ERISA and the Tax Code provide for special treatment of benefit plans maintained by churches. Church plans are generally exempt from ERISA and from some provisions of the Tax Code applicable to qualified retirement plans.
ERISA and Code Section 414(e) Definition of Church Plan
ERISA Section 3(33) 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 Code Section 501. The Code definition applicable to qualified plans, found at Code Section 414(e), is essentially identical.
What Constitutes a Church
According to Internal Revenue Manual 18.104.22.168.4(4), the IRS considers all the facts and circumstances in determining whether an organization is a church, including whether the organization has the following characteristics:
- a distinct legal existence
- a recognized creed and form of worship
- a definite and distinct ecclesiastical government
- a formal code of doctrine and discipline
- a distinct religious history
- a membership not associated with any other church or denomination
- a complete organization of ordained ministers ministering to their congregations
- ordained ministers selected after completing prescribed courses of study
- a literature of its own
- established places of worship
- regular congregations
- regular religious services
- Sunday schools for religious instruction of the young
- schools for the preparation of its ministers
Religious Orders and Organizations
According to Treas. Reg. 1.414(e)-1(e), the term "church" also includes a religious order or a religious organization if such order or organization:
- is an integral part of a church, and
- is engaged in carrying out the functions of a church, whether as a civil law corporation or otherwise.
Church Retirement Organizations
A church plan includes a plan maintained by an organization, whether a civil law corporation or otherwise, if:
- the principal purpose or function of the organization is the administration or funding of a retirement or welfare benefits plan for the employees of a church or a convention or association of churches, and
- such organization is controlled by or associated with a church or a convention or association of churches.
FICA Definition of Church
A narrower definition of church and church-controlled organizations applies for certain Tax Code purposes. This definition is found in the FICA tax provisions.
For purposes of the FICA defintion, the term “church” means 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.
For purposes of the FICA defintion, the term “qualified church-controlled organization” means 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.
What Constitutes an Employee of a Church
The term employee of a church or a convention or association of churches includes:
- a duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry, regardless of the source of his compensation;
- an employee of an organization which is tax-exempt under Code Section 501 and which is controlled by or associated with a church or a convention or association of churches; and
- a former employee of a church on whose behalf contributions are received by a plan for up to 5 years after the employee’s separation from such service (but only if tthe employee is not disabled at separation from service).
Employees of Church Controlled Organizations
As noted in item number 2 above, employees of tax-exempt organizations (e.g., schools, hospitals, charities, etc.) that are controlled by churches are considered church employees. These employees may participate in a church plan. Note, however, that if a tax-exempt organization controlled by a church wishes to sponsor a church plan itself, it will not be considered a church plan unless its plans are operated through a church retirement organization (discussed above).
A duly ordained, commissioned, or licensed minister of a church is a employee of a church (for church plan eligibility purposes) if, in connection with the exercise of their ministry, the minister:
- is a self-employed individual (within the meaning of Code section 401 (c)(1)(B)), or
- is employed by a non-tax-exempt organization and with respect to which the minister shares common religious bonds.
What Is Not a Church Plan
A plan is not a church plan:
- if it is established and maintained primarily for the benefit of employees of one or more "unrelated trades or businesses" (within the meaning of Code section 513); or
- if less than substantially all of the individuals included in the plan are employees of a church (or their beneficiaries).
Waiving Church Plan Status
A church plan may permanently waive its status by filing an appropriate statement with the IRS and (if a pension plan) the PBGC. Few church plans have so elected. ERISA preemption and PBGC insurance are among the few advantages of such an election.
A plan, other than a plan in existence on September 2, 1974, is established primarily for the benefit of employees (or their beneficiaries) who are not employed in connection with one or more unrelated trades or businesses if on the date the plan is established the number of employees employed in connection with the unrelated trades or businesses eligible to participate in the plan is less than 50 percent of the total number of employees of the church eligible to participate in the plan.
If a plan was in existence on September 2, 1974, it is a church plan if it meets grandfathering requirements described in Treas. Reg. Section 1.414(e)-1 (b)(2)(B).
Church plans are exempt from ERISA unless they affirmatively elect to be covered by ERISA.
ERISA Section 4 exempts church plans (as defined by ERISA) from ERISA Title I, which contains all of ERISA's core reporting and disclosure, participating and vesting, funding, fiduciary, and enforcement provisons, as well as COBRA and HIPAA requirements.
ERISA Section 4021 exempts church plans (as defined by the Tax Code) from ERISA Title IV, which requires defined benefit plans to pay insurance premiums to the PBGC and abide by its regulations.
Tax Code Exemptions
Unlike ERISA, the Tax Code does not comprehensively exempt plans for the employees of churches and church-controlled organizations from its requirements. Nonetheless, most church plans enjoy a favored position under the Tax Code.
Generally, all the requirements of Code Section 401(a) apply to the qualified plans that are church plans unless they are explicitly exempted.
Minimum Participation Standards
The Minimum Participation Standards of Code Section 410 do not apply to church plans. Church plans are not exempt from other nondiscrimation rules, however, including those of Code Section 401(a), those that apply to 401(k) plans, etc.
Church plans are exempt from ERISA's Vesting requirements. However, the Tax Code vesting provisions that existed before the enactment of ERISA in 1974 still apply to church plans.
Generally, these provisions provide that benefits must vest 100% at normal retirement age or plan termination.
Modified Section 415 Limits
The limits of Code Section 415 generally apply to church plans, but the 100% of compensation benefit limit for defined benefit plans does not apply to church plans that are sposnored by churches within the meaning of the FICA definition of church (but not church-controlled organizations).
Defined benefit church plans are exempt from the minimum funding standards of Code Section 412. Many church pension plans are funded on a pay-as-you-go basis. This is acceptable so long as sufficient assets are available to pay current benefits.
403(b) Plans sponsored by churches generally must meet all the requirements applicable to other 403(b) plans. However, most church 403(b) plans are retirement income accounts under Code Section 403(b)(9). Retirement income accounts are not subject to many of the investment restrictions that apply to other 403(b) plans.
Alternative contribution limitation
A church 403(b) plan may accept contributions for a church employee that exceed the annual Code Section 415 limits by up to $10,000 per year, as long as the excess for all years does not exceed $40,000.
Nonqualified plans sponsored by churches and church controlled organizations (within the FICA definition of these terms) are not subject to Code Section 457 -- therefore, these organizations do not need to create 457 Plans. Tax-exempt church organizations that do not fall within the FICA definitions must create 457 plans that comply with all the normal rules.
409A (Nonqualified Deferred Compensation)
Church plans are not exempt from the requirements of 409A. This may create problems for nonqualified church plans.
Correction of Church Plan Failures
If a plan fails to qualify as a church plan, it must correct the errow within a correction period which is the latest of:
- the period, ending 270 days after the date of mailing by the IRS of a notice of default with respect to the plan’s failure to meet one or more church plan requirements;
- any period set by a court of competent jurisdiction after a final determination that the plan fails to meet such requirements, or, if the court does not specify such period, any reasonable period determined by the IRS on the basis of all the facts and circumstances, but in any event not less than 270 days after the determination has become final; or
- any additional period which the IRS determines is reasonable or necessary for the correction of the default.
Once a church plan fails to qualify as a church plan at any time and does not timely correct the failure, it is permanently barred from qualifying again as a church plan. See Treas. Reg. 1.414(e)-1(a).
Church Welfare Plans
Because church plans are exempt from ERISA, they do not have comply with ERISA's requirement regarding welfare plans, including the filing of Form 5500.
Church medical plans are exempt from COBRA but not state laws that may have COBRA-like requirements.
Church medical plans are not exempt from the Tax Code provisions of HIPAA. HIPAA does contain reduced penalty provisions for church plans.
Group Life Insurance
The nondiscrimination provisions of Code Section 79 do not apply to church life insurance plans.
Educational Assistance Plans and Adoption Plans
- Church Plan Regulations
- Rev Proc 2011-44 (special procedures for applying for ruling on church plan status)
Rulings on Status
- EBSA Advisory Opinion 1992-09A
- EBSA Advisory Opinion 1994-06A
- EBSA Advisory Opinion 1995-12A
- EBSA Advisory Opinion 1995-30A
- EBSA Advisory Opinion 1996-11A
- EBSA Advisory Opinion 1996-19A
- EBSA Advisory Opinion 1996-24A
- EBSA Advisory Opinion 1997-09A
- EBSA Advisory Opinion 2000-02A
- EBSA Advisory Opinion 2000-05A
See also PLR 201233027.