PLR 1323042: IRS denies church-plan status for a continuing multi-employer plan

Plain-English summary

The IRS considered whether a tax-exempt organization's retirement plan qualified as a church plan under IRC § 414(e). The organization was affiliated with a church, but the plan had originally allowed multiple tax-exempt organizations to participate. The IRS concluded that the plan was a multiple-employer plan when established and that at least one participating employer was not a church exempt under IRC § 501(a). A later amendment converting the arrangement into a collection of single-employer plans did not change that history, and a later renamed plan was only a continuation. The requested church-plan status was denied.

Ruling snapshot

• Question: Could Plan X, and its renamed continuation Plan Y, qualify as a church plan under IRC § 414(e), effective in 2005 and for earlier years?
• Outcome: Denied.
• Key authorities: IRC §§ 401(a), 410(d), 414(e), 501, and 513; Treas. Reg. § 1.414(e)-1(c); Rev. Proc. 2011-44.

Full text (IRS public release)

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

MAR 12 2013

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

U.I.L. 414.08-00

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LEGEND:

Organization A = XXXXXXXXXXXXXXXXXXXXX
Church B = XXXXXXXXXXXXXXXXXXXXX
Constitution C = XXXXXXXXXXXXXXXXXXXXX
Board D = XXXXXXXXXXXXXXXXXXXXX
Organization E = XXXXXXXXXXXXXXXXXXXXX
Committee F = XXXXXXXXXXXXXXXXXXXX
Committee G = XXXXXXXXXXXXXXXXXXXX

Plan X = XXXXXXXXXXXXXXXXXXXX

Plan Y = XXXXXXXXXXXXXXXXXXX

State S = XXXXXXXXXXXXXXXXXX

Dear XXXXXXXXXX:

XXXXXXXXXXXXXXXXXXXXX

XXXXXXXXXXXXXXXXXXXXK

XXXXXXXXXXXXXXXXXXXXX

XXXXXXXXXXXXXXXXXXXXX

XXXXXXXXXXXXXXXXXXXXX

XXXXXXXXXXXXXXXXXXXX

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TEP:RA:T3

This is in response to correspondence dated March 11, 2005, as supplemented by
correspondence dated October 24, 2005, November 23, 2011, February 3, 2012,
February 15, 2012, April 24, 2012, May 11, 2012, and May 24, 2012, submitted by you
on behalf of Organization A, concerning whether Plan X qualifies as a church plan
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:

Organization A is a tax-exempt entity under section 501(c)(3) of the Code. Its principal
offices are located in State S. Church B is a church for purposes of determining church
plan status. Constitution C mandates that Organization A meet Church B's requirements
for its affiliate organizations.

Board D consists solely of individuals ratified by State S synods of Church B.

Board D has the power to adopt resolutions, appoint and remove Organization A's
president, approve Organization A's budget, and designate committees to act on behalf
of the board.

Constitution C declares Organization A's affiliation with Church B. Church B plays a
significant role in governance of Organization A. In addition to Church B's role in the
selection of Board D, Organization A's executive committee includes the bishop of the
three State S synods of Church B. These synods of Church B provide financial support
to Organization A. Organization A is included in a directory of Church B's ministries.
Services provided by Organization A are provided as part of the social ministry of
Church B.

Organization A has been recognized as an affiliated organization of Church B by annual
filings with the Internal Revenue Service ("Service") and is covered under a group ruling
issued to Church B.

Organization A adopted Plan X for the benefit of its eligible employees on January 1,
1966. Plan X is a tax-qualified plan under section 401(a) of the Code. It is represented
that Plan X does not benefit any Organization A employees engaged in unrelated trade
or businesses. Plan X allows various tax-exempt organizations to sponsor Plan X for the
benefit of their employees.

The Preamble of Plan X states that Plan X is for the exclusive benefit of the employees
(and their beneficiaries) of the plan sponsor and participating agencies, originally
effective as of July 1, 1970.

Section 1.1 of Plan X is the definitions section of Plan X. Section 1.1(r) of Plan X states
that an "Employer" means the Lead Sponsor and any health or welfare agency that is
exempt from taxation under Section 501(c)(3) or 501(c)(4) of the Code which has
adopted the Plan as may be provided under Article XV. Section 1.1(kk) defines the
"Lead Sponsor" as Organization E and any successor thereto.

Section 15.1 of Plan X states that any health or welfare agency that is exempt from
taxation under section 501(c)(3) or 501(c)(4) of the Code that is not an Employer may,

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with the consent of the Lead Sponsor, adopt and sponsor the Plan for the benefit of its
Employees and become an Employer hereunder by causing an appropriate written
instrument evidencing such adoption to be executed in accordance with the
requirements of its organizational authority.

Section 16.1 of Plan X states that the Lead Sponsor reserves the right at any time and
from time to time, by means of a written instrument executed in the name of the Lead
Sponsor by its duly authorized representatives, to amend or modify the Plan and, to the
extent provided therein, to amend or modify the funding agreement.

Section 16.2 of Plan X states that if an Employer should disagree with any general
amendment made to the Plan by the Lead Sponsor, the Employer shall have 60 days
following such amendment in which to notify the Lead Sponsor of its disagreement and
its intention either to terminate the Plan with respect to its Employees, as provided in
section 16.4, or to withdraw from the Plan and set up its own plan with its own funding
arrangement, as provided in section 16.13.

Section 16.3 of Plan X states that the Lead Sponsor reserves the right, by means of a
written instrument executed in the name of the Lead Sponsor by its duly authorized
representatives, at any time to terminate the Plan. In the event that Lead Sponsor
terminates the Plan, each Employer under the Plan must elect either to terminate the
Plan with respect to its Employees and proceed as provided in Section 16.4 or to set up
its own plan with its own funding arrangement.

Section 16.4 of Plan X states that each employer may, by action of its board of directors
or other governing body, elect to terminate the Plan solely with respect to its own
Employees and Participants. Except as otherwise provided in section 16.2 or 16.3, such
termination may be effectuated only on January 1, or July 1 of any year, and only after
the Employer has given the Lead Sponsor at least three months advance notice of its
intent to terminate.

On May 11, 2012, your representative sent a letter that included the most recent
determination letter for Plan X, the Eighteenth Amendment to the prior plan document,
and the current plan document. The Eighteenth Amendment is effective January 1,
1997, and states in relevant part that Plan X is a collection of single employer plans
maintained for the exclusive benefit of eligible employers of health or welfare agencies
exempt from taxation under section 501(c)(3) or 501(c)(4) of the Code that, with the
consent of the Lead Sponsor, adopt and sponsor Plan X for the benefit of their
respective employees and their beneficiaries. These employers are set forth on the
Schedule of Adopting Employers that immediately precedes Appendix A of Plan X.

The Eighteenth Amendment goes on to state that each adopting employer: (1)
maintains a separate single employer plan only with respect to its own respective
employees; (2) makes contributions to fund the benefits only of its own employees,
which assets are separately accounted for in Pension Fund sub-accounts segregated

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from any and all other adopting employers' contributions; and (3) has received a
separate favorable determination from the Service on the tax-qualified status of its plan.

Prior to March 15, 2005, Board D appointed Committee F to handle functions of Plan X.
Committee F consists of members appointed by Board D. Committee F was charged
with various tasks related to the funding and administration of Plan X. However, the
administration or funding of Plan X was not the principal purpose or function of
Committee F.

Effective March 15, 2005, pursuant to a resolution adopted on March 15, 2005 by Board
D, Board D appointed Committee G. Committee G consists of three Board D members
and two vice-presidents of Organization A. Board D members constitute the majority of
Committee G. The principal purpose and function of Committee G is the administration
and funding of Plan X. Committee G is responsible for determining which benefits are
offered to employees of Organization A, determining how to best provide such benefits,
determining the level of benefits provided to the employees of Organization A and
establishing funding policies for Plan X.

Effective January 1, 2010, Plan X, as adopted by Organization A, was restated and
renamed Plan Y.

On January 12, 2012, Plan Y filed a statement as part of its amended 2007 Form 5500
filing, electing ERISA coverage pursuant to section 410(d) of the Code, effective
January 1, 2007.

In accordance with Revenue Procedure 2011-44, Notice to Employees with reference to
Plan X was provided on November 22, 2011. This notice adequately explained to
participants of Plan X the consequences of church plan status.

Based on 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 effective March 15, 2005,
and for all prior years of the Plan's operation.

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 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

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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.

Section 1.414(e)-1(c) of the Federal Income Tax Regulations ("Regulations") states that
the term church plan does not include a plan which, during the plan year, is maintained
by two or more employers unless each of the employers is a church that is exempt from
tax under section 501(a) of the Code. The Regulations also state that the employees of
each employer must not be employed by an unrelated trade or business.

Based on the language of Plan X described above, Plan X was a multiple employer plan
when it was established and was a multiple employer plan until January 1, 1997, when
the Eighteenth Amendment to Plan X provided that Plan X is a collection of single
employer plans. Thus, effective January 1, 1997, Plan X is no longer a multiple
employer plan, but it cannot become a church plan, because it was not established as a
church plan. In addition, the Plan, in its current form, Plan Y, cannot be a church plan,
because it is merely a continuation of Plan X.

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Since Plan X was a multiple employer plan, not all of whose participating employers
were church plans when established, it failed to satisfy section 1.414(e)-1(c) of the
Regulations which states that the term church plan does not include a plan which,
during the plan year, is maintained by two or more employers unless each of the
employers is a church that is exempt from tax under section 501(a). There is at least
one employer that had employees that participated in Plan X that was not a church that
is exempt from tax under section 501(a). Therefore, we find that neither Plan X nor Plan
Y, as a continuation of Plan X, is or can become a church plan.

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

A copy of this letter has been sent to your authorized representative in accordance with
a power of attorney on file in this office.

If you have any questions regarding this letter, please contact XXXXXXXXXXXXXXXX.
Please address all correspondence to SE:T:EP:RA:T3.

Sincerely yours,

[signature illegible]

Laura B. Warshawsky, Manager
Employee Plans Technical Group 3

Enclosures:
Deleted copy of ruling letter
Notice of Intention to Disclose

CC:
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