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BulldogTom

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My pastor stopped me on the way out of church yesterday and asked me to take a look at some 403( b ) material he was reading. He asked me to read it and he will give me a call about it later. I am not in any official capacity in the church, but the pastor and I get along real well, so he leans on me for advice before he talks to the church treasurer.

Our church is very small, but we are members of the Southern Baptist Convention and the local Delta Valley Baptist Association. Delta has a 403(B ) plan through Guidestone that our church can participate in. Or we could contact Guidestone ourselves and get a plan, or we can go outside the SBC and get a plan from any commercial source (I assume).

My understanding of a 403(B ) is that is basically a 401K for non-profits? The "new" thing that I learned was that the pastor housing allowance is or can be compensation for purposes of any match or employer contributions. Since we pay our pastors so little, it is all designated as housing allowance. We have two pastors (no salary, all housing) and three part time employees (all retired from other jobs, secretary, treasurer, janitor) who receive salary only. We do not pay any health or other benefits.

Are there any problems with putting in a 403( b ) plan? I understand the universal access requirements and the highly compensated rules. I just don't know if there is something else we should be looking at?

Any suggestions would be appreciated.

Tom

Lodi, CA

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<<<Our church is very small, but we are members of the Southern Baptist Convention and the local Delta Valley Baptist Association. Delta has a 403( plan through Guidestone that our church can participate in. Or we could contact Guidestone ourselves and get a plan, or we can go outside the SBC and get a plan from any commercial source (I assume).>>>

I have been impressed by the quality of Guidestone Financial Resources information available for pastors and their tax circumstances. They have a free downloadable Minister's Tax Guide that is not too bad.

<<<My understanding of a 403( is that is basically a 401K for non-profits? The "new" thing that I learned was that the pastor housing allowance is or can be compensation for purposes of any match or employer contributions. Since we pay our pastors so little, it is all designated as housing allowance. We have two pastors (no salary, all housing) and three part time employees (all retired from other jobs, secretary, treasurer, janitor) who receive salary only. We do not pay any health or other benefits.>>>

The tax code's definition of includible compensation includes any amount received from an employer which is includible in gross income. Section 107 of the tax code specifies that a minister's housing allowance (or the annual rental value of a parsonage) is not included in the minister's gross income for income tax reporting purposes. Therefore, it would appear that the definition of includible compensation for purposes of computing the limit on annual additions to a TSA would not include the portion of a minister's housing allowance that is excludable from gross income, or the annual rental value of a parsonage.

The IRS website contains the following question and answer, which affirm this conclusion:

Question. I am an employee minister in a local church. Each year, my church permits $25,000 as a yearly tax-free housing allowance. I would like to use my yearly housing allowance as

compensation to determine my annual contribution limits (to a TSA) under section 415(C ) of the Internal Revenue Code. May I do so?

Answer. No. For purposes of determining the limits on contributions under section 415(C ) of the Internal Revenue Code, amounts paid to an employee minister, as a tax-free housing allowance, may not be treated as compensation pursuant to the definitions of compensation under section 1.415-2(d) of the income tax regulations.

You will want to crunch the numbers and see what you can include in gross income (reduce the housing allowance to do this) to give them this benefit. You may be able to do this without producing any taxable income. It may be that the reduction of housing allowance will not hurt them from a tax prespective and allow them to begin to acrue retirement benefits. If I remember correctly, the CA Southern Baptist, contribute on behalf of their pastors if they participate in this program.

<<<Are there any problems with putting in a 403( b ) plan? I understand the universal access requirements and the highly compensated rules. I just don't know if there is something else we should be looking at?>>>

There is no problem, the questions is do you want to.

I hope this helps.

Mike

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Mike,

Thank you for the very detailed response, but now I am very confused. The plan document for DVBA from Guidestone has a bunch of check marks and choices to make. Under the category of compensation, it asks what is included in compensation. There is a check box for housing allowance.

Are you sure that housing allowances cannot be considered income when calculating the employer contributions to the employee/pastor account? Or am I reading the plan document incorrectly. It says the employer will contribute X% of the employee's compensation to the plan. Compensation includes housing allowance. Is it only that the employee must have "includible compensation" to make a deferral, but the employer may make a contribution based on "total compensation" which can be based on housing allowances?

Are you saying that the pastor when he designates his compensation as housing every year might want to leave some amount as wages, then defer that amount into the 403( b ) plan? Is that a legitimate, legal strategy for the pastor to use?

Thank you again. Your expertise in this area is invaluable to us that do not practice regularly in this area.

Tom

Lodi, CA

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Sorry it took so long for me to get back to you. This thread did not show up under threads that had a response to them. I must have done something wrong.

<<Thank you for the very detailed response, but now I am very confused. The plan document for DVBA from Guidestone has a bunch of check marks and choices to make. Under the category of compensation, it asks what is included in compensation. There is a check box for housing allowance.

Are you sure that housing allowances cannot be considered income when calculating the employer contributions to the employee/pastor account? Or am I reading the plan document incorrectly. It says the employer will contribute X% of the employee's compensation to the plan. Compensation includes housing allowance. Is it only that the employee must have "includible compensation" to make a deferral, but the employer may make a contribution based on "total compensation" which can be based on housing allowances?>>>

I have no idea why their form is set up that way, unless they are trying to make sure that housing is left out of the compensation. If they just use the term compensation they may not know what the computation is based on. If they know that housing is included in the computation they can correct it. If this is a form you do not return, I suggest that you look again at their directions to see if anything is worded poorly. Failing that, you might try contacting them directly.

<<<Are you saying that the pastor when he designates his compensation as housing every year might want to leave some amount as wages, then defer that amount into the 403( b ) plan? Is that a legitimate, legal strategy for the pastor to use?>>>

Yes to both. I mean, how is that any different really, than carving an amount out for professional expenses to be used with an accountable reimbursement policy. You are simply receiving the same amount of money from the church structured to give you the best tax and economic advantage.

<<<Thank you again. Your expertise in this area is invaluable to us that do not practice regularly in this area.>>>

If I am not out of line for this board, you might put me on your prayer list. I am teaching a 3 hour CPE slot on clergy taxes for the OSTC on 17 May. I'm not sure this type of public speaking is my forte.

I hope this information has been helpful.

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I will pray for you. And I will ask that God provide you with the knowledge, wisdom, and confidence to impart your teachings in a way that glorifies Jesus Christ. I am sure you will do extremely well.

And if I may follow up one more time.

http://www.guidestoneretirement.org/~/medi...dule%20pdf.ashx

I don't know how to paste a link, but this is the form directly from the Guidestone website. If you look at the document, in section 1, it lists minister housing allowance as compensation for purposes of contributions.

Is there a chance you have time to look at this website and comment? I know you are extremely busy and you are giving professional advice for free. I am just so confused now. I thought housing allowances were excluded, then I thought they were allowed, now I don't have a clue.

Thanks in Advance Mike.

Tom

Lodi, CA

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Tom,

I think their form is wrong. I called Guidestone and queried them on this issue and they indicated that housing is not included in compensation for plan contribution limitations. I indicated that there was some conflicting advice being given by their site and they are going to review it and get back to me. They said the key term on the form is "on the W-2." I pointed out that their form in the same section indicate housing and rental value of parsonage. That a casual reading of the form did not make a limitation to W-2 items only. The response was they assumed we would know. I point out that the form was drawn up by their attorney and I'll bet he didnt' assume anything. She took my info and said she would get back to me. BTW, this sounds confrontation as I type it but it wasn't. They are good people.,..just need to clear this up. If something different should come up in the next couple of days I will get back to you. Sorry about the confusion.

Mike

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Wow, thanks for taking the time to go to all that trouble. I am glad you can see where my confusion came from.

Tom

Lodi, CA

Not a problem. I don't care if I am right or wrong (well, I really do:>), but we need the correct answer and all to be operating from the same page. Time will tell. Have a good day!

Mike

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Mike, I'll put you on my prayer list also. But, I'm sure you'll find that teaching IS one of your strong points. Just pretend you're typing a response to our queries. You've taught us much. Thank you for your willingness to share. I know your students in May will appreciate that you're stepping outside your comfort zone to share your knowledge with them. The peace of the Lord be with you.

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  • 4 weeks later...

Well, I did it. I completed teaching the 3hr CPE for OSTC. I thought it went well. My wife was along and said that some people that thought she was one in attendanc mentioned to her that "he was pretty good and they learned a lot." She said, "boy, you have got that right. He was great!" Thanks for the prayers, guys/gals, you made it happen!

Mike

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Mike,

You ought to look at the Tax Update Circuits and offer a Clergy class. I am going to Reno for the Calif Society of Enrolled Agent Super Seminar next week, and I know if there was a class on clergy taxes, I would take it. We all need our 24 hours a year, and there are multiple opportunities to sell what you know to the tax preparation community. Gear Up, Spidell, and CSEA are just a couple out here in CA that provide CPE.

You really should look at this as an opportuntiy to supplement your income at your practice in the off season. I think you would be excellent at it.

Tom

Lodi, CA

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