PLR 1322051: IRS recognizes a private school's pension plan as a church plan

Plain-English summary

The IRS ruled that a private nonprofit college preparatory school's defined-benefit pension plan qualified as a church plan under section 414(e). The school was associated with a religious order through its board, governance documents, group exemption, and common religious bonds. The IRS found that the covered employees were deemed church employees and that a benefits committee controlled and administered the plan with the required church association. The ruling treated the plan as a church plan retroactively from January 1, 1974. It expressed no opinion on whether the plan otherwise qualified under section 401(a).

Ruling snapshot

• Question: Did the school's defined-benefit pension plan qualify as a church plan under section 414(e)?
• Outcome: Approved
• Key authorities: IRC §§ 401(a), 410(d), 414(e), 501, 513, and 6110; Rev. Proc. 2011-44.

Full text (IRS public release)

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

201322051

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

MAR 0 8 2013

TEP: RATS

U.I.L 414.08-00

Legend:
School S:
State A:

City P:
Society J:
Year B:
Religion C:
Directory C:
Conference C:

Plan X:

Dear

This is in response to your letters dated, December 11, 2007, November 1, 2011, and
January 8, 2013, submitted on your behalf by your authorized representative, in which
you request a ruling that Plan X is a church plan described in Section 414(e) of the
Internal Revenue Code of 1986, as amended (the “Code’).

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

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School S is a private non-profit college preparatory school formed under the non-profit
corporation law of State A. School S was founded in Year B in City P as a Society J
secondary school for young men. The governing body of School S is a Board of
Trustees which consists of no fewer than 18 or more than 25 members of which no less
than one-third plus one shall be members of Society J, which is a religious order of
men. The Bylaws of School S provide that the Board of Trustees has the power and
authority to (1) appoint or remove the President of School S; (2) approve diplomas,
certificates and awards; (3) approve and adopt all major changes or renovations in the
educational programs of School S; (4) review and take appropriate action as to the
Budget, which shall be submitted to it upon recommendation of the President; (5)
institute and promote major fund raising efforts of School S; and (6) authorize any
changes in tuition and fees within School S.

The Bylaws of School S provide that the Board of Trustees has the authority to elect the
President of School S by a two-thirds majority of the Board of Trustees and by a
majority of the members of Society J then on the Board of Trustees, subject to the
approval by the Provincial of the Society J Province in which School S is located.

The Bylaws require a vote of a two-thirds majority of the Board of Trustees and a vote of
a majority of the members of the Society J then on the Board to approve any action
effecting a change in the essential character of School S as a Religion C Society J
secondary school.

School S is listed in Directory C and, consequently, is exempt from federal income taxes
under section 501 of the Code, pursuant to group rulings issued to Conference C by the
Internal Revenue Service (the “IRS’).

School S has maintained Plan X, a defined benefit pension plan, since September 15,
19 . Plan X covers all employees of School S after their completion of one year of
service. None of the eligible participants in Plan X are or can be considered employed
in connection with one or more unrelated trades or businesses with the meaning of
section 513 of the Code. All the eligible participants are employed by School S. Plan X
does not include any employees of for-profit entities.

Prior to May 15,20 , Plan X was administered by School S. By resolutions adopted
on May 15, 20 __, the Board of Trustees of School S established a benefits committee
(the “Committee”), the sole purpose of which is to have the exclusive authority to control
and manage the operation and administration of Plan X as well as any successor
retirement plan that the Board may hereafter establish. The resolutions provide that the
Board of Trustees shall appoint the members of the Committee, subject to the
requirement that at all times the Committee must consist of not less than three
members, the majority of whom must be vowed members of Society J. The resolutions
further provide that the members of the Committee will serve at the pleasure of and are
subject to removal by the Board of Trustees at any time with or without cause.

Page 3 201322051

In accordance with Revenue Procedure 2011-44, Notice to Employees with reference to
Plan X was provided on October ,20 . This notice explained to participants of Plan
X the consequences of church plan status.

You represent that School S has not made an election under Code Section 410(d) to be
subject to the provisions of the Code relating to vesting, funding, participation and other
standards applicable to other retirement plans.

Based on your submission and the above facts and representations, you request a
ruling that Plan X is a church plan, within the meaning of Section 414(e) of the Code,
retroactively effective for all prior years that the Plan has been in effect.

Section 414(e) was added to the Code by section 1015 of ERISA. Section 1017(e) of
ERISA provided that section 414(e) applied as of the date of ERISA’s enactment.
However, section 414(e) 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) 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 by 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.

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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.

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 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 a convention or association of
churches to have a qualified church pian, 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 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 School S and Society J, the inclusion of
School S in Directory C, and the indirect control of School S by Society J through the
Board of Trustees, we conclude that School S 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 School S 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 the Committee. The Committee is
controlled by and shares common religious bonds with Society J through its control by
the Board of Trustees and the common religious bonds of the members of the
Committee with Society J. The sole purpose of the Committee is to have exclusive
authority to control and manage the operation and administration of Plan X as well as

Page 5 201322051

any successor retirement plan that the Board of Trustees may hereafter establish. Thus,
the administration of Plan X satisfies the requirements regarding church plan
administration under section 414(e)(3)(A) of the Code.

Accordingly, in regard to your ruling request, we conclude that Plan X is a church plan
as defined in section 414(e) of the Code and has been a church plan since January 1,
1974.

This letter expresses no opinion as to whether Plan X, satisfies the requirements for
qualification under section 401(a) of 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.

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.

‘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.
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 Ruling Letter
Notice of Intention to Disclose