403(b) Contributions for No-Compensation Clergy

“Because he has another source of income, he has agreed with his church not to take a salary for his work there. However, his church would like to make a retirement plan contribution on his behalf to the denominational 403(b) plan, even though he has no salary. Can the church make such an employer contribution to the 403(b) plan? If so, what is the maximum that the church may contribute on his behalf? He is employed directly by the church rather than being a self-employed minister, if that makes a difference.”

Stacey Bradford, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

There is a longstanding provision that allows a relatively small contribution by the church or denomination to the pastor’s account in this situation. 

As you know, the usual 415 limit on annual additions to a 403(b) or 401(a) plan is the lesser of $54,000 (for 2017) or 100% of the participant’s compensation. So, zero compensation means the 415 limit is zero, right?  Except that under one of those obscure church plan rules, an annual addition for a participant in a church plan (including to an annuity contract or retirement income account described in section 403(b)) shall be treated as not exceeding that 100% limit if the annual addition is not in excess of $10,000, up to a lifetime limit on such amounts permitted under this rule of $40,000.

Of course, the plan has to permit this.  And unfortunately, those amounts, established decades ago, are not indexed. You can find this rule at Code section 415(c)(7)(A).

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.