Editor’s Note: The question of whether mutual funds and other private investment services can administer a 403(b) plan for ministers and designate housing allowances is addressed in the Church & Clergy Tax Guide . For more guidance with housing allowances and retirement planning, check out chapters 6 and 10 in particular.
Can a retired minister receive a housing allowance?
Treas. Reg. 1.107-1(b) says this: “The term rental allowance means an amount paid to a minister to rent or provide a home, if such amount is designated as a rental or a housing allowance pursuant to official action taken in advance of such payment by the employing church or other qualified organization.”
(Note: The tax code uses the term “rental allowance.” I use the term “housing allowance” to apply to both rental and ownership. But “rental allowance,” when used by the Internal Revenue Service, is not talking about only rent. It’s talking about ownership, as well.)
Now here’s the key in that regulation: “by the employing church or other qualified organization.” The issue here is this: Can a denominational pension board declare a housing allowance based on retirement distributions under a 403(b) plan?
For denominational pension plans, the IRS has acknowledged in Revenue Ruling 75-22 that the denominational pension plans can designate a housing allowance for retired ministers because they are—as noted in the above regulation—“other qualified organizations.” A housing allowance has to be declared by the employing church of a minister or other qualified organization. The denominational pension board is not an employing church. But it is, as the IRS concluded in that ruling back in 1975, an “other qualified organization.”
That is a very important phrase—“other qualified organization”—that is not defined in the tax code or the regulations. But in Revenue Ruling 75-22, the IRS said “denominational pension plans or other qualified organizations.” That’s why your denominational pension plan, if you’re enrolled in one, can designate a portion—or all of your retirement benefits—as a housing allowance.
The IRS ruling does say, however, that this assumes the minister has severed his or her relation with the local church. This is a very important component.
Now what about secular 401(k) or 403(b) plans, or 403(b) plans by a local church? That’s another issue. Are they “other qualified organizations”? There is some lack of clarity with respect to this. But the language in the regulation says “by the employing church.” If this was your employing church that developed its own 403(b) plan, rather than a denominational plan, it’s likely that’s going to qualify. (I address this in some detail in my annual Church & Clergy Tax Guide, for further reference.)
Another question: Can a denominational pension plan designate housing allowances out of distributions to the spouses of deceased clergy? This has become an issue in some denominational pension plans. And the answer is: No, you can’t, because to qualify for a housing allowance you must be a minister, and the allowance must represent compensation you earn from the performance of your ministerial duties. If a minister’s spouse becomes a credentialed minister, that doesn’t in and of itself make that person eligible for a housing allowance. That person must start accumulating funds in a pension or retirement fund or plan based on his or her own ministerial duties, not the spouse’s.
The IRS has also weighed in on the issue of the housing allowance and the expenses of assisted living arrangements, saying that in some cases you pay a lump sum fee to be enrolled in an assisted living or independent living arrangement, and that’s it. The IRS said if that’s the situation, then you can apply a housing allowance to that payment only in the year of the lump sum payment that you made. You can’t somehow amortize that over 10 or 20 years and claim a partial expense for each year (not if you paid for everything up front).
Financially, the lump sum payment is not a wise thing to do in many cases, because you lose the benefit of the housing allowance—whereas if you are thinking about a facility where you don’t pay an upfront lump sum but you instead pay annual fees to get in, the housing allowance can be applied under those circumstances to the amount you pay each year (provided that it can be connected to housing-related expenses). That does not include food, housekeeping, medical care, or any number of other things that that fee sometimes will cover.
