“Can amounts from a 401(a) or 401(k) church plan distributed to retired clergy be treated as tax-free parsonage (housing) allowance? I thought only 403(b) plans could provide for such an allowance.”
Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:
The Experts answer to this is a definitive “probably—to the extent that any distributions from pension plans are eligible to be treated as housing allowance.” Certainly many church plans do provide this.
One reason for the Experts qualification on that answer is that the that the guidance itself—much of which dates back to the 1960s and 1970s—is not specific on this particular issue. But none of these old IRS rulings make a distinction based on the type of plan—whether qualified, nonqualified, 401(a), 403(b)(1), 403(b)(7), or 403(b)(9) (which only dates to 1982)—as to whether it can support the tax-free distribution of housing allowance for clergy.
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Now, there have been numerous private letter rulings in the area over the years, but a private letter ruling cannot be relied upon except by the taxpayer who received it. As a review of those rulings will disclose, there are important questions around who must designate the distribution as eligible for housing allowance. (And don’t forget that designation must be accompanied by the retired minister actually spending it for housing to exclude it from income, in accordance with the rules under section 107.) But most importantly, for 30 years, the IRS has repeatedly 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.
Also, be aware that there remain groups seeking to have Section 107 declared unconstitutional by the courts. Due to the uncertainty in this area, it would be a good idea to consult with a qualified tax adviser before proceeding.
For more details on this issue, including other requirements for the retirement plan payments to be excluded from taxable income as housing allowance, please review our prior Ask the Experts column in this regard.
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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