Housing Allowance During Retirement

What Are The Special Requirements for Housing Allowance During Retirement?

To take a distribution with special housing allowance tax treatment, you must be at least age 59½ and receive a Housing Allowance Authorization Letter from your church or governing organization.

Housing Allowance Distributions

You can request one distribution and have a portion of that distribution be treated as housing allowance and another portion a regular distribution. You will receive one check or one electronic payment (ACH) for the total amount of the distribution less any elected tax withholding.

You may designate a percentage to be withheld from any taxable portion of your distribution, but you will be responsible for any estimated tax and any penalties incurred as a result of that decision.

Making Changes to Your Special Housing Allowance Tax Treatment

You are responsible for submitting a new Distribution Authorization Form—Special Housing Allowance Tax Treatment to Envoy. If you do not submit a new Distribution Authorization Form—Special Housing Allowance Tax Treatment to Envoy, your original Housing Allowance amount as elected on the form will continue from one tax year to the next for recurring payments.

Your payments will continue until you stop the payment or until your account balance is depleted. If you wish to stop payments, please contact Envoy.

Click here for more Housing Allowance questions and answers.


To learn more about housing allowance, download our FREE Housing Allowance eBook.

Envoy does not offer legal or tax advice and encourages that you consult with a lawyer and/or professional tax advisor for personalized tax advice.

Helpful Retirement Plan Compliance Resources

Helpful Retirement Plan Compliance Resources

Retirement Plan compliance is critical as you're a Christian organization and an example to others. Two governing agencies that oversee retirement plans are the IRS and The Department of Labor. You probably don’t want to become an expert on all of the regulations but you certainly want to arm yourself in case one of them shows up on your doorstep.

What is a 403(b) Plan?

A 403(b) plan is a retirement plan that is typically established by not-for-profit 501(c)(3) employers, hospitals, self-employed ministers, and public education organizations. Eligible employees may make salary reduction contributions into the plan on a pre-tax and/or after-tax (Roth) basis. 

Employers offering a 403(b) plan may make employer matching or employer basic (non-elective) contributions to the plan on behalf of the eligible employees. 

Earnings within a 403(b) plan accrue on a tax-deferred basis if the contributions to which they are associated are pre-tax contributions. Earnings within a 403(b) plan accrue on a tax-free basis if the contributions to which they are associated are after-tax (Roth) contributions. Certain restrictions apply. 

As a general rule, the administration associated with a 403(b) plan is less involved than the administration of a 401(k) plan. 

Click here to learn more about Church Retirement Plans.

What Are The Benefits Of A Roth IRA Or Roth 403(B) Plan?

If you don’t have a 403(b) or 401(k) plan available, fund an IRA. Many small employers, ministries, or faith-based organizations don’t have the money or experience to offer a retirement plan at all, let alone one with either a basic or matching contribution. This means you have to start your own retirement plan. Like the 403(b) or 401(k), an IRA can accommodate either pre-tax contributions (you save taxes now) or Roth contributions (you save taxes later). 

Roth Benefits

The benefits of a Roth 403(b) and Roth IRA are that principle and earnings grow tax free so there will be no taxes taken at the time of distribution if you are at least 59 1/2 and have had the Roth account for 5 years.

If you do not have access to a Roth 403(b), then a Roth IRA is the next best choice. The Roth 403(b) allows you to contribute more, but contributing up to the IRA limit is better than not contributing at all.

Click here to learn more about Church Retirement Plans.

How Is A 403(B)(9) Different From A 403(B) Retirement Plan?

403(b)(9) plans are for churches, or those with 501(c)(3) church status, while 403(b) and 403b(7) plans are for everyone else. There is no reason to use a 401(k) plan when you are a non-profit 501(c)(3)—church or not.

What Are the Benefits of a 403(b)(9) Plan?

One of the biggest benefits of 403(b)(9) plans is that they offer the Minister’s Housing Allowance distribution at retirement. This allows a minister who is ordained, licensed, or commissioned to receive a designated portion of their salary that is excluded from gross income and not subject to federal income tax.

403(b)(9) Plans are also not subject to certain ERISA requirements.

Not sure if you have a 501(c)(3) church status?

Reference your determination letter from the IRS. This notification will state whether you are classified as a church under section 501(c)(3) of the Internal Revenue Code.

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Click here to learn more about Church Retirement Plans.

Understanding ERISA Versus Non-ERISA Retirement Plans

ERISA organizations are subject to the rules promulgated by The Employee Retirement Income Security Act of 1974 (ERISA). This act identifies reporting requirements, fairness procedures, and fiduciary requirements. These requirements are considered “best practice” for all organizations; however, these requirements do not directly apply to Non-ERISA Plans.

Non-ERISA plans are those 403(b) plans that involve voluntary plan participation only. In other words, the employer is not contributing. Another parameter around this distinction is that all Church Plans are considered Non-ERISA.

Therefore, if your organization is a church, you want to ensure that you have a 403(b)(9) Church Plan. If your organization is not a church, and makes plan contributions of any kind (also known as “matching”), your retirement plan falls under the ERISA oversight rules. We hasten to say, that the ERISA regulations are very informative and add a high protection value to either a 403(b) or 401(k) Plan.

Click here to learn more about Church Retirement Plans.

Choosing Between A 403(B) And A 401(K) Retirement Plan

When choosing a retirement plan, it is important to understand the difference between 403(b), 403(b)(7), 403(b)(9), and 401(k) plans.

Assuming that your organization is a 501(c)(3) and is either a church or parachurch organization, you qualify for any of these retirement plans under IRS regulations. So, why chose one over the other?

In its simplest form, the 403(b) is cheaper to establish and administer.
The primary reason is due to the fact that 403(b) plans require less reporting and testing. We have seen that a majority of 401(k) plans are often recommended by advisors not familiar with 403(b) plans and how they can benefit ministry organizations.

If you are designated as a church by the IRS, always choose the 403(b)(9) plan.

Another reason for the recommendation of a 401(k) plan over a 403(b) plan by advisors is because they are associated with vendors that do not support a 403(b) platform. A simple way to remember the distinction between these two plans is that 401(k) plans are used exclusively by “for profit” organizations, as all of these organizations fall under ERISA Regulations.

Click here to learn more about Church Retirement Plans.

3 steps that can make your ministry retirement plan better

3 steps that can make your ministry retirement plan better

Is your retirement plan too complex and taking a lot of your time? If it’s too complicated for you, it will definitely be too difficult for your employees to understand. And if it's not easy for them to understand, then you are missing key pieces. Your retirement plan is too valuable not to put the right parts totally in place.

How Does the Minister’s Housing Allowance Impact Your Retirement?

How does Housing Allowance Impact Your Retirement?

  1. During your active ministry years, you pay significantly less SECA (The Self Employment Contribution Act) tax. Make sure you save the difference and set it aside in your retirement plan.

  2. During your retirement years you can take distributions equal to your housing allowance from your 403(b)(9) retirement plan without paying taxes. Functionally, this is an increase in compensation equal to your tax bracket—maybe as much as 25% at that point in time.

All voluntary contributions you make to your 403(b)(9) retirement plan reduces your SECA tax as well as your state and federal income tax. The SECA tax is paid by those with ministerial status who have not opted out of Social Security. For those who have not opted out, the increased savings is in the 15.3% range, in addition to normal retirement savings. Again, this provides an immediate tax savings of about 15.3%. Make sure to reinvest those tax savings back into your 403(b)(9) retirement plan account.

What Are The Special Requirements for Housing Allowance During Retirement?

To take a distribution with special housing allowance tax treatment, you must be at least age 59½ and receive a Housing Allowance Authorization Letter from your church or governing organization.

Click here for more on Housing Allowance during retirement.


To learn more about housing allowance, download our FREE Housing Allowance eBook.

Envoy does not offer legal or tax advice and encourages that you consult with a lawyer and/or professional tax advisor for personalized tax advice.

Housing Allowance Frequently Asked Questions

What is Housing Allowance?

  • A tax benefit for pastors.

  • A portion of income the is excluded from gross income, thus is not subject to federal income tax.

  • Gives them the ability to take a portion of money out of their 403b without the 20% mandatory withheld (its possible they may still owe state or SECA taxes).

  • Also referred to as parsonage allowance or rental allowance.

Why does one get Housing Allowance?

The idea is that pastors use their house as part of their regular duties.

Who can take Housing Allowance?

A person who is an ordained, licensed, or commissioned minister.

Is there a limit to the amount of Housing Allowance?

Housing Allowance cannot exceed the lesser of 100% of compensation or actual housing expenses.

 

What if they want to take more than their Housing Allowance limit?

They can and can even do it on the Housing Allowance form.  But they will be taxed on the extra amount.

What is required to take a Housing Allowance distribution?

The Housing Allowance Distribution Envoy form (signed by account holder, employer, and spouse if applicable) and a HA letter (can be recorded).

Is there a due date on the letter?

The letter must be dated by December 31st of the previous year, but the letter can be handed in later than that.  

Who approves it?    

It must be approved by the board at the church by December 31st of the previous year. 

Is there an age limit?    

Yes, the pastor must be 59 ½ or older to take it from their 403b and avoid the taxes.    

What is the fee?    

$25 for a one-time and $10 a time for a periodic    

What if they are still employed?

Technically they can take it, BUT:

  • They still need to be 59 ½ or older,

  • The plan needs to allow in-service distributions,

We need proof that they are not receiving their housing allowance in other ways (church is paying them the housing allowance).

Can they take Housing Allowance distribution if they rolled over to an IRA or 401(k)?

No, this is why it is important for pastors to keep their money in a 403(b) and not rollover into an IRA or 401(k).

However, if they get a new job, they can roll back into a 403(b), and then have housing allowance eligibility.

How will this look on their tax form?

The total amount taken from the 403b for the year will show up in the “Gross Amount” section, but the amount in the “Taxable Amount” section will be the gross amount minus the housing allowance. So the housing allowance will not show in the taxable amount. The form you will get is a 1099.

Is this money reported as income?

No. The employer does not report it as income. However, the pastor will include any excess housing allowance on their Form 1040.

What is Excess Housing Allowance?

Say in December of the previous year the pastor goes to his board and says that his housing allowance needs for next year will be $12,000. But at the end of the year he adds up his expenses and they were only $11,000. The extra $1,000 would need to be reported as income.

Can they set up a recurring/periodic payment?

Yes, but it if their housing allowance amount changes, the account holder is responsible for letting us know and will need to fill out a new form with a new Housing Allowance letter.

The account holder should also send us a new Housing Allowance letter each year, even if it hasn’t changed.

Can they stop a recurring/periodic payment?

They can call or email us to let us know to stop it.

Are there sample Housing Allowance letters

Yes, have them log on to the web portal and go to the Help/Resource Center > Distribution > Housing Allowance > Scroll down to the bottom.

Where can I look for more tax law info?

Section 107 of the Internal Revenue Code

Can it count towards RMD?

Yes, they can take out their housing allowance without the majority of taxes, and the IRS will see the distribution as an RMD. 

If their RMD is larger than their housing allowance they would need to take out more and it would be taxed like normal.

What Is Housing Allowance For Ministers?

A housing allowance—sometimes called a parsonage allowance or rental allowance—is excludable from gross income for federal and state income tax purposes, but not for self-employment tax purposes. When a portion of compensation is received as housing allowance, federal and state taxes are directly reduced. Self-Employment Contributions Act (SECA) taxes are not directly reduced.

Who Can Receive the Minister’s Housing Allowance?

In order to receive the Minister's Housing Allowance, you must be an ordained, licensed, or commissioned minister. 

The housing allowance is an exclusion from income permitted by Section 107 of the Internal Revenue Code. It is not a deduction. In other words, a housing allowance is money that is not reported as income. A housing allowance is never deducted because it is never reported as income in the first place. However, the minister is required to include any excess housing allowance as income on their Form 1040.

Whether the minister owns or rents a home, it is essential that his or her employing organization designate a housing allowance. Housing allowances must be:

  1. Adopted by the organization board or leadership

  2. Recorded in written form (such as minutes)

  3. Designated in advance of the calendar year

However, organizations that fail to designate an allowance in advance of a calendar year should do so as soon as possible in the New Year. The allowance will operate prospectively.

Click here for more Housing Allowance questions and answers.


To learn more about housing allowance, visit our Help Center or download our FREE Housing Allowance eBook.

Envoy does not offer legal or tax advice and encourages that you consult with a lawyer and/or professional tax advisor for personalized tax advice.

Is Housing Allowance Taxable?

The Minister's Housing Allowance is excludable from gross income for federal and state income tax purposes, but not for self-employment tax purposes. When a portion of compensation is received as housing allowance, federal and state taxes are directly reduced. Self-Employment Contributions Act (SECA) taxes are not directly reduced.

The housing allowance is an exclusion from income permitted by Section 107 of the Internal Revenue Code. It is not a deduction. In other words, a housing allowance is money that is not reported as income. A housing allowance is never deducted because it is never reported as income in the first place. However, the minister is required to include any excess housing allowance as income on their Form 1040.

Click here for more Housing Allowance questions and answers.


To learn more about housing allowance, download our FREE Housing Allowance eBook.

Envoy does not offer legal or tax advice and encourages that you consult with a lawyer and/or professional tax advisor for personalized tax advice.

What Are the Requirements to Receive Housing Allowance?

In order to receive the Minister's Housing Allowance, you must be an ordained, licensed, or commissioned minister. 

Each year, you need to provide Envoy with a Housing Allowance Authorization letter from your organization (on letterhead), signed by an authorized individual, and  indicating the amount of Housing Allowance approved for the year. The letter must be dated by December 31st of the previous year, but the letter can be handed in later than that.

Whether the minister owns or rents a home, it is essential that his or her employing organization designate a housing allowance. Housing allowances must be:

  • Adopted by the organization board or leadership

  • Recorded in written form (such as minutes)

  • Designated in advance of the calendar year

However, organizations that fail to designate an allowance in advance of a calendar year should do so as soon as possible in the new year. The allowance will operate prospectively.

What You Need to Know About Housing Allowance

  • Housing allowance cannot exceed the lesser of 100% of compensation or actual housing expenses. If you want to take more than your housing allowance limit, then you will be taxed on the extra amount.

  • You can NOT take housing allowance if you roll your money over to an IRA or 401(k). You must keep your money in a 403(b). However, if you get a new job, then you can roll the money back into a 403(b) and have housing allowance eligibility.

  • Housing allowance is excludable from gross income for federal and state income tax purposes but not for self-employment tax purposes. When a portion of compensation is received as housing allowance, federal and state taxes are directly reduced. SECA taxes are not directly reduced.

  • Housing allowance is an exclusion from income permitted by Section 107 of the Internal Revenue Code. It is not a deduction. In other words, a housing allowance is money that is not reported as income. A housing allowance is never deducted because it is never reported as income in the first place. However, the minister is required to include any excess housing allowance as income on their Form 1040.

Click here to learn about housing allowance during retirement.


To learn more about housing allowance, download our FREE Housing Allowance eBook.

Envoy does not offer legal or tax advice and encourages that you consult with a lawyer and/or professional tax advisor for personalized tax advice.

What Happens To Your Housing Allowance If You Change Employers?

When an employee leaves an organization, it is common practice for their retirement account to be transferred out of the retirement plan. The account is usually rolled to another retirement plan or to an IRA. When 403(b)(9) accounts are rolled to a 401(k) or IRA, eligibility for the housing allowance provision is lost. 

How Envoy Protects the 403(b)(9) Money Source When Ministers Change Employers

When a minister changes employers to a non-ministerial entity, Envoy can easily transfer the 403(b)(9) account to a specially earmarked IRA that protects the money source as from a 403(b)(9). If the minister later joins another organization where he/she is eligible for housing allowance, the IRA account can be rolled into the new plan, retaining full housing allowance eligibility.

Click here for more Housing Allowance questions and answers.


To learn more about housing allowance, visit our Help Center or download our FREE Housing Allowance eBook.

Envoy does not offer legal or tax advice and encourages that you consult with a lawyer and/or professional tax advisor for personalized tax advice.



Are Your Legally Mandated Oversight Requirements Being Met?

Are Your Legally Mandated Oversight Requirements Being Met?

A Retirement Plan Oversight Committee is a wise and effective way to help ensure that the legally mandated oversight requirements are being met. The new IRS 403(b) regulations have been touted as the most significant piece of legislation in the last 40 years for 501(c)(3) organizations.