PLR 1302045: IRS approves five benefit plans as church plans

Plain-English summary

A nonprofit school controlled by a religious organization asked whether five employee benefit plans qualified as church plans under section 414(e). The IRS found that the school was tax-exempt, associated with the religious organization, and controlled through its governing structure. It also found that the committee administering the plans was controlled by and shared common religious bonds with that organization. The IRS ruled that all five plans were church plans, while expressing no opinion on whether the defined contribution plan satisfied section 403(b).

Ruling snapshot

• Question: Do the five employee benefit plans qualify as church plans under section 414(e)?
• Outcome: Approved
• Key authorities: IRC §§ 403, 410, 414, 501, and 6110; Treas. Reg. provisions cited in the ruling; Rev. Proc. 2011-44

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

OCT 18 2012

U.I.L. 414.08-00

XXX

XXX

Attention: XXX

LEGEND:

Entity A =
Religion B =
Division X =
Area J =
Leader K = XXX
School C =
State D =
State E =
Country H =
Person Z =

Plan 1 =
Plan 2 = XXX
Plan 3 =

Plan 4 =

Plan 5 = XXX

201302045
Dear XXX:

This is in response to correspondence dated November 16, 2009, as
supplemented by correspondence dated November 14, 2011, December 12,
2011, January 11, 2012, February 10, 2012, and May 3, 2012, submitted on
behalf of Entity A by its authorized representative, concerning whether Plan 1,
Plan 2, Plan 3, Plan 4, and Plan 5 qualify as church plans under section 414(e) of
the Internal Revenue Code (“Code”).

The following facts and representations have been submitted under penalty of
perjury in support of the rulings requested:

Entity A is a State E non-profit corporation incorporated on April 4, 1979 that
controls School C, a secondary school that provides education under the
auspices of Division X and Religion B.

Division X was founded by Person Z as a religious division of Religion B and is
listed in the official directory of Religion B. In the United States, Division X is
divided into ten geographic areas. Each of these areas is led by a Leader.
Entity A is located in Area J and led by Leader K.

At its inception, School C was part of a group of schools founded in 1877 in State
D by members of Division X, who moved to the United States from Country H. In
the nineteenth century, the group of schools merged and moved from State D to
State E. The merged schools operated both a high school and a college. In 1921,
School C, the high school, separated from the other schools and later formed
Entity A.

Entity A is a not-for-profit corporation which is exempt from federal income tax
under section 501(a) of the Code as an organization described in section
501(c)(3). The Articles of Incorporation of Entity A provide that it is organized for
charitable, educational, and religious purposes and that its primary purpose is to
provide education in the tradition of Division X and in conformity with the teaching
of Religion B. The Articles provide for a Board of Members and Board of
Trustees.

The Articles also provide that, upon dissolution, the assets of Entity A are to be
distributed to Division X in Area J, provided that such an organization is in
existence and has an exempt status under section 501(c)(3) of the Code. If the
organization is no longer in existence or declines to accept those assets, the
assets are to be distributed to one or more Religion B secondary education
organizations in State E that have an exempt status at the date of dissolution that
have been designated by Leader K.

In order to ensure that the educational program of Entity A remains rooted in the
tenets of Religion B, the Articles of Incorporation for Entity A required that the

XXX 201302045

Page 3

governing body with ultimate control over its direction, the Board of Members, be
comprised entirely of members of Division X of Religion B. The Board of
Members controls who sits on the Board of Trustees and ensures that Entity A’s
program remains consonant with the teachings of Religion B. As a result,
Religion B, through Division X, controls the Board of Members, the Board of
Trustees and, accordingly, Entity A.

The Board of Members consists of no fewer than three and no more than five
members, all of whom must be members in good standing of Division X. The
Articles of incorporation provide that one of the seats reserved for a member in
good standing of Division X may be filled by a member of another division of
Religion B, who understands well the mission of Division X.

The Board of Members has three ex officio members: the highest ranking
member of Division X at Entity A; the President of Entity A, if that person is a
member of Division X; and any official of Religion B who is also a member in
good standing of Division X and who has been named by Leader K. Should any
member of the Board of Members cease to function as a member in good
standing of Division X or of another division of Religion B, that member shall
immediately cease to be a member of the Board of Members of Entity A.

Among the duties of the Board of Members are the following: the approval of all
individuals proposed for election to the Board of Trustees and the removal of
Trustees, with or without cause; to maintain and foster the development of the
Division X philosophy of education and Division X traditions and pedagogy at
Entity A in accordance with the laws and pronouncements of the official
Division X Education Association; and to determine and approve any major
changes in the philosophy, identity, and nature of Entity A.

The management and control of Entity A, other than those duties and
responsibilities specifically reserved to the Board of Members, is vested in the
Board of Trustees. The Board of Members elects all of the members of the Board
of Trustees. The Board of Trustees has a minimum of fifteen and a maximum of
twenty-five members, at least five of whom must be members of Division X. Two
of the members are ex officio: the President of Entity A, and the highest ranking
member of Division X at Entity A.

The principal responsibility of the Board of Trustees stated in the Articles of
Incorporation is to partner with the Board of Members to safeguard the Division X
character of Entity A, the Division X philosophy of education, Division X traditions
and pedagogy, the operation of Entity A, and the conduct of the affairs of

Entity A, including both educational and financial matters and the policies under
which the corporation operates.

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The Board of Trustees determines the number of trustees who shall serve at any
one time and elects its members. No individual can be elected to the Board of
Trustees without the prior approval of the Board of Members.

The Board of Trustees elects its chairman. This chairman may resign at any time
or may be removed by a vote of two thirds of the Board of Trustees. The
President of Entity A is elected by a majority vote of the Board of Trustees. The
President does not have to be a member of Division X, but must be a practicing
member of Religion B.

On November 1, 1979, Entity A adopted Plan 1, a defined contribution plan
intended to meet the requirements of section 403(b) of the Code. Entity A did not
make an election under section 410(d) of the Code

On January 1, 2004, Entity A adopted Plan 2, Plan 3, Plan 4, and Plan 5, all of
which are welfare benefit plans.

The participants in Plan 1, Plan 2, Plan 3, Plan 4, and Plan 5 (“Plans”) are

eligible current and former employees of Entity A. The Plans have no eligible
participants that are employed in connection with one or more unrelated trades or
businesses within the meaning of section 513 of the Code.

The administrative control of the Plans is vested in Entity A’s Board of Members.
By resolution dated November 3, 2009, the Board of Members established a
Committee, consisting of the following Entity A employees: the President, the
highest ranking member of Division X, the Chief Financial Officer, the Business
Manager, and the Payroll and Benefits Specialist. The Committee’s primary
purpose and function is the administration of the Plans. The Board of Members
has final oversight over the actions of the Committee. The Committee is
controlled by and shares common religious bonds with Religion B through the
controlling power that Division X exercises over Entity A’s Board of Trustees and
Board of Members.

In accordance with Revenue Procedure 2011-44, Notice to Employees with
reference to Plan 1 was provided on November 10, 2011. This notice explained
to participants of Plan 1 the consequences of church plan status.

Based on the foregoing, you request a ruling that the Plans are church plans
within the meaning of section 414(e) of the Code.

Section 414(e)(1) of the Code generally defines a church plan as a plan
established and maintained for its employees (or their beneficiaries) by a church
or a convention or association of churches which is exempt from taxation under
section 501 of the Code.

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Section 414(e)(2) of the Code provides, in part, that the term “church plan” does
not include a plan that is established and maintained primarily for the benefit of
employees (or their beneficiaries ) of such church or convention or association of
churches who are employed in connection with one or more unrelated trades or
businesses (within the meaning of section 513 of the Code); or if less than
substantially all of the individuals included in the plan are individuals described in
section 414(e)(1) of the Code or section 414(e)(3)(B) of the Code (or their
beneficiaries).

Section 414(e)(3)(A) of the Code provides that a plan established and maintained
for its employees (or their beneficiaries) by a church or a convention or
association of churches includes a plan maintained by an organization, whether a
civil law corporation or otherwise, the principal purpose or function of which is the
administration or funding of a plan or program for the provision of retirement
benefits or welfare benefits, or both, for the employees of a church or a
convention or association churches, if such organization is controlled by or
associated with a church or a convention or association of churches.

Section 414(e)(3)(B) of the Code generally defines “employee” of a church ora
convention or association of churches to include a duly ordained, commissioned,
or licensed minister of a church in the exercise of his or her ministry, regardless
of the source of his or her compensation, and an employee of an organization,
whether a civil law corporation or otherwise, which is exempt from tax under
section 501 of the Code, and which is controlled by or associated with a church
or a convention or association of churches.

Section 414(e)(3)(C) of the Code provides that a church or a convention or
association of churches which is exempt from tax under section 501 of the Code
shall be deemed the employer of any individual included as an employee under
subparagraph (B).

Section 414(e)(3)(D) of the Code provides that an organization, whether a civil
law corporation or otherwise, is associated with a church or a convention or
association of churches if it shares common religious bonds and convictions with
that church or convention or association of churches.

Revenue Procedure 2011-44, 2011-39 I.R.B. 446 supplements the procedures
for requesting a letter ruling under section 414(e) of the Code relating to church
plans. The revenue procedure: (1) requires that plan participants and other
interested persons receive a notice in connection with a letter ruling request
under section 414(e) of the Code for a qualified plan; (2) requires that a copy of
the notice be submitted to the Internal Revenue Service (“IRS”) as part of the
ruling request; and, (3) provides procedures for the IRS to receive and consider
comments relating to the ruling request from interested persons.

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In order for an organization that is not itself a church or convention or association
of churches to have a qualified church plan, it must establish that its employees
are employees or deemed employees of a church or convention or association of
churches under section 414(e)(3)(B) of the Code by virtue of the organization's
control by or affiliation with the church or convention or association of churches.
Employees of any organization maintaining a plan are considered to be church
employees if the organization: (1) is exempt from tax under section 501 of the
Code; and, (2) is controlled by or associated with a church or convention or
association of churches. In addition, in order to be a church plan, the
administration or funding (or both) of the plan must be by an organization
described in section 414(e)(3)(A) of the Code. To be described in section
414(e)(3)(A) of the Code, an organization must have as its principal purpose the
administration or funding of the plan and must also be controlled by or associated
with a church or convention or association of churches.

Entity A is a not-for-profit corporation which is exempt from federal income tax
under section 501(a) of the Code as an organization described in section
501(c)(3) of the Code. Entity A is listed in the Annual Directory of Religion B. The
primary purpose of Entity A is to provide education in the tradition of Division X
and in conformity with the teaching of Religion B. Entity A is governed by the
Board of Members, a majority of whom are members of Division X, and all of
whom are members of Religion B. The members of Division X are overseen by
Leader K.

In view of the common religious bonds between Entity A and Religion B, the
inclusion of Entity A in the Annual Directory of Religion B, and the indirect control
of Entity A by Religion B through the Board of Members, we conclude that Entity
A is associated with a church or convention or association of churches within the
meaning of section 414(e)(3)(D) of the Code, that the employees of Entity A meet
the definition of employee under section 414(e)(3)(B) of the Code, and that they
are deemed to be employees of a church or a convention or association of
churches by virtue of being employees of an organization which is exempt from
tax under section 501 of the Code and which is controlled by or associated with a
church or a convention or association of churches.

The administrative control of the Plans is vested in the Committee. The
Committee is controlled by and shares common religious bonds with Religion B
through the controlling power that Division X exercises over Entity A’s Board of
Trustees and Board of Members. The Committee’s primary purpose and function
is the administration of the Plans. Therefore, we conclude that the administration
of the Plans satisfies the requirements regarding church plan administration
under section 414(e)(3)(A) of the Code. Accordingly, the Plans are maintained by
an organization that is associated with a church or convention or association of
churches, and the principal purpose or function of which is the administration of
the Plans for the provision of retirement and welfare benefits for the deemed
employees of a church or convention or association of churches.

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Based on the foregoing facts and representations, we conclude that Plan 1, Plan
2, Plan 3, Plan 4, and Plan 5, maintained by Entity A, are church plans pursuant
to section 414(e) of the Code.

This letter expresses no opinion as to whether Plan 1 satisfies the requirements
of section 403(b) of the Code.

No opinion is expressed as to the tax treatment of the transaction described
herein under the provisions of any other section of either the Code or regulations
which may be applicable thereto.

This letter is directed only to the taxpayer who requested it. Section 6110(k)(3) of
the Code provides that it may not be used or cited as precedent.

Pursuant to a power of attorney on file with this office, a copy of this letter ruling
is being sent to your authorized representative. Should you have any concerns
regarding this letter, please contact XXX, SE:T:EP:RA:T2, at

(XXX) XXX-XXXX.
Sincerely yours,
[illegible]
Donzell Littlejohn, Manager
Employee Plans Technical Group 2
Enclosures:

Deleted copy of ruling letter
Notice of Intention to Disclose

CC:
XXX
XXX

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