The DOL’s new ESG rules may have a curious impact on some church related organizations which utilize faith based standards in their retirement plan investments. Their ability to continue do may now turn on the manner in which they handle their status as a “church plan.” It arises because the ESG rules will NOT apply to “non-electing” church plans, as ERISA does not apply to churches unless they affirmatively choose it to do so.
First some background.
Defining “Church” under the Code and ERISA has always been (dare I say) a bit “mystifying.” Yes, we all are comfortable with the church plan status of a place of worship which adopts a plan for its “ministers” and employees. But making this determination for those organizations which express some religious bond with those places of worship can be akin to trying to count the number of angels which dance on the head of the pin.
Neither the Code or ERISA well define a “church.” The IRS has made a game try at it, informally (though not through regulation, God Forbid!), in its Publication 1828.
Here’s characteristics the IRS says that “churches” commonly have:
• distinct legal existence;
• recognized creed and form of worship;
• definite and distinct ecclesiastical government;
• formal code of doctrine and discipline;
• distinct religious history;
• membership not associated with any other church or denomination;
• organization of ordained ministers;
• ordained ministers selected after completing prescribed courses of study;
• literature of its own;
• established places of worship;
• regular congregations;
• regular religious services;
• Sunday schools for the religious instruction of the young; and
• schools for the preparation of its ministers.
The IRS uses all the facts and circumstances, including the above, in making a “church” determination. The IRS disclaims any attempt to evaluate the content of whatever doctrine a particular organization claims is religious, “provided the particular beliefs of the organization are truly and sincerely held by those professing them and the practices and rites associated with the organization’s belief or creed are not illegal or contrary to clearly defined public policy.”
Then the Code complicates things by identifying churches further by applying “church” status to certain organizations associated with “churches,” identifying “Qualified Church Controlled Organization” (which we loving refer to as QCCOs), and even what is a “Non-Qualified Church Controlled Organization “(or Non-QCCO), stating that in order to be related to a church the organization needs to share common religious ground with a church.
ERISA doesn’t ever define really directly church either. It is only in its definition of church plans, where it circularly defines a church as an organization which is a church or an organization which is “controlled by or associated with a church”, which it then defines “associated with” as having a common religious bond with a church. It then defers the IRS’s definitions in its Advisory Opinions.
The recent spate of litigation over church plans (about whether the plans and sponsors were subject to ERISA’s participant protection rules and minimum funding rules) even takes the complications to another level. Eventually, even the Supreme Court punted, narrowly deciding the matter on whether or not a no-church organization could adopt a church plan covering ministers and church employees (the case being Stapleton v. Advocate Health care). We have had a more recent court of Appeals case finally taking up the issue, however, in Medina v Catholic Health care initiatives, but even that is provides narrow guidance.
So it is no surprise that some religiously affiliated organizations approach this issue gingerly, often simply electing not to deal with this issue at all. We have found over the years that some of these organizations choose to treat their plans as ERISA plans without resolving whether not they really are, often even going as far as filing the Form 5500. It is worthy to note that simply filing a 5500 does NOT trigger ERISA status, because Reg 1.410(d)-1 requires a very specific statement be filed in order to do so.
The publication of the ESG rules may well force the “church status” issue front and center once again for some organizations. Where the prior “church plan” disputes which have been litigated have been focused on defined benefit plan funding and did not seem to bother DC plans, the new ESG rules are squarely pointed at DC plans. A number of organizations affiliated with churches make socially related investments for their retirement plans as a matter of course. Though the final ESG rule does provide some key relief for such organizations, the rule now focuses the attention of these orgs on their status of “church plans” under ERISA. They may have been willing to bite the bullet in the past and, for example, file Form 5500s just because it was easier than directly dealing with the issue. But the ESG rule strikes at the heart of their mission, and they may not wish to change the way they invest. Some orgs may need to reconsider whether to now face this issue. Such organizations do have the chance to now reverse their earlier choices and claim church plan status if it now serves their needs.