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What Makes a Plan an Electing Church Plan?

“I discovered a church that has been filing a Form 5500 for its retirement plan even though it is not required to do so (it intends to be a non-electing plan). Will the IRS categorize the plan as an ‘electing church plan’ because of the Form 5500 filings?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in California is representative of a common question for plans maintained by churches.

Highlights of the Discussion

Fortunately, the IRS has taken the position that a church plan cannot be inadvertently categorized as an “electing church plan” [i.e., one that elects to have certain rules under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (IRC) apply as if the plan were not a church plan]. The plan administrator must make a formal election under Treasury Regulation 1.410(d)-1(c) in order to be treated as an electing church plan. The election is irrevocable.

There are two methods of election and both involve the plan administrator executing a written statement that indicates 1) the election is made under IRC Sec. 410(d) and 2) the first plan year for which it is effective. A plan administrator could either attach the written statement to the

  • Form 5500 it files for the first plan year for which the election is to be effective

OR

  • Determination letter application for a qualified IRC Sec. 401(a) plan.

If an election is made with a written request for a determination letter, the election may be conditioned upon issuance of a favorable determination letter and will become irrevocable upon issuance of such letter.

If the church plan is a qualified defined benefit plan, the plan administrator must also notify the Pension Benefit Guaranty Corporation (PBGC) of its election for PBGC insurance to apply [ERISA § 4021(b)(3)].

Conclusion

A bona fide church plan cannot accidently become an electing church plan, subject to ERISA and the IRC as any other qualified retirement plan would be. The plan administrator must execute a written statement that is either attached to a Form 5500 filing or determination letter application.

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Requesting Plan Documents—What’s Included?

“I’ve been working with a 401(k) plan committee on governance issues. A participant has requested copies of plan committee meeting minutes and notes for the last four quarters. Does the committee have to comply with this request?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in North Carolina is representative of a common question related to plan documents.

Highlights of the Discussion

The answer is—maybe. One thing is sure—whatever the plan officials decide, there should be documentation in the plan files as to the reason for their decision. The documentation will be important should litigation arise.

Section 104(b) of the Employee Retirement Income Security Act of 1974 (ERISA) requires plan officials to provide the following documents within 30 days of a plan participant’s request:

  • Summary plan description,
  • The latest annual report,
  • Any terminal report,
  • The bargaining agreement,
  • The trust agreement,
  • Contract, and
  • “Other instruments” under which the plan is established or operated.

The plan administrator may charge a reasonable fee to cover the cost of furnishing such copies.

Committee meeting minutes and notes are not explicitly listed in these ERISA disclosure requirements. The Department of Labor (DOL) has issued some guidance on the matter, but nothing definitive. In Advisory Opinion 96-14A, issued on July 31, 1996, the DOL stated, “ … any document or instrument that specifies procedures, formulas, methodologies, or schedules to be applied in determining or calculating a participant’s or beneficiary’s benefit entitlement under an employee benefit plan would constitute an instrument under which the plan is established or operated.”  The DOL reiterated this stance in Advisory Opinion 1997-11A.

Thus, it could be argued if benefit-related decisions were made or even discussed at committee meetings then the minutes, or at least applicable portions of the minutes, would have to be provided. This issue is clearly open to interpretation and argument, and there have been legal cases where courts have differed on their rulings as to the treatment of committee meeting minutes. For example, in Faircloth v. Lundy Packing Co., 91 F.3d 648, 654–55 (4th Cir. 1996), cert. denied, 519 U.S. 1077 (1997); and Brown v. American Life Holdings, Inc., 190 F.3d 856, 861 (8th Cir. 1999) the courts found that plan officials were not required to disclose committee minutes. Whereas, in Bartling v. Fruehauf Corp., 29 F.3d 1062 (6th Cir. 1994) and Hughes Salaried Retirees Action Committee v. Admin. of the Hughes Non-Bargaining Retirement Plan, 72 F.3d 686, 689 (9th Cir. 1995) (en banc) the courts concluded that “other instruments” should be construed more broadly to include such items as committee minutes.

Consequently, a committee facing a participant’s request for meeting minutes should, as expeditiously as possible (remembering the 30-day requirement to provide and penalty of $110 per day for late responses), seek legal counsel for direction and guidance.

Conclusion

ERISA requires plan officials provide certain plan documents upon participant request.  There is some uncertainty as to the treatment of committee meeting minutes in this context. Seeking legal counsel would be a prudent course of action, and documenting the decision would be a fiduciary best practice.

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Real Estate Agents and Retirement Plans

“A client of mine is a real estate agent who receives income that is reported on Form 1099-MISC, Miscellaneous Income. Can this individual contribute to a retirement plan?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with an advisor in North Dakota is representative of a common question related plan eligibility.

Highlights of Discussion

• Some unique rules for retirement plan eligibility apply for real estate agents, based on their worker status as a “statutory nonemployee.” (Since each employment scenario is based on unique facts and circumstances; it is recommended that workers seek professional tax advice for a definitive determination in their particular situations.)
• Individuals who perform services for businesses may be classified as an independent contractor, a common law-employee, a statutory employee, or a statutory nonemployee. The IRS explains each classification in more detail in Publication 15-A, Employer’s Supplemental Tax Guide.
• There are three categories of statutory nonemployees: direct sellers, licensed real estate agents, and certain companion sitters. Licensed real estate agents include individuals engaged in appraisal activities for real estate sales if they earn income based on sales or other output.  Direct sellers and real estate agents are treated as self-employed for all Federal tax purposes, including income and employment taxes, if the following are true.

1. Substantially all payments for their services as direct sellers or real estate agents are directly related to sales or other output, rather than to the number of hours worked; and
2. Their services are performed under a written contract that provides they will not be treated as employees for Federal tax purposes.
Because real estate agents are considered self-employed, they are eligible to establish a retirement plan based on their earnings from self-employment. Please see IRS Publication 560, Retirement Plans for Small Businesses.

Conclusion
If a licensed real estate agent meets the above criteria, he or she could establish a retirement plan using his or her Form 1099-MISC income. Since each employment scenario is based on unique facts and circumstances, it is recommended that workers seek professional tax advice for a definitive determination.

 

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ERISA Fidelity Bond Failure—So what?

“I’m aware of a business retirement plan that has not maintained an ERISA fidelity bond for the plan for the last several years.  What penalties is the plan facing?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Texas is representative of a common question related to the Department of Labor’s (DOL’s) requirement for retirement plans to have ERISA fidelity bonds.

Highlights of Discussion

Through examinations of Forms 5500, the IRS has determined that one of the top two most common compliance issues among plans is not having adequate ERISA fidelity bond coverage. The DOL, pursuant to ERISA Sec. 412 and related regulations, generally requires every fiduciary of an employee benefit plan and every person who handles funds or other property of a plan be bonded to protect the plans from risk of loss due to fraud or dishonesty on the part of the bonded individuals. Please see the Department of Labor’s Field Assistance Bulletin 2008-04 for more details on ERISA Fidelity Bonds. The DOL also has a handy hand-out entitled Protect Your Employee Benefit Plan with An ERISA Fidelity Bond that provides an overview of the bonding requirements and how to obtain a bond.

Although the DOL imposes an ERISA fidelity bonding requirement on employee benefit plans,[1] the agency has not identified a specific penalty for failing to have an appropriate bond when one is required. In practice, plan officials who have failed to secure bonds have received a range of consequences from auditors’ admonitions to obtain the necessary bonds to court mandates for their removal as plan fiduciaries and plan termination.

There are substantial risks associated with not meeting ERISA’s bonding requirements:

  • Failing to report a sufficient bond on the Form 5500 can trigger a plan audit.
  • It is against ERISA law for plan officials to be without an ERISA bond.
  • Plan fiduciaries can be held personally liable for losses that could have been covered by a fidelity bond.

 

Consider the following court case.

In Chao v. Thomas E. Snyder and Snyder Farm Supply Inc. 401(k) Plan, Civil Action No. 1:00CV 889, a federal district court judge in Grand Rapids, MI, ordered the defendant (the owner of a company) to purchase and maintain a fidelity bond for the company’s 401(k) plan until the plan was terminated. The defendant also was ordered to direct the plan’s custodian to distribute or roll over the accounts of plan participants. Under the consent judgment and order obtained by the DOL, Snyder, who was a fiduciary of the 401(k) plan, further agreed to pay all expenses related to the distributions, rollovers, or plan termination, except for annual maintenance fees charged against each plan participant’s account.

Conclusion

Although no particular DOL penalty is prescribed for failing to have an ERISA fidelity bond when one is required, nonetheless, noncompliant plan officials must be aware they expose themselves, unnecessarily, to DOL audits, personal liability and potential lawsuits.

[1] Exceptions: The bonding requirements do not apply to employee benefit plans that are 1) completely unfunded or that are not subject to Title I of ERISA, or 2) maintained by certain banks, insurance companies and registered broker dealers.

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