5500 for church 403(b)

[Guest SarahB]

Client has a church 403(b) with custodial accounts - salary deferral and employer contributions. They want to discontinue employer contributions and terminate. They have never filed a 5500 for this plan. I was under the impression that church 403(b)'s are exempt from 5500 requirement, but just read in BNA portfolio on Tax Deferred Annuities that "although governmental and church plans are generally exempt from ERISA, their plan administrator must file annual returns with the IRS with respect to tax-deferred custodial accounts. I was always under the impresseion that a church 403(b) plan is exempt from 5500 requirement, but apparently not it is not exempt if custodial accounts are involved? Any comments are greatly appreciated.

[John Feldt ERPA CPC QPA]

I hesitate to disagree with BNA, but I see not their argument. Did they provide a citation for it?

Maybe they are confusing T.R. §1.403(b)-3(b)(3)(iii) which tells me that church plans using retirement income accounts must have to have a written plan, but church plans NOT using retirement income accounts have no written plan requirement?

The instructions to Form 5500 tell us that government 403(b) plans and church 403(b) plans that are not "employee benefit plans" under Title I of ERISA are exempt from filing. Remember of course, if the "church" 403(b) plan primarily covers employees of an unrelated trade or business of the church, then the ERISA exemption won't apply.

Under Code §410(d), a church plan may elect to apply funding, participation, and vesting rules from ERISA, which then subjects the plan to ERISA Title I. Such an election is irrevocable.

To me, this means that the "sponsor" of a true "church" 403(b) plan could volunteer to subject themselves to ERISA permanently, and doing so would require the 5500 reporting.

[Guest SarahB]

BNA cites back to a previous section which states:

Note: Although 403(b)(7)(B) and Regs. 301.6058-1(a)(2) specifically subject 403(b)(7) custodial accounts to the annual filing requirement, Regs. 301.6058-1(a)(3) and (4) provide that the information is to be filed as required by the applicable forms ad instructions. The instructions for Form 5500 exclude from the annual report filing requirement an annuity arrangement described in DOL Regs. 2510.3-2(f), e.g., 403(b)(7) custodial accounts established pursuant to to salary reduction agreements or agreements to forego an increase in salary. Thus, no Form 5500 filing should be required for 403(b)(7) cutodial accounts that that only include salary reduction contributions and meet the requiremetns of DOL Regs. 2510.3-2(f). The DOL has indicated that compliance with the 2007 403(b) regulations generally should not impact an employer's ability to stay within this DOL safe harbor. If, however, the custodial account is part of an employer-sponsored plan within the meaning of ERISA, the employer or custodian would file a single annual Form 5500 series return/report. If the account is not part of such a plan, however, a separate annual return apparently would have to be submitted for each individual employee.

BNA seems to be suggesting that 403(b)(7)(B) (which states that a custodial account is to be treated as a qualified plan for purposes of reporting requirements) trumps the reporting exemption for church plans and governmental plans. I have not come across this anywhere else. BNA is usually gospel but I don't know if they got it right here.