- Controlled Group Rules. The Church Plan Clarification Act establishes rules for aggregation of church-related entities for benefits rules and testing purposes that reflect the unique structural characteristics of religious organizations. Currently, the controlled group rules for tax-exempt employers may require certain church-affiliated employers to be included in one controlled group (i.e., treated as a single employer), even though they have little relation to one another. A modification is necessary to the controlled group rules to ensure that multiple church-affiliated entities – which may be related theologically, but have little or no relation to one another in terms of day-to-day operation – are not inappropriately treated as a single employer under the tax code.
- Grandfathered Defined Benefit (“DB”) Plans. Internal Revenue Code (“IRC”) section 403(b) church DB plans established before 1982 are called grandfathered DB plans and were intended to be treated and continue to operate as DB plans. The Church Plan Clarification Act would clarify that that such plans must comply with the benefit accrual limitations applicable to defined benefit plans under IRC section 415(b) and not the accrual limitations applicable to defined contribution plans under IRC section 415(c). This clarification would prevent unintended consequences that can arise from application of both limitations as provided by current law, principally harm to clergy who are lower-paid and closest to retirement.
- Automatic Enrollment. The Church Plan Clarification Act equalizes the availability of automatic enrollment for church and conventional private-sector retirement plans by preempting state laws that may be inconsistent with including auto-enrollment features in church retirement plans.
- Transfers Between 403(b) and 401(a) Plans. It is not uncommon for churches or church-related employers to establish an IRC section 401(a) qualified plan on their own, only to subsequently decide that they would prefer to participate in their denomination’s IRC section 403(b) plan. Current regulations, however, do not allow transfers and mergers between a 403(b) church retirement plan and a 401(a) qualified church retirement plan. This limitation on transfers and mergers increases complexity and administrative costs for church employers and creates more confusion for covered employees when they are covered by more than one plan maintained by the pension board (e.g., multiple account balances, statements, etc.). The Church Plan Clarification Act would allow for such mergers and transfers, decreasing the complexity and administrative costs resulting from current law.
- 81-100 Trusts. The Church Plan Clarification Act allows special tax-exempt investment vehicles (often referred to as “group trusts,” “collective trusts,” or “81-100 trusts”) to accept pooled church plan assets. Many church pension boards hold, on a pooled basis for investment purposes, plan assets and non-plan church-related assets devoted exclusively to church purposes, allow churches the benefit of the board’s greater resources, investment skills, and economies of scale. These pension boards are currently prohibited from investing pooled assets in 81-100 trusts, which forecloses an attractive investment opportunity that achieves diversification at low cost.
The changes made to the controlled group rules and the provision relating to limits on defined benefit section 403(b) plans apply to years beginning before, on, or after the date of enactment (December 18, 2015). The provision relating to automatic enrollment is effective on the date of enactment. The provision relating to plan transfers and mergers applies to transfers or mergers occurring after the date of enactment. The provision relating to investments in group trusts applies to investments made after the date of enactment.
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