Understanding the Different World of Church Plans

There is much opportunity for advisers in the 403(b) church plan market, but one should get educated first, because church plans are different.

Bob Architect, Vice President, Compliance and Market Strategy, VALIC, started his workshop by explaining that under IRC 3121(w)(3)(A)(B), churches include:  

•  Churches, conventions or associations of churches, and church controlled schools;   

•  and Qualified Church Controlled Organizations (QCCO) 

  • church controlled 501(c)(3) offering goods, services or facilities substantially less than the cost of providing them, and  
  • no more than 25% of support from “non-church” revenue. 


There are tens of thousands of participants or potential participants in these entities’ plans – a large opportunity, Architect said.  

For these entities, there is no written plan document required, unless the plan is a 403(b)(9) retirement income account; the Employee Retirement Income Security Act (ERISA) does not apply, unless the organization elects to be covered by ERISA; and section 403(b)(12) non-discrimination rules are not applicable, including universal availability and ACP testing for employer contributions.  

However, these entities must follow the applicable requirements of the 403(b) regulations, including adhering to statutory contribution limits, remitting salary deferrals timely and monitoring for loan and hardship limits.  

Architect explained that 403(b)(9) retirement income accounts are plans in which the defined contribution plan investments are not limited to annuities or custodial account mutual funds, although 403(b)(1) annuities and 403(b)(7) custodial accounts can be offered in “9” plans. However, mutual funds are not considered custodial accounts for purposes of excise tax.  

These accounts are generally seen in the “larger” conventions of churches, and oversight is provided by the church pension board, Architect said.

Special Rules for Church Plans  

There are special rules for church plans, not applicable to other 403(b)s.  

Architect explained that for clergy, post retirement distributions designated for reasonable housing costs are tax-free. This applies to 403(b)(9), 403(b)(1),403(b)(7) and any church retirement plan. The distribution must be designated and used strictly for housing costs. Architect said Revenue Ruling 75-22 explains more.  

Self-employed clergy and clergy employed by a non-church employer can participate in an established church plan, but cannot establish their own plan. Finally, includible compensation for clergy does not include tax-free housing allowance.   

For church plans, years of service are counted for all years with the church, not just with the current church employer. This is true for the special 15-years-of-service catch-up provision allowed for 403(b) plans.   

Under 415(c)(7)(A) a church can contribute a maximum of $10,000 per year even if it's not includible compensation, up to a lifetime limit of $40,000. The limit is the difference between includible compensation and $10,000 per year.  

For foreign missionaries, under 415(c)(7)(C), a church can contribute up to $3,000 per year (even if ther is no U.S. taxable compensation). This is applicable only to missionaries with $17,000 or less in adjusted gross income.

Other Notes  

There are also “church plans” sponsored by Code Section 414(e) religious employers, Architect explained.  These entities are controlled by or share a bond with non-religious employers. These plans must have a written plan document, even if they are only funded through 403(b)(1) annuities or 403(b)(7) custodial accounts, and are subject to non-discrimination rules.  

However, plans of 414(e) religious employers are exempt from ERISA, unless they elect ERISA coverage.  

Architect added that 414(e) organizations can sponsor 457(b) plans for the “rank & file” (unless ERISA coverage is elected).  

Architect also noted that non-discrimination rules do apply to churches and QCCOs sponsoring 401(a) and/or 401(k) plans, and churches and QCCOs can sponsor non-qualified deferred compensation plans. They are not subject to the rules of 457 but are subject to 409A.