Some companies are reclassifying their pension plans with the IRS in order to save on insurance premiums, while causing employees to potentially lose their pensions.

Take the case of a hospital worker from New Jersey, who worked for a local hospital for 25 years. Her employer shut down the pension plan in 2004 because it couldn't afford to support it any longer. Currently, the pension plan has $5.25 million in assets which are being distributed at the rate of $2.7 million per year. The former employee, who has 12 years until retirement, will not be able to get the pension, since the money from the fund will be gone.

Normally, a hospital pension plan would have been back-stopped by the Pension Benefit Guarantee Corporation, which is a federally sponsored agency that insures most private sector plans. If a plan goes under, PBGC takes over and continues to make payments to the participants and most receive 100 percent of their promised benefits.

This hospital plan was not typical because a year before the plan closed, it was reclassified as a church plan, which made it exempt to federal pension law. The Employee Retirement Income Security Act has always exempted plans operated by churches so that it was easier for the churches to operate their own plans.

Now, a growing number of plans that had no direct ties to a religious organization began declaring themselves as church plans. Then, asking the IRS to issue private-letter rulings confirming the exemptions, which free the plans from federal funding requirements. Many organizations like this exemption because they could receive a refund on PBGC insurance premiums that they had paid from up to six years ago.

Some feel the issue is with the IRS allowing affiliate organizations to become church plans when they really didn't have a significant tie in with a church.

In this case, plan participants sued the hospital, the Archdiocese, PBGC and the IRS, but the lawsuit was dismissed. A settlement was reached because no pension fund recipient had been harmed yet.

Since this case, the IRS has taken action and has issued new rules requiring plans to notify participants if they want to convert from a pension plan to a church plan status. This would allow participants to file comments with the IRS before a decision is made and hopefully discourage companies from classifying their pension plans this way.

Source: Reuters, "Workers fight switch to church pension plans," Mark Miller, Jan. 25, 2012