403(b) Outlook: Church Plans

August 06, 2008

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Section 403(b) Plans for Churches and Organizations Affiliated with Churches

What is the rule? The final 403(b) regulations generally require all Section 403(b) plans be in writing, whether or not the plan is subject to ERISA. In addition, 403(b) plans of 501(c)(3) tax-exempt institutions are generally subject to specific provisions of the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act (ERISA) and related regulations. However, certain of these rules are either wholly or partly inapplicable to Section 403(b) plans sponsored by qualified church organizations ("QCOs") and organizations affiliated with churches (affiliated church organizations or "ACOs"). What follows is a brief description of the ways in which the application of the rules relating to Section 403(b) plans varies for QCOs and ACOs.

A QCO is, generally, a "steeple" church, which is defined as a religious order that carries on activities normally associated with a church. QCOs include churches, synagogues, temples, mosques and similar entities, religious conventions, associations of churches, and the K-12 schools controlled, or principally supported by, or affiliated with such organizations.

ACOs are generally IRC 501(c)(3) tax-exempt colleges, universities, hospitals, and nursing homes that are affiliated with or controlled by QCOs. An ACO is an organization that offers goods, services or facilities for sale to the general public and normally receives more than 25% of its support from either governmental sources or receipts from admissions, sales of merchandise, performance of services or furnishing of facilities other than in an unrelated trade or business. Congress carved out an exception to the definition of qualified church organizations for these church-affiliated organizations. The reasoning is that these organizations should not be given the special exemption of being a church when they are actually "open to the public", receive revenues from the public, and are not just available to their church members

What rules apply? Section 403(b) plans sponsored by QCOs are not subject to the requirements of ERISA (unless the organization affirmatively elects ERISA coverage), to the IRC nondiscrimination rules, or to FICA taxation. Qualified church organizations that sponsor an IRC section 403(b)(9) retirement income account must adopt written 403(b) plans by January 1, 2009. However, based on , it appears that the written plan requirement imposed by the final 403(b) Regulations does not apply to an IRC section 403(b) plan funded with 403(b)(1) annuity contracts and/or 403(b)(7) custodial accounts sponsored by a QCO. In other words, these organizations do not have to have a written plan (unless they elect to have the plan be subject to ERISA) unless the plan is funded with a 403(b)(9) retirement income account.

Section 403(b) plans sponsored by ACOs are not subject to the requirements of ERISA (unless the organization affirmatively elects ERISA coverage), but they are treated just like any other tax-exempt university, hospital and nursing home for purposes of the tax rules. They are subject to the IRC nondiscrimination rules and to FICA taxation. In addition, these organizations must adopt written 403(b) plans by January 1, 2009.

Effective Date: Where required, written plan documents must be adopted by January 1, 2009.

What happens if you do not have a written plan document by January 1, 2009? All plan contributions could be fully and immediately taxable to the plan’s participants.

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