“We are a church denominational 403(b)(9) plan which has not elected to be covered by the Employee Retirement Income Security Act (ERISA). Our participants include self-employed ministers. In Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans), the IRS instructs self-employed ministers that their includible compensation is net earnings from ministry minus contributions made to the retirement plan and the deductible portion of their self-employment tax. If the minister makes designated Roth or after-tax contributions to their 403(b) account do those contributions reduce includible compensation since these contributions do not reduce taxable income?”
Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:
This can be a confusing issue, as there is no clear guidance since many of the rules addressing taxable compensation of self-employed ministers predate the time that Roth contributions were added to the Code. That said, we look to the Code and Treasury Regulations for direction here.
Consequently, since not excludable from gross income under Code section 403(b), Roth contributions by ministers would generally be part of net earnings from self-employment subject to SECA tax (unlike pre-tax elective deferrals by the same minister), and would thus appear to be included in includible compensation for 403(b) purposes, supporting a higher 415 limit. This would be consistent with the applicable regulations and is supported by IRS Publication 517, addressing the calculation of SECA for ministers, which provides that the retirement plan contribution exclusion from net earnings from self-employment only applies to those salary reduction contributions (elective deferrals) “that aren’t included in gross income.” It would also seem better policy, since treating the Roth 403(b) contribution as includible compensation for 415 limit purposes would seem more consistent with paying SECA and income tax on the contribution. However, the description in Pub. 571 could be read otherwise, and the IRS has not issued definitive guidance on the question.
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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