Parsonage Payment Distributions from 403(b)s / Tax Reporting

[Guest paulg]

A question from the perspective of a firm that processes 403(b) distributions and prepares the 1099-R reporting:

If a participant wishes to take a distribution from his 403(b) and would like to take advantage of the tax-free benefits that apply to parsonage payments, how should we handle this from a processing standpoint?

Would we just process this as a normal distribution (code 7) and leave it to the participant to claim an exemption when filing his taxes? And if so, what about withholding? Under normal circumstances, we would be required to withhold 20% if the distribution were eligible to be rolled over; would the participant be able to opt out of this for a parsonage payment?

Has anyone had any experience with this?

THANKS!

[TLGeer]

I have done parsonage allowance work, including legal opinions and obtaining private letter rulings. Here are some thoughts.

Has the participant retired? Post-retirement parsonage has been a no rulings area for IRS for some time.

In addition, there are hoops you have to jump through, in order to claim the exclusion.

There is an excellent article on this at www.churchbenefitsassociation.org/AnnualMtg/Workshop07/program/06_Housing_Allowance_for_Clergy_Retirement_Plan_Issues.pdf

Parsonage allowance issues can be straightforward or very difficult, depending in the circumstances. The fact that anyone administers a retirement plan with members of the clergy in it does not give them any particular expertise in the area, so your declining to make a determination should not surprise anyone.

Except in a very clear case, I recommend you would take the position that somebody else has to determine the applicability of the parsonage allowance exclusion. Perhaps the employer's counsel or CPA? Or could you retain an expert at the employer's cost?

Tom Geer

[masteff]

Speaking just to the 1009-R question....

http://www.usccb.org/finance/DFI%20UPDATES...RKUP%200807.pdf

Page IV-4 (pdf page 11) says: The sum of all pension payments issued in a calendar year are to be reported as the gross distribution amount on form 1099-R. If the diocese has properly designated all, or a portion of the pension payments as a housing allowance, the taxable portion of the total payments cannot be determined by the diocese, since the amount excludable from income as a housing allowance has to be determined by the taxpayer based on the three options shown above. Therefore, the taxable amount on form 1099-R should be left blank and the box “taxable amount not determined” checked.