May 29, 2009

Housing Designation of 403(b) Plan Distributions

Question:

"I know that the IRS does allow for retirement distributions from a 403(b) plan to be at least partially designated as a housing allowance (true, see my Feb. 6, 2007, post and others). But up to this point I have not found if this is available for 403(b)(7) plans. A pastor has a 403(b) plan that he and the church both contribute to. Is there any way that part of the retirement distributions can be designated as a housing allowance? I have talked to [the mutual fund firm] and it will not “code” the Form 1099-R for any housing allowance." (The mutual fund firm will not report a lower taxable amount for a distribution than it reports as the full distribution amount simply because a recipient can provide documentation of a housing allowance designation by his congregation.)

Answer:

Two issues here...

1) Regardless whether the investments are held in a traditional TSA sold only by insurance companies (as initially described by Congress in 1958 when it established 403(b) plans) or in mutual funds (as modified by Congress in 1974 in IRC section 403(b)(7) to allow for non-annuity investments) a church can designate all or a portion of the distributions as housing allowance. Of course, a minister must comply with other requirements (e.g. must be 59 1/2 years old).

2) In my July 26, 2008, post I stated "the retired minister reports the full distribution on Line 16a (2007 Form 1040) and the taxable amount after allowable housing allowance on Line 16b." This reporting method, however, does have its challenges. The IRS document matching program may/will assume that an error has been made and propose a change in the return. The taxpayer must respond by providing an explanation for the discrepancy. I recommend that a schedule of the minister's housing expenses also be provided. The minister should maintain his documentation in case the Service requests it.

2 comments:

  1. Very helpful. In this situation, let's assume the pastor is retired and no longer serving the local church. Does he have to go back to that church every year and ask for a housing allowance "statement" of some sort? What if the church no longer exists??

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  2. The statement can be in perpetuity but should state either an annual amount or that 100% of all distributions from employer plans are designated as housing. Note: IRA accounts are generally not viewed as employer plans.

    If the minister's employer no longer exists... that's a tough one since it is a minister's employer who designates a portion of his compensation or retirement distribution as housing. Perhaps a church previous to the one he retired from or his current congregation (as a member) could provide the designation statement. I do not know that this type of designation has been considered by the IRS and cannot testify of its success.

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