February 12, 2015

Church Plan: 401(k) or 403(b)?

Question:

According to Revenue Rulings 58-359 and 63-156, retirement distributions to a pastor may be designated as housing allowance if they come from a church plan. Does a 401(k) plan sponsored by the church qualify as a church plan?

Answer:

Normally, non-profit organizations set up 403(b) retirement plans for its employees while for-profit organizations establish 401(k) retirement plans. For churches, one of the benefits of implementing a 403(b) plan is that the retirement distributions to a pastor can be designated as a housing allowance (tax-free compensation). Here are a couple of blog posts that we have written on the matter:

403(b) Retirement Distributed as Housing Allowance
Housing Designation of 403(b) Plan Retirement Distributions
  
According to The Minister Audit Techniques Guide, "...the retired minister may exclude from net earnings from self-employment any retirement benefits received from a church plan (our emphasis). Rev. Rul. 58-359, 1958-2 C.B. 422." 

So that leads to the the above question: Does a 401(k) plan qualify as a church plan?

Precedence tells us that 403(b) plans are the standard for most church plans. However, according to The Tax Magazine on December 1, 2011, a 403(b) or a 401(k) plan may be classified as church plans as long as other requirements of the above revenue rulings are satisfied. 

As always, churches should reach out to a tax professional when determining what type of retirement plan to set up for its employees. 

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