Churches Question Need for Provision in Multiple Employer Plan Regs

May 27, 2022

Internal Revenue Service
Attn: CC:PA:LPD:PR (REG-121508-18)
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Re:IRS Reg. 121508-18; Multiple Employer Plans

To Whom It May Concern:

The Church Alliance is submitting this letter as a public comment to the Multiple Employer Plans Notice of Proposed Rulemaking published by the Internal Revenue Service (“IRS”) on March 28, 2022, at 87 Fed. Reg. 17225 (“2022 Proposed Regulations”). The Church Alliance appreciates the IRS's ongoing consideration of issues related to multiple employer plans and the opportunity to comment.

As discussed in more detail below, the Church Alliance believes that there is uncertainty over whether Section 413(c) of the Internal Revenue Code of 1986 (“Code”) and regulations thereunder apply to Code Section 403(b) multiple employer church plans. The Church Alliance requests that the IRS clarify that Code Section 413(c) does not apply to Code Section 403(b) church plans. Alternatively, the Church Alliance requests that the IRS provide relief for Code Section 403(b) church plans from the unified plan rule.

I. Introduction

The Church Alliance is composed of 37 church benefit organizations, covering mainline and evangelical Protestant denominations, three Jewish entities, and Catholic schools and institutions. The organizations provide employee benefit plans, including retirement and/or health coverage, to nearly one million participants (clergy, lay workers, and their families), serving approximately 155,000 churches, parishes, synagogues, and church-related organizations. The plans of church benefit organizations (“denominational plans”) are defined as “church plans” under Section 3(33) of the Employee Retirement Income Security Act of 1974 and Code Section 414(e).

II. Background on Church Benefit Plans

A. Church Benefit Plans Generally

Church benefit organizations are mission-bound and have a long history of caring for the faith leaders serving our communities. Church benefit plans have been in existence for decades and, in some cases, pre-date the enactment of the Code in 1913. Denominational plans are typically maintained by a separately incorporated church benefit organization for eligible employees of ministries in a denomination, providing retirement and welfare benefits to thousands of clergy and lay workers working for different employers. In some cases, the sponsor is the church or denomination, not the benefit organization.

In addition to serving churches, denominational plans also cover other nonprofit organizations associated with the denomination or church. Participating employers can include church-affiliated nursing homes, day care centers, seminaries, universities, elementary and secondary schools, food pantries, and other social services organizations. These organizations are essential to fulfilling the mission and ministry of the church and share common bonds of worship with the denomination. Individuals, such as self-employed ministers and missionaries, may also participate in the plans.

B. Church Retirement Plans

Most church retirement plans are governed by Code Section 403(b)(9).¹ These church retirement plans, often referred to as “church 403(b)(9) plans,” offer robust savings options for clergy and lay workers of churches and church related organizations. These plans accept employer and employee contributions during an employee's working life, as well as beyond their working life in some instances, using the five-year post-severance contribution feature, which allows them to provide for employees with little or no savings near retirement.

Because they serve multiple employers, church retirement plans provide efficiency, continuity, and consistency for ministers and lay workers as they move throughout the country from one church or church-related organization to another within a denomination. Most participating employers are small, local churches with only a few employees. In many denominations, the local church's pastor may be the only employee. If there are others, they may be full or part-time workers who assist with administrative duties, which are performed by volunteers in many churches.

III. Multiple Employer Plans Notice of Proposed Rulemaking

A. 2019 Proposed Regulations

On October 1, 2019, the Church Alliance submitted comments in response to the Multiple Employer Plans Notice of Proposed Rulemaking published by the IRS on July 3, 2019, at 84 Fed. Reg. 31777 (“2019 Proposed Regulations”). The regulations proposed an exception for certain plans to the unified plan rule under 26 C.F.R. § 1.413-2(a)(3)(iv), which provides that “the failure by one employer maintaining the plan (or by the plan itself) to satisfy an applicable qualification requirement will result in the disqualification of the MEP for all employers maintaining the plan.”

In its comments, the Church Alliance shared in the observations made by the American Benefits Council in its comments filed on September 30, 2019, regarding the uncertainty surrounding the application of Code Section 413(c) to Section 403(b) plans.² In its letter, the Church Alliance requested that the IRS confirm that Code Section 413(c) and its implementing regulations, including the unified plan rule, do not apply to Code Section 403(b) plans.

Alternatively, the Church Alliance requested that relief be granted to Code Section 403(b) church plans in a manner that does not require the spinoff of assets related to a noncompliant employer. As explained in the comments submitted, a condition of implementing a plan spinoff may infringe upon ecclesiastical requirements, eroding the portability features that are critically important to church plans, and likely be unworkable.

B. 2022 Proposed Regulations

The 2022 Proposed Regulations withdrew the 2019 Proposed Regulations in response to the SECURE Act, which added Section 413(e) to the Code, providing statutory relief from the unified plan rule for pooled employer plans and “related employer” multiple employer plans.

The background to the 2022 Proposed Regulations, after referencing Code Section 413(e) plans, provides that “[a] MEP is eligible for the exception to the unified plan rule if it is a section 413(c) defined contribution plan described in section 401(a) or consists of individual retirement accounts described in section 408 (including by reason of section 408(c)), provided that the MEP either is maintained by employers that have a 'common interest' or has a 'pooled plan provider.'” Footnote 2 to that quoted text states: “Although section 403(b) plans are defined contribution plans, they are not plans described in section 401(a) or 408. Therefore, section 413(e)(1) does not apply to section 403(b) plans.”

Likewise, Code Section 413(c) should not apply to Code Section 403(b) church plans. Code Section 403(b) church plans are instead subject to the Code Section 403(b) regulations. Most of the rules in Code Section 413(c) would be inapplicable to church plans, and those that should be applicable are incorporated in the Code Section 403(b) regulations.

Based on the above, and consistent with the comments submitted in response to the 2019 Proposed Regulations, the Church Alliance requests that the IRS confirm that Code Section 413(c) does not apply to Code Section 403(b) church plans. Notably, this would be consistent with language included in the Securing a Strong Retirement Act of 2021 (H.R. 2954), also referred to as “SECURE 2.0.”³ This proposal, which passed the House in March 2022, would put in place a framework for Code Section 403(b) multiple employer plans. With regard to church plans, SECURE 2.0 exempts Code Section 403(b) church plans from the provisions related to Code Section 403(b) multiple employer plans. The Church Alliance is hopeful Congress will move forward with expeditious enactment of SECURE 2.0 or similar legislation.

As an alternative to the IRS clarifying that Code Section 413(c) does not apply to Code Section 403(b) church plans, the Church Alliance requests relief for Code Section 403(b) church plans from the unified plan rule.

IV. Conclusion

The Church Alliance is grateful for the IRS's focus on multiple employer plans. As the IRS advances the Multiple Employer Plans Notice of Proposed Rulemaking, the Church Alliance respectfully requests that it be clarified that Code Section 413(c) does not apply to Code Section 403(b) church plans. Alternatively, the Church Alliance requests relief for Code Section 403(b) church plans from the unified plan rule.

The Church Alliance appreciates the opportunity to comment and welcomes the opportunity to serve as a resource. Please do not hesitate to contact us if you have any questions or wish to discuss these comments further. Thank you.

Sincerely,

Karishma Shah Page
Partner
K&L Gates LLP
Washington D.C.
On behalf of the Church Alliance