Employee benefit plans involving churchs are fascinating because traditional employee plan concepts are a poor fit when it comes to church employees. With Church 403(b) plans caught in the intersection this year between the Final 403(b) Regulations, which may require some church plans to restate onto an updated plan document by January 1, 2009, and the Final 415 Regulations, which are applicable for limitation years beginning on or after July 1, 2007, church plans concepts are receiving renewed scrutiny. One of those concepts unique to church plans are foreign missionaries, also known in the tax code as employees who perform services outside of the United States for very little compensation.
The Internal Revenue Code includes a provision which addresses foreign missionaries who participate in employee benefit plans. Code section 415(c)(7)(C) states:
- (C) Foreign missionaries. In the case of any individual described in subparagraph (B) performing services outside the United States, contributions and other additions for an annuity contract or retirement income account described in section 403(b) with respect to such employee, when expressed as an annual addition to such employee’s account, shall not be treated as exceeding the limitation of paragraph (1) if such annual addition is not in excess of $3,000. This subparagraph shall not apply with respect to any taxable year to any individual whose adjusted gross income for such taxable year (determined separately and without regard to community property laws) exceeds $17,000.
When the IRS promulgated the Final 415 Regs, they reflected this language in Treas. Reg. 1.415(c)-1(d)(3), which states:
- (3) Foreign missionaries. Pursuant to section 415(c)(7)(C), in the case of any individual described in paragraph (d)(1) of this section performing any services for the church outside the United States during the limitation year, additions for an annuity contract under section 403(b) for any year are not treated as exceeding the limitation of paragraph (a)(1) of this section if such annual additions for the year do not exceed $3,000. The preceding sentence shall not apply with respect to any taxable year to any individual whose adjusted gross income for such taxable year (determined separately and without regard to community property law) exceeds $17,000.
The IRS then provides this example to illustrate Treas. Reg. 1.415(c)-1(d)(3):
- Example 2. (i) F is an employee of XYZ Church and F’s taxable year is the calendar year. F earns $2,000 during each calendar year for services he provides to XYZ Church, all of which are performed outside the United States during each calendar year. F participates in a section 403(b) annuity contract maintained by ABC Church beginning in the year 2008. The limitation year for the plan coincides with the calendar year. ABC Church contributes $10,000 to be allocated to F’s account under the plan for the year 2008. F’s adjusted gross income for each taxable year (determined separately and without regard to community property law) does not exceed $17,000.
(ii) Under paragraph (d)(1) of this section, this allocation is treated as not violating the limits established in paragraph (a)(1) of this section because it does not exceed $10,000. Moreover, since an annual addition of $10,000 would otherwise exceed the limitation of paragraph (a)(1) of this section by $7,000 (the excess of $10,000 over the greater of the $2,000 compensation limitation under section 415(c)(1)(B) or the $3,000 section 415(c)(7)(C) amount), XYZ Church may make such allocations for 5 years (for example, for years 2008 through 2012) without exceeding the aggregate limitation of $40,000 specified in paragraph (d) of this section. In year 2013, XYZ church may contribute $8,000 to be allocated to F’s account under the plan (the sum of the $3,000 limitation computed under paragraph (d)(3) of this section and the remaining $5,000 of the $40,000 aggregate limitation under paragraph (d)(1)(ii) of this section on annual additions in excess of the limits under paragraph (a)(1) of this section). For years after 2013, pursuant to paragraph (d)(3) of this section, XYZ Church could allocate $3,000 per year to F’s account.
A recent law review article discusses that while the IRS has created employee benefit plan provisions to address unique church plan issues, such as this foreign missionary provision, the Courts have been restrictive when interpreting these provisions. Suzanne K. Skinner just authored a law review article on The ERISA Church Plan Exception: Why the Lown Test is Improperly Narrow, 10 U. Pa. J. Bus. & Emp. L. 741 (2008). Over the next few years, as church plans receive heightened scrutiny due to recent regulatory changes, including the Final 403(b) Regs and the Final 415 Regs, I expect to see more law review articles addressing church plan issues.
[tags]Pension Protection Act, ppa, foreign missionary, church, 403(b), Suzanne Skinner, ERISA[/tags]
