December 12, 2012

Establishing Retirement Housing Plan for Pastor

Question:

A church would like to provide housing for its minister after he retires. His retirement is still a few years off. What can the church do now to provide for its pastor after his retirement? The church would rather not use the parsonage to provide for this retirement housing.

Answer:

Churches have a few options worth considering when discussing how best to provide for a retired minister:

(1) The church can establish a 403(b) plan for a minister before he retires and make contributions to it. Upon retirement (retired and no longer providing services to the church), the pastor can use this to provide for his own housing, if so designated by the church. Following advice provided in other blog postings on MinistryCPA, distributions from the 403(b) account to the pastor may enjoy tax-free status as a housing allowance.

403(b) Retirement Distribution as Housing Allowance

As seen in the above link, the church can designate all or a part of the distributions as housing allowance. The part not classified as housing allowance is income.

(2) After the minister retires (and is no longer providing services to the church), the church can continue to provide him with housing. The Minister Audit Techniques Guide  says "The retired minister may exclude from his/her net earnings from self-employment (SE) the rental value of the parsonage or the parsonage allowance received after retirement. The entire amount of parsonage allowance received is excludable from net earnings from self employment, even if a portion of it is not excludable for income tax purposes. In addition, the retired minister may exclude from net earnings from self-employment any retirement benefits received from a church plan. Rev. Rul. 58-359, 1958-2 C.B. 422."

Thus the church could elect to have the pastor stay in the parsonage after his retirement. The housing would be non-taxable to the minister in this arrangement.

(3) A third option applies to those churches wishing to provide benefits to the pastor after retirement yet are planning on the minister no longer living in church parsonage. In this case, the church could continue to provide compensation after retirement (and is no longer providing services to the church), and simultaneously designating a portion or all of the compensation as housing allowance. Please see citation above under Option 2. This would not be subject to SE tax. For more information, please click on the following link.

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