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Church Plan Excluded Eligible Employees - Correction by Amendment?

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A local church sponsors a 403(b)(9) plan offered by the pension board of the denomination. The Plan meets the definition of a church plan for ERISA and IRC purposes.

Adoption agreement states that all employees working 20 hours or more per week are eligible to participate. Church did not realize this and has only been allowing employees working 40 hours per week to participate.

Can this be corrected by adopting a retroactive amendment changing eligibility to 40 hours per week?

IRS fix-it guide says that a failure to operate a 403(b) plan according to the terms of the written plan can be corrected by adopting a retroactive amendment conforming the plan to its operation, but I am unclear whether this would apply to the situation at hand.   It just seems too simple....

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My guess is the employees who work 20 hours or more per week are not excludable from the universal availability rule.  If so, and by that I mean if you have to cover them under the universal availability rule, a retroactive amendment is not permitted.  That would be like operating a plan to require 5 years of service where the plan only requires one year, learning about the mistake, and then adopting a retroactive amendment to require 5 years of service for eligibility.  That simply would not be allowed.   Similarly here, you can't violate the universal availability rule with a retroactive amendment.  If they are not required to be covered under the universal availability rule, you might try a retroactive amendment under EPCRS, but I'm not sure you would get it.  Maybe, maybe not.     

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4 minutes ago, PensionPro said:

Unless I am missing something the plan is not subject to universal availability.  The plan should seek legal counsel.

Ah, yes.  This is a church plan (at least we are assuming it is).   I agree with the recommendation to seek legal counsel.  One question they will ask is whether the church plan elected ERISA coverage.  The question suggests it may have.     

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No Universal Availability rules apply to Church Plans and they are not ERISA (unless elected, which is unlikely).  A Church cannot "accidentally" elect ERISA (completely different than a Non-ERISA plan sponsored by a 501(c)(3) org.).   If they elected ERISA, there would be a written document stating that this was so.  I have lots of Church plans and have never had one elect ERISA.  Why would they?  I would suggest the retroactive amendment and advise the client to seek counsel concerning further remedies or reporting.    Unless you are a hospital trying to eliminate employees from your DB plan by hoping that you are a church, I see very little audit activity in this area.

Patricia Neal Jensen, JD

Vice President and Nonprofit Practice Leader

|Future Plan, an Ascensus Company

21031 Ventura Blvd., 12th Floor

Woodland Hills, CA 91364

E patricia.jensen@futureplan.com

P 949-325-6727

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The church did not have to follow universal availability.  But they did have to follow their plan. Being a church doesn't mean you get to disregard plan provisions.

So we're back to what would we advise any Sponsor who improperly excluded eligibles: QNEC under EPCRS.

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Even a church plan has to follow the terms of it's plan document, else why even require one!  I think you essentially have vested accrued benefits to deal with and are stuck with QNECs, and potentially required ER contributions. Retroactively taking away an accrued benefit by amendment seems risky at best and I would definitely seek legal counsel before going that route.

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If you have a significant operational failure that was not corrected within the two-year correction period you have to correct via VCP.  I have serious doubts that the IRS would approve a retroactive amendment with no corrective costs in VCP but no harm in trying.  Advising self-correction by means of a retroactive amendment is imprudent.

PensionPro, CPC, TGPC

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I agree with prior comments.

Unlikely they elected ERISA status so universal availability doesn’t apply. 

A non-ERISA Church plan isn’t required to have a written plan unless it’s a 403(b)(9) plan - which you stated is what this plan is.

Example 4 from the IRS web site on the remedial amendment period seems to be on point assuming the plan since 2009 - or if later, when established - has had this problem. The example is based on the UA exclusion of 20 hours per week but I don’t think that makes a difference here. You’re subject to EPCRS and if you want to correct by a plan amendment then it’s VCP and there’s no telling if the IRS will allow it. At least with a non-ERISA plan you don’t have to worry about any anti-cutback issues.

Example 4: compliance in form but not in operation

Plan D, adopted effective in 2012, provides that all employees may make elective deferrals. However, the plan sponsor operates the Plan in plan years 2012 - 2016 to exclude employees who work fewer than 20 hours per week (part-time employees) as otherwise permitted under Treas. Regs. Section 1.403(b)-5(b)(4)(ii)(E).

Conclusion: By excluding employees who work fewer than 20 hours per week during 2012 - 2016 without having a plan provision that permits that exclusion, the plan sponsor failed to operate the plan according to its terms. Therefore, Plan D doesn’t comply with Treas. Regs. Section 1.403(b)-3(b)(3)(i). The plan could have been drafted to exclude part-time employees, but wasn’t. Although Plan D, as drafted, complies with the 403(b) regulations in form, it wasn’t operated consistent with its terms and can’t be corrected by amendment during the plan’s RAP. Instead, the sponsor must correct this operational failure under EPCRS.


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