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Maximizing Retirement Contributions without Violating Non-Discrimination Rules

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Question: 

Our church would like to increase our contribution towards our senior pastor's retirement funds but are not sure what is the most tax efficient way to do so.  We currently give 5% of all our employees gross wages towards a SEP IRA but we'd like to add additional funds for just the senior pastor.  Can you provide any suggestions?

Answer: 

Perhaps the most common way that employers overcome the non-discriminatory rules that confront this situation is to enable employees to make elective deferrals under a “Salary Reduction Agreement.” This permits a more highly compensated employee to defer a significant portion of that higher compensation into a qualified retirement plan. 

Since SEP IRA plans are funded only by the employer, the church in the situation cited here should consider whether an alternative plan should be adopted. For many churches this has meant that they adopt an Internal Revenue Code Section 403(b) plan.

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