Minister's housing allowance at plan termination?

[Kevin C]

A small non-electing Church DB has been frozen for several years. The plan will be terminated at some point, but that is still a few years off. They have a couple of ministers who will be retiring in a couple of years and are discussing designating the retired minister's monthly payments as housing allowance so they can claim it on their tax returns. That's not a problem while the plan continues, but what happens when the plan terminates? Does anyone know if monthly payments from an annuity purchased by the plan when the plan terminates would be treated the same as payments from the plan for purposes of the minister's housing allowance? I haven't been able to find anything that mentions this situation.

[david rigby]

The plan will be terminated at some point, but that is still a few years off. They have a couple of ministers who will be retiring in a couple of years and are discussing designating the retired minister's monthly payments as housing allowance so they can claim it on their tax returns. That's not a problem while the plan continues...

Help us out please. Why is this not a problem?

[Peter Gulia]

Kevin C, I'm not sure, but I suspect the church plan's fiduciaries might want your advice on at least these questions:

1) On plan termination, can the church governing body or authority and the plan's fiduciaries resolve a designation of the amounts or portions of the periodic payments that are treated as parsonage allowance so that this designation will last for decades?

2) Can the plan's fiduciaries negotiate with the annuity insurer for tax-reporting that supports a participant's exclusions from income? (If the pension plan ends, what person or entity with enough steady money will indemnify the insurer for its reliance on the parsonage instruction?)

The ideal is to get an Internal Revenue Service letter ruling on all points. But given a small plan with few participants, the people involved might prefer not to spend the plan's or the church's money on that procedure. Alternatively, they might spend a little money on lawyering to get the insurer/payer comfortable.

[Kevin C]

IRC 107, Rev. Ruling 75-22, Rev. Ruling 63-156 and 1.107-1. Also, from page 10 of the 2015 IRS Publication 517:

Retired ministers. If you are a retired minister,

you can exclude from your gross income the rental value of a home (plus utilities)

furnished to you by your church as a part of your pay for past services, or the part of your

pension that was designated as a rental allowance. How- ever, a minister's surviving

spouse can't ex- clude the rental value unless the rental value is for ministerial services

he or she performs or performed.

There are a number of lawsuits by groups trying to get this tax break ruled unconstitutional, but we'll cross that bridge if we get to it. The immediate question is would payments from an annuity purchased by the plan be treated the same as payments from the plan?

[Kevin C]

Peter,

1) I have sample designations that apply to all future payments, unless later rescinded. From what I've been able to find, that appears to be typical of designations from retirement plans.

2) Negotiating with the insurance company may be the stumbling point because of the relatively small size of the annuities. As for liability, that should all be on the individual minister unless there is a reason it isn't allowed for payments from the annuity. That leads back to my question. The designation sets an upper limit on the amount the minister can claim, but the minister has to be able to justify the amount actually claimed. Depending on the minister's actual expenses, the maximum amount that can be claimed could be less than the pension payment.

Per Rev. Proc. 2007-3, 3.01(10), the IRS will not issue a ruling regarding whether amounts distributed to a retired minister from a pension or annuity plan should be excludable from the minister's gross income as a parsonage allowance under § 107.

Are we having fun yet?

[Peter Gulia]

About point 2 (in my earlier post and your most recent), in my experience what the ministers want (and the church wants to help happen) is that the payer's 1099 reporting will display not only the gross amount paid but also a lower taxable amount - to make the minister's tax-return preparation easier and tidier. When I represented the payer/tax-reporter, it would play along if it got satisfactory indemnification from an entity with plenty of money.

The letter ruling one might seek would not be about whether something is excludable as a parsonage allowance; rather, you'd ask the IRS to confirm that an otherwise available tax treatment (whatever it is) does not become undone merely because the obligation was transferred from the pension plan to the annuity insurer.