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New: Legislation Affecting Church 403(b) Plans

By Robert Toth, J.D.; Member, NTSA Communications Committee

(Editor’s note: This article, with minor changes, appeared in Bob and Conni Toth’s Business of Benefits Blog, and is shared with NTSA members with permission.)

Of great interest to our members who work with church plans, is the extraordinary and fundamental changes introduced to church 403(b) plans by the PATH Act where the Tax Code will now permit the merger of 401(a) and 403(b) plans of churches; and the “transfer” of assets between the two types of plans will be permitted.

Merging 403(b)s and 401(a)s has been an ongoing issue in the tax-exempt marketplace: consultants and advisors trying to clear up the often messy retirement plan structures of their not-for profit clients continue to be stymied by the inability to merge these two types of plans. Not only could these plans not be merged, but there is no way to do a “plan-to-plan transfer” between them. The only way to accomplish any sort of “transfer” was for there to be a distribution from one of the plans which could be “rolled” into the other. One preferred method is to terminate the 401(a) plan with a default “deemed” rollover election (yes, this is permitted by Treas. Reg. §1.401(a)(31), Q7) into the 403(b) plan.

The PATH Act will eventually change all of that for church plans. “Under rules prescribed by the Secretary,” church 403(b) and 401(a) plans (of the same church) will be able to either merge or transfer assets between them, effectively using the same “merger and transfer” rules currently in place for 401(a) plans. The good news is that this rule uses the broad definition of “church” under Internal Revenue Code Section 414(e)(3), which includes “steeple” churches and organizations associated with or controlled by churches — which will include such organizations as hospitals and universities.

Don’t go racing to merge your church plans yet, however. We will need to wait for the IRS to issue guidance before that can be done. But the door will be open at some point. We will report that guidance when it is issued.

One of the questions that the IRS will need to answer in guidance is how Revenue Procedure 2007-71 applies. That revenue procedure permitted employers to exclude from its plan certain pre-2005 contracts (and, under certain circumstance, certain pre-2009 contracts), so it will be important to see if the IRS excludes those old contracts for merger purposes.

Note also that there will be some serious complications under ERISA for those “electing church plans,” which have elected to be covered by ERISA. What really makes the new rules work so well is that the typical 414(e)(3) church will not be governed by ERISA, which will make the merger/transfer much simpler.

The PATH Act also introduced a few more changes to church 403(b) plans. It preempted state payroll laws which may otherwise prevent a church from auto-enrolling participants in a 403(b) plan (the existing rules auto-enroll rules did not cover church 403(b) plans); there is a controlled group/aggregation rule clarification; collective trust guidance; and grandfathered 403(b) DB guidance. Click here for a copy of the PATH Act Church Rules.

Robert Toth is Principal, Law Office of Robert J. Toth, Jr., LLC.
Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA, or its members.