Contributory Church Plan

[Guest Patrick Foley]

A church that sponsors a poorly-funded non-ERISA DB plan is considering several options, including initiating mandatory employee contributions in the current plan.

I assume that for current employees, continued participation in the plan would require employee contributions, and that for new employees, contributions would be a condition of employment.

Although this seems a backward-looking notion, a contributory church DB plan doesn't appear to be prohibited. Converting a noncontributory plan to a contributory plan seems to involve certain risks, such as possible coverage and nondiscrimination violations and the risk of triggering a partial termination if significant numbers of employees decline to make contributions and are thus excluded. Presence of employee contributions in the plan would require some operational changes, but they seem to be minor.

Are there other issues here, or does anyone have additional thoughts?

[SoCalActuary]

Employee contributions do raise the level of recordkeeping.

Church plans are exempt from some of the vesting rules, so I don't know without research whether the plan must now comply with all the vesting issues for contributory plans.

Unfortunately, poorly funded plans for church groups have no PBGC protection.

Thus, the plan participants need to understand that their retirement benefits are much like Social Security, in that their benefits depend on the good will of their congregation.

Honest, plain talk to the plan sponsor about the underfunding is vital. Then the employees will need to understand what is at risk if they don't contribute.

[Guest Patrick Foley]

The plan would remain exempt from Code section 411, including the employee contribution rules of section 411©. The basis recovery rules under section 72 would apply, raising the level of recordkeeping as you point out.

I agree that raising the consciousness of the plan sponsor, and presenting it to employees with the proper spin, is crucial to making this change work. The big funding deficit will require this even if the church chooses another solution, such as freezing the DB plan and putting in a DC plan for the future.