New IRS Church Plan Guidance Should Influence Participant Disclosures

IRS Revenue Procedure 2011-44 imposes a new notice requirement upon any employer requesting a ruling from the IRS to confirm the status of an employee benefit plan as a “church plan” within the meaning of Code Section 414(e). The notice, for which the IRS has provided a model, is intended to let employees know that their employer is seeking a church plan ruling for its identified plans and explain the consequences to them (as plan participants) of such a ruling. Since those consequences include the elimination of many rights that participants and beneficiaries would enjoy if the subject plans were governed by ERISA, it seems appropriate that an employer seeking church plan status should have to make this kind of disclosure to its employees. More interesting to us, however, is what Rev. Proc. 2011-44 could mean for an employer who already maintains a church plan and the conclusions that such an employer can draw from this new guidance.

Church plans are exempt from the requirements that form the core participant protections afforded by ERISA – the minimum participation, coverage and vesting requirements, to name a few. Perhaps more importantly these days, church plans are also exempt from the minimum funding requirements that apply to ERISA pension plans and benefits are not covered by the guarantees provided by the Pension Benefit Guaranty Corporation. This means that retirement benefits due to participants in a church pension plan are at risk if the church-affiliated plan sponsor lacks the financial resources to fully fund the plan. As has been widely reported (including in this space), the potential liability of the sponsoring employer and plan fiduciaries for failing to fully fund church pension plan benefits – and the remedies available to participants under applicable state law – are now the subject of litigation. Given those legal realities and recognizing that church-related employers face many of the same financial pressures that afflict other pension plan sponsors the IRS has responded to calls from members of Congress and from organizations like the Pension Rights Center, indicating that it will take a closer look at applications for church plan status. A first step in that direction is the new notice requirement.

The model notice appended to Rev. Proc. 2011-44 enumerates in detail (and in plain English) the various rights and protections afforded by ERISA-covered retirement plans that a church plan is not required to provide. The model notice effectively warns employees that: (1) they may be subject to a longer waiting period before commencing participation; (2) their benefits may become vested over a longer time period; (3) the plan may be amended to reduce previously earned benefits; (4) minimum funding requirements do not apply; (5) they may not have the right to bring a suit under federal law for payment of benefits, fiduciary violations, failure to receive a benefit statement or other plan information; and (6) their benefits are not insured by the PBGC. The notice explains that state law may or may not provide protections similar to those provided under ERISA and observes that while an employer may choose to provide similar protections, the plan may be able to discontinue those protections to the extent state law does not prohibit such action. Finally, the model notice invites employees to comment on a church plan ruling application and provide other “relevant information” including information that may shed light on the extent to which the employer is really church controlled. (One big complaint that groups like the Pension Rights Center have is that many employers who seek or have already obtained church plan rulings are not all that tightly bound to a church or church controlled entity.)

While Rev. Proc. 2011-44 is designed to supplement the procedures for church plan applications, we think it deserves the close attention of existing church plan sponsors. Specifically, the model notice offers valuable guidance regarding the kinds of things that a church plan sponsor should consider disclosing to its plan participants in the ordinary course of plan administration. We have observed that many church plans, particularly those that began their lives as ERISA plans, still make disclosures in the form of “summary plan descriptions” and use language that is often indistinguishable from language one would use to describe an ERISA plan. This is often the case even where the plan document itself has been stripped of ERISA protective provisions and has been augmented with terms that are more consistent with church plan status. When push comes to shove, we think the age old rule that the plan document will trump contrary provisions in an SPD should still apply even in the litigation of claims for church plan benefits. Nevertheless, since such claims are likely to play out under applicable state law, the provision of direct disclosure to participants regarding limitations on their rights and protections under a church plan could aid in the defense of claims brought under equitable theories of recovery such as equitable estoppel.

No employer designs any employee communication with the goal of frightening employees. But a church plan sponsor that consistently downplays the consequences of church plan status in employee communications may wish that it had been more forthcoming with employees about these matters if lack of funding forces changes in the benefit design of the plan. The time may be right for church plan sponsors to pay closer attention to employee communications in light of the model notice provided in Rev. Proc. 2011-44.