Religious Differences

For advisers who wish to pursue 403(b) plan business, it is vital to understand the distinct employer groups governed by the tax code, each with its varying demographics, needs, and expectations.

Among the market segments, religious organizations or so-called church plans are unique in the fact that they are exempt from most of the new 403(b) rules.

Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting, where church plans make up about 10% of 403(b) business, explains that different types of church plans are subject to different rules. One type—the 3121(w) “steeple” church—is a congregation or group of congregations and is subject to the fewest rules. Secondary schools associated with these are also under liberal rules. However, a second type of church plan consists of businesses affiliated with denomination 414e religious organizations, such as a health-care facility or group home, and the new Internal Revenue Service guidance is more restrictive, similar to the rules for nonprofit organizations (see “Greater Plans,” PLANADVISER, November-December 2009).

One commonality among the types of church plans is that all are exempt from the Employee Retirement Income Security Act (ERISA) but can elect to be ERISA plans, Webb notes.

John Begley, Executive Vice President, Fidelity Investments, which services more than 1,600 religious organizations, says the three different types of church plans Fidelity administers include individual congregation 403(b)s that only cover clergy, or clergy and a few staff; master plans for national denominations that congregations across the nation can adopt; and organizations that include churches and other affiliated entities such as hospitals or schools.

Many larger independent churches have voluntary or employer 403(b)s and frequently also have a 401(k) plan in place, says Kevin Kidwell, Vice President of National Nonprofit Sales at OneAmerica, which recordkeeps for 140 church plans.

According to Kidwell, most “steeple” church plans, large or small, have a retirement income annuity arrangement, covered by IRS Code section 403(b)(9), because many ministers are considered self-employed, and a 403(b)(9) is the only type of plan in which a self-employed person can participate. Kidwell says this type of plan was designed specifically for churches and always has required a plan document to be in place, which required hiring an attorney, but OneAmerica provides one that all churches can use.

Webb and David Powell of the Groom Law Group expanded, in an online column for PLANSPONSOR.com, on the differences in the final 403(b) regulations between the narrow definition of “steeple” churches and qualified church-controlled organizations (QCCOs) under 3121(w) and the broader definition of religious organizations under 414(e) that includes those that do not meet the steeple or QCCO definition (often referred to as nonqualified church-controlled organizations, or non-QCCOs). The final regulations specifically exempt steeple churches themselves, or QCCOs such as church elementary and secondary schools, from the written plan requirement and the nondiscrimination rules.

However, according to Webb and Powell, church hospitals, colleges, nursing homes, and other religious organizations that fall out of the definition of QCCO must maintain a written plan document and satisfy the nondiscrimination rules, including the universal availability requirements. They note that many legal counsels advise plan sponsors to have a written plan document even if not required, as it otherwise may be very difficult for an employer to prove the terms of the plan should there be a dispute with other employers or participants.

Similarly, the final 403(b) regs specifically exempt 3121(w) steeple churches and QCCOs from controlled-group rules while non-QCCOs are subject to the controlled-group rules. Under controlled-group rules, certain organizations that are under common control are required to be treated as a single employer, and a primary provision defines common control to include the fact that at least 80% of the directors of an organization are representatives of, or directly or indirectly controlled by, another organization. Webb and Powell suggest that it may be necessary to determine whether any non-QCCOs in the plan are in the same controlled group for applying the nondiscrimination rules.

According to Webb, though they are not subject to ERISA, most church plans try to have structure in place because it is a moral issue about doing what is best for participants. Church plans typically had a plan document in place before the new regulations and have similar investments to nonprofits, including individual annuity products and mutual funds held by a custodian.

However, other differences for church plans that Webb notes include that any church plan that is not a retirement income account can have investments other than variable annuities and mutual funds (e.g., investments in Israel for Jewish entities or exchange-traded funds). In addition, a portion of distributions for clergy at retirement can be declared a tax-free housing allowance.

The fact that steeple church plans and secondary schools do not have to follow nondiscrimination rules means the plans can contribute only to clergy or can restrict voluntary participation to certain church staff, Webb points out. Also, special contribution rules apply because some participants have made a vow of poverty and have no income to be matched, so plan sponsors can make special contributions for them.

According to Begley, advisers may not have an understanding of how complicated these differences make church plan administration. In addition, Begley says church plans can be highly decentralized, so a provider can receive payroll info daily from thousands of congregations. Another challenge is ensuring each congregation is in compliance and that sponsors communicate to all separate entities.

However, Kidwell points out that, as with other 403(b) market segments, the one thing that the new rules made abundantly clear is that the sponsor is responsible for compliance, and employees can no longer self-certify transactions such as loans and hardship withdrawals. So, while advisers must understand the nuances between different types of church plans, they also must be able to educate sponsors about the new rules.

Tom Peller, Vice President, Compliance Group, Fidelity Investments, adds that church plans continue to be a unique niche that requires specialized infrastructure and expertise. According to Kidwell, the church-plan market often has been overlooked by providers, and there are only a few that serve the market.

In addition to consulting on plan design, Kidwell says church plans need advisers to consult on investment offerings. Begley says church plans typically have someone on staff that understands investing, but they may need a middleman to the provider. In addition, Begley says advisers should understand that faith-based organizations have cultural sensitivities, frequently leading to an importance of socially responsible investment offerings.

Webb says the market should be appealing to advisers because church plan sponsors are receptive to ideas about growing their plans, so, if advisers can partner successfully with a large organization, the potential attainment of assets could be great.

According to Kidwell, it may be, in some ways, the most underserved market in the nonprofit segment.

“It is an exciting market for advisers who haven’t yet looked into it,” says Webb.