A supplement to its broader How America Saves report, the Small Business edition focuses on trends relevant to Vanguard Retirement Plan Access (VRPA) clients, who include full-service plan fiduciaries for plans with less than $20 million in assets.
In the report, Vanguard notes a significant increase in its work with small business clients—from roughly 1,400 small business plans in 2013 to nearly 8,900 in 2017, with the number of participants increasing six-fold to more than 370,000 over the same time period.
In addition to increased coverage, Vanguard reports that small business plans are broadly adopting progressive design features that can lead to improved retirement readiness of their employees. The findings bolster many of those in the 2018 PLANADVISER Micro Plan Survey, which also highlights the increasing professionalization of this segment of the defined contribution (DC) plan marketplace.
Looking closer at Vanguard’s book of business in the sub-$20 million market, nearly two-thirds of all eligible employees participated in their small business 401(k) plan in 2017. Participation rates vary depending on income and age, as is the case with larger plans. However, Vanguard researchers highlight how employees subjected to automatic enrollment have far higher participation rates across all demographic variables. Plans with automatic enrollment had an 83% participation rate, compared to 58% for plans with voluntary enrollment.
Deferral rates have also steadily increased in small business plans, Vanguard finds. When considering both employee and employer contributions, the average participant contribution rate was “a healthy 9.7% in 2017,” up from 9.3% the year before. Also similar to the larger plan market, deferral rates increase with job tenure and age—from 5.2% for employees age 25 and younger to 10.6% for those age 65-plus.
Nearly all plans (96%) on the VRPA platform offer target-date funds (TDFs) as the qualified default investment alternative, Vanguard reports. More than two-thirds of participants use TDFs and 59% are invested in a single TDF. The data shows TDFs have helped reduce extreme equity allocations. According to Vanguard, “only 4% of participants had no allocation to equities while participants investing exclusively in equities was 7%.”
Small business plans have also clearly embraced the offering of Roth savings, with eight in 10 now offering such a feature. Another positive for participants, nearly 100% of plans offer eligible participants the ability to make catch-up contributions.
“Within the small business marketplace, we’re seeing more plan sponsors implementing positive plan design features to better help their employees save for a comfortable retirement,” observes Jean Young, author and senior research associate in the Vanguard Center for Investor Research. “In particular, we expect that the use of professionally managed allocations, predominantly TDFs, will continue to increase over the next few years, helping to increase diversification, lower investment costs, and ultimately improve outcomes.”
The full small business plan report is available for download here.
Church Plan Operating Under Rules of ERISA Has Not Elected to Be an ERISA Plan
Since the Supreme Court decision about the definition of church plan under the Employee Retirement Income Security Act, the Internal Revenue Service has issued several private letter rulings concerning entities’ church plan status, including an organization with a 403(b) plan.
The Internal Revenue Service (IRS) has received several requests for private letter rulings (PLRs) from retirement plans since the Supreme Court decision about the definition of church plan under the Employee Retirement Income Security Act (ERISA) asking the agency to affirm that the plans are indeed church plans.
However, one request also asked if the plan’s operation using ERISA rules means it has elected to be an ERISA plan under Internal Revenue Code Section 410(d). The plan files an annual Form 5500 and pays Pension Benefit Guaranty Corporation (PBGC) premiums.
In PLR 201739010, the IRS notes that Code Section 410(d) allows a church or a convention of churches which maintains any church plan to make an irrevocable election that certain provisions of the Internal Revenue Code and Title I of ERISA shall apply to the plan as if it were not a church plan. Section 1.410(d)-1 of the Regulations provides that the plan administrator of the church plan may make the election by attaching an affirmative statement to either the plan’s Form 5500 or to Form 5300, Application for Determination for Employee Benefit Plan.
The agency points out that Section 1.410(d)-1 does not provide for an alternative form of election. Therefore, it concluded that the filing of Forms 5500 and payment of PBGC premiums with respect to the plan in question does not constitute an election under Section 410(d).
PLRs about church plan status
Following oral arguments in March 2017 in the cases of Advocate Health Care Network v. Stapleton, St. Peter’s Healthcare System v. Kaplan, and Dignity Health v. Rollins, the U.S. Supreme Court found plans maintained by principal-purpose organizations qualify as “church plans.”
In its slip opinion, the Supreme Court focused on the definition of church plan under ERISA, noting that from the beginning, ERISA has defined a “church plan” as “a plan established and maintained … for its employees … by a church.” Congress then amended the statute to expand that definition, adding the provision that: “A plan established and maintained for its employees … by a church … includes a plan maintained by an organization … the principal purpose … of which is the administration or funding of [such] plan … for the employees of a church …, if such organization is controlled by or associated with a church.”
The Supreme Court concluded that a plan maintained by a principal-purpose organization qualifies as a “church plan,” regardless of who established it.
In PLR 201811007, Entity A was originally established by Church Official B, and has been incorporated as a non-profit entity. Entity A is a ministry of Church Jurisdiction C and is listed in Church Directory E. Entity A’s purpose includes furthering the general welfare and common good of the public by establishing, organizing, and maintaining a Church D agency which makes available social services to residents of a particular geographic area.
Entity A established Plan X, a defined benefit plan qualified under Section 401(a) of the Internal Revenue Code, effective in 1978, in order to provide retirement benefits to Entity A employees. Plan X was frozen several years ago, and Entity A employees subsequently began participating in the Section 401(k) plan of Church Jurisdiction C. Entity A employees have always participated in Church Jurisdiction C’s health plan.
Committee I has been established by Entity A to be responsible for administering the employee benefit plans maintained by Entity A, including Plan X. Committee I has overall responsibility and authority to manage and control the operation and administration of Plan X (however, Entity A remains responsible for determining whether an individual is eligible to participate in Plan X). The members of Committee I are appointed by Church Official B. Committee I is comprised of three members: the Chair of the Entity A Board’s Finance Committee, the Vice Chair of the Board of Entity A, and the Chief Financial Officer of Entity A.
None of the eligible participants in Plan X are or can be considered employed in connection with a for-profit entity or one or more unrelated trades or businesses of Entity A within the meaning of Code Section 513. All eligible participants of Plan X are employed directly by Entity A and there are no other participating employers in Plan X.
In PLR 201826009, Entity A is a residential addiction treatment center that has served Church D for more than 60 years. Entity A provides alcoholism and addiction treatment solely to clergy, men and women religious, and seminarians. Entity A is a Section 501(c)(3) non-profit organization, and is listed in Church Directory E.
Entity A established Plan X, a defined benefit plan qualified under Section 401(a), in order to provide retirement benefits to eligible employees of Entity A. Plan X was frozen. Entity A has the authority to designate the plan administrator of Plan X, and has established Committee F to administer the retirement benefits of employees of Entity A, including Plan X. The members of Committee F are appointed by the Board of Trustees. Committee F is comprised of three members: Entity A’s Chief Executive Officer (CEO), Chief Financial Officer (CFO), and Human Resources Manager. The CEO and CFO are members of Church D, and members of Committee F carry out their duties in accordance with Entity A’s mission.
In PLR 201803007, Order A is a religious order within Church C. Order A is organized within and shares common bonds with Church C. Order A is listed in Directory D and is an organization described in Section 501(c)(3) of the Code and exempt from tax under Code Section 501(a).
One of the Order A’s ministries is to provide health care. Order A began work to provide a health care facility in City E, which is now present-day Hospital H. Hospital H is a nonprofit corporation under State F law. Hospital H is listed in Directory D as a hospital associated with Church C. Hospital H is exempt from tax under Code Section 501(a) as an organization described in Section 501(c)(3) pursuant to a group exemption letter applicable to organizations listed in Directory D.
Hospital H’s Articles of Incorporation and Bylaws provide that the sole member of Hospital H is Entity N, a State F nonprofit corporation. Entity N is listed in Directory D as the parent of Hospital H. Entity N is exempt from tax under Code Section 501(a) as an organization described in Section 501(c)(3) pursuant to a group exemption letter applicable to organizations listed in Directory D.
Hospital H sponsors the plans, which cover the employees of Hospital H. Plan 1 is intended to meet the requirements of a defined benefit plan under Section 401(a) of the Code. Plan 2 is intended to meet the requirements of a defined contribution plan under Section 401(a) of the Code. Plan 3 is intended to meet the requirements under Section 403(b) of the Code.
Committee R is the administrator of the Plans. Committee R was established by resolution of the Board of Trustees of Entity N, pursuant to Entity N’s Bylaws. The principal purpose of Committee R is the administration of the Plans. Committee R’s charter provides that members of Church C must make up the majority of the five members of Committee R. Also, one or two members of Order A must serve on Committee R and will be selected by the members of Order A who serve on the Board of Trustees. A member of Order A serves as Chair of the committee, and the Chair is selected by the members of Order A who serve on the Board of Trustees of Entity N.
In all three cases, the IRS found the plans to be church plans under Code Section 414(c).