June 25, 2015

1099-MISC Ministers and 403(b) Plans

Question:

I am treated as a 1099-MISC self-employed contractor by my U.S. mission agency. Should I consider establishing and contributing to a 403(b) retirement plan? Am I eligible? 

Answer:

This blog post will deal with the issue concerning a self-employed minister’s eligibility to establish a 403(b). Please bear with the very technical nature of this post.

Starting with IRS Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans), we see two conflicting statements when taken at face value.

First Statement: “The following ministers are eligible employees for whom a 403(b) account can be established… Self-employed ministers. A self-employed minister is treated as employed by a tax-exempt organization that is a qualified employer.”

Second Statement: “Who Can Set Up a 403(b) Account? … A self-employed minister cannot set up a 403(b) account for his or her benefit. If you are a self-employed minister, only the organization (denomination) with which you are associated can set up an account for your benefit.”

How are these statements reconciled? According to Internal Revenue Code (IRC) Section 1.403(b)(8)(D), an eligible employer is a “minister described in section 414(e)(5)(A), but only with respect to a retirement income account established for the minister.” 

Per IRC Section 414(e)(5)(A)(i)(I), certain ministers may participate [in a church retirement plan]. These ministers include a “self-employed individual (within the meaning of section 401(c)(1)(B)).” A self-employed individual means an individual who has “earned income,” which is net earnings from employment.

Section 414(e)(5)(A)(ii) further reads that a self-employed minister as described in (i)(I) [as stated above] “shall be treated as employed by the minister’s own employer which is an organization described in section 501(c)(3) and exempt from tax under section 501(a).”

In layman’s terms, it appears that a self-employed minister is considered both the employee and employer for 403(b) plan purposes and should be eligible to establish the retirement plan.

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