Bicameral Coalition Aims To Clarify Pension Rules For Clergy And Other Religious Institution Workers

WASHINGTON – U.S. Senators Ben Cardin (D-MD) and Rob Portman (R-OH), both members of the Senate Finance Committee, along with Representatives Pat Tiberi (Ohio-12) and Richard E. Neal (Mass.-01), both members of the House Ways and Means Committee, have introduced the Church Plan Clarification Act of 2015 (S. 2308/H.R. 4085) to support the retirement security of our nation’s clergy, church lay workers, and their families. The Church Plan Clarification Act clarifies the application of certain tax and retirement laws and regulations to the unique structures of church pension plans. The Senate legislation is cosponsored by Senator Amy Klobuchar (D-Minn.),Ranking Senate Member of the Joint Economic Committee.

“Retirement security should not be based on faith when you dedicate your working life to serving a church, synagogue or other religious entity,” said Senator Cardin. “Many church plans date back to the 18^th century, and our complicated tax system hasn’t always kept up with the times. More than 1 million clergy, faith institution workers, and their dependents deserve the peace of mind that comes with the financial security during retirement that we wish for every American.”

“Those who dedicate their life to serving a church, synagogue or other religious organization should be able to have peace of mind when they retire,” Senator Portman stated. “Our bill will make important reforms to ensure financial security for those who have devoted their lives to faith.”

“Unintended consequences created by our overly complex tax code could impact the retirement security of more than one million clergy and lay workers at faith institutions across the country,” said Congressman Tiberi. “This bill would correct these inequalities to ensure that those who spend their lives working in the name of their faiths have the same retirement security as their private-sector counterparts.”

“This common sense initiative will make retirement security easier for members of the clergy and our religious institutions,” said Congressman Neal.  “I am pleased to introduce bipartisan, bicameral legislation that will simply the tax code to fix long-standing problems to give our faith leaders the ability to save for retirement.”

“People who dedicate themselves to a life of religious service should have the same opportunities for financial security in retirement as other working Americans,” said Senator Klobuchar. “This bipartisan bill will help provide those who have devoted their lives to their faith with peace of mind in their retirement years.”

In recognition of their unique status, most church retirement plans are exempt from the Employee Retirement Income Security Act of 1974 (“ERISA”) and are instead subject to special laws and regulations that reflect the distinctive issues that these plans and churches confront. Church retirement plans are subject to stringent state and federal laws and Church Alliance regulations, including state fiduciary standards, state contract law, and Internal Revenue Code requirements. Church retirement plans ensure the stability of participants’ investments by applying many of the same strong safeguards applied to corporate and public pension funds. Moreover, churches and synagogues have a strong lifelong relationship with employees and are motivated to provide for and serve the clergy and church lay workers who have dedicated their lives to working for religious institutions.

Due to their distinctive structure, certain legislative and regulatory changes have unintentionally resulted in uncertainty and/or compliance issues for these plans.  TheChurch Plan Clarification Act of 2015 corrects five legal/regulatory issues confronting church retirement plans:

• 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.