Have you checked your church plan status lately?
Why does it matter?
While changes in church plan status don’t happen often, it is extremely important for you to be confident that your employer continues to be eligible to sponsor a church plan. It’s possible that your employer’s organizational structure or ties with a particular church or denomination may change over time.
If your organization is no longer eligible to sponsor a church plan, your retirement plans and insurance plans will become subject to the requirements of the Employee Retirement Income Security Act (ERISA). For instance, ERISA requires detailed reporting to the Department of Labor (DOL) and specific disclosures to participants. If these requirements are not satisfied, steep fines and sanctions may be imposed. So, it’s good to know if your plan is a legitimate church plan that continues to be exempt from ERISA.
Your plan type is important to GuideStone because it defines our recordkeeping requirements.
For instance, participants in plans subject to ERISA are ineligible to invest in non-registered mutual funds. If the correct recordkeeping is not in place and participants invest in non-registered mutual funds, complicated issues could arise during required filings. Additionally annuities cannot be offered through GuideStone for plans subject to ERISA. If you have an ERISA plan and your employees establish annuities through GuideStone, you will be out of compliance and could become subject to fines.
Moreover, your deferred compensation plan (such as your 457(b) or 409A plan) will be impacted. Participating in a non-qualified plan kept as a church plan, when the plan should have been subject to ERISA, could have adverse tax consequences for participants.
What are the general rules regarding eligibility to offer a church plan?
Code section 414(e)(1) defines a 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 section 501.” This code section sets forth two basic requirements a plan must satisfy to be considered a church plan:
- A church plan must be established and maintained by a church or a convention or association of churches which is tax-exempt.
- A church plan must be primarily for the benefit of employees of a church or a convention or association of churches.
However, under code section 414(e)(3) there are two additional special rules important for this distinction:
- A plan can be deemed to satisfy the “established and maintained by a church” requirement if it is “maintained by an organization … the principal purpose or function of which is the administration of a plan or program for the provision of retirement benefits … for employees of a church or a convention or association of churches.” GuideStone is such an organization; a plan committee may also fit this definition.
- Additionally, an employee can be deemed to be an employee of a church or a convention or association of churches for purposes of the “must be primarily for church employees” requirement if he or she is “ … an employee of an organization … which is exempt from tax … and which is controlled by or associated with a church or a convention or association of churches …”
In the above special rules, what does “controlled by” or “associated with” mean?
The regulations under 414(e) provide that “ … an organization, a majority of whose officers or directors are appointed by a church’s governing board or by officials of a church … ” is an example of an organization that is controlled by a church.
The code and regulations provide that “[a]n organization is associated with a church if it shares common religious bonds and convictions with that church.” The IRS has provided guidance on what it means to share common religious bonds and convictions; for examples see Letter Rulings 8824049 and 200042028 and General Counsel Memoranda 39832 and 39001.
However, there is no objective definition of the meaning of “associated with.” This determination depends upon the particular facts and circumstances involved, with no particular fact or circumstance viewed as being controlling. For example, various rulings have held that “associated with” status may be shown by:
- Sharing in strongly held religious tenets and doctrine
- The presence of a chapel where services are conducted
- An organization operated under church principles
- Articles of incorporation and bylaws which require the organization to incorporate in its policies and practices the moral teachings of the church
- Being listed in a particular directory as associated with the church. The IRS recognizes some organizations in some cases; see Letter Ruling 8824049; GCM 39832 (Oct. 12, 1990); GCM 39007 (July 1, 1983).
There is a common misperception that, if an organization’s board is not controlled by a church or a convention or association of churches, the organization cannot offer a church plan. That is not true. As indicated above, employers that share strongly held religious tenets and doctrine can be viewed as “associated with” and thereby be eligible to sponsor a church plan, regardless of whether their board is controlled by a church or convention.
However, making the determination of “associated with” is very fact-intensive, and it is critical to the operation of your retirement plan(s) that you get it right. If there’s any question, you should always consult with your benefit adviser about the church plan rules and how they apply to your particular circumstances.
What can we do now?
Review the requirements for church plan status to ensure that you still qualify. You may also want to periodically review your ability to offer a church plan with your benefit adviser. GuideStone would be happy to share information with you and your benefit adviser based on our experience with church plans.
If your status appears to be changing, notify GuideStone immediately. Making a prospective change, if necessary, is a much smoother process than requesting a retroactive change. Retroactive changes present many significant challenges, making it practically impossible to retain a plan’s church plan status for years prior to when the plan ceased to be a church plan.