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(b)lines Ask the Experts – Using Distributions for Ministers’ Housing Allowance in Church Plans

“I know participants can apply part of their distributions as ministers’ housing allowance (granted they meet the requirements) in a 403(b)(9) church retirement income account.  But can they also do so from a 403(b)(7) mutual fund custodial account?”

By PS | May 23, 2017

David Powell, with Groom Law Group, answers: 

The answer, as usual is that it depends. First, keep in mind that the idea that a retired minister may claim rental allowance on compensation paid in retirement that is compensation for past services as a “minister of the gospel” within the meaning of Code section 107 is based on some very old rulings, such as Rev. Rul. 63-156, Rev. Rul. 72-249. Those rulings do not make a distinction based on the type of plan—whether qualified, nonqualified, 401(a), 403(b)(1), 403(b)(7), or 403(b)(9).                     

But also keep in mind that there are numerous requirements for the retirement payment being excludable as housing allowance, including that the employing church or other qualified organization eligible to make the rental allowance designation has done so. Other old Internal Revenue Service (IRS) rulings discuss, for example, when this might be a national church body. (See, Rev. Rul. 75-22 and Rev. Rul. 62-117.)  There are also numerous private letter rulings in the area, but a private letter ruling cannot be relied upon except by the taxpayer who received it. And, of course, the distribution must be actually expended for housing to be eligible for income tax exclusion.

However, while the Revenue Rulings cited have not been withdrawn and may currently be relied upon, the IRS has, since 1989, listed the subject of "Whether amounts distributed to a retired minister from a pension or annuity plan should be excludible from the minister's gross income as a parsonage allowance under § 107" as an area in which they will not rule. (See, most recently, Rev. Proc. 2017-3, Section 2.01(17).) Thus, there is certainly some lack of clarity in the area, and it would be a good idea to review the facts with a qualified tax adviser.

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.  

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