in Advocate Health Care Network et al. v.
Stapleton et al. The ruling means that
plans maintained by certain tax-exempt
organizations that are controlled by or
associated with a church, such as a faith-based hospital or university, may qualify
as a church plan exempt from ERISA.
Specifically, as long as the plan is
maintained by an organization whose
“principal purpose” is the administration
or funding of a retirement plan or welfare
plan, or both, and that organization is
controlled by or associated with a church,
the plan is a church plan.
But litigation over church plans
will likely continue in the lower courts
because the Supreme Court left several
issues unresolved, including:
• What qualifies as a “principal
purpose organization” that may maintain
a church plan?
• What does it mean to be “controlled
by” or “associated with” a church?
• What is the definition of a “church”?
• Is the church plan exemption from
ERISA an unconstitutional accommodation under the First Amendment’s establishment clause?
Of course, Congress could in the
meantime amend ERISA Section 3( 33),
which defines a church plan, to tighten
the definition, but that seems unlikely in
the near future given its current political
If you have any question as to
whether your organization may establish
or maintain a church plan, you should
consult an attorney.
Q: What is the consequence to a plan
that, though it was written to permit only
403(b) eligible investments, (403(b)( 1)
fixed/variable annuities, and/or 403(b)( 7)
custodial accounts (mutual funds), actually offers nonqualified investments? Is
this a defect that can be self-corrected?
A: We assume you are not referring to a
403(b)( 9) retirement income account in
a church plan, as investments outside of
what would normally be permitted in a
403(b) plan are permitted in such accounts,
and thus an operational failure would not
exist for the fact pattern you provide.
For all other plans/accounts, a failure
does indeed exist. And the consequences
of such a failure, though it is an operational error and not a defect as to form in
the plan document, can be substantial.
The reason is that such defects are identified in the Internal Revenue Service (IRS)
Employee Plans Examination Guidelines
for 403(b) Plans—specifically Section
126.96.36.199.1—as disqualifying the plan as
CONTRIBUTORS: David Levine and David Powell, both principals with Groom
Law Group, Chartered, and Michael Webb, vice president, retirement plan
services, Cammack Retirement Group, field selected questions concerning
403(b) plans and regulations, for use in this article. Stacey Bradford, an associate at Groom, also contributed. This article is meant to provide general information only, does not constitute legal advice, and cannot be used or substituted
for legal or tax advice.
Do you have a 403(b) question? Send it to firstname.lastname@example.org with
the subject line: Ask the Experts. Questions must be of a general nature and of
interest to a majority of plan sponsors.
education organization maintaining a
plan intended to be an IRC 403(b) plan.
All contributions under the plan are
invested in life insurance policies for its
employees. Because life insurance must
be incidental to the primary purpose of
providing retirement benefits, the plan is
not an IRC 403(b) plan.
A plan-level failure that revokes a
plan’s 403(b) status is the most severe
type of plan failure. In theory, the IRS
could disqualify the entire 403(b) plan
upon audit, resulting in immediate taxation of all the account balances to all
participants, as well as other taxation and
withholding consequences. Obviously,
… if the defaulted loan has been repaid,
neither payroll deduction nor outside
collateral is required ... to re-borrow.
a 403(b) plan. Two specific examples are
provided, as follows:
• Example 8: ABC Foundation, an
Internal Revenue Code (IRC) 501(c)( 3)
organization, maintains an annuity plan
intended to be an IRC 403(b) plan. The
foundation makes both elective deferrals
and employer contributions that are not
elective deferrals to individual investment
accounts—not mutual funds—for each of
its employees. The foundation purchases
annuity contracts for employees at their
retirement. The arrangement is not an
IRC 403(b) plan.
• Example 9: Employer A is a public
this is undesirable, and, in practice, such
disqualification is uncommon. But it does
underscore the significance of this type of
As for possible correction, the IRS
Employee Plans Compliance Resolution
System (EPCRS), which provides the
corrective procedures for retirement
plans, including 403(b)s, is silent as to
the correction of this defect. Given the
severity of the failure, it would be prudent
for the sponsor to contact counsel with
specific expertise in such matters for
guidance as to how to approach the IRS
on this issue.