Practice Management
How a plan is designated as a church plan, and whether it can offer a 403(b) and what kind of plan document it can use, depends of a variety of factors.
Following is a specific scenario that serves as an interesting case study in making these determinations.
An employer calls itself a church. It holds a church service one night a week and offers a housing program for the homeless. The program also offers assistance with substance abuse as well as for ex-offenders who have become homeless after being released from incarceration. The employer offers counseling, classes, work therapy, job skills training, etc. The program also includes a social enterprise business, a thrift store, which serves as a real-life employment training opportunity for program participants. The employer also helps feed the community with a food pantry.
The church and thrift store use the same employer identification number (EIN). They have a 501(c)3 designation from the IRS listing them as a public charity, but not as a religious organization.
They have by-laws and a charter that appears to have all the proper “church” language in it (mission, doctrine, elders, etc). However, their website seems to lean more to the mission and thrift store than the church.
There are variety of questions to consider.
- Does it make a difference that the church and thrift store use the same EIN?
- Is it an issue that the employer’s website stresses the mission and thrift store more than being a church?
- Do they need to have the designation as a religious organization to have a church plan?
- Can the church and thrift store be under one plan if they have the same EIN?
- Basically, do they qualify as a church 403(b) plan?
The Determination
Under Internal Revenue Code Section 3121(w)(3)(A), a church plan under Code Section 403(b)(9) must be established by a church or convention; an 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.
Churches without a steeple may not be included in a 403(b)(9) plan document for now. They include:
1. QCCO (qualified church controlled organization), defined under Code Section 3121(w)(3)(B), for example, a church school. QCCOs are:
- not subject to ERISA (unless they elect to be);
- not subject to nondiscrimination rules; and
- primarily funded by the church (i.e., more than 25% of their income comes from the church). For instance, an organization that offers goods, services or facilities for sale, other than on an incidental basis, to the public (that, is to individuals who are not members of the church), other than goods, services or facilities which are sold at a nominal charge that is substantially less than the cost of providing such goods, services or facilities.
2. Non-QCCO (non-qualified church-controlled organization), for example, a nursing home run by the church, more than 25% of whose income comes from non-church resources. They are:
- not subject to ERISA (unless they elect to be); however,
- they are subject to nondiscrimination rules, including the universal availability rule.
This scenario appears to describe a church without a steeple; the next step is to determine if it is a QCCO or non-QCCO.
As stated, its employees cannot participate in a 403(b)(9) plan. However, some document providers do have a 403(b) for religiously affiliated organizations in lieu of a 403(b)(9).
The bottom line is that this employer can have a 403(b) since it is a 501(c)(3) org. The church needs to still determine if it is a QCCO or non-QCCO, or a part of the church (same EIN might indicate that.) There are a multitude of other factors they can consider in making this determination—for instance:
- Whether they are listed in the church directory.
- Funding.
- Whether it is merely “affiliated” with a church or denomination.
These are questions that really only their counsel can answer.
Sue Diehl is President of PenServ Plan Services.
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