(b)lines Ask the Experts – Non-Electing Church Plans and Nondiscrimination Testing

David Powell, Groom Law Group, answers:  

IRS Notice 2001-46 provides that non-electing church plans (within the meaning of Code Sec. 410(c)(1)(B)) are not subject to the regulations under the nondiscrimination rules of section 401(a)(4) and 401(a)(5), the integration rules of 401(l), and  the nondiscrimination in compensation definition requirements of 414(s), until further notice, and such further notice has not yet been provided.    

Consequently, those regulations do not apply to such non-electing 401(k) church plans.  However, that does not mean that those statutory provisions do not apply.  That notice further provides that such non-electing 401(k) church plans would also have to be operated in accordance with a reasonable, good faith interpretation of these statutory provisions until the time such further notice is provided.  Keep in mind that reasonable, good faith does not mean that the requirements of those Code sections can be ignored.  Presumably any variation from the regulations under those Code sections must be consistent with the Code section itself.   

With respect to the ADP and ACP tests of Code section 401(k) and 401(m), those tests are independent of 401(a)(4) and 401(a)(5), and are not referenced in Notice 2001-46 or cited in the “flush language” following Code section 401(a), nor is there any provision in the regulations under those sections indicating they do not apply to church plans.  While under the 401(a)(4) regulations, a plan that satisfies the ADP and ACP tests is generally deemed to satisfy 401(a)(4), the IRS would likely apply the exemption of Notice 2001-46 narrowly and require that a church 401(k) plan satisfy the ADP and ACP tests under the applicable final regulations in order to be deemed to satisfy 401(a)(4).  And there is no provision applying the converse – that a good faith satisfaction of 401(a)(4) would be deemed a satisfaction of the separate ADP and ACP tests for a church plan.   

Of course, for many church 401(k) plans, it may be a moot point if they have no highly-compensated employees.  But for any churches that do have highly-compensated employees, that is why the broader nondiscrimination exemptions for church plans under Code section 403(b) tend to favor the adoption of a church 403(b) plan.  

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.