Jump to content

Church Plan - Is this allowable


Santo Gold
 Share

Recommended Posts

We are looking at a larger Church plan (300+ employees) that elects not to be subject to ERISA.  There are several HCEs.  They have followed mainly vanilla plan provisions but are looking to make some changes starting in 2019.  Do these changes sound permissible?

For individuals hired 1/1/19 or later, they want to have a 3 year cliff vesting schedule apply annually to that year's contribution.  So that if you are eligible to receive an ER contribution for 2019 plan year and have 1 YOS in 2019, you do not vest in that contribution until 2021. If eligible for contribution in 2020, you do not vest until 2022, and so on.  Since this is non-ERISA, that seems to be acceptable for this type of plan.

However, because it might be messy for the recordkeeper to track money in this manner, the ER was not going to deposit the money into the plan until they actually vest in it.  The ER would keep those contributions in a non-plan ER account.  So, from the above example, for those affected individuals, their 2019 ER contribution would be deposited into their accounts in 2021, 2020 ER contributions deposited in 2022....  If someone from 2019 leaves in 2020, their contributions never vested so that year's $$$ can stay with the ER or go to another year's contribution.

Writing the language in the plan document would be a challenge, but assuming that can be done, is this allowed?  Are there any 410(b)-type tests that have to be done since there are HCEs?  Its not subject to ERISA so maybe not?

Any comments are really appreciates.  

Link to comment
Share on other sites

It's been so long, but while I know that after ERISA class-year vesting was permitted by Section 411 itself (until the 1986 TRA), you'll have to make sure it was permitted under pre-ERISA interpretations of 401(a).  I just don't remember.

The deferred deposit idea I am not sure about either.  Does it violate the definite allocation requirement?  What about 401(a)(4) issues?  Also, 415 applies so do you run a risk of having a problem if you bunch three years' worth of annual additions into a single year?  Just spit-balling here.  

 

Link to comment
Share on other sites

Not my area of expertise either but some thoughts:

1) Like jpod I think you need to look beyond ERISA to the IRC.

2) You might want to look to state law or contract law.  For example this holding the cash until they vests means the benefits could be subject to creditor claims if the organization declares bankruptcy.   But such a thing could cause the plan to be terminated and everyone becomes 100% vested.  How does this conflict get resolved?  

 

Link to comment
Share on other sites

If this church is part of a national church organization, also look to see if there are any national standards.

I think class-year vesting would be permissible, but NOT advisable.  Many ways to mis-communicate it, mis-understand it, and mis-administer it.  Why bother?  (This is not a rhetorical question.  I advise the sponsoring organization have  clearly defined goal(s) here.)

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

Link to comment
Share on other sites

FYI, The BNA portfolio on church and governmental plans has a nice summary of the pre-ERISA vesting and nondiscrimination requirements that apply to church plans. 

Even that type of vesting rule is permissible, I agree with David that it seems to increase the risk of administrative or other errors. I also question whether you will find a recordkeeper who can accommodate it.  In my anecdotal experience, church plans sometimes end up following rules that are the same as or similar to those that apply to ERISA plans, simply because that is what vendors can accommodate. 

Link to comment
Share on other sites

You would, of course, absolutely, positively want to obtain a determination letter for the plan.  Even so, I would discourage your client from adopting a plan design which, in my experience, is unique.  The contribution, forfeiture, and vesting requirements are in place do not seem to contemplate this sort of design. Since qualification under section 401(a) provides significant benefits to the participants, why take a chance that your unique design may not be up to snuff? 

As for what is specifically wrong, I would suggest that it violates the exclusive benefit rule since it allows the employer to use money for three years which has been putatively allocated to a participant.  Beyond that, it simply does not seem to fit the definition of a profit sharing plan since the participants do not receive the benefit of the gains or losses on the account for that three year period.

I suspect that there are other problems with this design as well.  There is no reason to make more difficult what is already a challenging compliance and risk management issue for the employer.

Link to comment
Share on other sites

Thank you for all replies.  I do not like the design that they are considering either.  But what if they kept this as a non-ERISA plan but instead of the rolling 3 year vesting and/or holding the deposits for 3 years, they just not give contributions to anyone with less than 3 years of service?  Keep the plan at 100 vesting but you have to be there 3 years before receiving employer contributions.  They may or may not pass 410(b) in a given year,  but if not under ERISA, would it matter?

Link to comment
Share on other sites

  • 2 years later...

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...