PLR 1318030: Three retirement plans qualify as church plans

Plain-English summary

The IRS considered whether a nonprofit hospital's defined benefit, money purchase, and tax-deferred annuity plans qualified as church plans under IRC § 414(e). The hospital was controlled by a religious order through its corporate structure, and a committee controlled by the order administered the plans. The IRS ruled that the hospital's employees were deemed church employees and that the plans were administered by an organization controlled by or associated with a church. It therefore treated all three plans as church plans, retroactive to redacted dates.

Ruling snapshot

• Question: Do the hospital's three retirement plans qualify as church plans under IRC § 414(e)?
• Outcome: Approved.
• Key authorities: IRC §§ 401(a), 403(b), 410(d), 414(e), 501, and 513; Rev. Proc. 2011-44

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224 201318030

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

FEB 06 2013
U.I.L.: 414.08-00

Attn:

Legend:

Taxpayer A =
Order B =
Church C =
Network D =
State E =
Statute N =
Entity F =
Country G =
Committee H =
Entity I =
Entity J =
Directory S =
Plan X =
Plan Y =
Plan Z =

Dear [illegible]:

This letter is in response to your request dated May 13, 2005, as supplemented
by correspondence dated March 5, 2012, submitted on your behalf by your
authorized representative regarding the church plan status of Plan X, Plan Y and
Plan Z within the meaning of section 414(e) of the Internal Revenue Code
(Code).

The following facts and representations have been submitted under penalties of
perjury on your behalf:

Taxpayer A was established in 19[illegible] by Order B, a Church C religious order
based in Country G, which operates hospitals and health care facilities in three
locations in the United States. Taxpayer A is a not-for-profit corporation
organized under the laws of State E. Taxpayer A is listed in Directory S, and
accordingly, is exempt from Federal income tax under section 501(c) of the
Code. Order B is listed in Directory S as being represented in Entity I by virtue of
its presence at Taxpayer A. The current president and chief executive officer of
Taxpayer A is a member of Order B.

Taxpayer A's by-laws contain the stated purpose to establish and operate a
Church C hospital for the purposes of providing hospitalization and care of the
sick and injured, necessary facilities for the treatment of disease, and for
scientific purposes; and to establish and operate schools and educational
institutions in the hospital, nursing and related fields. Any applicant for
appointment to Taxpayer A's medical staff must, as part of the application, agree
to be bound by the Ethical and Religious Directives of Church C Healthcare
Services as promulgated by Entity J.

Under Article II of Taxpayer A's by-laws, the sole member of Taxpayer A's
corporation is Network D. Also under the by-laws, Network D has the right to
ensure that Taxpayer A is conducting its business and affairs consistently with
and in furtherance of the objectives and philosophy of Order B.

Network D is a corporation organized under Statute N. Among its corporate
purposes is to conduct the business affairs of the corporation in a manner
consistent with the objectives and philosophy of Order B. Prior to September
[illegible], 20[illegible], members of Network D were from the Provincial Council of Order B,
and those members of Entity F Executive were appointed by the Provincial
Council. The Provincial Council of Order B is comprised of the local Provincial
Superior of Order B and the local Provincial Superior of Order B's councilors.
The Entity F Executive is comprised of Order B members who have been
appointed by the Provincial Council to serve on the Entity F Executive.

Effective September [illegible], 20[illegible], Network D's by-laws were amended to provide
that Network D's members shall be comprised of seven members appointed by
the General Council of Order B, at least four of whom must at all times be
members of Order B. As a result, you represent that Taxpayer A is under the
control of Network D, a majority of whose members must be members of Order
B. If at any time Network D ceases to exist, Taxpayer A's by-laws provide that
the Provincial Council may elect a new corporate member.

Prior to the adoption of Taxpayer A's current by-laws on October [illegible], 20[illegible],
Taxpayer A's members were members of Order B's Provincial Council and
members of the Entity F Executive. Since its founding in 19[illegible], Taxpayer A has
been controlled either directly, or through Network D, by Order B.

Taxpayer A's board of trustees is responsible for the oversight of Taxpayer A, the
appointment of its officers and medical staff, the assessment of its programs, the
preparation and recommendation to Network D of Taxpayer A's capital and
operating budget, and certain additional oversight responsibilities set forth in
Taxpayer A's by-laws. The board of trustees is comprised of not less than 12,
nor more than 18 members, including three members of Order B or their
representatives, appointed by Entity F, at least five members appointed by
Network D, two members of Taxpayer A's medical staff, and any additional
trustees (up to 18) appointed by Network D.

Entity F is a corporation which is incorporated under the laws of Country G.
Under its by-laws, its membership is limited to members of Order B. The
members of Entity F consist of the members of the Provincial Council of Order B
and selected members of the Entity F Executive. Any member of the board of
trustees of Taxpayer A may be removed by Network D with or without cause. As
a result, through its power to appoint Taxpayer A's trustees, either through Entity
F or through Network D, and its power through Network D to remove the trustees
with or without cause, you represent that Order B controls the board of trustees.

In 19[illegible], Taxpayer A adopted Plan X for the benefit of the employees of Taxpayer
A. Plan X is a defined benefit pension plan. Plan X is a new plan, not a
successor plan, and meets the requirements of section 401(a) of the Code.
Effective September [illegible], 19[illegible], Plan X's benefit formula was incorporated into the
plan document for Plan Y. Accruals under Plan X were frozen by an amendment
to Plan X effective November [illegible], 19[illegible], which is incorporated into the current plan
by an individually designed amendment.

Plan Y is a defined contribution money purchase pension plan adopted by
Taxpayer A on September [illegible], 19[illegible], solely for the benefit of its employees. Plan Y
is intended to be qualified under section 401(a) of the Code.

The combined plan document for Plan X and Plan Y was amended and restated
periodically, and the most recent favorable determination letter for the combined
plan document is dated April [illegible], 20[illegible]. Participation in Plan X and Plan Y has
been limited to employees of Taxpayer A at all times.

Plan Z was originally adopted by Taxpayer A effective January [illegible], 19[illegible], solely for
the benefit of its employees. Plan Z is intended by Taxpayer A to be a tax
deferred annuity arrangement under section 403(b) of the Code. Participation in
Plan Z has been limited to employees of Taxpayer A at all times.

None of the eligible participants in Plan X, Plan Y or Plan Z are, were, or can be
considered to be employed in connection with one or more unrelated trades or
businesses within the meaning of section 513 of the Code. The plans do not
include as participants employees of for-profit entities.

By resolutions dated December [illegible], 20[illegible], Taxpayer A established Committee H.
Committee H's sole purpose and function is to administer Plan X, Plan Y and
Plan Z. Under the resolutions, the initial members of Committee H were the
president and chief executive officer of Taxpayer A, and the executive vice
president of Taxpayer A. If Taxpayer A's president is a member of Order B, the
president is an ex officio member of Committee H and has the authority to
appoint and discharge up to six Committee H members at any time. Under
Taxpayer A's by-laws, the President of Taxpayer A is appointed, and can be
removed, by Network D.

You represent that the establishing resolutions for Committee H provide that if
the president is not or ceases to be a member of Order B, Network D shall
assume the authority to appoint and discharge up to seven Committee H
members, so that Committee H continues to constitute an organization that is
controlled by or associated with Order B. As established by Taxpayer A,
Committee H has all such powers as may be necessary or helpful to discharge
its duties as administrator of the plans.

By resolutions dated December [illegible], 20[illegible], Taxpayer A amended Plan X, Plan Y
and Plan Z to name Committee H as the administrator under each of the Plans.

Taxpayer A has not made the election under section 410(d) of the Code with
respect to Plan X, Plan Y, or Plan Z. However, it has in the past voluntarily
operated Plan Y in compliance with the standards of the Employee Retirement
Security Act of 1974 (ERISA) to include filing Form 5500, and paying premiums
to the Pension Benefit Guaranty Corporation.

In accordance with Revenue Procedure 2011-44, Notice to Employees with
reference to Plan X was provided on March [illegible], 20[illegible]. This notice explained to
participants of Plan X, Plan Y and Plan Z the consequences of church plan
status.

Based on the foregoing, you request a ruling that Plan X and Plan Y are church
plans within the meaning of section 414(e) of the Code effective as of January 1,
1974; and that Plan Z is a church plan within the meaning of section 414(e) of the
Code effective as of January 1, 1987.

Section 414(e) was added to the Code by section 1015 of ERISA. Section
1017(e) of ERISA provided that section 414(e) of the Code applied as of the date
of ERISA's enactment. However, section 414(e) of the Code was subsequently
amended by section 407(b) of the Multiemployer Pension Plan Amendments Act
of 1980, Pub. Law 96-364, to provide that section 414(e) of the Code was
effective as of January 1, 1974.

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.

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 by 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 of 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 defines “employee” of a church or a 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 the organization shares common religious bonds and
convictions with that church or convention or association of churches.

Section 414(e)(4)(A) of the Code provides that if a plan, intended to be a church
plan, fails to meet one or more of the church plan requirements and corrects its
failure within the correction period, then that plan shall be deemed to meet the
requirements of this subsection for the year in which the correction was made
and for all prior years. Section 414(e)(4)(C)(i) of the Code provides, in pertinent
part, that the term “correction period” means the period ending 270 days after the
date of mailing by the Secretary of a notice of default with respect to the plan's
failure to meet one or more of the church plan requirements.

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.

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 a 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 plan must
be administered or funded (or both) 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.

In this case, Taxpayer 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. In view of the common religious
bonds between Church C and Taxpayer A, the inclusion of Order B in Directory
S, and the indirect control of Taxpayer A by Church C through Order B, we
conclude that Taxpayer A is associated with a church or a convention or
association of churches within the meaning of section 414(e)(3)(D) of the Code,
that the employees of Taxpayer 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.

Effective December [illegible], 20[illegible], with Taxpayer A's establishment of Committee H
and Committee H becoming administrator of Plan X, Plan Y and Plan Z, the
plans are each maintained by an organization whose sole purpose and function
is the administration of the plans. Under the establishing resolutions for
Committee H, if Taxpayer A's president is a member of Order B, the president is
an ex officio member of Committee H, and has the authority to appoint and
discharge up to seven additional Committee H members. The establishing
resolutions for Committee H provide that if the president is not or ceases to be a
member of Order B, Network D has the authority to appoint and discharge
Committee H members. Accordingly, Committee H is an organization that is
controlled by or associated with Order B which is a Church C religious order. As
a result, the plans are administered by an organization that is controlled by or
associated with a church or an association of churches within the meaning of
section 414(e)(3)(A) of the Code.

Also, as provided under section 414(e)(4)(A) of the Code, where a plan fails to
meet one or more of the church plan requirements and corrects its failure within
the correction period, then that plan shall be deemed to meet the requirements of
section 414(e) for the year in which the correction is made and for all prior years.
Committee H was established to administer Plan X, Plan Y and Plan Z on
December 1, 20[illegible], which is within the correction period for Plan X, Plan Y and
Plan Z.

Based on the foregoing facts and representations, we conclude that Plan X and
Plan Y are church plans within the meaning of section 414(e) of the Code, and
have been church plans within the meaning of section 414(e) of the Code
retroactive to January [illegible], 19[illegible]. We conclude that Plan Z is a church plan within
the meaning of section 414(e) of the Code, and has been a church plan within the
meaning of section 414(e) of the Code retroactive to January [illegible], 19[illegible].

This letter expresses no opinion as to whether Plan X and Plan Y satisfy the
requirements for qualification under section 401(a) or whether Plan Z satisfies
the requirements of section 403(b) of the Code.

This ruling 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 by others as precedent.

A copy of this letter is being sent to your authorized representative pursuant to a
Power of Attorney on file in this office.

If you have any questions regarding this letter, please contact [illegible]
at [illegible]. Please refer all correspondence to SE:T:EP:RA:T3.

Sincerely yours,

Laura B. Warshawsky, Manager
Employee Plans Technical Group 3

Enclosures:
Deleted copy of letter ruling
Notice 437

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