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Housing Allowance Contributions


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A non-electing church 403(b) plan defines compensation as W-2 Wages. Ministers , who receive housing allowance, contribute all or part of this type of compensation to the plan on a pre-tax basis. Minister defers salary, but only determine at end of year how much salary was used for housing allowance. I am not sure this is allowed. As an alternative, could the ministers contribute housing allowance to plan on an after-tax basis? Rationale is that includible compensation doesn't include housing allowance for purposes of caclulating 415 maximum limits to the plan - i.e., the lesser of 100% of compensation or maximum dollar amount permitted under the Code ($50,000 for 2012). Treasury Reg. § 1.415-2(d)(3)(iv) states that the term "compensation" does not include items such as "opther amounts which receive special tax benefits...". Therefore, housing allowance is not included in the annual limit, since it is an after-tax allowance. A minister could contribute the hosuing allowance on an after-tax basis if his pre-tax salary exceeds the 415 limit and his pre-tax plan contributions do not meet the $50,000 limit.

Also, when retired ministers take a distriubtion, the total distribution is subject to 20% Federal Income Tax Withholding and applicable State Income Tax Withholding, since it is not know what portion of the distribution is attributable to the tax free houswing allowance, Box 2b of Form 1099-R - Taxable Amount Not Determined is checked. This procedure allows the retirees, when filing taxes, to exclude from income distributions from the plan that are designated as housing alowances.

I am concered about participants deferring on the housing allowance and withholding 20% on the distribution. What do you think?

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