Does Your Plan Qualify as a Church Plan?A Federal Appeals Court Says, Maybe Not
Evan Giller
A retirement plan that qualifies as a church plan under ERISA and the Internal Revenue Code is exempt from a variety of important provisions of these statutes.A church plan is not covered by ERISA’s minimum funding rules, reporting and disclosure requirements, spousal rights requirements, and, for defined benefit plans, the payment of premiums to the Pension Benefit Guarantee Corporation.
However, whether a plan is a church plan or not is not always so clear. Over the last three years, a series of lawsuits have questioned whether the retirement plans of church affiliated organizations (such as hospitals and health care providers) were correctly being treated as church plans exempt from ERISA. In Kaplan v. St. Peter’s Healthcare System, issued on December 29, 2015, the U.S. Court of Appeals for the Third Circuit considered this question, and it concluded that the definition of “church plan” under ERISA is to be read narrowly.
The issue stems from the language in ERISA that creates the exemption. Under ERISA Section 3(33)(A), a “church plan means a plan established and maintained...for its employees (or its beneficiaries) by a church or a convention of churches which is exempt from tax” under IRC section 501 (emphasis added). That part is relatively straightforward. But the statute also provides that a church plan includes a plan maintained by a certain church affiliated organizations that are controlled by or associated with a church or a convention or association of churches.This part of the definition omits the term “established”. The question before the court was whether the ERISA exemption covers retirement plans that are established by the church affiliated organization, as opposed to established by the church itself.
The Third Circuit found that the plain meaning of ERISA provides that only retirement plans established by a church can meet the definition of church plan.While a plan that covers employees in a church affiliated organization can be maintained by that organization, it could not be established by it. To qualify for the exemption, the church must have established the plan of the affiliated organization.
The Third Circuit’s decision did not only rely on an interpretation of the statutory language.Although St. Peter’s Healthcare System argued that the legislative history of the church plan exemption supported its view for a broader definition of church plan, the court read the legislative history as demonstrating Congress’ desire for a narrow exemption.And the court found the fact that the IRS has for many years issued “at least several hundred” church plan exemptions based on the broader reading of the statute to be completely unpersuasive. It is interesting to note that St. Peter’s Healthcare System itself had received a ruling from the IRS stating that it was a church plan.
This is potentially a very significant ruling for tax-exempt entities that are affiliated with churches and believe that they are maintaining church plans,such as hospitals and schools.If the Third Circuit view prevails, all such entities will need to review whether they are in fact subject to the church plan exemption from ERISA, even if they have a favorable ruling from the IRS.However, there are six other district courts that have issued opinions on this question, split three-to-three on how the statute should be read.It is very likely that other Courts of Appeals will be asked to decide the issue, and if another circuit disagrees it is possible that the Supreme Court will need to answer the question.In the meantime, church plans should keep a close watch on the developments in this area.
It’s a Great Day to Make Plan Corrections: The IRS Announces Reduced VCP Fees
On January 4, 2016, the Internal Revenue Service (IRS) released bulletin 2016-1 detailing reduced general compliance fees for submissions to the Voluntary Correction Program (VCP) under the Employee Plans Compliance Resolution System (EPCRS). Effective February 1, 2016, fees for submitting applications are reduced for most employers who seek to correct retirement plan errors to protect their tax qualified status.
See the table below to compare the old and new VCP general compliance fees, which are based on the number of participants within the plan (determined by the most recently filed IRS Form 5500).
What About Other Fees?
The table above details general compliance fees for Qualified Plans and 403(b) Plans submitting under the VCP program, but different and/or fees are sometimes applicable when pursuing the VCP process. These other fees may include: fees for non-amender failures, multiple failures, group submission, SEPs and SIMPLE IRA Plans, egregious or intentional failures, establishing the number of plan participants, and insufficient general compliance fee. The dollar amount required for these other types of VCP submissions remains unchanged and are detailed in Section 12 of Rev. Proc. 2013-12.
The Benefits of Correcting Through VCP
Applying for VCP is an effective way to address errors within a plan document at less risk and cost than during an IRS examination. Employers may not utilize VCP if they are currently involved in an Employee Plans examination with the IRS. As a result, it is critical that plan documents and operations be reviewed regularly in order to identify and address any potential errors.
The VCP Program Allows Employers to:
Address errors and bring the plan into compliance with federal tax law.
Receive a compliance statement from the IRS (document stating that plan correction methods have been approved).
Protect the plan’s tax qualified status.
Request relief from excise or federal income taxes that may otherwise be imposed in the case of certain plan errors.
The reduced application fees serve as encouragement from the IRS for plan sponsors to perform a comprehensive look into their plan documents to ensure federal compliance. Please, contact us if you have any questions regarding your plan document or seek assurance that your plan is in compliance with the federal tax law.
Copyright ©2016Boutwell Fay LLP. All rights reserved. This newsletter is for informational purposes only and does not constitute legal or tax advice.