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Issue Snapshot - Qualification Requirements for Non-Electing Church Plans under IRC Section 401(a)

A plan that meets the definition of a church plan in IRC Section 414(e) is exempt from certain requirements imposed on other tax-qualified retirement plans under the Internal Revenue Code (IRC). However, a church plan sponsor can elect under IRC Section 410(d) to have the plan treated as though it were not an exempt church plan. Plans for which no IRC Section 410(d) election was made are known as “non-electing church plans.”

This Snapshot identifies sections of the Internal Revenue Code that a non-electing church plan must satisfy in order to be a qualified plan under IRC Section 401(a). Non-electing church plans must also satisfy certain pre-ERISA requirements in order to be a qualified plan. This Snapshot also identifies those requirements.

IRC Sections and Treas. Regulations

  • IRC Section 401(a)
  • IRC Section 410
  • IRC Section 411
  • IRC Section 414(e)
  • IRC Section 415
  • IRC Section 416
  • IRC Section 417
  • Treas. Reg. Section 1.410(d)-1

Resources

  • IRC Sections 401(a)(3), (4), (5) and (7) as in effect on September 1, 1974 (prior to amendment by P.L. 93-406)
  • 2003 CPE, Chapter 4, Church, Governmental and Collectively Bargained Plans
  • Memorandum for Manager, EP Determinations from the Acting Director of EP Rulings and Agreements, dated April 30, 2012 (pertains to governmental plans, but includes a general discussion of pre-ERISA vesting requirements)
  • Notice 2001-46, 2001-32 I.R.B. 122
  • IRS Publication 778, Guides for qualification of pension, profit sharing and stock bonus plans (Rev. 2-72) (includes a discussion of certain pre-ERISA requirements applicable to qualified plans)

Analysis

Non-electing and electing church plans

Church plans under IRC Section 414(e) can be classified as belonging to one of two general categories – (1) those that made an election under IRC Section 410(d) to have the plan treated as though it were not a church plan (commonly referred to as electing church plans); and (2) those that did not make an election under IRC Section 410(d) (commonly referred to as non-electing church plans). Electing church plans must meet all of the requirements of IRC Section 401(a) in order to be qualified. Non-electing church plans are exempt from many of the IRC Section 401(a) qualification requirements otherwise applicable to electing church plans.

The election is made under Treas. Reg. Section 1.410(d)-1(c) by filing a statement to that effect either (i) with an annual return (Form 5500) or (ii) with a request for a determination letter under IRC Section 401(a). Once such an election is made, it is irrevocable with respect to that plan.

Qualification requirements NOT applicable to non-electing church plans

The starting place to determine the qualification requirements for non-electing church plans is the flush paragraph at the end of IRC Section 401(a). The flush language is found immediately after IRC Section 401(a)(37). Under that text, certain plans to which IRC Section 411 does not apply are not subject to the following sections of the IRC:

  • 401(a)(11) – Joint and survivor annuities (see also IRC Section 417)
  • 401(a)(12) – Mergers and transfers of assets and liabilities
  • 401(a)(13) – Assignment and alienation
  • 401(a)(14) – Commencement of benefit requirements
  • 401(a)(15) – Reductions in benefits due to Social Security increases
  • 401(a)(19) – Forfeiture of mandatory contributions
  • 401(a)(20) – Total distributions

IRC Section 411(e)(1)(A) provides that IRC Section 411 does not apply to non-electing church plans. (However, as described further below, under IRC Section 411(e)(2), a non-electing church plan – to be qualified -- must nonetheless satisfy the pre-ERISA vesting requirements resulting from the application of IRC Sections 401(a)(4) and 401(a)(7) as in effect on September 1, 1974.)

Qualification requirements applicable to non-electing church plans

The following requirements of IRC Section 401(a) are applicable to non-electing church plans, albeit with some modifications as noted below:

  • 401(a)(1) – Contributions to the plan must be for employees
  • 401(a)(2) – Exclusive benefit rule
  • 401(a)(4) – Nondiscrimination testing (but see Notice 2001-46, which provides that the regulations under IRC Sections 401(a)(4), 401(a)(5), 401(l), and 414(s) will not apply to non-electing church plans until further notice. Until such notice is provided, non-electing church plans must be operated in accordance with a reasonable, good faith interpretation of these statutory provisions.)
  • 401(a)(5) – Special nondiscrimination rules, including those relating to salaried and clerical employees, permitted disparity, contributions and benefits that bear a uniform relationship to compensation, and plan aggregation rules (but see Notice 2001-46, noted above)
  • 401(a)(8) – Forfeitures in defined benefit plans
  • 401(a)(9) – Minimum distribution requirements (but see IRC Section 401(a)(9)(C)(iv) for special rules applicable to certain church plans)
  • 401(a)(10)(B) – Top-heavy requirements (see also IRC Section 416)
  • 401(a)(16) – Limitation on contributions and benefits under IRC Section 415 (see also IRC Section 415)
  • 401(a)(17) – Limitation on compensation
  • 401(a)(25) – Requiring that actuarial assumptions be specified in the plan
  • 401(a)(26) – Additional participation requirements
  • 401(a)(27) – Determinations as to profit-sharing plans
  • 401(a)(30) –Limitation on elective deferrals under IRC Section 402(g)
  • 401(a)(31) – Direct transfer of eligible rollover distributions
  • 401(a)(36) – In-service distributions permitted to participants who have attained age 62
  • 401(a)(37) – Death benefits under USERRA

Certain pre-ERISA requirements

Non-electing church plans are exempt from the ERISA provisions pertaining to participation, coverage, and vesting. See IRC Sections 410(c)(1)(B) and 411(e)(1)(B). However, these plans are subject to the requirements for participation, coverage and vesting that were in effect on September 1, 1974, prior to the enactment of ERISA. See IRC Sections 410(c)(2) and 411(e)(2).

A complete discussion of the pre-ERISA requirements applicable to non-electing church plans is beyond the scope of this Snapshot. However, certain relevant sections of the IRC prior to the enactment of ERISA provided in part as follows:

  • Vesting. The pre-ERISA vesting requirements are set forth in IRC Sections 401(a)(4) and 401(a)(7) as in effect on September 1, 1974. A plan’s compliance with these sections depends on both its form and operation.

Section 401(a)(4) stated, in pertinent part, that a trust constitutes a qualified trust “if the contributions or benefits provided under the plan do not discriminate in favor of employees who are officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees.”

Section 401(a)(7) stated, in pertinent part, that “upon its termination or complete discontinuance of contributions under the plan, the rights of all employees to benefits accrued to the date of such termination or discontinuance, to the extent funded, or the amounts credited to the employees’ accounts are nonforfeitable.”

  • Participation and Coverage. The pre-ERISA participation and coverage requirements are set forth in IRC Sections 401(a)(3) and 401(a)(5) as in effect on September 1, 1974. Several permissible options were available. Section 401(a)(3) provided that a plan could satisfy one of two alternative percentage tests:
    1. 70% or more of all employees must be covered under the plan.
    2. 70% or more of all employees must be eligible under the plan, and if so, at least 80% of all eligible employees must be covered.

The percentages above are applied after excluding employees:

  • who worked less than a period stated in the plan, not to exceed 5 years;
  • who do not customarily work for more than 20 hours in any one week; and
  • whose customary employment is not more than 5 months in any calendar year.

In lieu of meeting one of the percentage tests, the plan may cover a classification of employees which does not discriminate in favor of officers, shareholders, persons whose principal duties consist of supervising the work of other employees, or highly compensated employees.

Section 401(a)(5) provided that a classification shall not be considered discriminatory within the meaning of IRC Section 401(a)(3)(B) merely because it is limited to salaried or clerical employees.

Audit tips

  • Is the plan a non-electing church plan?
  • Review the plan document, applications for prior determination letters, prior determination letters, and Form 5500 (if any).
  • Determine if a statement was filed pursuant to Treas. Reg. Section 1.410(d)-1(c).