PLR 1350048: church-affiliated community's welfare plans qualify as church plans

Plain-English summary

A not-for-profit community operated health-care and senior services under a foundation connected to a church district. It maintained ten welfare benefit plans for its employees and related entities and asked whether the plans were church plans under IRC § 414(e). The IRS found that the community and foundation were controlled by or associated with the church through their governance and shared religious bonds. It also found that the benefits committee was established within the statutory correction period, and ruled that the plans qualified as church plans.

Ruling snapshot

• Question: Do the community's ten welfare benefit plans qualify as church plans under IRC § 414(e)?
• Outcome: Approved
• Key authorities: IRC §§ 414(e), 501(a), 513; Treas. Reg. § 1.414(e)-1(b)(2)(ii)

Full text (IRS public release)

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION

U.I.L. 414.08-00

Attn:

Legend:

The Community:

State A:
Foundation B:

District C:

Church D:
Entity E:

Plan A-1:

Plan A-2:

Plan A-3:

Plan A-4:

*

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE 201350048

WASHINGTON, D.C. 20224

SEP 16 2013

SE:T:EP:RA:T3

201350048

Plan A-5:

Plan A-6:
Plan A-7:
Plan A-8:

Plan A-9:

Plan A-10:

Dear

This is in response to your letters dated September 17, 2012, February 28, 2013, June
10, 2013, July 16, 2013, August 13, 2013, and August 30, 2013, submitted on your
behalf by your authorized representative, in which you request a ruling that health and
welfare Plans A-1 through Plan A-10 (collectively “the Plans”) are church plans
described in section 414(e) of the Internal Revenue Code (the “Code”).

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

The Community is a not-for-profit entity established under section 501(c)(3) of the Code
in State A. The sole member of the Community is Foundation B. Foundation B also is a
not-for-profit entity established under Section 501(c)(3) of the Code.

The Internal Revenue Service has determined that the Community and Foundation B
are entities described under Section 501(c)(3) of the Code, and as such are exempt
from tax under Section 501(a) of the Code.

The Board of Directors of the Community is comprised of 13 members. Six members of
the Board are elected by Foundation B, in its capacity as sole member of the
Community. The President of the Community, who also serves as President and CEO
of the Foundation, also serves as an ex officio member of the Board of the Community.
The remaining Board members are elected by the Board of the Community. The Board
is responsible for the operations of the Community. There are approximately 720
individuals employed by the Community.

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Foundation B is governed by its own 13 member Board. The members of Foundation B
are the members of District C of Church D. The members of District C have the sole

voting rights for Foundation B and may also appoint a majority of the Foundation B
Board.

District C is one of 23 districts in Church D. The Community operates under Foundation
B and Foundation B operates under District C.

The Articles of Incorporation of the Community and Foundation B both provide that one
of the purposes of the Community entity is to provide retirement facilities with nursing
care services and spiritual influences for aging persons, including members of Church D
and others. The Articles of the Community also provide that its purposes are similar to
Foundation B. The Community Bylaws further provide that upon dissolution of the
Community, its property will go to Foundation B, and if Foundation B does not exist,
District C.

The Community offers health-care programs for the elderly and disabled. In addition to
its nursing home, the Community's services include: a nonsectarian specialty hospital,
comprehensive geriatric medicine and psychiatry programs, adult day programs
throughout its service area, and management of senior assisted living complexes. The
functions and activities of the Community result in the Community acting as the “face” of

Church D in the localities and neighborhoods in which the Community and Church D
serve.

The Community is a leader in the development of nursing, medical and social services
for the elderly within the Church D community of State A. The Mission Statement and
Charter of the Community specify that it will conduct its programs and business while
adhering to the values inherent in Church D, including the continuation of its tradition of
service to the Church D community. Through the Community, Church D continues its
religious commitment to the maintenance of organizations that can relieve human
suffering and promote the welfare of others, activities that are important elements of
Church D's life and faith. The Community’s nursing home is the only religious nursing
home in State A with a full-time chaplain. In furtherance of Church D's teachings and
tenets, the Community's chaplain conducts religious services daily and on major
religious holidays. The Community also observes other religious laws and restrictions.
Based on particular religious needs, the Community's policies provide for an admissions
preference for adherents of Church D with regard to its nursing home facility.

Church D provides financial support for the Community through contributions and
fundraising in its underlying churches throughout the central State A area, from the

individual members of those underlying churches, and from members of the
Community.

A congregation regularly meets on Community premises to conduct worship services
and other activities for residents in the Community.

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The Community has established and maintains ten welfare benefit plans, the Plans.
Plans A-1, A-2, and A-8 were effective January 1, 2011. Plans A-3, A-4, and A-10 were
effective January 1, 2013. Plan A-5 was effective October 4, 2010, and Plan A-6 was
effective February 1, 2002. Plan A-7 was effective July 1, 2010, and Plan A-9 was
effective August 10, 2010.

Each plan has been established and is maintained by the Community for the benefit of
employees of the Community, or in some cases, certain other related entities (such as
Foundation B), and their beneficiaries. You have represented that employees of a
certain related entity, Entity E, and any other unrelated trade or businesses covered by
Plans A-1 through A-10 have always been and will continue to be an insubstantial
portion of the overall number of participants covered by the Plans.

The Community represents that the members of the Benefits Committee have been
named and that it expects to convene its first meeting in September 2013. The function
and principal purpose of the Benefits Committee will be to administer the Plans. The
members of the Benefits Committee have been appointed by Foundation B’s Board of
Directors, which, in turn, is directly appointed by the members of District C. The
Committee shall serve at the pleasure of Foundation B.

Based on the above facts and representations, you request a ruling that the Plans are
church plans as defined in Code Section 414(e).

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

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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.

Treasury Regulation Section 1.414(e)-1(b)(2)(ii) provides that a plan shall be considered
maintained primarily for the benefit of employees of a church who are not employed in
connection with one or more unrelated trades or businesses if it satisfies the following
two-part test in four out of its five most recently completed plan years: (A) less than 50%
of the persons participating in the plan (at any time during the plan year) consist of, and
in the same year (B) less than 50% of the total compensation paid by the employer
during the plan year (if benefits or contributions are a function of compensation) to
employees participating in the plan is paid to, employees employed in connection with
an unrelated trade or business.

In order for an organization that is not itself a church or a 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 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.

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In view of the Foundation’s relationship to the Community, the control over the
Foundation exercised by the members of District C, and the common religious bonds
between Church D, Foundation B, the Community, and District C, we conclude that the
Community and the Foundation are associated with a church or convention or
association of churches within the meaning of section 414(e)(3)(D) of the Code, and
that the employees of the Community and the Foundation 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.

In light of the control over the Benefits Committee exercised by the Board of Foundation
B, and the members of District C’s power to appoint a majority of the members of the
Board of Foundation B, we conclude that the Benefits Committee will be controlled by or
share common religious bonds with Church D. The Benefits Committee would
accordingly constitute an organization described in Section 414(e)(2)(A) whose principal
purpose or function is the administration or funding of a plan or program for the
provision of retirement or welfare benefits for the employees of a church or a convention
or association of churches, and which is controlled by or associated with a church or
convention or association of churches.

The Benefits Committee, which is essential to satisfaction of the church plan
requirements, has been formally established in September 2013. 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) of the Code for the year in
which the correction is made and for all prior years. The formal establishment of the
Benefits Committee to administer the Plans in September 2013 is within the correction
period for the Plans.

Accordingly, in regard to your ruling request we conclude the Plans are church plans as
defined in section 414(e) 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.

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.

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If you have any questions regarding this letter, please contact
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: