November 27, 2009

Partially Retired Minister Compensation

Question:

A minister is partially retired and receiving Social Security benefits that will be limited by the Social Security Administration (SSA) if his earnings exceed the SSA's thresholds. at age 62. Can the church continue to employ him and compensate him appropriately without exceeding the threshold? The church did investigate a deferred compensation arrangement called a "rabbi trust" but found it to be overly complex.

Answer:

According to the SSA website:

"If you are under full retirement age for the entire year, we deduct $1 from your benefit payments for every $2 you earn above the annual limit. For 2009 and 2010, that limit is $14,160.

"In the year you reach full retirement age, we deduct $1 in benefits for every $3 you earn above a different limit, but we only count earnings before the month you reach your full retirement age. If you will reach full retirement age in 2009 or 2010, the limit on your earnings for the months before full retirement age is $37,680.

"When we figure out how much to deduct from your benefits, we count only the wages you make from your job or your net profit if you're self-employed. We include bonuses, commissions and vacation pay. We don't count pensions, annuities, investment income, interest, veterans or other government or military retirement benefits.".

For most ministers, the amount reported on Schedule SE to Form 1040 will be the amount compared to these limits. This amount includes cash compensation plus housing allowance, but does not include the following:
  • professional expense reimbursements from an accountable plan
  • health care benefits
  • other non-taxable fringe benefits (e.g., employer matching of 403(b) plan contributions)
In addition, elective deferrals to a 403(b) plan by a minister are excluded from SE income
(IRS Revenue Rulings 68-395 and 78-6). Also, please search other postings in this blog.

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