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403(b) Retirement Distributed as Housing Allowance

Question:

A pastor recently left his ministry to start a business. While in the ministry, he had a 403(b)* plan which he contributed to for over 12 years. When he retires, are the distributions from this 403(b) eligible for housing allowance, or will the IRS see this as not housing allowance eligible since he is no longer a minister?

Answer:

The 403(b) plan will be eligible for housing allowance, as long as the church designates it as such. A previous blog post provided some additional information on this issue. Excerpts and a link to the post merit revisiting:

"A retired minister may receive part of his or her pension benefits as a designated parsonage allowance based on past services. Trustees of a minister’s retirement plan may designate a portion of each pension distribution as a parsonage allowance excludible under IRC § 107 (Rev. Rul. 63-156, 1963-2 C.B. 79, and Rev. Rul. 75-22, 1975-1, C.B. 49)" (IRS Minister Audit Technique Guide published in April 2009).

Since it may be a long time between the pastor’s discontinuance of his employment at the church and the time when he receives distributions, he must reestablish contact with its leadership and request a formal housing designation in writing.  We generally recommend that the church designate 100% of all future distributions from the 403(b) plan as housing allowance. The minister must then exclude only that portion of the distributions from income for which he has met the three-part test for housing allowance. (See other postings on this blog for a refresher of these rules.)

Minister's Retirement Distributions Designated as Housing Allowance

* 403(b) plans are described in the Internal Revenue Code Section 403, subparagraph b, hence the name "403(b) plans."

Comments

  1. I have passed on your info to one of my Pastors regarding pastoral housing and retirement plan distributions.
    He was told that the type of underlying investment in the 403(b) affects whether this can be done on a tax-free basis, naming index funds as ineligible versus managed funds. Is there any such restriction that you aware of or can steer me to for him?
    Thank you!

    ReplyDelete
  2. Dan:

    The following blog post addressed church plans:

    http://ministrycpa.blogspot.com/2015/02/church-plan-401k-or-403b.html

    The Minister Audit Techniques Guide provides little direction as to the definition of a church plan. However, we have no knowledge at this time that would require different treatment for investments by a 403(b) plan in index funds as opposed to managed funds.

    ReplyDelete
    Replies
    1. I've just retired and my 403b is in an index fund. Do you have any new info about the above question? Thanks--Carl

      Delete
    2. We have no new info. However, it makes no sense to distinguish between managed funds and indexed funds for which the Internal Revenue Code 403 makes no reference.

      Delete

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