Are Church 401(k) Plans subject to 401(k) and (m) testing

[CharlesLeggette]

Non-electing Church plans are exempt from discrimination testing....preERISA rules generally apply. IRS Notice 2001-46 essentially is silent about K & M testing on 401(k) plans adopted by churches.

I don't believe they are subject to K&M testing.

Is there any IRS pronoucement that settles this issue? Since 403(b) church plans are clearly and uniquivocably exempt from any kind of contribution testing other than Deferral and 415 limits, it stands to reason that church plan 401k's would be treated similarly.

Does anyone have any opinion on this.

[PensionPro]

This is my understanding and opinion. Notice 2001-46 references 401(a)(4) and 401(a)(5) but not 401(k) and 401(m). It is quite possible that the IRS would require a non-electing church plan to satisfy the ADP/ACP tests. I am not aware of a more direct or clear pronouncement from the IRS.

[Belgarath]

FWIW, I'd say that a nonelecting church plan IS subject to K/M testing. Since there is no specific exemption from this qualification requirement (that I'm aware of) then the requirements apply.

Caveat: I don't deal with Church plans, so this is hardly an expert opinion in this arena!

[ETA Consulting LLC]

It would not be subject to ADP/ACP.

Keep in mind that elective deferrals are "employer contributions" made pursuant to the employee's election. These amounts (like matching contributions) satisfy the non-discrimination requirements of 401(a)(4) by passing their respective ADP/ACP tests. Since church plans already satisfy 401(a)(4), then no ADP/ACP test is needed for these contributions.

The difference of opinion here result from not understanding that you meet the non-discrimination requirements of 401(a)(4) by passing the ADP/ACP tests. Therefore, when you are already deemed to meet 401(a)(4), then no ADP/ACP would be required.

Good Luck!

[Belgarath]

Ah, good point!!

[Kevin C]

Can you provide a cite showing that non-electing church plans are deemed to satisfy 401(a)(4)?

Notice 2001-46 says:

III. EXTENSION OF EFFECTIVE DATE OF NONDISCRIMINATION REGULATIONS FOR NONELECTING CHURCH PLANS

The regulations under §§401(a)(4), 401(a)(5), 401(l), and 414(s) shall not apply to nonelecting church plans until further notice, but in no case earlier than the first plan year beginning on or after January 1, 2003. Nonelecting church plans must be operated in accordance with a reasonable, good faith interpretation of these statutory provisions until the time such notice is provided.

[PensionPro]

toolkit - surprisingly, I understand that a plan that satisfies 401 k/m is generally deemed to satisfy 401a4. That is not the point of discussion.

Neither Notice 2001-46 nor the regulations provide an exemption from 401 k/m. To interpret the reference to 401a4 in the notice as an exemption from ADP/ACP testing is a job for the client's legal counsel. There is IMO nothing in the regs/guidance that would prevent the IRS from requiring a church 401k plan to satisfy ADP/ACP. As the OP noted, the exemptions available to a church under the 403b regs are broader and more lucid.

[ETA Consulting LLC]

401(a)(4) is the rule that requires a plan to be non-discriminatory. Without getting into semantics of "deemed to satisfy" versus "rules do not apply", the general requirement is that a plan meet the non-discrimination rules unless an exemption exists.

When we look at how these plans are tested, ADP/ACP is actually more lenient in that HCEs (on average and regardless of age being used for some cross-tested advantage) may receive contributions at a rate that is 2 percentage points higher (lesser of 2 plus or two times) than NHCEs. No other test does this. These tests, coupled with "benefiting" being defined as merely being eligible to contribute (or receive a match if you were to contribute) allows the plan to pass 401(a)(4).

Agree or disagree, but ADP/ACP is how you meet 401(a)(4) requirements with respect to Elective Deferrals and Matching Contributions.

Otherwise, you can have a church that isn't required to pass 410(b) and design a plan where only the HCE is eligible to defer. You have no test because only HCEs are eligible to defer. That wouldn't make sense to have to test the same plan under ADP/ACP merely because you allow NHCEs to defer (when you are exempt from 410(b) if you leave them NHCEs as ineligible).

This is why the rules are silent on ADP/ACP, because these are merely methods to satisfy 401(a)(4). If 401(a)(4) does not apply, then neither would ADP/ACP.

Good Luck!

[MWeddell]

My comments will only muddy up the waters, not clarify the situation. Apologies in advance.

As most clearly can be seen in the context of testing for employees employed in collective bargaining units, Code Section 401(k) including the ADP test is regarded as a requirement independent from 401(a)(4). It is not the case that a 401(a)(4) exemption always exempts one from 401(k).

When I looked at the issue a very long time ago, even if one concludes that the 401(m) ACP test does not apply to church plans, it is more difficult to conclude that the excise tax on excess aggregate contributions does not apply to church plans.

[Kevin C]

I guess I don't understand the confusion. Notice 2001-46 says non-electing Church plans must operate in accordance with a reasonable good faith interpretation of 401(a)(4). I don't see any way you can twist that into they are exempt from 401(a)(4).

The discrimination rules in 401(k) are the exclusive means of demonstrating non-discrimination under 401(a)(4) for the 401(k) portion of the plan. See 1.401(k)-1(a)(4)(iv)(A). It's also in 401(k)(1), but not so clearly worded.

[PensionPro]

Essentially agree with both posts 9 and 10 above, but not with posts 4 and 8. The 401 k/m regulations themselves do not provide any exemption for church plans. A church seeking relief from the burden of nondiscrimination testing should carefully consider the merits of a 403b plan vs a 401k plan.

[BG5150]

The ERISA Outline Book is pretty unambiguous in its opinion that non-electing church plans ARE subject to ADP/ACP:

(Chap 1A: Definitions--Church Plans

2. Which qualification requirements apply? The following qualification requirements are applicable
to a nonelecting church plan.
(1) §401(a)(1) - the plan must be for employees of employer. Therefore, independent contractors may
not be covered by the plan.
(2) §401(a)(2) - exclusive benefit rule. The exclusive benefit rule is discussed in Chapter 3B (Section
XII).
(3) Pre-ERISA coverage rules, as they were prescribed by the pre-1974 version of §401(a)(3). The pre-
ERISA coverage rules generally required that the plan benefit at least 70% of all employees (or at least
70% of the eligible employees if at least 80% of the employees were eligible). See IRC §410©(2) and
Chapter 2 (Section VII).
(4) §401(a)(4) - nondiscrimination testing (including §401(k) testing, if the plan contains a 401(k)
arrangement, and §401(m) testing, if the plan includes a §401(m) arrangement (i.e., matching
contributions and/or after-tax employee contributions))

Emphasis added

[Ben Jensen]

Use a 403(b).  The problem here is using a 401(k) for a non-electing church.  It is a fundamental error which causes many issues that a 403(b) church plan would not have.

 

[Belgarath]

This was updated/reviewed by the IRS in 2023. Just informational.

https://www.irs.gov/retirement-plans/issue-snapshot-qualification-requirements-for-non-electing-church-plans-under-irc-section-401a