Robert J. Toth
NTSA Net has been religiously reporting on the recent spate of church plan litigation. Ray Harmon has reported
as recently as Sept. 21 that there have been more than a dozen cases filed in the past couple of years, and that the Supreme Court has now decided to take up the “issue.”
The question being decided is actually a very narrow and absurdly technical one, yet it is one with potentially significant impact on a very large number of 403(b) plans of church-related schools, hospitals, nursing homes and others: though the courts all acknowledge that both “steeple” churches and “church-related” organizations can all maintain “church plans” is the right to actually first establish that plan reserved solely to steeple churches?
There is an odd absurdity to it all.
A church controlled organization (let’s call it a CCO), like a “steeple” church, is still a “church” as defined by ERISA. Even if a CCO could not adopt a “church plan” (as some courts have found), the CCO could still adopt a 403(b) plan.
This means that the 403(b) plan — though it would be a plan adopted by a “church” — would technically not be considered a church plan. It would, instead, be a “non-church” plan, maintained by a church. How does this make any sense at all? This is the reason I don’t have a great deal of fondness for class action lawyers, even defense counsel: details matter in our business, but not theirs, it seems.
The Supreme Court issued a stay on the first such case which came to its doors. In that first case (as in at least two other appellate cases since decided as well), the lower courts found that only steeple churches have the right to actually establish a “church” plan. If the Supreme Court upholds the lower court rulings, it will mean that all of those church-related organizations which established their own 403(b) plans without being authorized to do so by the religious organization with which they are affiliated will likely be subject to the full requirements of ERISA’s fiduciary, prohibited transaction, reporting and disclosure obligations.
It will be a destructive nightmare if this is to come to pass. Sadly, the continued existence of a large number of small, community-centered, mission-oriented, nearly bankrupt organizations run by people of faith for the underserved actually will be put at risk. And all because multi-billion-dollar hospital organizations, each employing tens of thousands of employees, and each claiming a church’s mantle, chose to underfund their pension funds.
Regardless of the ultimate outcome of this litigation, and potentially corrective legislation, it really does make the point for those dealing with church 403(b) plans to know their churches well. This is because, even without this litigation, the differences between types of churches are critical for tax compliance purposes.
First, ERISA and the Internal Revenue Code define a “church” the same way the Supreme Court defines pornography: you know it when you see it. A church is a “church or a convention or association of churches.” We typically look to such an entity as a place of worship, the keeper of dogma, a source of charity and spiritual activity.
A church, however, also includes organizations “controlled by or associated with” that church or convention of churches. If there is insufficient control or relationship between the main church and its associated organization, it will fail to be a church, and its plan will be subject to ERISA. This failure happens more times than you may think.
Secondly, the Internal Revenue Code draws distinctions between two types of churches, to which it attaches different compliance rules. There is the “church” which includes the place of worship (the steeple church); an “elementary or secondary school which is controlled, operated or principally supported by a church or by a convention or association of churches;” and a “qualified church-controlled organization” (which is called the QCCO). An organization qualifies as a QCCO only if 75% or more of its revenues come from church members, and its services are offered to the public only on an incidental basis. Few organizations ever meet this QCCO standard. If your organization falls within one of these three definitions of a “church,- there are few tax compliance rules to follow.
If, however, you are a CCO which fails to meet the QCCO standard (most church hospitals, universities and community-based charities fail to be QCCOs), you are then a “Non-QCCO.” Though your affiliation with a steeple church may be significant enough to qualify as a “church,” you are not exempt from the tax compliance rules such as coverage and nondiscrimination testing as are the other type of “churches” (including steeple churches, schools and QCCOs).
But in all cases, the steeple church, the school, the QCCO and the non-QCCO ALL are exempt from ERISA — and therefore are not required to file a Form 5500.
Robert J. Toth, Jr. is principal in the Law Office of Robert J. Toth, Jr., LLC and is a member of the NTSA Communications Committee.
Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA or its members.