Parsonage in Retirement - Top 10 Questions and Answers
Before retirement, every cantor must know how to retain the parsonage allowance in retirement. This document should assist you in gathering that information. Occasionally, retired members of the ACC have questions regarding non-taxable distributions for parsonage from the ACC Retirement and Supplemental Plans. While we cannot address the particulars of any individual’s tax situation, this article explains our understanding of the federal tax laws as they relate to housing allowances provided to retired cantors.
This is not intended to be tax advice and you should consult your own legal and tax advisors for information about your particular tax situation.
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What are the general rules of parsonage?
Pursuant to Section 107 of the Internal Revenue Code, a “minister of the gospel” (which includes a cantor) may exclude from gross income:
- The rental value of a home furnished to him as part of his compensation; or
- The rental allowance paid to him as part of his compensation, to the extent used by him/her to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and such appurtenances such as a garage, plus the cost of utilities.
- The IRS regulation requires that the home or rental allowance be provided as remuneration for services that are ordinarily the duties of a minister of the gospel. The Tax Court has ruled that the parsonage allowance exclusion is limited to the amount used to provide the home, if that amount is lower that the fair rental value of the home. [Warren v. Commissioner, 114T.C. No 343 (2000), appeal dismissed 302F. 3d 1012 (9th Cir. 2002).] Although parsonage is not able to be included in income for federal income tax purposes, it is considered self-employment income for SECA purposes prior to retirement.
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Are cantors “Ministers of the Gospel”?
Yes, a cantor is a “minister of the gospel” for purposes of section 107.
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Are retired cantors eligible for parsonage?
According to the IRS Revenue Ruling 63-156, the rental value of the home furnished or the housing allowance paid to a retired minister as part of his compensation for past services is excludable from income under section 107 of the Internal Revenue Code with proper designation.
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What is proper designation?
The parsonage allowance exclusion is allowed only if the allowance is officially designated as a housing allowance before it is paid. The designation must be made by the employing church or other organization. The designation may be evidenced in an employment contract, minutes of the church, etc., resolution or other official instrument such as an employer’s budget.
Where a retired cantor’s relationship with his former employer is completely severed, the designation of a portion of a clergyperson’s retirement funds in a qualified church plan as a rental allowance may be made by duly appointed retirement trustees. This is why the ACC Retirement Plan Administrator requests parsonage information from each retired plan participant. Prior to the beginning of each taxable year, the ACC Retirement Plan Trustees review and officially “designate” the parsonage each retired member has certified as being an excludable parsonage distribution for that upcoming year. The designation, which is reflected in the minutes of the Trustees’ meeting, is intended to satisfy the IRS requirements that the allowance be officially designated. However, each cantor is responsible for determining whether the amount requested does not exceed the lesser of the fair rental value of the home or the actual cost and bears the responsibility for substaniating these costs to the IRS.
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Is a retired cantor's widow/er eligible?
No, the exclusion does not apply to a rental allowance paid to a retired minister’s widow/er.
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Is it possible to take parsonage from more than one source?
Yes, as long as the parsonage is officially designated and the total does not exceed the allowance. Only "church plans" can designate parsonage.
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What is the ACC Plan procedure for designating parsonage?
In the fall of each year, the Retirement Administrator sends all known retirees a “Parsonage Transmittal Form,” to be completed and returned prior to the annual meeting of the Trustees which normally takes place by the end of November.
At the annual meeting, the Trustees review and officially “designate” the parsonage certified by each retired member as being an excludable parsonage distribution for the upcoming taxable year.
This designation, which is reflected in the minutes of the Trustees’ meeting, is intended to satisfy the IRS requirements that the allowance be officially designated. However, each cantor is responsible for determining whether the amount requested does not exceed the lesser of the fair rental value of the home or the actual cost.
If you are planning to retire and begin receiving distributions from the Plan, you should contact the Retirement Administrator to obtain a transmittal form to inform the Trustees of the amount of parsonage expenses you expect to incur during the calendar year. Your transmittal form must be returned to the Plan in sufficient time for the Trustees to act before you begin receiving distributions which you would like to have treated as parsonage. Otherwise, any distributions you receive prior to the Trustees designation of your parsonage will be fully taxable to you under Federal income tax rules.
It is important to stress that you cannot exclude Plan benefits from taxable income simply because they have been designated as parsonage under the procedures outlined above. The parsonage designation is the first step. After a parsonage designation has been made on your behalf, you can then exclude from taxation only those benefits that have been designated as parsonage to the extent you have actual parsonage expenses, as indicated above. In this regard, it is suggested that you contact your individual tax advisor to determine exactly what you can claim as parsonage expense. If, at the end of the calendar year, you determine that your actual parsonage expenses are less than the amount you estimated on your transmittal form, please inform the Plan Administrator.
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How do I request a parsonage distribution?
You must contact Fidelity Investments directly at 1-800-343-0860 to initiate distributions from your account and be sure to inform the representative your distribution will be for parsonage/housing allowance. If this is your first distribution from the plan, you will need to complete a Fidelity distribution form and return the form to the Plan Administrator for plan sponsor (ACC) approval. The plan sponsor will submit the completed signed form to Fidelity for processing. You should consider establishing an ACH payment method with Fidelity so all distributions can be deposited directly to your bank account on file.
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Can I take a parsonage distribution from my Supplemental Plan?
Yes. Beginning in 2018, parsonage distributions are allowed from both the ACC Retirement Plan and the ACC Supplemental Plan.
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Must my minimum required distribution (MRD) be separate from parsonage distributions?
Your MRD and parsonage distribution may be the same. The IRS requires that your take a minimum distribution but does not require that the distribution is taxable.
Parsonage may be taken from the ACC Retirement Plan, and beginning in 2018, the Supplemental Plan.
Transfers in from other pre -tax employer plans, such as a 401k or IRA are permitted but are not eligible for parsonage.
Transfers from another 403b church plan to the ACC Retirement Plan may qualify for Parsonage if the source is documented as from a congregation or other 403(b) qualified church plan.
ACC Associate Members and GTM members, though they may participate in the ACC Retirement Plan may not receive parsonage in retirement if they have not been ordained from a seminary recognized by the ACC Executive Board; the ACC Retirement Plan Board does not grant clergy status
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