IRS Reminds Non-Electing Church Plans of Qualification Requirements

In a recent Employee Plans (EP) Issue Snapshot, the Internal Revenue Service (IRS) identifies sections of the Internal Revenue Code (IRC) that a non-electing church plan must satisfy in order to be a qualified plan under IRC Section 401(a).

As the Snapshot notes, a plan that meets the definition of a church plan in IRC Section 414(e) is exempt from certain requirements imposed on other tax-qualified retirement plans under the IRC. However, a church plan sponsor can elect under IRC Section 410(d) to have the plan treated as though it were not an exempt church plan. Plans for which no IRC Section 410(d) election was made are known as “non-electing church plans.”

Non-electing church plans are exempt from the Employee Retirement Income Security Act (ERISA) provisions pertaining to participation, coverage, and vesting; however, these plans are subject to the requirements for participation, coverage and vesting that were in effect on September 1, 1974, prior to the enactment of ERISA. The pre-ERISA vesting requirements are set forth in IRC Sections 401(a)(4) and 401(a)(7) as in effect on September 1, 1974.

Section 401(a)(4) stated that a trust constitutes a qualified trust “if the contributions or benefits provided under the plan do not discriminate in favor of employees who are officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees.” In addition, regarding vesting, Section 401(a)(7) stated that “upon its termination or complete discontinuance of contributions under the plan, the rights of all employees to benefits accrued to the date of such termination or discontinuance, to the extent funded, or the amounts credited to the employees’ accounts are nonforfeitable.”

According to the Issue Snapshot, the pre-ERISA participation and coverage requirements are set forth in IRC Sections 401(a)(3) and 401(a)(5) as in effect on September 1, 1974.

Section 401(a)(3) provided that a plan could satisfy one of two alternative percentage tests:

• 70% or more of all employees must be covered under the plan; or
• 70% or more of all employees must be eligible under the plan, and if so, at least 80% of all eligible employees must be covered.

The percentages above are applied after excluding employees:

• who worked less than a period stated in the plan, not to exceed 5 years;
• who do not customarily work for more than 20 hours in any one week; and
• whose customary employment is not more than 5 months in any calendar year.

The IRS notes that in lieu of meeting one of the percentage tests, the plan may cover a classification of employees which does not discriminate in favor of officers, shareholders, persons whose principal duties consist of supervising the work of other employees, or highly compensated employees. Section 401(a)(5) provided that a classification shall not be considered discriminatory within the meaning of IRC Section 401(a)(3)(B) merely because it is limited to salaried or clerical employees.