Q: It is my understanding that distributions from a retirement plan made to retired pastors can be deemed a housing allowance and as such, are not taxed. It is also my understanding that this provision does not extend to a surviving spouse.
If so, what happens if the pastor passes away before a distribution is taken in a given year (in this case, his required minimum distribution). Will the RMD remain eligible to be deemed a housing allowance since it will be withdrawn post-death?
A: A ‘qualified’ housing allowance is not taxable to the pastor receiving the distribution from a 403(b) plan, but keep in mind the financial institution or TPA will not ‘know’ if the distribution truly is a ‘qualified’ housing allowance. This is a tax matter that is reported (or not) on their 1040 tax return.
This is the way that it generally works from the 403(b) plan:
1. First a distribution form should have “qualified housing allowance” as a reason for the distribution.
2. The retired pastor, by checking this as the reason, is indicating that the amount requested is not more than the amount they are permitted to receive for the tax year.
3. The payor would then report the distribution on the Form 1099R as follows: Box 1 – the amount of the distribution; Box 2a (taxable amount), enter “0”; and check the box in 2b for “taxable amount not determined.”
4. The actual amount that is taxable or nontaxable will depend on the pastor’s employment agreement. Remember, this is the CPA’s job not yours.
It should be noted that not all financial institutions will agree to report the distribution as noted in #3 above. Clergy and church plans need to ask this question when setting up accounts.