Changing from QCCO to non-QCCO status

[WolverineBenefits]

A religious school that gets no funding from the diocese anymore is nonetheless still qualified as a QCCO. The school was established in the 1950s, and we suspect that it would have qualified prior to the adoption of the QCCO rules. The school has been told that they likely would not qualify as a QCCO if they were to seek it out now, although they are still listed as a church related entity in the master list of catholic organizations. 

The issue arose because the school wants to adopt a 457 plan. They are considering whether to "reclassify" itself as a non-QCCO.

ERISA and tax-qualification issues for their existing plan aside, have you seen a religious school undertake this process? Any thoughts?

PS: We realize that it can still adopt a 409A plan instead, but they would prefer that distributions be eligible for rollover treatment. 

[Peter Gulia]

For a § 457(b) plan to provide an I.R.C. § 402(c)(4) “eligible rollover distribution”, wouldn’t the plan need to be a governmental employer’s § 457(b) plan?

Internal Revenue Code (26 U.S.C.) § 402(c)(8)(B)(v) https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleA-chap1-subchapD-partI-subpartA-sec402.htm.

[Patricia Neal Jensen]

Although Non-QCCO's can adopt 457(b) plans,  a Non-Governmental tax-exempt plan (this one!) can only be rolled over to another non-governmental 403(b) plan. (What I believe Peter is saying above).  Participant would not be able to roll over a distribution to an IRA, a 401(k) or a 403(b).  BTW, this Non-QCCO (if that is what it is) is still a church-affiliated plan.

[Peter Gulia]

I read Internal Revenue Code § 402(c)(8)(B)(v) as including in the defined term eligible retirement plan a § 457(b) plan only if the § 457(b) plan “is maintained by an eligible employer described in section 457(e)(1)(A)[.]”

Likewise, Internal Revenue Code § 457(e)(16)(A) provides an exclusion from gross income for a rollover of an eligible rollover distribution only “[i]n the case of an eligible deferred compensation plan established and maintained by an employer described in [§ 457](e)(1)(A)[.]”

I don’t see that a school, even if not a qualified church-controlled organization, “still listed as a church[-]related entity in the master list of [Roman] [C]atholic organizations” would be “a State, political subdivision of a State, [or] an[] agency or instrumentality of a State or political subdivision of a State[.]” I.R.C. § 457(e)(1)(A).

If a nongovernmental § 457(b) plan is not an § 402(c)(8)(B) eligible retirement plan, how would such a plan be a payer of an eligible rollover distribution?

See also IRS, Automatic Rollover, Notice 2005–5, 2005-3 I.R.B. 337, 338 Q&A-6 (Jan. 18, 2005) (“[A] governmental eligible deferred compensation plan described in [§ 457](e)(1)(A) must meet requirements similar to the requirements of § 401(a)(31).  . . . . The automatic[-]rollover requirements of § 401(a)(31)(B) do not apply to non-governmental § 457(b) plans.”).

Some nongovernmental § 457(b) plans allow a transfer of a deferred compensation obligation from a § 457(e)(1)(B) obligor to another § 457(e)(1)(B) obligor that accepts the obligation.

This is not advice to anyone.

[Patricia Neal Jensen]

Hope I was clear, Peter.  I agree.  Not an eligible payer.

PNJ

[R Griffith]

6 hours ago, Patricia Neal Jensen said:

Although Non-QCCO's can adopt 457(b) plans,  a Non-Governmental tax-exempt plan (this one!) can only be rolled over to another non-governmental 403(b) plan. (What I believe Peter is saying above).  Participant would not be able to roll over a distribution to an IRA, a 401(k) or a 403(b).  BTW, this Non-QCCO (if that is what it is) is still a church-affiliated plan.

Patricia - I think this might be the confusing part - shouldn't that say - "non-governmental 457(b) plan"?  That might be what Peter was trying to clarify - 

[Peter Gulia]

Yes, as R Griffith suggests.

BenefitsLink’s generous neighbors, including Patricia Neal Jensen, don’t want a BenefitsLink reader to think there might be a nongovernmental § 457(b) to § 403(b) rollover. Not every reader would have discerned that Patricia Neal Jensen likely meant to describe a transaction involving nongovernmental § 457(b) plans regarding both transferring and assuming sides of a transfer.

Further, while I’m aware there’s a business usage of rollover that’s wider than the tax law meaning, I find it more helpful to think about a transfer. Using a distinct word might remind us that, if the transferring and assuming plans so provide, one employer’s obligation is satisfied because the obligation is transferred to the other. (For a nongovernmental employer’s unfunded deferred compensation plan, the obligation is not an obligation of an exclusive-purpose trust.)

Returning to WolverineBenefits’ originating post, if establishing a § 457(b) plan for a nongovernmental school’s employees would not set up an opportunity for a § 402 rollover, the school might reconsider the school’s and its to-be-compensated employees’ plan-design preferences.