Rabbis and 403b distributions

[Guest robertcusick]

A prospective client informed me that the rabbinical council advised him that is was acceptable to take a non-taxable distribution of $15,000 per year from his 403b account for "living expenses." What section of the code or PLR supports this position?

[Carol V. Calhoun]

The individual is no doubt referring to the "parsonage allowance" under IRC § 107. There have been some rulings to the effect that if a portion of the distribution (not exceeding actual housing expenses) is specified to be a parsonage allowance, the exclusion may be available under certain circumstances. (I spent some time advising rabbis myself, and was always amused at having to cite a provision for "parsonage allowances" for "ministers of the gospel," but that's life!)

[Kirk Maldonado]

No more rulings on whether amounts paid from a tax-qualified retirement plan will qualify for the exclusion for parsonage allowance under Section 107. Rev. Proc. 91-3, Section 5.06.

[Guest newlifeca]

I have a copy of an IRS document MSSP - "Ministers" - it's a training document for IRS employees. In it is the statement "A retired minister may recieve part of his or her pension benefits as a designated parsonage allowance" it then refers to IRS ruling 75-22. While this MSSP document is not a legal opinion, it may provide a starting point. Hope this helps.

[Carol V. Calhoun]

There was an earlier, and quite detailed, discussion of this issue on the Church Plans message board. You can get to it by clicking on this link:

http://benefitslink.com/boards/index.php?showtopic=2055

[Guest robertcusick]

From the replies (and thanks to all who replied), I see that the IRS is "accepting" of the practice without actually having ruled on the subject. This brings me to more questions, namely:

- does the rabbi/minister have to be active. or can he/she be retired and still claim the allowance?

- is it safe to assume costs including rent/mortgage, utilities, maintenance etc., are attributable to "housing expenses"?

- what "certain circumstances" is Carol V. Calhoun referring to? (I love that phrase)

- can the exclusion be applied to distributions from an IRA rollover account (from the taxpayer's 403b plan), or must the distribution be from the original plan?

[Guest newlifeca]

I answer to three your questions

1) It is my understanding that is definately for a retired rabbi, here is some wording from a IRS document for field workers dealing with ministers

"A retired minister may receive part of his or her

pension benefits as a designated parsonage allowance

based on past services. If so, the "least of" rules

apply.8

Trustees of a minister’s retirement plan may designate

a portion of each pension distribution as a parsonage

allowance excludable under IRC section 107. The

minister may claim that the amount is both excludable

from income as a parsonage allowance under IRC section

107 and excludable from self-employment income for

Self-Employment Contribution Act (SECA) purposes."

2) Allowable expenses are outlined in IRS publication 517

Hope this helps

[Guest Jim Andrews]

Does anyone know if there are any restrictions on the housing allowance if a 1035 annuity exchange is done within a 403b? I am being told that it will not be allowed.

[Guest Jim Andrews]

Let me restate that. The housing allowence will not be allowed.

[Carol V. Calhoun]

This is probably the correct interpretation, at least if the new annuity is not one available under the original plan. The existing authorities that have allowed a housing allowance in the context of a 403(B) plan have relied on some action taken by the plan sponsor. If the retiree is dealing directly with a provider without plan sponsor involvement, it would be harder to make the claim that a nontaxable housing allowance was available.