PLR 1319036: IRS recognizes a hospital retirement plan as a church plan

Plain-English summary

Two tax-exempt hospitals asked whether their defined contribution profit-sharing plan qualified as a church plan. The hospitals were controlled or associated with a church through a religious order and a province, and a committee connected with that structure administered the plan. The IRS concluded that the hospitals' employees met the church-plan employee rules and that the committee satisfied the administration requirement. The IRS also concluded that the plan was exempt from the participation, vesting, and funding requirements in IRC §§ 410, 411, and 412, subject to the plan meeting the corresponding rules in effect on September 1, 1974. The letter expressed no opinion on whether the plan otherwise qualified under IRC § 401(a).

Ruling snapshot

• Question: Did Plan X qualify as a church plan, and was it exempt from the requirements of IRC §§ 410, 411, and 412?
• Outcome: Approved
• Key authorities: IRC §§ 401(a), 410, 411, 412, 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

201319036

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

FEB 08 2013

U.I.L.: 414.08-00

SET: EP:RA:T3

Legend:

Order A = ***

Province B = ***
***

Directory C = ***

Hospital D = ***
***

Hospital E = ***

City F = ***

Year G = ***

Church R = ***

Plan X = ***

Committee F = ***

Dear ***:

This letter is in response to your letter dated December 3, 2008, as supplemented by
correspondence dated March 18, 2009 and November 21, 2011, submitted on your
behalf by your authorized representative regarding the church plan status of Plan X
within the meaning of section 414(e) of the Internal Revenue Code (Code).

2

The following facts and representations have been submitted on your behalf:

Order A, a religious order of women within Church R, was founded in City F in Year G.
Organized within and sharing common bonds and convictions with Church R, Order A
was established to provide care for the sick, poor and dying. Order A is listed in
Directory C and is an organization described in section 501(c)(3) of the Code and
exempt from tax under Code section 501(a).

Currently, Order A operates two health care facilities in the United States and additional
health care facilities in Europe, Africa, Australia and New Zealand. Health care
institutions located in the United States are operated under the auspices of Province B.

Order A founded Province B in furtherance of Order A's mission within Church R.
Specifically, Province B was founded to establish and conduct houses for the practice
and promotion of Christian charity, particularly to provide nurses to care for the sick and
indigent according to the practice and discipline of Church R. Province B is a tax-
exempt organization described in section 501(c)(3) of the Code and is listed in Directory
C. Province B sponsors Hospital D and Hospital E. Each Hospital is a charitable tax-
exempt organization under section 501(c)(3) of the Code and is listed in Directory C.

Both Hospitals are separately incorporated as a not-for-profit corporation in the state in
which it is chartered and licensed to operate. Both hospitals have their own Board of
Directors which consists of members who are elected by Province B. The Chairperson
of the Board of each Hospital is appointed by Province B. Each Board is responsible for
the operation and governance of its hospital, with certain powers reserved to Province
B, particularly with regard to those matters subject to Canon Law and Administration of
Goods and Property. Also, each Board must uphold the mission and philosophy of
Order A and its role in Church R.

These requirements of Canon Law relate to matters such as limits on spending,
approvals for acquisitions or dispositions of property, leasing and certain kinds of
contracts. Province B also approves annual budgets for both hospitals, requests to
exceed budget over specified amounts and other requests related to fiscal responsibility
and stewardship. Upon dissolution of one or both hospitals, the assets of the
corporations shall revert to Province D or shall be transferred to such other charitable
organization as Province B shall provide.

Article I, section 2 of the bylaws of Province B recognize control by Church R. Sections
3.1 and 3.2 of the bylaws of Hospital D, provide that the sole member of the corporation
is Province B. Section 3.6 provides that certain powers are reserved to Province B,
including the power to designate the chairperson or president of the corporation, i.e.
Hospital D, to approve the purchase, sale, transfer or encumbrance of assets
constituting Stable Patrimony of the Member. In accordance with section 5.3, all
members of the Board of Directors are elected by Province B; and in accordance with
section 7.2 of the bylaws, Province B elects the Chairperson of the Board of Directors

3

and the President. The remaining officers of the Board are elected by Board members
and subject to the approval of Province B.

In addition, in accordance with Article II, Section 1, of the bylaws of Hospital E, the
Members of Hospital E consist of the Province Leader and the members of the Council
of Province B, all of whom are members of Order A. In accordance with Article II,
Section 2 of the bylaws, the members have the power to fix the number of Directors of
the corporation and to appoint and remove them. The members have the power to
appoint and remove the President and CEO of the corporation and the chairperson of
the Board of Directors. The members have the power to establish or approve the
mission and philosophy of Hospital E, to approve the acquisition of assets, the
incurrence of indebtedness and the lease, sale, transfer and assignment of
encumbering of the assets.

The Hospitals jointly established Plan X for their employees, effective January 1,
. Plan X is a defined contribution profit sharing plan intended to qualify under section
401(a) of the Code. Benefits under Plan X are funded pursuant to a trust agreement. No
election has been made under section 410(d) to have the participation, vesting, and
funding provisions of Code sections 410, 411, and 412 apply to Plan X. Plan X was
adopted as a prototype plan. The prototype plan was the subject of a favorable opinion
letter dated September 4, .

No eligible participants in Plan X are or can be considered employed in connection with
an unrelated trade or business under section 513 of the Code. Additionally, you
represent that all of the eligible participants are or will be employed by an organization
that is controlled by or associated with a church or a convention or association of
churches, as provided in section 414(e)(3)(B)(ii) of the Code.

Plan X has been administered by Committee F since the plan was first established
effective January 1, ***. The sole and exclusive purpose of Committee F is, and has
always been, the management, administration and funding of Plan X and a pension plan
maintained by Hospital D and E which is not covered by this ruling letter. Committee F
was established by the Provincial Superior of Province B. Members of Committee F
include the Chief Financial Officer and the human resources directors of both hospitals.
In addition, the treasurer of Province B, who is a member of Order A, is a member of
Committee F. Any recommendations that Committee F may have regarding Plan X are
presented to both Hospitals for proper approval.

There have been no changes to Order A, Province B, Hospital D or Hospital E since the
Internal Revenue Service issued a private letter ruling in 1993 on the church plan status
of the pension plan maintained by the hospitals. The Hospitals' pension plan is not
covered by this ruling letter.

In accordance with Revenue Procedure 2011-44, Notice to Employees with reference to
Plan X was provided on January 19, ***. This notice explained to participants of Plan
X the consequences of church plan status.

4

Based on the foregoing, you request rulings that:

(1) Plan X qualifies as a church plan within the meaning of section 414(e) of the
Code; and

(2) Plan X is exempt from the requirements of section 410, 411 and 412 so long as
the plan satisfies coverage, vesting and funding requirements of the Code as in
effect on September 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 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 generally 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 it shares common religious bonds and convictions with that church or
convention or association of churches.

5

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 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.

In view of the common religious bonds between Hospital D, Hospital E and Church R,
the inclusion of Hospital D and Hospital E in Directory C of Church R, and the indirect
control of Hospital D and Hospital E by Church R through Order A and Province B, we
conclude that Hospital D and Hospital E are 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 Hospital D and Hospital E 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 Plan X is vested in Committee F. Committee F is controlled
by and shares common religious bonds with Church R through its control by Province B
and the Chief Financial Officer and human resource directors of both hospitals.
Furthermore, the involvement of the Provincial Superior of Province B in Committee F
and the activities of the Hospitals themselves ensure that Committee F and the
Hospitals share common religious bonds and convictions with Church R. The sole
function of Committee F is to administer Plan X and the pension plan. Committee F
performs all acts necessary for the administration of Plan X. Thus, the administration of
Plan X satisfies the requirements regarding church plan administration under section
414(e)(3)(A) of the Code.

6

With respect to ruling request number one, we conclude that Plan X 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 since its establishment on January 1, ***.

To qualify under section 401(a) of the Code, a retirement plan must meet the
participation standards of section 410 of the Code and the minimum vesting standards
of section 411 of the Code. Qualified pension plans also must meet the minimum
funding standards of section 412 of the Code. Each of these sections, however,
contains an exception for a church plan as defined in section 414(e) of the Code, unless
an election has been made in accordance with section 410(d) of the Code.

Hospital D and Hospital E represent that to the best of their knowledge an election has
never been made under section 410(d) of the Code to have the participation, vesting
and funding provisions of sections 410, 411 and 412 of the Code apply.

Therefore, with respect to ruling request number two, we conclude that Plan X is
exempt from the requirements of sections 410, 411 and 412 so long as Plan X meets
the coverage, vesting and funding requirements of the Code as in effect on September
1, 1974.

This letter expresses no opinion as to whether Plan X otherwise satisfies the
requirements of section 401(a) of the Code.

This letter is directed only to the taxpayers 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.

If you have any questions regarding this letter, please contact *** at ***. Please
address 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

cc: