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What Is a Church Plan and Who Can It Cover?
(Posted July 12, 2017)
Question 345: What is a church plan and who can it cover?
Those two questions are closely interrelated because the Code definition of church plan has an expansive definition of employee. Church plans are defined in Code 414(e) and ERISA 3(33). I wll focus on the Code definition.
A “church plan” must meet all of these characteristics:
- It must either (1) be established and maintain by a church or (2) be maintained by a principal-purpose organization.
- Substantially all the participants must be church employees or deemed employees described below.
- It cannot primarily benefit church employees who are employed in connection with an unrelated trade or business.
This very brief summary of the rules is little more than an introduction to the detailed church plan rules in the law. The following definitions and special rules apply to church plans.
- The term “church” includes an association or convention of churches. [Code §414(e)(1).] It also includes religious orders or organizations which are integral parts of the church and carry out church functions. [Treas. Reg. §1.414(e)-1(e).] The church must be exempt from tax under Code §501(c)(3).
- Employees. The term “employee” includes some persons who are not employees of the church itself. Although this special definition of employee technically applies only to the definition of “church plan,” it would appear that the intent of Congress is that these employees will enjoy employee status for all matters related to the plan, including the exclusive benefit rule. The plan is not a church plan if “substantially less than all” plan participants are church employees or these additional employees. [Code §414(e)(2)(B).] The church is deemed the employer of these individuals. [Code §414(e)(3)(C).] The additional employees are:
- Duly ordained ministers acting in their ministry (regardless of whether they are common-law employees of the church). [Code §414(e)(3)(B)(i).] This includes self-employed individuals and individuals employed by an organization (other than a “charity” under Code §501(c)(3)) “with respect to which the minister shares common religious bonds.” [Code §414(e)(5)(A)(i).] If such an employee-minister participates in the church plan, then the minister’s employer can exclude the minister from coverage and nondiscrimination testing in its plans. [Code §414(e)(5)(C).] That minister’s compensation can’t be counted under both the church plan and the other organization’s plan. [Code §414(e)(5)(D).]
- Employees of tax-exempt organizations controlled by or associated with a church. [Code §414(e)(3)(B)(ii).]
- Certain former church employees. [Code §414(e)(3)(B)(iii).] A church plan can hold the benefit of a former employee and can receive contributions for the employee’s benefit after separation from service. Unless the former employee is disabled when the employee separates from service, the plan can no longer receive contributions for the employee 5 years after separation from service. [Code §414(e)(3)(E).]
- Principal-purpose organization. A principal-purpose organization has the principal purpose of administering or funding a plan or program providing retirement and/or welfare benefits for employees of the church. The organization must be controlled by or associated with the church. [Code §414(e)(3)(A).] The Supreme Court unanimously ruled that if a plan is maintained by a principal-purpose organization, it does not matter whether a church set up the plan. [Advocate Health Care Network v. Stapleton, No. 16-74 (U.S. June 3, 2017).]
- Associated organizations. An organization is associated with a church if it shares common religious bonds and convictions with the church. [Code §414(e)(3)(D).]
- Unrelated businesses. A plan is not a church plan if it is established and maintained primarily to benefit employees of one or more unrelated trades or businesses under Code §513. [Code §414(e)(2)(A).] The regulations provide a detailed 50% test for this rule, softened by a facts and circumstances alternative. [Treas. Reg. §1.414(e)-1(b)(2), (3).]
- Multiple employer plan. If more than one organization sponsors a plan, each organization must be a church and each must separately satisfy the rules relating to unrelated trades or businesses. [Treas. Reg. §1.414(e)-1(c).]
- Corrections. There is a special retroactive correction procedure in the Code for plans of churches which fail to satisfy the definition of “church plan.” [Code §414(e)(4).]
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law to the particular facts of this and similar situations.
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