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Qualified Church-Controlled Organizations?


Guest Penelope
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Guest Penelope

[Also posted on 403(b) Board]

I am reviewing the 403(b) plans for two religious schools--one a Jewish high school, the other a Catholic elementary/secondary school. The Catholic school is not operated by a parish or archdiocese, nor by a religious order, but the head of the school is a sister. There is daily religious observation and instruction. The school is listed in the official Catholic Directory.

The Jewish school is not affiliated with any temple or synagogue, but it has daily morning prayers and instruction in Hebrew and Torah, observes the laws of kashrut, is headed by a rabbi and has several rabbis on its board. To be admitted, a student must be Jewish (as defined by principles of reform Judaism).

Each plan is administered by a committee appointed by the board of directors of the respective schools. I am fairly certain that both plans would be "church plans" for purposes of ERISA and Code section 414(e) as the schools are "associated" with a church or association of churches.

But....

Are these plans subject to the ACP and other discrimination requirements of 403(b)? I am having a hard time figuring out it they are qualified church-controlled organizations--it appears that the standard for this is narrower than for "association" with a church. Would these plans be retirement income accounts under 403(b)(9) or custodial accounts under 403(b) (7)? Does it matter for any reason other than investment options? Any advice about useful research sources would be greatly appreciated.

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  • 4 weeks later...
Guest Danny Miller

There is language in the legislative history to the Tax Reform Act of 1986 (and also in the Blue Book for such Act published by the Joint Committee on Taxation) that a church secondary or elementary school is treated as a qualfied church controlled organization for purposes of the 403(b) nondiscrimination and coverage rules exemption available to churches and QCCOs under section 403(b). Thus, the ACP test doesn't apply to a 403(b) plan maintained by such an organization.

403(b)(7) vs. 403(b)(9): Investments is one difference, as you mentioned. Also, in a (b)(7) all contributions (both employer and employee) are subject to distribution restrictions. Only elective deferrals (salary reduction contributions) are subject to such restrictions in a (b)(9). Also, (b)(7)s are subject to the 6% section 4973(a) excise tax on excess contributions--(b)(9)s are not subject to this excise tax.

Note that the proposed 403(b) regs will require church plans to indicate in the future (when the 403(b) regs become effective) that they are subject to (b)(9) if they want (b)(9) treatement. That's not the case now.

Resources: David Powell and I author a chapter on special church plan rules in The 403(b) Answer Book published by Panel Publishers. That book is an excellent resource for all things 403(b).

Hope this helps.

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Guest lskin

I thought the school's had to be controlled by the church to be considered under 3121(w)(3) of the code and thus not subject to testing.

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Guest Penelope
I thought the school's had to be controlled by the church to be considered under 3121(w)(3) of the code and thus not subject to testing.

Yes, I assumed that, too. Neither of my clients is "controlled" by a church--they are controlled by independt boards of directors, although they are associated with religions.

Danny, are you saying that this connection is enough for an elementary or secondary school to be "church controlled" under 3121(w)(3)? That would be good news!

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