By Jeffrey Owen
Is your non-profit organization affiliated (even somewhat loosely) with a recognized religious denomination? Do you have a self-funded health insurance plan? If you answered “Yes” to these two questions, your insurance plan is likely a candidate for being classified by the IRS as a “Church Plan.” Even insured plans can benefit, but to a lesser extent.
Now you ask, “Why should I bother?” Things are going well for our self-funded health plan right now. There are about 20 major IRS code sections that hit non-church plans from which church plans are exempt. Many of these are minor exemptions, but a few are important. Here are the key benefits of having your health plan qualify as a “Church Plan”:
1. COBRA Does Not Apply. Without a doubt, this is the number one benefit. Here’s how it works. Let’s say you have an employee who becomes covered under your health plan whom you subsequently terminate for drinking on the job. Your policy is to offer terminated employee COBRA for 18 months. During the COBRA period, the terminated employee has a liver transplant (alcoholism) and a heart transplant (obesity) and dies. Your self-funded plan pays out $1,000,000 for these expensive surgeries. Who is stuck with the bill? If your stop-loss limit is high, the plan pays – really the employees pay – in increased premiums. If your stop-loss is triggered, your experience rating shoots up and your premium jumps in the next plan year. Your participants are again stuck with a bill. Being a Church Plan allows you to offer only the COBRA-like benefits that you want to offer. Perhaps you would like to implement a sliding scale of post-termination health benefits tied to longevity. Perhaps you would like to offer only 3 months of COBRA-like benefits to all terminated employees. Any rationally applied standard would probably work. But before you get too excited, you need to check the law of your state to see if there is a state-law equivalent to COBRA that applies to religious organizations (hint, NC = no problem).
2. No 5500 Filing Required. Another exciting and expensive annual task is to have your accountant prepare and file a form 5500. Become a Church Plan and get rid of it. How much are you paying your CPA to do this annually? No more filings!
3. HIPPAA Relief. How would you like a little relief from HIPPAA? Church Plans are exempt from the ERISA-based portions of HIPAA since they are not subject to ERISA. Some other health information laws apply, so you don’t get a free pass. Penalties for non-compliance are relaxed and correction periods extended for Church Plans.
“How do I become a Church Plan” you ask? There are two ways. You can self-declare or you can obtain an IRS Private Letter Ruling. The Letter Ruling will be a definitive ruling on the issue for your organization from the IRS and is of course preferred. The IRS fee for the letter ruling is $10,000 or so and legal costs would be about $10,000 to $20,000 depending on your particular facts. So for under $30,000 you can have all the benefits of being a Church Plan and save your participants lots of premium costs. Often the cost will be paid for in the first year of operation. So what are you waiting for?
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Jeffrey Owen practices in the nonprofit ERISA arena and has successfully obtained rulings for his clients on this issue. If you would like to discuss the benefits of Church Plan status for your organization’s health plan (or other employee benefit plans) please contact him at jowen@mwbavl.com.
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