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Housing Allowance & RMD


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Happy Friday!

A minister's housing allowance is excludable from gross income for income tax purposes.  Considering Treas. Reg. 1.401(a)(9) Q&A9 below, would a distribution made for a housing allowance count toward satisfying the RMD for a participant? 

 

Thoughts? 

 

https://www.law.cornell.edu/cfr/text/26/1.401%28a%29%289%29-5

 

Q-9. Which amounts distributed from an individual account are taken into account in determining whether section 401(a)(9) is satisfied and which amounts are not taken into account in determining whether section 401(a)(9) is satisfied?

A-9. (a)General rule. Except as provided in paragraph (b), all amounts distributed from an individual account are distributions that are taken into account in determining whether section 401(a)(9) is satisfied, regardless of whether the amount is includible in income. Thus, for example, amounts that are excluded from income as recovery of investment in the contract under section 72 are taken into account for purposes of determining whether section 401(a)(9) is satisfied for a distribution calendar year. Similarly, amounts excluded from income as net unrealized appreciation on employer securities also are amounts distributed for purposes of determining if section 401(a)(9) is satisfied.

(b)Exceptions. The following amounts are not taken into account in determining whether the required minimum amount has been distributed for a calendar year:

(1) Elective deferrals (as defined in section 402(g)(3)) and employee contributions that, pursuant to rules prescribed by the Commissioner in revenue rulings, notices, or other guidance published in the Internal Revenue Bulletin (see § 601.601(d)(2) of this chapter), are returned to the employee (together with the income allocable thereto) in order to comply with the section 415 limitations.

(2) Corrective distributions of excess deferrals as described in § 1.402(g)-1(e)(3), together with the income allocable to these distributions.

(3) Corrective distributions of excess contributions under a qualified cash or deferred arrangement under section 401(k)(8) and excess aggregate contributions under section 401(m)(6), together with the income allocable to these distributions.

(4) Loans that are treated as deemed distributions pursuant to section 72(p).

(5) Dividends described in section 404(k) that are paid on employer securities. (Amounts paid to the plan that, pursuant to section 404(k)(2)(A)(iii)(II), are included in the account balance and subsequently distributed from the account lose their character as dividends.)

(6) The costs of life insurance coverage (P.S. 58 costs).

(7) Similar items designated by the Commissioner in revenue rulings, notices, and other guidance published in the Internal Revenue Bulletin. See § 601.601(d)(2)(ii)(b) of this chapter.

 

Any feedback would be greatly appreciated!

 

E

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The plan shouldn't care what the employee is doing with the distributed funds (other than trying to roll them over). 

My hunch is this is gonna be okay, but I'll see how others chime in.  The yellow highlighted text references the next sentence about not worrying whether or not there's any basis in the RMD payment.  Even though it's not a basis issue, the plan is paying what it needs to.  (Does the 1099-R even go and reflect nontaxability?  The nontaxability of it comes outside the norm.)

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On 11/2/2018 at 12:56 PM, ErisaGooroo said:

Happy Friday!

A minister's housing allowance is excludable from gross income for income tax purposes.  Considering Treas. Reg. 1.401(a)(9) Q&A9 below, would a distribution made for a housing allowance count toward satisfying the RMD for a participant? 

 

Thoughts? 

 

https://www.law.cornell.edu/cfr/text/26/1.401%28a%29%289%29-5

 

Q-9. Which amounts distributed from an individual account are taken into account in determining whether section 401(a)(9) is satisfied and which amounts are not taken into account in determining whether section 401(a)(9) is satisfied?

A-9. (a)General rule. Except as provided in paragraph (b), all amounts distributed from an individual account are distributions that are taken into account in determining whether section 401(a)(9) is satisfied, regardless of whether the amount is includible in income. Thus, for example, amounts that are excluded from income as recovery of investment in the contract under section 72 are taken into account for purposes of determining whether section 401(a)(9) is satisfied for a distribution calendar year. Similarly, amounts excluded from income as net unrealized appreciation on employer securities also are amounts distributed for purposes of determining if section 401(a)(9) is satisfied.

(b)Exceptions. The following amounts are not taken into account in determining whether the required minimum amount has been distributed for a calendar year:

(1) Elective deferrals (as defined in section 402(g)(3)) and employee contributions that, pursuant to rules prescribed by the Commissioner in revenue rulings, notices, or other guidance published in the Internal Revenue Bulletin (see § 601.601(d)(2) of this chapter), are returned to the employee (together with the income allocable thereto) in order to comply with the section 415 limitations.

(2) Corrective distributions of excess deferrals as described in § 1.402(g)-1(e)(3), together with the income allocable to these distributions.

(3) Corrective distributions of excess contributions under a qualified cash or deferred arrangement under section 401(k)(8) and excess aggregate contributions under section 401(m)(6), together with the income allocable to these distributions.

(4) Loans that are treated as deemed distributions pursuant to section 72(p).

(5) Dividends described in section 404(k) that are paid on employer securities. (Amounts paid to the plan that, pursuant to section 404(k)(2)(A)(iii)(II), are included in the account balance and subsequently distributed from the account lose their character as dividends.)

(6) The costs of life insurance coverage (P.S. 58 costs).

(7) Similar items designated by the Commissioner in revenue rulings, notices, and other guidance published in the Internal Revenue Bulletin. See § 601.601(d)(2)(ii)(b) of this chapter.

 

Any feedback would be greatly appreciated!

 

E

I'm not sure why you bring up the housing allowance for ministers. That has nothing to do with an RMD.  The RMD is a taxable distribution.  The housing allowance is an amount paid by the church or congregation that is excluded from taxation if it meets the necessary criteria.  The two have no connection.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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I agree with Larry.  The distribution is taxable.  The plan doesn't pay a housing allowance for a minister.  Why would it?  The minister is not performing services for the plan.

If anything, if the distribution is not reported as taxable, this could be considered a PT as a transfer to the church and then payment by the church for the housing allowance. 

I have not researched the issue specifically, but it doesn't pass the smell test.  

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Thinking about it some more.  Can ministers take a deduction for charitable contributions of taxable income to their own church?  

If that answer to that is yes, you might consider reporting the distribution with a 1099R, the minister makes a contribution to the church and gets the deduction, and then the church uses that money to pay for his housing.  

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https://ttlc.intuit.com/questions/4232259-how-do-i-enter-minister-s-housing-allowance-as-a-retired-minister-when-i-do-not-receive-a-w-2-form

 

It is my understanding Rev Ruling 75-22 allows under the correct conditions the retirement plan payment to be a non-taxable housing allowance.  See link above.  

 

I can't cite anything but I don't see why such a payment doesn't meet the RMD requirement.  I have always understood an after-tax (not Roth) distribution can satisfy an RMD requirement.  Or at least the part that typically is non-taxable since most after-tax distribution have a mix of both taxable and non-taxable. 

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Retirement plan distributions to a minister can be designated as housing allowance.  In the examples I've seen, the Church does a resolution that designates 100% of any distribution to a minister as housing allowance and it's up to the minister to justify the amount actually claimed as a housing allowance.  If you google retired minister housing allowance, you will find lots of sites with information.

From a Ministers Audit Techniques Guide on the IRS website:
https://www.irs.gov/pub/irs-utl/ministers.pdf

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.

 

As for the RMD, the regulation cited in the OP says that determining if a distribution counts as an RMD is not affected by whether or not the amount is taxable.

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8 hours ago, ESOP Guy said:

https://ttlc.intuit.com/questions/4232259-how-do-i-enter-minister-s-housing-allowance-as-a-retired-minister-when-i-do-not-receive-a-w-2-form

 

It is my understanding Rev Ruling 75-22 allows under the correct conditions the retirement plan payment to be a non-taxable housing allowance.  See link above.  

 

I can't cite anything but I don't see why such a payment doesn't meet the RMD requirement.  I have always understood an after-tax (not Roth) distribution can satisfy an RMD requirement.  Or at least the part that typically is non-taxable since most after-tax distribution have a mix of both taxable and non-taxable. 

Wait a minute; we are talking about apples and succotash!  A RETIREMENT PAYMENT by a church from a church plan (nothing to do with an IRA) can have as part of the payment a housing allowance that is non-taxable (the cite above explains some of that).  But that has NOTHING to do with an existing IRA and nothing to do with an RMD that is required from that IRA.  PERIOD.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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16 minutes ago, jpod said:

Did the OP say we were talking about an IRA?

I went back and checked; Nope.  He posted on Friday and with all this activity, still hasn't clarified.   So, until we know exactly what the situation is, here are the answers (BTW, would love to have fully fleshed questions posted; always provide MORE information than you think is necessary; our business is one of nuances and tricky issues):

If this is a distribution from an IRA, it is fully taxable and counts for the RMD.

If this is a distribution from a church plan, it counts as an RMD, but whether it is taxable is a separate question dependent on the rules for minister housing allowances, a separate issue.

The issue is actually simple when boiled down:  it's not "is a housing allowance an RMD", it's "is a distribution from a plan (whether taxable or not) counted toward RMD requirements". The answer to that is simple: Yes; the status of the taxation does not affect the application of RMD rules.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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20 hours ago, Larry Starr said:

I went back and checked; Nope.  He posted on Friday and with all this activity, still hasn't clarified.   So, until we know exactly what the situation is, here are the answers (BTW, would love to have fully fleshed questions posted; always provide MORE information than you think is necessary; our business is one of nuances and tricky issues):

If this is a distribution from an IRA, it is fully taxable and counts for the RMD.

If this is a distribution from a church plan, it counts as an RMD, but whether it is taxable is a separate question dependent on the rules for minister housing allowances, a separate issue.

The issue is actually simple when boiled down:  it's not "is a housing allowance an RMD", it's "is a distribution from a plan (whether taxable or not) counted toward RMD requirements". The answer to that is simple: Yes; the status of the taxation does not affect the application of RMD rules.

Hello, Everyone:

Thanks for the replies.  It is a distribution from a church plan (nothing to do with an IRA). 

My concern was whether or not the housing allowance (for the most part, a non-taxable distribution) would satisfy at least a portion of the RMD requirement (a taxable distribution).  The participant takes a distribution for a housing allowance and is also now required to take RMDs. 

 

 

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50 minutes ago, ErisaGooroo said:

My concern was whether or not the housing allowance (for the most part, a non-taxable distribution) would satisfy at least a portion of the RMD requirement (a taxable distribution). 

 

And the clear answer is "yes" the distribution used for a housing allowance can do double duty.  The fact it is not taxable is irrelevant.  

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12 minutes ago, ESOP Guy said:

And the clear answer is "yes" the distribution used for a housing allowance can do double duty.  The fact it is not taxable is irrelevant.  

Thank you all very much for your help.  I appreciate it.

It's nice to be important, but it's more important to be nice...

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3 hours ago, ESOP Guy said:

And the clear answer is "yes" the distribution used for a housing allowance can do double duty.  The fact it is not taxable is irrelevant.  

100% agreed.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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I agree you report the gross in box 1 and the taxable in box 2 (I think it is box 2).  Maybe I asked the wrong question. I was thinking what happens if the distribution exceeds the RMD or the RMD exceeds the housing allowance.  That also raises withholding issues.

But this is a hypothetical, so I don't need an answer.  I was just curious.  

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I would expect in most cases that the distributing plan doesn't have sufficient information to determine how much of the distribution is taxable.  The non-taxable amount is the lesser of 1) the amount designated by the plan as a housing allowance or 2) the amount the minister can justify as a housing allowance.  The instructions for 2a and 2b say what to do if the taxable amount can not be determined.

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