Questions and Answers about Eligibility

Transcription

1 Questions and Answers about Eligibility For Employers Considering the Retirement Savings Plan of the Presbyterian Church (U.S.A.) The Board of Pensions does not provide legal or tax advice to individual churches and church-related employers. These questions and answers (Q&As) are intended to be educational only and are based on the Board s employer-eligibility policy. They are not intended to replace the advice of your organization s legal or tax counsel. If your organization elects to adopt the Retirement Savings Plan of the Presbyterian Church (U.S.A.) (RSP), it should adopt its plan with the advice of its own legal and tax counsel. 1 What type of employers may offer the RSP? The RSP permits any Presbyterian local church (church), board, agency, or controlled affiliate of those organizations (qualified church controlled organization or QCCO) or a tax-exempt organization that is controlled by or associated with the PC(USA) but receives more than 25 percent of its revenues from the sale of services (non-qualified church controlled organization or Non-QCCO) to offer the RSP to its employees. A self-employed PC(USA) minister working in the exercise of ministry in a service validated by a mid council (middle governing body) may also participate. In such a case, the minister is considered the employer as well as the employee. A non-presbyterian employer (e.g., a hospital, prison, or governmental unit such as one of the Armed Services) may also enroll a Presbyterian minister serving as a chaplain in the RSP instead of in its retirement plan. If enrolled in the RSP instead of the employer s plan, the minister would be excluded from the employer s plan testing and other reporting requirements. 2 Must a non-profit organization be controlled by or associated with the PC(USA) to offer the plan? What does it mean to be associated with the Church? Yes, to participate in a PC(USA) church plan, your organization must be controlled by or associated with the Church. The Internal Revenue Code specifies the types of organizations that may participate as employers in a church plan. Controlled entities include related entities such as presbyteries, synods, General Assembly (GA) agencies, and other organizations, which are considered controlled by the Church by virtue of the appointment of directors and other reserved powers of control in the Church s Constitution. In addition to those organizations, there are ecumenical, educational, social, and welfare organizations that are carrying out the mission of the Presbyterian Church but are not controlled by the Church or its local churches, mid councils, or agencies. Such organizations may participate in the plan if they are associated with the Church. To be associated, the organization must share common bonds of worship with the PC(USA). Each organization has a different story about its relationship with the Presbyterian Church. Some organizations are members of Presbyterian associations such as Presbyterian Association of Homes and Services for the Aging (PAHSA), Association of Presbyterian Colleges and Universities (APCU), or the Presbyterian Church Camp and Conference Association (PCCCA). Many were founded, owned, and controlled by presbyteries but due to business reasons became independent standalone organizations over time. Their mission and association with the Church continue nonetheless. Others have specific references to the Church in their articles of incorporation or bylaws. The Board of Pensions will consider the current and historical relationships of the organization with the Church, as well as the endorsement of the General Assembly, a presbytery, or other agencies of the Church as to the relationship of the organization with the Church and its role in supporting the Church s mission, in determining whether an organization meets the associated standard. RSP-300 Page 1 of 8 Rev. 1/ The Board of Pensions of the Presbyterian Church (U.S.A.)

2 3 What type of plan is the RSP? The RSP is a defined contribution type of plan. Officially, it is a retirement income account church plan as defined in section 403(b)(9) of the Internal Revenue Code. 4 Our current plan document says it is a 403(b)(9) defined contribution plan: What is the difference between a defined contribution 403(b)(7) and a 403(b)(9) plans? A 403(b)(7) plan is a defined contribution plan available to non-profit and government organizations. The only investment options that can be offered in a 403(b) plan are mutual funds. Most 403(b)(7) plans are ERISA plans (governed by the Employee Retirement Income Security Act of 1974). ERISA plans are subject to the Department of Labor fiduciary, audit, disclosure, and reporting obligations. Only church organizations can sponsor a church plan such as a 403(b)(9) plan. There are no investment option restrictions on a 403(b)(9) plan. It can offer mutual funds, proprietary funds, such as the Board s PC(USA)-screened funds, and annuity products. 403(b)(9) plans are exempt from ERISA s fiduciary, audit, disclosure, and reporting obligations unless the plan sponsor files an election with the IRS to be governed by ERISA. Church plans may also declare distributions to ministers as housing allowances eligible for exclusion from federal income taxes under Section 107 of the Internal Revenue Code. 5 What are the benefits of offering a church plan? In recognition of the nature of church organizations, church plans have the benefit of certain exemptions from regulations and taxes that lessen the burden of administration for church employers and benefit the participants, particularly minister participants. These exemptions include the following: A church plan is exempt from ERISA s fiduciary, audit, disclosure, and reporting obligations unless the plan sponsor files an election with the IRS to be governed by ERISA. As a result, the plan administration is less burdensome and expensive. A church plan is regulated as if it is a single employer plan but, in the case of the RSP, thousands of PC(USA) church employers participate in the plan. This allows the plan to benefit from volume-based discounts for administrative services from the plan s record keepers, administrators, and/or other service providers. As a result, the fees in the RSP are generally less than a single organization can obtain for its standalone plan. PC(USA) churches, their affiliates, and denominational agencies are exempt from the non-discrimination and controlled group rules that apply to other employers. As a result, each employer may offer different benefit eligibility rules to different classes of employees. A church plan may designate distributions from the plan as housing allowances under Section 107 of the Internal Revenue Code. This enables a disabled or retired minister to exclude an otherwise taxable RSP distribution from federal and some state income taxes if he or she uses the distribution for eligible housing expenses. Some of the 403(b)(9) regulatory exemptions are only available to local churches, denominational agencies, elementary and secondary schools, and seminaries (i.e., churches and QCCOs). Other organizations that are eligible to participate in church plans but receive more than 25 percent of their revenues from the sale of services (referred to as non-qualified church controlled organizations or Non-QCCOs) are not exempt from certain requirements. Non-QCCOs include organizations such as Church-related or associated universities, colleges, retirement homes, and other welfare organizations. For example, a Non-QCCO participating in the RSP is still subject to the nondiscrimination testing rules for 403(b) plans. Provided with this Q&A is a table listing the differences between church plans and other retirement plans available to non-profit organizations. RSP-300 Page 2 of 8 Rev. 1/ The Board of Pensions of the Presbyterian Church (U.S.A.)

3 6 Can a Non-QCCO organization such as a retirement community, college, camp and/or conference center, family or children s service or other organization sponsor a church plan only for its employees, or must it participate in the church plan sponsored by the denomination with which it is associated? An employer eligible to participate in a church plan (as described above) may sponsor its own church plan for only its employees and former employees rather than offer the church plan sponsored by the denomination. It must be noted, however, that notwithstanding the IRS s 30-year history of approving individual standalone church plans for individual eligible employers, recent cases have challenged this interpretation of Section 414(e) of the Internal Revenue Code by the IRS. In a 2018 United States Supreme Court decision, the Court upheld the interpretation of the Code section that permits an affiliated organization to establish and maintain a church plan. The plaintiffs in those cases have announced that they plan to continue to challenge other provisions of that section of the Code that permits an organization that is not controlled by the denomination to establish and administer a church plan. 7 Will our organization be subject to non-discrimination testing? As noted above, the church plan exemption from the non-discrimination testing rule is not available if your organization is a Non-QCCO. If your organization is a nursing home, healthcare provider, university, or college, it will not be exempt from the non-discrimination rules if it participates in the RSP. However, your organization will be exempt from the ERISA fiduciary, audit, disclosure, and reporting requirements. 8 Our plan document includes ERISA language. Does this mean we are an ERISA plan? Not necessarily. The first question is whether your organization is eligible and wants to sponsor a church plan. If your organization offers a church plan, it can only become an ERISA plan if an irrevocable written election is filed with the IRS. The regulations provide that an election may only be made by the plan administrator by attaching a written election statement to either (i) the annual 5500 return required (or an amended return) with respect to the plan which is filed for the first plan year for which the election is effective or (ii) with a written request for a plan qualification determination letter (for retirement plans). The election statement must indicate that the plan administrator is making an election under section 410(d) of the Internal Revenue Code and the first plan year for which it is effective. If an election is made, the plan must comply with the applicable provisions of the Code and ERISA. An election is not made by including or adopting ERISA rights language in plan communications. This may create a contractual commitment to provide those rights to plan members but it does not constitute an irrevocable election for your church plan to be subject to ERISA under the Code. In our experience, many brokers are unaware of the availability of church plans or do not have a product from a financial services or insurance carrier that is written as a church plan, so their clients are provided standard non-profit organization ERISA plan documentation. Until the (b) regulations, there was no obligation to have a written plan document for a 403(b) plan. If your employer is eligible to sponsor a church plan, the mere fact that the organization has offered a plan that includes ERISA language does not mean that the plan is not a church plan. Several courts have ruled that a church plan that believes it is subject to ERISA or that performs functions only applicable to electing church plans, such as filing a Form 5500 with the Department of Labor (DOL) is not an electing church plan unless the formal election under Section 410(d) of the Code has been made. For example, Rinehart v. Life Insurance Company of North America, (W.D.Wa. April 14, 2009) held that a church plan filing Forms 5500 with the DOL because it believed the plan to be subject to ERISA was not enough to make it an electing church plan, especially considering the irrevocable nature of the election after it is made. Similarly, in a case in which a church plan had indicated on its Forms 5500 filings that the plan was subject to ERISA, the court in Torres v. Bella Vista Hospital, Inc. (D.P.R. October 29, 2007) held that a church plan is not treated as an electing church plan subject to ERISA unless a specific election that referenced Section 410(d) of ERISA had been made. To determine church plan status, the employer must confirm 1) the organization is eligible to sponsor a church plan and 2) the organization has not filed a statement electing to be an ERISA plan with 5500 forms. RSP-300 Page 3 of 8 Rev. 1/ The Board of Pensions of the Presbyterian Church (U.S.A.)

4 9 How do we know if we have elected to be an ERISA plan? Church plans may elect to be subject to ERISA by making an affirmative election under Section 410(d) of the Internal Revenue Code. An election to become subject to ERISA is binding and irrevocable once made. Treasury Regulation 1.410(d)-(1)(c) provides that the election must be made by the plan administrator of the church plan, who must attach an election statement to either a Form 5500 or a written request for a determination letter relating to the qualification of the plan. The statement must specifically indicate: (i) that the election is being made under Section 410(d) of the Code and (ii) the first plan year for which the election is effective. An organization should conduct due diligence with its brokers and other advisors who are involved in the filing of ERISA forms and plan documentation and determine whether there is a record of the filing of an election. The organization s lawyers or benefit consultants should be consulted for advice. If no election statement can be found, the employer may also want to check with the Department of Labor and the IRS. Those agencies do not retain copies of the 5500 forms for long durations and may not have a record of whether the plan made an election, but it is worth knowing what they have and being able to prove that the employer checked with them in undertaking the investigation. Ultimately, the organization will have to make a good faith determination of its status based on the results of its due diligence If we want to adopt the RSP for our employees, can we merge our existing plan with the RSP? If your organization s plan is a church plan or a non-erisa 403(b) plan, you may merge your plan with the RSP. Under Section 414(z) of the Internal Revenue Code, a church plan qualified under Section 401(a) of the Code, such as a 401(k) plan, can be merged with a church plan that is qualified under Section 403(b) of the Code if the two plans are sponsored by the same church. If our plan has made an election to be subject to ERISA, can we merge our current plan with the Board s RSP? No, the Board of Pensions cannot allow a merger of an ERISA plan into the RSP plan because if there was such a merger, the surviving plan would be an ERISA plan and the RSP would no longer be a church plan. In Private Letter Ruling , the IRS ruled that, in the event of a merger of a non-electing church plan into an electing church plan, the surviving plan would be an electing church plan that is subject to ERISA. While private letter rulings issued by the IRS are not binding on either the Department of Labor or to parties that were not subject to the ruling itself, they show how the IRS thinks about the law in similar situations. We do not have reason to think that the IRS would rule differently with respect to a merger of an electing church plan into the RSP. Additionally, the basis of the court cases described above emphasize the irrevocable nature of an election for ERISA status as the reasoning for requiring that a plan meet the exact requirements of Section 410(d) of the Internal Revenue Code to enter into ERISA status. This emphasis on the irrevocable nature of electing ERISA coverage is likely to lead the IRS and the courts to view the surviving plan of a merger of an electing church plan with a non-electing church plan as having continued ERISA coverage. If your organization s plan is truly an ERISA plan, you might want to consider freezing your ERISA plan and using the RSP for future contributions for your employees. The RSP permits plan-to-plan transfers by individual employees into the RSP if an employee wants to consolidate their frozen account balances with their new RSP account. An employer should always consult with the appropriate legal counsel to determine the participant rights under your plan in the event of a termination or freezing of the plan. RSP-300 Page 4 of 8 Rev. 1/ The Board of Pensions of the Presbyterian Church (U.S.A.)

5 12 13 If our plan is a 401(a) defined benefit plan, what options will our employees have to roll over their 401(a) balance into the Retirement Savings Plan? A defined benefit pension plan typically does not provide for lump sum distributions. However, if your organization is terminating such a plan or if the plan is frozen, and your plan terms permit a participant to transfer assets to a 403(b) account, an individual may transfer the assets to the RSP in either an in-service transfer or a rollover if the individual is eligible to make a rollover. What if our existing plan is a 401(k) plan? Do the responses provided for 403(b) plans apply to a 401(k) plan? Churches and non-profit organizations have been able to offer 401(k) plans since the adoption of the Small Business Job Protection Act in While most churches and organizations have adopted 403(b) plans because there are numerous provisions in Internal Revenue Code Section 403(b) that address specific issues relevant to ministers, missionaries, and church employers generally, some benefits administrators prefer 401(k) plans because they are better known and understood by secular employers and employees and have adopted such a plan. The 401(k) regulations do not address church plans specifically. But based on the church plan provisions in the Code, since 1998, the Board believes that a church or 501(c)(3) organization that is controlled by or associated with a church can sponsor a 401(k) as a church plan, designate distributions from the 401(k) to ministers as housing allowance and be exempt from ERISA unless an irrevocable election to be subject to ERISA is made by the administrator. Overview of Considerations 401(k) Plan 403(b) ERISA Plan 403(b) Non-Electing Church Plan Retirement Savings Plan of the PC(USA) Eligibility Eligible Employers Any for-profit or non-profit entities 501(c)(3) non-profit organizations A church, association or convention of churches, including organizations whose principal purpose or function is the administration or funding of benefit programs The Presbyterian Church (U.S.A.) PC(USA) or any board, agency, or local church under the jurisdiction of the PC(USA) and is eligible to participate in a church plan Non-QCCO plan allows any employing organization recognized by the Board as associated with the PC(USA) but which does not satisfy the definition of Church or QCCO in the Internal Revenue Code. Any employee of a participating employer, other than employees working for an employer located in Puerto Rico may be eligible for elective deferrals. Employer may limit eligibility under the adoption agreement. Eligible Employees Employer may impose eligibility restrictions, subject to nondiscrimination testing. All employees (other than those who regularly work less than 20 hours per week) must be eligible for elective deferrals. Employer may impose eligibility restrictions for other contributions, subject to non-discrimination testing. Employer may dictate eligibility requirements. RSP-300 Page 5 of 8 Rev. 1/ The Board of Pensions of the Presbyterian Church (U.S.A.)

6 Eligibility Participation of Self-Employed Clergy Minimum Age & Service Requirements Contributions Contribution Types Employee Contribution Limit Total Annual Contribution Limit Compensation Cap Post-Employment Employer Contributions Vesting Requirements 401(k) Plan 403(b) ERISA Plan 403(b) Non-Electing Church Plan No No Yes Yes Age 21 & 1 year of service (may have 2-year requirement for 100% vested employer contributions) Employee deferrals (pre-tax & Roth), employee after-tax contributions, matching contributions, non-elective contributions, and rollover contributions permitted. $18,500 (in 2018), plus participants 50 or older an additional $6,000 catch-up (in 2018) (highly compensated employees may be limited by nondiscrimination testing) Cannot exceed 100% of compensation or $55,000 in 2018 Maximum of $275,000 (in 2018) considered as plan compensation No Maximum 6-year graded and 3-year cliff schedules Age 21 & 1 year of service (no service requirement for elective deferrals & may have 2-year requirement for 100% vested employer contributions) Employee deferrals (pre-tax & Roth), employee after-tax contributions, matching contributions, non-elective contributions, and rollover contributions permitted. $18,500 (in 2018), plus participants 50 or older an additional $6,000 catch-up (in 2018), plus long-service catch-up, up to $3,000. Cannot exceed 100% of compensation or $55,000 in 2018 Maximum of $275,000 (in 2018) considered as plan compensation Yes, for up to 5 years following termination of employment. Maximum 6-year graded and 3-year cliff schedules None, but Non-QCCOs must allow all employees to participate in elective deferrals. Employee deferrals (pre-tax & Roth), employee after-tax contributions, matching contributions, non-elective contributions, and rollover contributions permitted. $18,500 (in 2018), plus participants 50 or older an additional $6,000 catch-up (in 2018), plus long-service catch-up, up to $3,000 Cannot exceed 100% of compensation or $55,000 in 2018 Maximum of $275,000 (in 2018) considered as plan compensation Yes, for up to 5 years following termination of employment. None; employer may impose any vesting requirements Retirement Savings Plan of the PC(USA) None, but employer may insert minimum age and service requirements under the adoption agreement. Non-QCCO may only limit the plan to those who work at least 20 hours per week, those making or who make at least a $200 deferral to the plan annually, and those participating in another 403(b) plan. Employee deferrals (pre-tax & Roth), employee aftertax contributions, matching contributions, non-elective contributions, and rollover contributions permitted. $18,500 (in 2018), plus participants 50 or older an additional $6,000 catch-up (in 2018), plus long-service catch-up, up to $3,000. Cannot exceed 100% of compensation or $55,000 in 2018 Maximum of $275,000 (in 2018) considered as plan compensation Yes, for up to 5 years following termination of employment, based on the employee s average compensation during the 12-month period following termination. All contributions are fully vested at all times RSP-300 Page 6 of 8 Rev. 1/ The Board of Pensions of the Presbyterian Church (U.S.A.)

7 Distributions Distributions of Elective Deferrals Distribution Form Required Minimum Distributions at Age (k) Plan Elective deferrals generally available upon age 59.5, separation from service, financial hardship, death, and disability. Rollovers distributable at any time, and employer contributions may be withdrawn if they have been in plan account at least 2 years or participant has at least 5 years of service. Lump sum, installment payments, or purchase of an annuity contract from an insurance company Required, except for employees who are still working and are not 5% owners of the Employer. 403(b) ERISA Plan Elective deferrals generally available upon age 59.5, separation from service, financial hardship, death, and disability. Rollovers distributable at any time, and employer contributions may be withdrawn if they have been in plan account at least 2 years or participant has at least 5 years of service. Lump sum, installment payments, or purchase of an annuity contract from an insurance company Required, except for employees who are still working and are not 5% owners of the Employer. 403(b) Non-Electing Church Plan Elective deferrals generally available upon age 59.5, separation from service, financial hardship, death, and disability. Rollovers distributable at any time, and employer contributions may be withdrawn if they have been in plan account at least 2 years or participant has at least 5 years of service. Lump sum, installment payments, purchase of an annuity contract from an insurance company, or self-annuitized benefit from the plan Required Retirement Savings Plan of the PC(USA) Elective deferrals generally available upon age 59.5, separation from service, financial hardship, death, and disability. Rollovers distributable at any time. Employer contributions may be withdrawn by ministers of the Word and Sacrament and lay pastors for the purpose of purchasing a principal residence. Lump sum or installment Required Loans Permitted Permitted Permitted Permitted In-Plan Roth Permitted Permitted Permitted Permitted Conversions Distributions Received as Housing Allowance Yes Pastors may receive a portion of distributions as housing allowance. Permitted Investments Generally, no restrictions Annuity contracts through an insurance company, custodial accounts with investments in regulated investment companies, such as mutual funds, or retirement income accounts with either annuities or mutual funds Pastors may receive a portion of distributions as housing allowance. Annuity contracts through an insurance company, custodial accounts with investments in regulated investment companies, such as mutual funds, or retirement income accounts with either annuities or mutual funds (Church plans may also selfannuitize benefits) Mutual funds RSP-300 Page 7 of 8 Rev. 1/ The Board of Pensions of the Presbyterian Church (U.S.A.)

8 401(k) Plan Fiduciary Requirements Fiduciary Liability Subject to ERISA s prudent expert standard of care and fiduciaries may be liable for acts of co-fiduciaries. Prohibited Transactions Prohibited Transactions can cause retroactive disqualification of plan and cause excise tax of 15% of amount involved in each year, and if uncorrected, 100% of amount involved. Administrative Requirements Form 5500 Filing with Department of Labor Independent Audit of Plan Non-Discrimination Testing Disclosure Requirements Pre-Emption of State Law 403(b) ERISA Plan Subject to ERISA s prudent expert standard of care and fiduciaries may be liable for acts of co-fiduciaries. Prohibited Transactions can cause retroactive disqualification of plan and cause excise tax of 15% of amount involved in each year, and if uncorrected, 100% of amount involved. 403(b) Non-Electing Church Plan Not subject to ERISA s fiduciary requirements and are subject to state trust law. However, exclusive benefit rule of Section 401(a)(2) of the Internal Revenue Code applies, which requires that plan assets be used for the exclusive benefit of participants and beneficiaries. Prohibited transactions can cause prospective disqualification of plan, but no excise tax applies. Retirement Savings Plan of the PC(USA) Not subject to ERISA s fiduciary requirements and are subject to Pennsylvania law. Exclusive benefit rule applies. Prohibited transactions can cause prospective disqualification of plan, but no excise tax applies. Required Required Not required Does not file Form 5500 Required Required Not required Not performed ADP, ACP, top-heavy testing, minimum coverage requirements, and nondiscrimination in benefits, rights, and features Summary plan descriptions, summaries of material modifications, and statement of ERISA rights Yes; state causes of action such as misrepresentation, fraud, and breach of contract are not heard and ERISA limits remedies to equitable relief; no special or punitive damages. ACP, minimum coverage requirements, and nondiscrimination in benefits, rights, and features Summary plan descriptions, summaries of material modifications, and statement of ERISA rights Yes; state causes of action such as misrepresentation, fraud, and breach of contract are not heard and ERISA limits remedies to equitable relief; no special or punitive damages. Churches and QCCOs are not subject to non-discrimination testing but non-qccos are subject to the same rules as 403(b) ERISA plans None No Churches and QCCOs: none Non-QCCOs are subject to ACP, minimum coverage requirements, and non-discrimination in benefits, rights, and features No formal requirements, but a summary of the plan is provided. No. Pennsylvania law applies. RSP-300 Page 8 of 8 Rev. 1/ The Board of Pensions of the Presbyterian Church (U.S.A.)