IRS 403(b) Compliance

501(c)(3) Organization

This is the Internal Revenue Code (IRC) that defines certain tax exempt organizations that can participate in a 403(b) program. These organizations are:

• Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

Important – For your ministry employees to be able to participate in the AGFinancial 403(b) Retirement Plan, your ministry must meet all the following requirements:

• Be controlled by or associated with the Assemblies of God
• Be tax exempt
• Be a 501(c)(3) organization

401(a)(17) Limits

This Internal Revenue Code section places limits on the maximum amount of compensation that can be considered in making employer contributions to 403(b) retirement accounts if your ministry is a nonqualified church-controlled organization (NQCCO). The 2017 limit is $270,000. This limit is not applicable for churches and qualified church-controlled organizations (QCCOs).

Important – It is important for a NQCCO ministry employer to stay within these limits when calculating employer contributions so that there will be no tax implications to your employees.

3121(w)(3)(A) Church

The Internal Revenue Code (IRC) that defines church as:

• A church.
• A convention or association of churches (such as a district council).
• An elementary or secondary school which is controlled, operated, or principally supported by a church or by a convention or association of churches.

Important – A church as defined by IRC 3121(w)(3)(A), along with QCCO’s, do not have to meet non-discrimination requirements in employee eligibility and contributions. This provides flexibility for ministries to build their retirement plan as they would like.

Associated with a Church

Certain organizations that are associated with the Assemblies of God or with an Assemblies of God church are ones that share common religious bonds and convictions with the fellowship.

Important – A 501(c)(3) organization that meets certain requirements, including being associated with the Assemblies of God, can participate in the AGFinancial 403(b) Retirement Plan as an eligible employer.

Church Controlled

An organization is church-controlled when “a majority of whose officers or directors are appointed by a church’s governing board or by officials of a church.”

Important – A 501(c)(3) organization that meets certain requirements, including being an AG church-controlled organization, can participate in the AGFinancial 403(b) Retirement Plan as an eligible employer. Also, certain church-controlled organizations may be able to have the participation flexibility of being a QCCO.

Common Control

The same control group is organizations where 80% or more of the directors or trustees are directly or indirectly controlled by or representatives of another organization. The organization may be for-profit or not-for-profit. The controlled group rules allow for permissive disaggregation of churches and qualified church-controlled organizations (so coverage rules and testing would be for the nonqualified church-controlled organizations and for-profit entities). Nondiscrimination in coverage and testing apply to all retirement contributions of a controlled group.

Contract Exchange

This is a transfer of all or a portion of an employee’s 403(b) retirement balance from one employer-approved service provider to another.

Important – At the time a contract exchange is done, the ministry employer must sign an Information Sharing Agreement with the service providers. This agreement states that the employer will give the service providers information when certain events happen so that compliance with 403(b) regulations is maintained.

Highly Compensated Employee (HCE)

The IRS defines an employee who is paid $120,000 or more (net of clergy housing allowance) in 2017 as being a Highly Compensated Employee. This dollar amount may change annually due to cost of living adjustments.

Important – Nondiscrimination rules on employer contributions apply to ministries which are nonqualified church-controlled organizations if there are highly compensated employees.

Includible Compensation

This is the compensation that can be considered in computing allowable retirement contribution maximums (click here to see retirement contribution maximums). Includible compensation for employees is usually compensation included in Box 1 of the federal W-2 tax form, plus pre-tax elective deferrals to 403(b) and other eligible retirement plans, plus pre-tax deferrals to a section 125 cafeteria plan (such as a flexible spending account), plus foreign earned income. Includible compensation does not include a nontaxable clergy housing allowance for minister employees. Self-employed ministers’ (those that qualify to file schedule C for their ministry earnings) includible compensation is their net earnings from self-employment which does include clergy housing allowance.

Important – Failure to stay within the maximum contribution limits will cause retirement balances to become immediately taxable to employees.

Matching Employer Contributions

An employer may decide to match all or a portion of each eligible employee’s deferral contributions to a 403(b) plan (examples: The employer could match 100% of the employee’s deferral up to 6% of plan-defined compensation; or the employer may match 50% of the employee’s deferral up to 8% of plan-defined compensation).

Important – A matching contribution could encourage participation to help your employees be partially responsible for their retirement security.

Nondiscrimination Coverage

Nondiscrimination coverage means that nonqualified church-controlled organizations (NQCCO’s) may not discriminate in employer (matching and discretionary) and traditional after-tax 403(b) contributions in favor of highly compensated employees (HCE’s). An HCE is one that has $120,000 or more in compensation (net of clergy housing allowance) in 2017. The nondiscrimination rules are applicable to coverage, contributions, and other benefits listed under Internal Revenue Code sections 401(a)(4), 401(a)(5), 401(a)(17), 401(m), and 410(b). Churches and QCCO’s are not subject to the nondiscrimination rules.

Important – If your NQCCO ministry does not satisfy the nondiscrimination coverage, your employees’ 403(b) retirement balances may become fully taxable immediately. If your ministry and your ministry’s other organizations under its control have HCE’s, you should perform testing to make sure that there is not discrimination in contributions.

Nonqualified Church-Controlled Organization (NQCCO)

An organization which does not meet the definitions of a 3121(w)(3)(A) church or a qualified church controlled organization, but does meet all of the following requirements for participation in the AGFinancial 403(b) Retirement Plan:

• It is controlled by an Assemblies of God church, The General Council or a district council, or it is associated with the Assemblies of God.
• It is tax-exempt.
• It is a 501(c)(3) organization.
• Offers goods, services, or facilities for sale, other than on an incidental basis, to the general public, other than goods, services, or facilities that are sold at a nominal charge that is substantially less than the cost of providing such goods, services, or facilities.
• Normally receives more than 25 percent of its support from either (a) government sources or (b) receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities, in activities that are not unrelated activities, or (c) both.

Important – An NQCCO must meet certain non-discrimination requirements of which employees are eligible to participate and in contribution amounts. AGFinancial is able to help your ministry meet these requirements.

Qualified Church-Controlled Organization (QCCO)

A QCCO is an organization that is not a church as defined by Internal Revenue Code 3121(w)(3)(A) but meets all of the following requirements:

• It is a 501(c)(3) organization.
• It is church-controlled.
• It is an organization other than an organization that meets both of the following requirements:
• Offers goods, services, or facilities for sale, other than on an incidental basis, to the general public, other than goods, services, or facilities that are sold at a nominal charge that is substantially less than the cost of providing such goods, services, or facilities; and
• Normally receives more than 25 percent of its support from either (a) government sources or (b) receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities, in activities that are not unrelated activities, or (c) both.

Important – Churches and QCCO’s do not have to meet non-discrimination requirements that non-qualified church controlled organizations do. Churches and QCCO’s have the right to include or exclude whichever employees they wish.

Universal Availability Rule

For nonqualified church-controlled organizations (NQCCO’s), universal availability means if you make employee deferrals to a 403(b) retirement plan available to one employee or one group of employees, you must make employee elective deferrals to a retirement plan available to all employees except those that are specifically excluded by rules and regulations. Those employees who can be excluded are:

• employees working less than 20 hours per week,
• student employees performing services under a work-study program,
• non-resident aliens with no U.S. source income,
• employees whose contributions to the plan would be less than $200 per year, and/or
• employees eligible to defer on a reasonably equivalent basis under a 401(k) or 457(b) plan that you maintain. Universal availability is not applicable to churches and qualified church-controlled organizations (QCCO’s).

Universal availability rules also require that the employer give employees an effective opportunity for all eligible employees to make elective deferrals. This effective opportunity must be given upon initial eligibility and annually thereafter.

Important – Failure for an NQCCO ministry employer to make deferrals universally available will cause your 403(b) plan to fail. This may make your employees’ plan balances taxable to them immediately.