Q: Can a simplified employee pension plan (SEP) or solo 401K be used to designate post-retirement housing allowances as tax-free distributions? Since we do not have a 403(b) plan, we set up a SEP to fund retirement for our one member of the clergy.
Payments from a minister's “church plan” plan can be designated as housing allowance provided certain qualifications are met. Internal Revenue Code Section 107 requires that all housing allowance payments be designated in advance and in writing by the church organization making the payments. A minister cannot make the designation on his own return. Therefore, the only retirement payments that are eligible to be designated as a housing allowance are those paid through a church or denominational retirement program. These are considered as payments made from the church, and the church has the ability to designate the payments as a housing allowance. Once a minister transfers funds to an IRA account, it is not possible to designate the payments as housing allowance under IRC Section 107. However a “church plan” can be any defined contribution plan so it can be a type of qualified plan (401(a) which includes Solo-Ks), or a 403(b). A SEP plan invests in IRAs, so it is questionable whether that would work — and there has been no guidance from the IRS on using an IRA.