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DTH

403(b) Distributions Treated as Housing Allowance

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DTH    0

A church that sponsors a 403(b)(1) plan and wants to add language to the plan document that all distributions to ministers are designated as housing allowance unless the church says otherwise.

Treasury regulation 1.107-1(b) requires that the employing church or other qualifying organization must designate the amount of parsonage allowance in advance of payment.

The 403(b) LRMs doesn’t have housing/parsonage allowance language. Is it appropriate to designate plan distributions as housing/parsonage allowance in the plan document?

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Belgarath    339

I claim no expertise in the area of Church Plans. However, I confess to being puzzled as to why they would even want to do this. Is it their intention that by doing this, they hope to make distributions from the 403(b) non-taxable? If so, then IMHO, it isn't valid.

I won't go so far as to say you CAN'T have such a provision, but I doubt the IRS would approve it in a pre-approved document, and I'm dubious that it is permissible in an individually designed document. But even if you do put it in, and even if he IRS says it is ok, I still fail to see what it would accomplish?

Maybe someone else can offer a more informed opinion.

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Kevin C    155

Yes, 403(b) distributions to ministers can be designated as housing allowance.  I haven't seen it done in a plan document.  The examples I've seen all had the designation made in a Resolution by the Church.  The ones I've seen designate the entire distribution as housing allowance and it is up the minister to determine how much of the distribution actually qualifies as housing allowance.

Our Church clients that have done this included language like this in the Resolution:

Quote

 NOTE:  The housing allowance that may be excluded from a Clergyperson’s gross income in any year for federal income tax purposes is limited under Internal Revenue Code Section 107 and regulations there under to the least of:  (1) the amount of the housing allowance designated by the Clergyperson’s employer or other appropriate body of ********* for such year, (2) the amount actually expended by the Clergyperson to rent or provide a home in such year; or (3) the fair rental value of the home, including furnishings and appurtenances (such as a garage), plus the cost of utilities in such year.

If you google minister pension housing allowance, you'll find lots of information, including this IRS webpage

https://www.irs.gov/businesses/small-businesses-self-employed/minister-audit-technique-guide

From the IRS web page:

Quote

 

Retired Ministers


A retired minister may receive part of his or her pension benefits as a designated parsonage allowance based on past services.  Trustees of a minister’s retirement plan may designate a portion of each pension distribution as a parsonage allowance excludible under IRC § 107. (Rev. Rul. 63-156, 1963-2 C.B. 79,  and Rev. Rul. 75-22, 1975-1, C.B. 49) The “least of” rules should be applied to determine the amount excludible from gross income.


The retired minister may exclude from his/her net earnings from self-employment the rental value of the parsonage or the parsonage allowance received after retirement.  The entire amount of parsonage allowance received is excludible from net earnings from self employment, even if a portion of it is not excludible for income tax purposes. In addition, the retired minister may exclude from net earnings from self-employment any retirement benefits received from a church plan. Rev. Rul. 58-359, 1958-2 C.B. 422.

 

 

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DTH    0

Thanks for all the great feedback. I think what the church is trying to do is have the plan document say that 100% of any distribution is designated as housing allowance (unless the church board says its not) rather than the church make a formal designation (e.g., employment contract, church minutes, church budget). 

I'm just uncomfortable about putting language in the plan.The LRMs are silent. 

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