June 21, 2017

401(k) distribution rollover to 403(b) plan

For a quick review, readers should be reminded that ministers may be eligible to make contributions to an Internal Revenue Code section 403(b) plan established by their not-for-profit employers. The traditional 401(k) plan is available to for-profit employers. Also, ministers' distributions at retirement taken from 403(b) plans may be designated as non-taxable housing allowance.

See other postings on this blog for a refresher of these rules:
403(b) Retirement Distributed as Housing Allowance

Question 1:

An ordained minister, formerly working for a for-profit company, is now working for a nonprofit ministry. His former retirement plan was a 401(k). The current employer offers a 403(b) plan. Can a 401(k) distribution be rolled over into a 403(b) plan?

Answer 1:

According to IRS Publication 571,

You can generally roll over tax free all or any part of a distribution from an eligible retirement plan to a 403(b) plan.”

Question 2:

But should a minister consider doing so? Will the ability to designate as housing allowance all or a portion of 403(b) retirement plan distributions still be allowed?

Answer 2:

Caution is advised when comingling non-church [401(k)] and church [403(b)] accounts. The church monies may become ineligible for a housing allowance designation if careful records are not kept of the 401(k) roll over amount (and subsequent earnings on that amount) versus church and minister 403(b) contributions and related earnings. The minister may be called upon to defend his calculations of tax-free housing related to his 403(b) portion of the church plan account.

We do not have definitive guidance on this particular matter. Accordingly, we recommend avoiding comingling monies from a 401(k) rollover with monies that can be distributed tax free through a housing allowance designation from a 403(b) account.

An alternative to rolling over the 401(k) distribution into the 403(b) plan is to rollover the 401(k) into a traditional IRA, leaving the 403(b) solely for church monies. Therefore, no confusion should arise as to the eligibility of the 403(b) monies for a housing allowance.