The ERISA consultants at the Learning Center Resource Desk, which is available through Columbia Threadneedle Investments, regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with an advisor in Connecticut is representative of a common inquiry involving the IRS’ rules regarding controlled groups. The advisor asked:
“Are church plans subject to controlled group rules?”
- Yes, church plans are subject to controlled group rules and, in fact, provisions in the Protecting Americans from Tax Hikes (PATH) Act, enacted Dec. 15, 2015, clarified the controlled group rules as they relate to church plans.
- As background, special rules apply with respect to qualified retirement plans that are church plans and to Internal Revenue Code Section 403(b) plans that are maintained by churches or qualified church-controlled organizations. A church plan, generally, is a plan established and maintained for its employees (or their beneficiaries) by a church or by a convention or association of churches that is tax-exempt.
- Section 336 of the PATH Act clarifies the controlled group rules for church plans. Previously, the controlled group rules may have required churches and certain church-related organizations (that have little relation to one another) be treated as a single employer and, therefore, be aggregated for plan purposes. The PATH Act provides a general rule for organizations eligible to maintain a church plan. Under this general rule, one organization is not aggregated with another organization and treated as a single employer unless two conditions are satisfied:
1. One organization provides directly or indirectly at least 80% of the operating funds for the other organization during the preceding taxable year of the recipient organization, and
2. There is a degree of common management or supervision between the organizations, such that the organization providing the operating funds is directly involved in the day-to-day operations of the other organization.
There are two exceptions to this general aggregation rule:
1. Nonqualified controlled church organizations (NQCCOs) will be aggregated with other NQCCOs (or with an organization that is not a tax-exempt organization) if at least 80% of the directors or trustees of the other organization(s) are either representatives of, or directly or indirectly controlled by, the first organization.
2. A church or convention or association of churches with which an organization which has the principal purpose or function of the administration or funding of retirement or welfare benefits plans for church employees is associated, or an organization designated by such church or convention or association of churches, may elect to treat the organizations as a single employer for the plan year. Once this election is made, it will apply to all future years unless it is revoked by providing notice to the IRS.
- A QCCO is any church-controlled tax-exempt organization other than an organization that:
— Offers goods, services, or facilities for sale, other than on an incidental basis, to the general public, other than goods, services of facilities that are sold at a nominal charge substantially less than the cost of providing the goods, services or facilities; and
— Normally receives more than 25% of its support from either governmental sources, or receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities, in activities that are not unrelated trades or businesses or from both.
- An example of a QCCO could be a 501(c)(3) tax-exempt nursing home that is “controlled” by a church but receives 25% or less of its support from fees paid by residents. If the nursing home received 25% or more of its support from fees paid by residents it would be an NQCCO.
- These provisions are effective for plan years before, on, or after the date of the enactment of the PATH Act.
Conclusion
Church plans are subject to controlled group rules. Provisions in the PATH Act, enacted Dec. 15, 2015, clarified for church plans when one organization is not required to be aggregated with another organization and treated as a single employer.
The Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC (RLC), a third-party industry consultant that is not affiliated with Columbia Threadneedle. Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Columbia Threadneedle does not provide tax or legal advice. Consumers consult with their tax advisor or attorney regarding their specific situation.
Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Columbia Threadneedle.
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