Nonprofits Which Laws Apply to Your Bennies

January 21, 2000
Do you sponsor a retirement plan for your employees? What about a health plan? A cafeteria plan? Or a group life-insurance plan?

If you're a nonprofit or government employer and you provide these or any other benefits for your employees, it's important for you to know which state and federal laws apply to you.

As you may know, life in the world of employee-benefits law isn't the same for nonprofit and governmental employers as it is for other employers some of the laws that apply to everybody else also apply to you, some of them don't, and some laws apply only to you.

It would be impossible in one short article to discuss all of the laws that apply to nonprofit and governmental benefit plans. But here's a brief rundown of some of the more basic laws that may apply to benefits that you provide for your employees:

The federal law that governs most employee benefit plans including retirement plans, health plans, and other welfare plans is the Employee Retirement Income Security Act of 1976 (affectionately known as ERISA). Here's how this law applies to you:

  • Governmental plans. ERISA does not apply to any employee benefit plan established and maintained by the federal government, the government of any state (or political subdivision of the state), or any agency or instrumentality of any of the above.
  • Church plans. ERISA generally does not apply to any plan sponsored by a church (or a convention or association of churches) that is exempt from tax under Section 501 of the federal tax code and meets certain other criteria. Note: A church plan that would otherwise be exempt from ERISA may elect to be covered by its provisions.
  • Plans sponsored by other nonprofit organizations. These plans generally must comply with ERISA.

The federal tax law officially referred to as the Internal Revenue Code (IRC) contains numerous requirements for employee benefit plans, particularly for retirement plans that wish to obtain "tax-qualified" status (which means tax benefits for the employer and for employees who participate in the plan).

A retirement plan that qualifies as a church plan is not subject to all of the same tax qualification rules as other plans unless it elects to be so covered. A plan that does not make this election is often referred to as a non-electing church plan.

For governmental plans and non-electing church plans (referred to below as simply "church plans"), wading through the quagmire of tax qualification rules and trying to figure out which ones apply to them can be a confusing and frustrating experience, to say the least.

Some of the rules apply to church plans and some don't; and some of the rules apply to governmental plans, while others don't (or certain governmental plans but not others). And some rules apply to church or governmental plans in a modified form.

For example, church plans and most (and possibly all) governmental plans are not subject to the ordinary tax rules that dictate which employees must be covered by the plan (often referred to as the coverage rules). But a different set of coverage rules does apply. Similarly, the ordinary rules that determine when an employee's retirement benefits must be "vested" (which generally means they can t be taken away) are not the same for church and governmental plans as they are for other plans.

And the rules that say plan benefits may not discriminate in favor of certain highly paid employees don t apply to most (and possibly all) governmental plans, but they do apply to church plans .... And the list goes on.

The federal Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) requires most employer-sponsored group health plans to offer continued coverage under the plan for a limited period of time to certain employees and their dependents who would otherwise lose that coverage as the result of termination of employment or certain other "qualifying events." Does COBRA apply to your plan?

  • Governmental plans. Governmental plans (and plans sponsored by any governmental agency or instrumentality) are exempt from COBRA. But state and local governments must comply with virtually identical requirements under the federal Public Health Services Act (PHSA). And certain federal employees are protected by COBRA-like requirements under a separate federal law.
  • Church plans. Church plans are generally exempt from COBRA.
  • Plans sponsored by other nonprofit organizations. COBRA generally applies.

The federal Health Insurance Portability and Accountability Act of 1996 (HIPAA) includes a variety of requirements that apply to most group health plans sponsored by employers for their employees. What about governmental and nonprofit plans?

  • Governmental plans. HIPAA does not apply to plans sponsored by the federal government. But it does apply to state and local governmental plans with one limited exception: A state or local government may elect to be exempt from certain portions of HIPAA if it satisfies the requirements described in the statute.
  • Church plans. HIPAA does not apply to a church plan if the plan has not elected to be covered by ERISA.

Note of caution for insured plans: An insurer that provides insurance coverage for a governmental plan that opts for the HIPAA exemption, or for a church plan that is exempt from HIPAA altogether, is not necessarily exempt just because the plan itself is exempt.

  • Plans sponsored by other nonprofit organizations. HIPAA generally applies.

Section 403(b) Plans and Section 457 Plans.
These are plans that are designed to be used only by certain nonprofit and governmental employers. Here's a brief synopsis of each one:

  • Tax-sheltered annuity (TSA) arrangements under IRC Section 403(b). This is a section of the tax code that allows public educational institutions, as well as churches and nonprofit organizations that are tax-exempt under section 501(c)(3) of the IRC, to establish a tax-sheltered annuity arrangement for their employees.
  • Deferred compensation plans under IRC Section 457. Under this section of the tax code, state and local governments and tax-exempt employers (other than churches) may establish deferred compensation plans to which participants may make pre-tax contributions.

Special Rules for Compensation Paid to Nonprofit Officers.
The IRC imposes a special set of tax rules on compensation paid by a 501(c)(3) tax-exempt organization to highly paid employees of the organization and certain other individuals described in the IRC. If the organization violates these rules, it may be subject to some rather harsh tax penalties.

A Word to the Wise.
As you can see, if you're a nonprofit or governmental agency, simply trying to figure out which rules apply to your benefit plans (not to mention trying to comply with those rules) can be an all-consuming task. Before creating a plan and on a continuing basis as you strive to keep the plan in compliance with the law it's wise to consult with a competent benefits attorney to be sure you understand which rules apply to your plan.

Discuss these issues at the Public Employers forum.

The information contained inthis article is intended to provide useful information on the topic covered,but should not be construed as legal advice or a legal opinion.