September 27, 2008

403(b) Plan Documents

Question:

A ministry writes: "Having received notification from the investment company that we must comply with the new IRS regulations for our employer-sponsored 403(b) plan, we must write the plan. Do you have any advice on how to get the plan written easily?"

Answer:

Unfortunately, I don't have an easy answer for this one. The churches and Christian organizations that I've worked with have relied on the support provided by financial services firms (e.g., TIAA-CREF), some of which are getting out of the 403(b) market. My recommendation is that churches and Christian organizations with 403(b) plans work with the investment firm receiving the employees' elective deferrals and employer's matching contributions to assure that the January 1, 2009, deadline for establishing written 403(b) plans is met. If your investment company (yes, the one that's been charging your employees commissions on their monthly contributions) is placing the onus on your ministry for the written plan and unable to assist you, then I would guess that your organization has been operating with scant plan documents already. It may be time to change investment firms.

September 24, 2008

Roth IRAs

Question:

Do I pay tax when I invest in Roth IRAs?

Answer:

Since annual contributions to Roth IRAs are not tax deductible, the minister who invests in them uses funds available to him from income on which he first paid federal income tax. It sounds a little awkward to say that one pays tax when investing in Roth IRAs, so I prefer to explain it the way I do here.

September 12, 2008

Pastor's Salary Breakdown

Question:

A layperson writes: "My pastor's salary is broken down as follows: Wages, Insurance, Education, Housing, Utilities, Social Security Offset. Is every category taxable income on his W-2 Form?"

Answer:

This is a good review question. I'll try to answer concisely without oversimplification.
Wages -- Form W-2, Box 1
Insurance -- Health insurance premiums paid: Not reported as taxable income (additional rules apply to other insurance benefits such as disability and life)
Education -- Continuing professional education reimbursements: Not reported as taxable income (additional rules apply to other education benefits such as payments for dependent(s) and payments for employees' basic entry-level training)
Housing -- Reporting on Form W-2 not required, but I highly recommend it as a memo item in Box 14 (this apprises the pastor of the amount he must document in order to enjoy full income tax-free status and of the amount that he may need to report on Form 1040, Schedule SE as self-employment income)
Utilities -- Treated identically as housing
Social Security Offset -- Payments to the pastor in lieu of his self-employed status under which the church incurs no obligation to match a FICA withholding amount (unlike non-ministerial employees) are taxable income reported on Form W-2, Box 1

September 03, 2008

Church Matching Contributions to 403(b)

Question:

A church matches and contributes a portion of church staff members' salary to a 403(b) plan with an investment firm. Instead of using the 403(b) plan, can the employee direct the church contribution money to an investment option/plan of his or her own? Would there be a problem in changing the church policy to allow staff members to direct their retirement funds where they want to?

Answer:

The church administration will need to consult its plan documents presumably filed by investment firm. Normally the church as employer must, however, be consistent in its application of plan provisions among all employees. Accordingly, it is not likely that your plan document (nor Section 403(b) of the Internal Revenue Code) will permit this “cash or deferral” choice with the church’s matching portion.