You may have heard about 403(b) retirement plans. These plans are designed for schools, universities, churches, camps, rescue missions, hospitals, or 501(c)(3) charitable organizations.
But if you’re a church, there’s another designation retirement plan—called a 403(b)(9) plan—that you should consider. And it provides better benefits for churches than a 403(b). Here’s why.
What Is a 403(b)(9) Retirement Plan?
A 403(b)(9) retirement plan is designed for the distinct needs of churches or those with 501(c)(3) church status. This plan provides many benefits for churches and is an option that most churches should not pass up.
How do you qualify for a 403(b)(9) plan? You must receive a determination letter from the IRS that specifies your status as a church.
Who Can Participate in a 403(b)(9) Retirement Plan?
Employees of a church or church-related organization are eligible to participate in a 403(b)(9) plan. But not all employees may be able to contribute to the plan.
For 403(b)(9) plans, employers have the ability to decide which employees can participate in the plan. This means that they can require employees to meet certain requirements—such as age or service obligations—before participating in the plan. Your Plan Document will reflect your organization’s objectives, including plan eligibility requirements.
403(b)(9) Plans and ERISA Regulations
403(b)(9) retirement plans are non-ERISA, meaning that they do not fall under the Employee Retirement Income Security Act (ERISA) regulations.
ERISA regulations require tax-deferred retirement accounts to comply with periodic reviews and discrimination testing. Because a 403(b)(9) plan does not fall under ERISA regulations, it is less expensive to administer and requires fewer form preparations and testing requirements—saving time and costs.
Unlike a non-ERISA 403(b) plan where employers cannot contribute to a plan, employers of non-ERISA 403(b)(9) plans can contribute to the plan.
403(b)(9) Plans and Tax-Savings Benefits
One of the biggest benefits of 403(b)(9) retirement plans are the specific opportunities for tax savings.
Housing Allowance is a big tax-savings benefit for ministers who are ordained, licensed, or commissioned. It gives them the ability to receive part of their salary for housing allowance purposes, which is excluded from gross income and not subject to federal income tax.
When ministers retire, they can take part of their distribution in the amount of the housing allowance without paying taxes on that money.
For Social Security purposes, a minister is considered self-employed. This means that they are responsible for Social Security Self-Employment taxes (SECA). But a big tax savings benefit is that contributions are made pre-SECA tax (for those who have not opted out of Social Security). This is almost a 15 percent tax savings benefit.
403(b)(9) Retirement Plan Benefits Recap
- The employer has the flexibility to decide who is eligible to participate in the plan. An example of restrictions could be age or service requirements.
- 403(b)(9) retirement plans do not fall under ERISA regulations. This means they require less administration and have fewer costs.
- Housing Allowance gives ministers that contribute to a 403(b)(9) plan a big tax break. Their housing allowance is excluded from gross income and not subject to federal income taxes. Additionally, they can take a distribution in retirement that is equal to the housing allowance amount without paying taxes on it.
Be aware that ministers cannot roll over into an IRA after retirement if they want to continue to claim housing allowance. Keep your money in your 403(b)(9) account so you can continue to take your tax-free distributions. - Contributions made by those with ministerial status are made pre-SECA tax—a 15% tax savings.
At TruthPoint Financial, our mission is to not only make sure you’re educated on your retirement plan options but to also develop your retirement plan based on Truth and Transparency. Give us a call today so that we can talk about your 403(b)(9) retirement plan options.