Church Group Requests Expansion of Preapproved Plan Program

June 26, 2020

The Honorable Charles Rettig
Commissioner
Internal Revenue Service
1111 Constitution Avenue NW
Washington, DC 20224

Dear Commissioner Rettig:

On behalf of the Church Alliance, I am writing to request that the Treasury Department and Internal Revenue Service (“IRS”) expedite guidance to ensure that church benefits plans that participated in the IRS's 403(b) pre-approved plan program and obtained pre-approval of their 403(b)(9) plans be permitted to amend those plans to allow certain types of church-affiliated organizations to participate, in accordance with the recent enactment of the SECURE Act.

The Church Alliance

The Church Alliance is an organization composed of thirty-seven church benefit boards, covering mainline and evangelical Protestant denominations, three Jewish entities, and Catholic schools and institutions. The boards provide employee benefit plans, including retirement and/or health coverage, to approximately one million participants (clergy and lay workers) serving over 155,000 churches, parishes, synagogues and church-associated organizations. These plans are defined as “church plans” under section 3(33) of the Employee Retirement Income Security Act of 1974, as amended, and section 414(e) of the Internal Revenue Code of 1986 (“Code”), as amended.

The SECURE Act and Background on 403(b)(9) Non-Qualified Church Controlled Organizations Issue

The SECURE Act provisions that were included in the 2019 year-end funding agreement reached by Congress and signed by the President (P.L. 116-94) included a clarification provision for which the Church Alliance has been actively advocating for several years. This provision clarified that church-affiliated organizations that are “non-qualified church-controlled organizations,” or “non-QCCOs,” are eligible to participate in church retirement income account programs described in Code section 403(b)(9). This legislative clarification is retroactively effective back to 1982, when section 403(b)(9) was first added to the Code.

The “non-QCCO” problem first came to our attention when the IRS was reviewing 403(b) “volume submitter” plan documents that had been submitted under the IRS's pre-approved 403(b) plan program. IRS representatives in Cincinnati who were involved in this review informed representatives of several organizations that filed plan documents for pre-approval that both non-QCCOs and organizations that qualified as “QCCOs” (qualified church-controlled organizations) were ineligible to participate in a volume submitter plan described in Code section 403(b)(9). Church benefit program representatives subsequently learned that IRS Chief Counsel in Washington, D.C. advised the Cincinnati IRS office that their view was that non-QCCOs are not eligible to participate in a 403(b)(9) plan and, further, that the IRS had decided not to allow QCCOs to participate in a pre-approved volume submitter 403(b)(9) plan either, because QCCOs might turn into non-QCCOs at some point. This surprising and disappointing news necessitated a legislative effort that eventually resulted in the SECURE Act provision amending Code section 403(b)(9) to clarify that both types of organizations are indeed eligible to participate in 403(b)(9) plans — and always have been.

Guidance Needed to Conform 403(b) Pre-Approved Plan Program

As noted above, Code section 403(b)(9) has now been clarified to provide the requested relief. However, the pre-approved volume submitter 403(b)(9) plan documents, as approved by the IRS, do not permit QCCOs and non-QCCOs to participate in them. The IRS created the 403(b) pre-approved plan program so that tax-exempt employers eligible to participate in 403(b) plans could adopt a pre-approved plan and thereby insure that their retirement plans meet the written plan document requirement imposed on 403(b) plans by the IRS effective in 2010.¹ The Church Alliance members who sought and obtained approval of their 403(b)(9) volume submitter plan documents would like to be able to permit QCCOs and non-QCCOs to participate in their pre-approved plans now, but they cannot do that without amending their pre-approved plan documents to permit such participation. These Church Alliance members are concerned that making such an amendment and allowing such participation would invalidate the pre-approved status of their plans.

The Church Alliance strongly supports the IRS's goal of having as many eligible nonprofit employers as possible adopt a 403(b) pre-approved plan. With this shared goal in mind, we respectively request that the Treasury Department and IRS expedite guidance to allow current sponsors of pre-approved 403(b)(9) plans to amend those plans to permit adoption by QCCOs and non-QCCOs. We also request that the special remedial amendment period available to employers participating in 403(b) pre-approved plans be made available to adopting QCCOs and non-QCCOs even if such adoption occurs after June 30, 2020 (the date on which this special remedial amendment period will expire).

Proposed Snap On Amendment

We believe that the volume submitter plan amendments required to allow QCCOs and non-QCCOs to participate in such plans would be straightforward — in part, because the coverage and nondiscrimination provisions that apply to non-QCCOs are already contained in the pre-approved plan documents.² The necessary plan document changes could be made by implementation of a “snap on” amendment, along the lines of the attached document.

Additional SECURE Act Implementation Issue

Finally, we wanted to call your attention to an issue that has arisen with respect to the section 401 “stretch IRA” provision that was included in the SECURE Act. Section 401 essentially modifies the distribution rules, except for certain “designated beneficiaries,” and also includes an exception for existing annuity contracts on the date of the enactment. That exception is for a “qualified annuity” which is defined as a commercial annuity and must also meet the requirements of Code section 401(a)(9). Although church retirement income accounts that self-annuitize meet the Code section 40l(a)(9) requirements under the section 403(b) regulations, which allow the rules to be met “without the purchase of a commercial annuity” (26 CFR § 1.403(b)-6), the reference to commercial annuity, as defined in Code section 3405(e)(6), creates a lack of clarity. In this regard, we request that the IRS allow church 403(b)(9) retirement income accounts, consistent with the Code section 401(a)(9) requirements, to be treated as commercial annuities for purposes of the grandfathering exception under section 401(b)(4) of the SECURE Act. We are happy to provide additional information if it would be helpful.

Thank you for your time and consideration of this request. The Church Alliance is happy to serve as a resource on this and other issues impacting church benefits plans. If you have any questions, please contact Karishma Page at (202) 778-9051.

Sincerely,

On behalf of the Church Alliance
Karishma Shah Page
Partner
K&L Gates LLP
Washington, DC