Loophole Puts Pension Plans at Risk
Seeking to cut pension costs, Jewish social service groups are using an obscure tax loophole to skirt federal rules that protect workers from being left out in the cold if their retirement plans collapse.
Jewish organizations, including federations and hospitals, have filed for the special “church status” that strips workers and retirees of legal protections and allows groups to drop insurance that would cover shortfalls in their pension plans.
Federal tax experts say the status is supposed to be for houses of worship and clergy-run religious groups, yet groups that are not clearly religious in nature have been approved, and more are eager to qualify.
“Once you get a church status, workers will no longer have the protection all other private pension plans have,” said Eric Loi, an attorney who works at the Pension Rights Center, a Washington-based organization.
Among the Jewish groups that have already won the special status are the federations of Philadelphia, Detroit, Cleveland and Baltimore. Old-age homes and hospitals in Connecticut and in Baltimore, as well as the American Jewish Joint Distribution Committee, have also qualified.
Those groups all obtained the status several years ago, often with little or no publicity, even though the changes can dramatically affect workers’ retirement security. Last year, the Internal Revenue Service issued new guidelines ordering groups to inform employees about the proposed changes and to allow their input.
The latest major group to push for the controversial change is United Jewish Communities of MetroWest New Jersey, one of the nation’s largest federations.
On January 11, UJC MetroWest told current and former employees that “because of extraordinary financial pressure,” the federation has turned to the Internal Revenue Service and asked that its pension program be recognized as a church plan.
“To qualify for this special plan exception,” the letter reads, the federation will have to demonstrate to the IRS that its pension plan is “established and maintained by a religious organization.”
If the request is approved, the New Jersey federation’s pension plan will not have to abide by rules set in the Employee Retirement Income Security Act of 1974.
The most significant exemption is from the need to insure the plan in the Pension Benefit Guaranty Corporation. It’s a costly requirement for pension funds, but one that ensures employees get at least part of their money in case the pension plan goes broke. Church plans are also exempt from many of the reporting and transparency requirements put in place to inform workers of how their retirement money is managed.
Officials at UJC MetroWest assured 1,144 participants in their pension fund that the group will continue to run the plan “in a responsible way” regardless of the change in status.
Howard Rabner, the federation’s chief operating officer and chief financial officer, told the Forward that he expects the change to “have no impact on the pension benefits” of retirees and employees. Rabner added that obtaining an exemption from ERISA requirements would “provide critical flexibility to fund the pension plan while continuing to provide our mission-based programming locally, in Israel and overseas.”
Not all participants in the UJC MetroWest plan feel at ease. At least one wrote a letter to the IRS, arguing that the federation is not a religious organization but rather a provider of social services. In the letter, the participant, who asked not to be named, explained that the federation does not employ clergy, has no religious school and does not conduct worship services.
William Josephson, expert on not-for-profit law and former head of the New York State Attorney General’s Charities Bureau, agreed.
“They’re not a church,” he stated, quoting the legal requirements for obtaining a “church plan” status. “How are they going to bypass that?”
Rabner said he believed that UJC MetroWest fit the description of a religious group because other federations had qualified.
In another recent case involving a Jewish organization, workers succeeded in derailing a plan to achieve church status recognition. Employees of the Jewish Community Center of Greater Washington pushed back against their employer’s intention to ask for the religious exemption. After writing board members and consulting with experts, they managed to convince the JCC to withdraw the request.
History has shown that workers have good reason to be concerned. Losing federal protection can present a real risk for those counting on their pensions to provide for their retirement years.
In 2003, the Hospital Center at Orange, located in Orange, N.J., received a “church plan” status for its pension program. The hospital shut down the following year, and only then did employees learn that their pension program was underfunded and would soon be depleted. Since the hospital was exempt from buying into the PBGC insurance, workers have no way to retrieve their pensions.
In another case, the Roman Catholic Diocese of Wilmington, Del., went bankrupt, leaving behind an underfunded pension plan. Since it was a church plan, participants did not have access to information about the dire situation of their retirement program.
So far, there are no similar horror stories at Jewish federations or other groups that obtained the special status. The JDC insisted that it applied for the status to free up cash for programs because its pension was significantly overfunded.
“The plan was fully funded under (government) rules and remains fully funded today under the same rules,” JDC spokesman Michael Geller said.
An official with the Associated Jewish Federation of Baltimore said the question of its church plan status is no longer relevant since the federation closed its pension plan and switched to a 401(k) program several years ago.
A spokesman for the IRS did not respond to inquires regarding exemptions for Jewish organizations’ pension plans.
Contact Nathan Guttman at [email protected]