, for the first time, controlled-group rules for tax-exempt entities. The ability to control 80% or more of the board of directors or trustees of a tax-exempt entity will result in the application of the controlled-group rules.

• In-service Transfers – In-service transfers (formerly governed by Revenue Ruling 90-24) will continue to be allowed only if there is a written agreement between the employer and the vendor that permits the sharing of employee information so that the eligibility and distribution rules of the plan may be followed.

• Catch-up Coordination – Some 403(b) plan participants are eligible for two separate catch-up contributions and the final regulations address the coordination of those catch-up provisions. The final regulations specify that the special 15-years of service catch-up (which is available to the UCC and to certain UCC-related ministries) must be applied before the age 50 catch-up is applied.

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• Plan Termination – A 403(b) plan may terminate if certain rules similar to the 401(k) successor rules are followed. Before the final 403(b) regulations, there were questions with respect to whether and how a 403(b) plan could terminate.

• Effective Date – The final regulations are generally applicable for plan years beginning after December 31, 2008 (i.e., January 1, 2009 for most 403(b) plans), however, the new rules for in-service transfers apply to transfers occurring after September 24, 2007. 403(b) plan sponsors may operate under the final regulations before the effective date if the final rules are applied on a consistent and reasonable basis.

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Exemptions from Securities Laws

• Church plans and the investment pools maintained by church benefit programs in connection with such plans are exempt from federal and state securities laws.

• Church plans utilizing these securities laws exemptions are required to inform plan participants that they will not be afforded the protection of the securities laws. This notice is to be given to new participants as soon as practicable after beginning participation and to all participants annually.

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Health and Welfare Plans

• Church health care plans are exempt from Code provisions imposing an excise tax upon failure to provide continuation coverage under a group health plan under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA). [Code § 4980B(d)(2),(3)]

• Many states have continuation coverage rules similar to COBRA under their insurance laws, and many such provisions do not exempt employers with fewer than 20 employees as under the federal provision, so that medical insurance contracts purchased by churches may nevertheless include such provisions.

• Many church plans voluntarily follow the federal or state COBRA rules.

• The Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA) also imposes continuation coverage requirements for participants serving in the uniformed services. USERRA does not exempt church plans from its rules.

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Church Plan Parity and Entanglement Prevention Act of 1999 • Whether a denominational church welfare plan is a single-employer plan or a multiple

employer welfare arrangement (“MEWA”) is unclear. MEWAs are often subject to onerous state law requirements. To address this issue, Congress enacted the Church Plan Parity and Entanglement Prevention Act of 1999.

• A church plan that is a welfare plan is deemed to be a plan sponsored by a single employer that reimburses costs from general church assets or purchases insurance coverage with general church assets, or both.

– Such church plans would not be treated as MEWAs.

– Such church plans are also exempt from state licensing, solvency and insolvency requirements.

• The exemption does not extend to insurers doing business with the church plan.

• In addition, the act provides that for purposes of enforcing provisions of state insurance laws that apply to a church welfare plan, the plan will be subject to state enforcement as if the church plan were an insurer licensed by the state.

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Church Group Term Life Insurance

• Church group term life insurance plans are not subject to the nondiscrimination requirements of Code § 79(d).

• For purposes of this exemption, a plan is a church plan if it meets the requirements of Code § 414(e) but excludes employees of certain church-related universities and colleges, hospitals and medical nonprofit organizations.

• For this purpose and for purposes of treatment as life insurance for the purpose of the death benefit exclusion of Code § 101, self-funded church death benefit plans are treated as life insurance. The provision of such a death benefit under a church plan does not, however, cause the sponsor to be taxed as an insurance company.

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Reporting and Disclosure Requirements

• Qualified § 401(a) and § 403(b) church plans are subject to certain withholding, deposit, and information reporting requirements. For example, these plans must

– Report lump sum or total distributions to participants on Form 1099-R

– Make periodic deposits of withheld taxes using federal tax

deposit coupons (Form 8109) or electronically through the Electronic Federal Tax Payment System (EFTPS)

– Annually report non-payroll taxes on Form 945

• Church plans must indicate on Form W-2 whether an employee was an active participant in a pension plan for the calendar year being reported.

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Reporting and Disclosure Requirements (Cont.)

• Church plans are exempt from the reporting and disclosure requirements of ERISA and, therefore, are not required to

– To file Form 5500 or other reports specified in ERISA to be filed

with the U.S. Department of Labor, or

– To distribute to participants, summary plan descriptions, summary annual reports or any other reports to plan participants

• Church plans are exempt from PBGC reporting requirements and are not required to file PBGC Form 10 or any other reports with the agency.

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• Church plans are not generally subject to the participant disclosure requirements under ERISA.

• For example, church plans are not required to furnish participants with summary plan descriptions, although many church plans do so voluntarily (but they do not include the ERISA required legal provisions that include advising the plan participants of their right to sue the plan administrator).

• A §401(a) church plan must be communicated to employees in order to be qualified.

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• Church plans that are §401(a) or § 403(b) plans must provide plan participants or beneficiaries who receive certain plan distributions with notice of their right to elect not to have federal income tax withheld.

• Church plans must also provide recipients of certain distributions with

rollover eligibility information.

• If such notices are not provided, the church plan administrator may be subject to a penalty of $100 for each such failure, up to a maximum $50,000 in a calendar year.

• Church plans must provide copies of Form 1099-R to persons receiving

distributions.

• Dependent care reimbursement plans also have certain notice requirements imposed by the Code that do not provide exemptions for church plans.

Using Church Plan Status to Enhance Your Employee Benefits James T. Herod, J.D., LL.M. (Tax), CEBS...

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