Church NQDC Plan Top-Hat Exempt?

Can a church offer a nonqualified deferred compensation plan, subject to Code Section 409A, to all employees or must participation be limited to a top-hat group?

The prohibition against unfunded plans for rank-and-file employees comes from ERISA.  A church plan that hasn't elected ERISA coverage is exempt from it.

Thank you, Tom Veal.

As a follow-up, my understanding is that churches are not subject to Internal Revenue Code Section 457, which I believe implies that the rule governing 457(f) plans of non-church tax-exempt organizations requiring that deferred compensation is taxable upon vesting does not apply.  Is it then safe to say that for a church NQDC plan, vested benefits are not taxed until the compensation is paid or otherwise made available to a participant? 

For Internal Revenue Code of 1986 § 457, the focus might be on the employer rather than on whether the plan is ERISA-governed or a church plan.

The statute defines an eligible employer to include “any other organization (other than a governmental unit) exempt from tax under [the income tax] subtitle [of the Internal Revenue Code].” I.R.C. (26 U.S.C.) § 457(e)(1)(B).

Under the Treasury department’s interpretation, the specially defined terms include these:

“Eligible employer means an entity that is a State that establishes a plan or a tax-exempt entity that establishes a plan. The performance of services as an independent contractor for a State or local government or a tax-exempt entity is treated as the performance of services for an eligible employer. The term eligible employer does not include a church as defined in section 3121(w)(3)(A), a qualified church-controlled organization as defined in section 3121(w)(3)(B), or the Federal government or any agency or instrumentality thereof. Thus, for example, a nursing home which is associated with a church, but which is not itself a church (as defined in section 3121(w)(3)(A)) or a qualified church-controlled organization as defined in section 3121(w)(3)(B)), would be an eligible employer if it is a tax-exempt entity as defined in paragraph (m) of this section.” 26 C.F.R. § 1.457-2(e) https://www.ecfr.gov/current/title-26/part-1/section-1.457-2#p-1.457-2(e)

“Tax-exempt entity includes any organization exempt from tax under subtitle A [income tax] of the Internal Revenue Code, except that a governmental unit (including an international governmental organization) is not a tax-exempt entity.” 26 C.F.R. § 1.457-2(m) https://www.ecfr.gov/current/title-26/part-1/section-1.457-2#p-1.457-2(m)

For more information, see chapters 2 and 6 in 457 Answer Book.

Thanks, Peter Gulia.  In my situation, there isn't any question as to whether the plan sponsor is a church.  It is a church.

Does the fact that a church is not an eligible employer under Section 457 mean that a NQDC plan sponsored by a church escapes the rule that benefits are taxable upon vesting, which rule applies to deferred compensation plans of non-church tax-exempt organization plans governed by Section 457(f)?

In other words, can a church NQDC plan that isn't covered by Section 457, including presumably Section 457(f), be treated the same as a for-profit company NQDC plan in allowing benefits to vest without those benefits being taken into income upon vesting?

I have not considered whether a church is or isn’t an eligible employer within the meaning of Internal Revenue Code of 1986 § 457(e)(1)(B). I have not advised a church about an unfunded deferred compensation plan. So, I have not thought about your income tax questions.

How is that even possible?  You think of everything!