Employee Benefits for Tax-Exempt Organizations (Portfolio 487)

Tax Management Portfolio, Employee Benefits for Tax-Exempt Organizations, No. 487, focuses on the special issues that arise in connection with the design and administration of deferred compensation, welfare benefit and incentive plans maintained by private organizations that are exempt from federal income tax under §501 of the Internal Revenue Code. To view this Portfolio, visit Bloomberg Tax for a free trial.

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Tax Management Portfolio, Employee Benefits for Tax-Exempt Organizations, No. 487, focuses on the special issues that arise in connection with the design and administration of deferred compensation, welfare benefit and incentive plans maintained by private organizations that are exempt from federal income tax under §501 of the Internal Revenue Code. Special rules that only apply to plans maintained by churches and church-controlled organizations also are addressed. In addition, background information respecting generally applicable rules is provided.

This Portfolio may be cited as Schwartz, 487 T.M., Employee Benefits for Tax-Exempt Organizations.


Daniel J. Schwartz, Esq.

Daniel J. Schwartz, University of Missouri at Columbia (A.B. 1974, cum laude); University of Missouri at Kansas City (J.D. 1977); Member of the Bar Association of Metropolitan St. Louis, the Missouri Bar, and the American Bar Association Section of Taxation, Committee on Employee Benefits; Charter Fellow of American College of Employee Benefits Counsel.

Table of Contents

Detailed Analysis
I. Scope of Portfolio
II. Qualified Retirement Plans Under §401(a)
A. Background
B. Types of Qualified Plans
1. Pension Plans
2. Profit-Sharing Plans
C. Plans with Cash or Deferred Arrangements
1. General Description
2. Nondiscrimination Testing
3. Safe Harbors
4. Tax-Exempt Employer Sponsorship
D. Who May Participate in Qualified Plans
E. Ownership of Assets; Investment Media
F. Nondiscrimination Requirements for Qualified Plans
1. Highly Compensated Employee
2. Minimum Age and Service Requirements
3. Minimum Coverage Rules
4. Minimum Participation Rule
5. Nondiscrimination with Regard to Contributions and Benefits
6. Other Nondiscrimination Requirements
G. Vesting Requirements for Qualified Plans
H. General Limitations on Contributions and Benefits
1. Defined Benefit Plans
2. Defined Contribution Plans
I. Distribution Requirements for Qualified Plans
1. Restrictions on Early Distribution
2. Restrictions on Delay in Distribution
3. Other Requirements Respecting Form and Time of Distribution
4. Loans to Participants
5. Spendthrift Rules
J. Funding Requirements for Qualified Plans
K. Prohibited Transactions
L. Federal Income and Employment Tax Treatment of Employer Contributions
1. Federal Income Tax Treatment
2. Federal Employment Tax Treatment
M. Employer Excise Taxes and Penalties
1. Tax on Reversions
2. Tax on Nondeductible Contributions to Qualified Plans
3. Tax on Discriminatory Contributions
4. Tax on Unpaid Minimum Funding Contributions
5. Pension Liability Overstatement Penalty
N. Federal Income and Employment Tax Treatment of Distributions
1. Federal Income Tax Treatment
a. Lump-Sum Distributions
b. Eligible Rollover Distributions
c. Annuity or Installment Distributions
2. Federal Employment Tax Treatment
3. Excise Taxes on Distributions
4. Excise Tax on Failure to Receive Minimum Required Distribution
P. Obtaining IRS Approval for Qualified Plans
1. In General
2. Employee Plans Compliance Resolution System
Q. Remedial Amendment Periods
1. General Remedial Amendment Period
2. Cyclical Remedial Amendment Period
a. Individually Designed Plan Cycles
b. Pre-Approved Plan Cycles
c. Compliance Lists
3. EGTRRA Remedial Amendment Period (Closed)
4. Extension of General Remedial Amendment Period
5. Interim Amendments and Discretionary Amendments
R. Special Rules for Plans of Societies, Orders, VEBAs, Etc.
III. Tax-Deferred Annuities Under §403(b)
A. Background and 2007 Regulations
B. Tax-Exempt Organizations That May Offer §403(b) Annuities
1. Tax-Exempt Organizations Under §501(c)(3)
2. Organizations Related to §501(c)(3) Organizations
3. Indian Tribal Agency Organizations
4. Former Eligible Employers
C. Who Is Eligible to Participate in §403(b) Plans
1. Active Employees
2. Former Employees
3. Chaplains and Self-Employed Ministers
D. Section 403(b) Plan Must Comply in Form and Operation
E. Ownership of Assets; Investment Media
F. Incidental Life Insurance Coverage
G. Nonforfeitability
H. Nontransferability
I. Nondiscrimination Requirements for §403(b) Plans
1. In General
2. Universal Availability for Elective Deferrals
3. Pre-2009 Safe Harbors
4. Exception for Certain Church Plans and Ministers
5. Aggregation of Discriminatory Plans
J. Procedures Relating to Salary Reduction Agreements
K. Distributions from §403(b) Plans
1. In General
2. In-Service Distributions
L. General Limitations on Excludible Contributions
1. Section 415 Limit
a. Includible Compensation
b. Aggregation Rules
c. Special Rule for Church Employees
d. Effect of Exceeding §415 Limit
2. Section 402(g) Limitations on Elective Deferrals
a. In General
b. Section 414(v) Catch-Up Contributions
c. Special §403(b) Catch-up Election
d. Catch-Up Election for Returning Veterans
e. Effect of Exceeding §402(g) Limit
M. Excise Taxes Imposed on Employer
N. Income, Excise and Employment Taxes Imposed on Employee
1. General Federal Income Tax Treatment
2. Loans
3. Qualified Domestic Relations Orders
4. Rollovers
5. Contract-to-Contract Transfers
6. After-Death Distributions
7. Federal Excise Taxes on Distributions
O. FICA and FUTA Taxes on Salary Deferral Contributions to §403(b) Plans
P. Section 403(b) Plan Terminations and Frozen Plans
Q. Obtaining IRS Approval for §403(b) Plans
R. ERISA Requirements Affecting §403(b) Plans
1. Church Plans
2. Other §403(b) Annuities
3. Bankruptcy Considerations
IV. Unfunded Deferred Compensation Plans Governed by §457
A. In General
B. Application of §457 to Plans Maintained by Tax-Exempt Organizations
C. Eligible Plans Under §457(b)
1. Who Is Eligible to Participate
2. Ownership of Assets; Investment Media
3. Deferrals Subject to §457
4. Procedures Relating to Deferral Agreements
5. Deferral Limitations
a. Annual Deferral Limit
b. Catch-Up Contributions
(1) Section 414(v) Catch-Up Contributions
(2) Special §457 Three-Year Catch-Up Rule
(3) Catch-up Election for Returning Veterans
c. Individual Limits
d. Excess Deferrals
6. Distribution Requirements
a. Restrictions on Early Distribution
b. Restrictions on Delay in Distribution
c. Restrictions on Participant Elections Respecting the Form and Time of Distribution
7. Income, Excise and Employment Taxes
8. Right to Cure
9. Effect of §409A
D. Ineligible Plans
1. Section 457(f)
2. When §457(f) Does Not Apply
a. Severance Plans
b. Transfer of Property Under §83
c. Employment Retention Plans
d. Annualized Part Year Compensation
3. Effect of §409A
4. Substantial Risk of Forfeiture
a. Vesting Schedules
b. Non-Competes
c. Attainment of Goals
d. Rolling Risk of Forfeiture
5. Alternatives to §457(f)
6. Participant's Tax Treatment
E. Nondiscrimination Requirements for §457 Plans
F. Obtaining IRS Approval for §457 Plans
G. Section 457 Plans Under ERISA
H. Additional Issues for §457 Plans
1. Transfers Between Plans
2. Qualified Domestic Relations Orders
3. Bankruptcy Considerations
4. Plan Termination
5. Grandfather and Transition Rules
V. IRAs, SIMPLE and SEP Plans
Introductory Material
1. In General
2. Roth IRAs and Designated Roth Accounts in Qualified Plans
3. Deemed IRAs
C. SEP Plans
VI. Prohibited Tax Shelter Transactions
Introductory Material
A. Entity-Level Penalties
B. Entity Manager Penalties
C. Prohibited Tax Shelter Disclosure Requirements
VII. Restrictions on Total Compensation
A. Private Inurement and Private Benefit
B. Intermediate Sanctions for Excess Benefit Transactions
C. Excise Tax on Excess Executive Compensation
1. In General
2. Covered Employees
3. Remuneration Subject to the Tax
4. Applicable Tax-Exempt Organizations
5. Related Organizations
6. Tax Liability
VIII. Health and Other Benefits and Funding Methods
A. Background
B. Health Plans
1. In General
2. Patient Protection and Affordable Care Act
a. Tax Credit for Small Tax-Exempt Organizations
b. Shared Responsibility Penalty Tax
c. Preventative Health Services
d. Discrimination in Favor of Highly Compensated Individuals
e. No Lifetime or Annual Coverage Limits
f. Prohibition on Rescission
g. Appeals Process
h. Dependent Coverage
i. Prohibition of Excessive Waiting Period
j. Prohibition of Pre-Existing Condition Based on Health Status
k. Prohibition of Discrimination Against Individual Participants and Beneficiaries Based on Health Status
l. Reporting Value of Health Coverage on Form W-2
m. Standardization of Coverage Documents
n. Reporting Quality of Care
o. Employer Requirement to Inform Employees of Coverage Options
p. Reporting of Employer Health Insurance Coverage
5. Mental Health and Substance Use Disorder Parity
6. Newborns' and Mothers' Health Protection
7. Medicare Secondary Requirements
8. HMOs
9. Continued Coverage of Dependent Students
C. Other Benefits
1. Disability Plans
2. Group Term Life Insurance
3. Parsonages
4. Educational Assistance Benefits
a. Tuition Reduction Programs and Prizes and Awards
b. Educational Assistance Plans
c. Business Expenses
5. Meals and Lodging Furnished by the Employer
a. In General
b. Meals
c. Lodging
6. Cafeteria Plans
7. Dependent Care Assistance Programs
8. Fringe Benefits Under §132
9. Adoption Assistance Programs
10. Long-Term Care Insurance
D. Funding Methods
1. Voluntary Employee Beneficiary Associations
2. Supplemental Unemployment Compensation Benefit Trusts
3. Section 501(c)(3) Supporting Organization for Charities
4. Grantor Trusts
IX. Church Plans
A. Non-Electing Church Plans
1. Employers That May Sponsor Church Plans
a. Churches
b. Church-Affiliated Organizations
2. Employees That May Be Covered Under a Church Plan
3. Church Plan Failures — Causes and Remedies
a. Unrelated Organizations
b. De Minimis Rule
c. Conversions and Mergers
4. Tax and ERISA Rules Applicable to Church Plans
a. Requirements from Which Church Plans Are Excused
b. Requirements from Which Church Plans Are Not Excused
5. Securing Government Approval of Church-Plan Status
B. Electing Church Plans
X. Statutory Benefits
A. Social Security Coverage
1. In General
2. Church Employees Other Than Ministers
3. Ministers and Members of Religious Orders
B. Unemployment Compensation
XI. Employer Aggregation
A. Which Employers Must Be Aggregated
1. Section 414(b) and (c)
a. Parent-Subsidiary Group
b. Brother-Sister Groups
c. Special Considerations Relating to Tax-Exempt Entities
2. Section 414(m)
3. Section 414(n)
4. Section 414(o)
B. Affected Statutory Requirements
1. Nondiscrimination Requirements
2. Funding Requirements
XII. Employment Law
Introductory Material
B. Title VII
XIII. Same-Sex Spouses

Working Papers

Table of Worksheets
Worksheet 1 IRC §403(b) Plan Technical Guidance
Worksheet 2 IRC §457 Examination Guidelines
Worksheet 3 Sample Company 403(b) Plan (Church Plan)
Worksheet 4 Sample Company 457(b) Plan (Church Plan)
Worksheet 5 Sample University 457(f) Deferred Compensation Plan
Worksheet 6 Comparison of 403(b), 401(k), and 457(b) Plans
Worksheet 7 Comparison of 403(b) Funding Vehicles
Worksheet 8 Computation of General Limitation on Employer Contributions Pursuant to §415(c)
Worksheet 9 Computation of Limitation on Elective Deferrals Pursuant to §402(g)