(b)lines Ask the Experts – Special Tax Rules for Clergy

April 6, 2010 (PLANSPONSOR (b)lines) – A plan provider says: "If a minister who is 59 ½ (and is in a church 403(b) plan that allows distributions at that age) converts assets in that plan from salary-reduced contributions to a Roth IRA, will he/she have to pay the SECA tax?  That person would not have paid the SECA tax (15.3%) on the original, tax-deferred contribution."
By PS

David Powell, Groom Law Group, Chartered answers:  

This points out something those in the 403(b) world should keep in mind in dealing with church plans, which is that clergy have a number of special tax rules.  One of them is that clergy may be self-employed or they may be common law employees, depending on the facts (and often the position of their denomination), but regardless of whether they get a W-2 or a 1099-MISC, they pay self-employment tax (SECA), not FICA.  A good discussion of this can be found in IRS Publication 517, “Social Security and Other Information for Members of the Clergy and Religious Workers.”  

This means, in turn, that their employment tax consequences are governed by Code section 1402 for SECA rather than section 3121 for FICA.  The rules for the two are different.  As the question observes, clergy do not include in their self-employment income contributions, including elective contributions, to a 403(b) plan.  The provision for clergy SECA is at Code section 1402(a)(8) and provides that an individual who is a duly ordained, commissioned, or licensed minister of a church or a member of a religious order shall compute his or her net earnings from self-employment derived from the performance of services in the exercise of such ministry not including “any retirement benefit received by such individual from a church plan (as defined in section 414(e)) after the individual retires.”  

Thus, the clergy person should not take the distribution into account for SECA, regardless of whether or not the distribution is converted into a Roth IRA, if it is made “after the individual retires.”  Unfortunately, this term, added by the Small Business Job Protection Act of 1996, is not defined.    

An argument can certainly be made that if the person is eligible for a post-59 1/2 distribution, that should be sufficient.  This is supported by the legislative history, which states: “The Committee believes that, like retirement benefits paid from qualified plans sponsored by private employers, retirement benefits paid from church plans to ministers should not be subject to self-employment tax.”    

Because a similar distribution to a lay person would not be subject to FICA, it would seem reasonable to conclude that the distribution to the clergyperson should not be subject to SECA either.  Similarly, an older Revenue Ruling, 58-359, generally held that pension payments or retirement allowances received by an ordained minister subject to SECA do not constitute net earnings from self-employment for self-employment tax purposes. However, as with many things in the church plan world, there is little clear authority from the IRS.  

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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