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Take 2 - The Pre-Approved 403(b) Program and Certain 501(c) (3) Organizations

Sue Diehl

The Jan. 24, 2017 403(b) Advisor included a MarketBeat feature, “The Birth of the First Ever IRS Pre-Approved 403(b) Plan Documents!” which described IRS Revenue Procedure (Rev. Proc.) 2017-18 and the three-year remedial amendment period (RAP) for all 403(b) employers to bring their plans up to date under the new restatement. This RAP began on March 31, 2017 and will end on March 31, 2020. IRS approval letters on these new plans have all been mailed to the mass submitters and soon you will all see these new plans being offered.

With this new revenue procedure being released, there have been many questions posed to us by advisors, investment companies, and employers regarding certain 501(c)(3) organizations and the Pre-Approved 403(b) Program. These questions have primarily related to charter schools and faith-based organizations. With 403(b) “restatements” around the corner, outlining some of the unique features these two types of 501(c)(3) organizations can help avoiding mistakes concerning the type of 403(b) plan to be used.

Charter Schools

A charter school is a 501(c) (3) organization that is established by a charter between the granting body (school board; the state”s Department of Education; another entity) and an outside group (teachers; parents; or another group). The IRS refers to charter schools as having “dual taxuality”; leaving it up to the states to determine whether they are governmental or merely a nonprofit organization under 501(c)(3). This determines what type of retirement plan they should have.

  • In some states, charter schools are “linked” to a public school, while others are not. A characteristic of such affiliation is a state law allowing or requiring the charter school”s employees participate in the state retirement plan. This would indicate that the charter school is considered to be “governmental organization,” in addition to being a 501(c)(3) organization.

  • A charter school can also be considered a “public school” and as such is a “governmental organization.” These charter schools adopt a plan very similar to any other public school and would not be subject to ERISA.

  • Or a charter school may not be linked to a public school system and are therefore merely a 501(c)(3) organization and would (if for example there were employer contributions) be subject to ERISA.


Churches and Related Organizations

There are 3 types of “Church and Related Organizations. They are:

1. Qualified Church Controlled Organizations (QCCOs);
2. Nonqualified Church Controlled Organizations (NonQCCOs); and
3. Steeple Churches, conventions or associations of churches.

These organizations are covered by two types of plans. They are:

1. A Non-electing Plan for Churches and Religious Organizations
2. A 403(b)(9) Church Plan

What Does this Mean for a Church/QCCO/NonQCCO)?

A Non-electing Plan for Churches and Religious Organizations. This plan operates in the same way as a plan for a 501(c)(3) organization; however, since the Employer is a Church, they are able to elect to NOT be covered by ERISA. Additionally, based on the type of entity sponsoring the plan, certain requirements related to Universal Availability and Nondiscrimination testing may not apply.

Non-Electing 403(b)”s for Churches and Religious Organizations” fall under two categories:

1. Qualified Church-Controlled Organization (QCCO). A QCCO is defined in section 3121(w)(3)(B) as: a convention or association of churches (e.g. the denomination), or an elementary or secondary school that is controlled, operated, or principally supported by a church or by a convention or association of churches.

2. Non- Qualified Church-Controlled Organization (Non-QCCO). A Non-QCCO is a 501(c) (3) entity which is controlled by or "associated with" a church or a convention or association of churches if they share common religious bonds and convictions with that church or convention or association of churches, but which does not satisfy the above definition of "QCCO.”

A key difference between QCCOs and Non-QCCOs is the amount of support provided by the church. So, for example, if a church maintains on its property an elementary school and the church supports the school with more than 25% of support from church revenue, then they would be viewed as a QCCO and would not be subject to ERISA nor would it be subject to any nondiscrimination requirements.

CONCERN: If your client is faith-based, be sure you understand the applicable rules. For QCCOs and Non-QCCOs, the restatement will not be made under a 403(b)(9) Plan, even if they participated in the “church plan” for years. Until further guidance is received, these employers will need to restate using a 403(b) for non-electing religious organizations. Keep in mind that some Non-QCCOs can be quite large. For example, a university that is a faith based school; or a medical facility that is faith based — such plans may be Non-QCCOs and, therefore, be subject to nondiscrimination testing.

A 403(b)(9) Church Plan. A plan will qualify as a 403(b) (9) Church Plan if it establishes that:

1. Substantially all of its covered employees are employees or "deemed" employees of a church or convention or association of churches under Internal Revenue Code Section 414(e)(B);
2. The plan is not primarily for the benefit of employees (of their beneficiaries) who are employed in connection with one or more unrelated trades of businesses (within the meaning of Code Section 513); and
3. The plan is established or maintained for employees:

  • by a church or a convention or association of churches that is exempt from tax under section 501; or by an organization described in section 414(e) (3) (A); and


  • for purposes of Code Section 414(e) only, the term "church" also includes a religious order or a religious organization if such order or organization is (1) an integral part of a church, and (2) engaged in carrying out the functions of a church, whether it is a civil law corporation or otherwise. [Reg 1.414(e)-1(e)].


It is important to note that church-controlled religious organizations have been excluded from this definition, and therefore cannot restate on a 403(b)(9) plan document.

Why Do I Need to Know this?

In the process of submitting plans to the IRS, the IRS determined that QCCOs and non-QCCOs could not participate in a 403(b)(9) approved plan. Therefore, in the restatement process, it may be required to “pull apart” the employers that may all be participating in one plan of the employer.

What About Electing ERISA Coverage?

A church plan may make an election under Internal Revenue Code Section 410(d) to have ERISA (and certain Internal Revenue Code rules from which it would otherwise be exempt) apply. This written election may only be made by the plan administrator of the plan; is irrevocable and must be submitted along with the filing of the Form 5500. If the employer has never made this written election, but has filed a form 5500 for all past years, then the employer can stop filing the form 5500, and indicate to the DOL that they filed in error.

CONCERN: The mere filing of a Form 5500, testing of the plan under the nondiscrimination requirements, execution of an ERISA plan document or provision of an SPD will not make the plan subject to ERISA! Occasionally, an employer such as a tax-exempt hospital or school may wish to be subject to ERISA. They file the irrevocable election with the filing of their form 5500. This can never be “undone.”

Susan D. Diehl, CPC, QPA, ERPA, is President, PenServ Plan Services, Inc. and Chair of the NTSA Communications Committee.

Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA or its members.

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