(b)lines Ask the Experts – Church Plans: Foreign Missionaries

The provider asks: “Can you describe exactly what a foreign missionary is?” and also “I understand that the foreign missionaries may have no US income; however, Code Section 415(c)(7)(B) permits a $3000 contribution on behalf of a foreign missionary into the 403b plan. Is the employer making this contribution, or is the foreign missionary? And is this after-tax or pre- tax? How are the special contributions under Code Section 415(c)(7)(A) treated (the $10,000/$40,000 lifetime contributions for church plan participants with low or no pay)?”

There are several different rules concerning church plans and 415 limits, and two involve foreign missionaries.

First, the 415 regulations provide that a foreign missionary is an employee of a church or a convention or association of churches, including an organization described in section

414(e)(3)(B)(ii) (generally, a tax exempt organization controlled by or associated with a church or convention or association of churches), performing any services for the church outside the United States during the limitation year.  See Treas. Reg. section 1.415(c)-1(d).

As to the contribution limits for foreign missionaries, keep in mind that salary reduction contributions always meet the 415 limits (up to the 402(g) limit, currently $16,500 for 2019 and 2010, plus any catch-ups) because compensation for purposes of the 100% of compensation limit includes those.  (See code section 403(b)(3)(A).)

The usual problem for making non-elective contributions for low-paid or volunteer church plan participants is that 100% of compensation limit. For example, a church may want to contribute a few thousand dollars to accounts of part-time clergy or foreign missionaries who mainly support themselves through other jobs, to help them save some for retirement, but 100% of zero is zero.

The $3,000/$17,000 rule of Section 415(c)(7)(C) for foreign missionaries allows employers of foreign missionaries who have less than $17,000 of Adjusted Gross Income for the year (determined separately and without regard to community property laws, so you can disregard the spouse’s earnings) to make a non-elective contribution of up to $3,000.  That is a pretty low AGI limit, but again, this is usually utilized by missionaries who are supporting themselves.

If that is not enough (and even if the person is not a foreign missionary, provided it is a church plan) the employer can contribute up to $10,000 for a limitation year under Section 415(b)(7)(A), up to a $40,000 lifetime limit (counting amounts contributed only by operation of 415(b)(7)(A) over the limit that would apply otherwise). They do not have to pay it to the employee first.

As to the tax treatment of the contributions, in most cases, foreign missionaries pay no actual income tax by operation of Code section 911 tax credit.  Therefore, it is in their interest if the contribution could be treated as an after-tax contribution, so they could have basis and receive part of the benefit tax-free upon retirement back in the U.S. under the usual Code section 72 rules for taxation of distributions.

Normally, to do so would require the amount be paid to the missionary and then contributed by the missionary to the plan.  The last sentence of Code section 72(f)(2), though the wording is somewhat opaque, was intended to treat non-elective contributions in that circumstance as after-tax employee contributions anyway, without having to go to the trouble of actually paying the funds overseas and back.  Of course, even after-tax contributions are subject to the 415 limits.

–David Powell, Groom Law Group, Chartered

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.