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Practice Management

Designating Distributions from a Previous Employer’s Plan


Q. Suppose an ordained minister has a 403(b) (7) plan set up with a custodian investing in mutual funds. The account is in the name of the church, and the minister is listed as the owner or participant. But the minister no longer is associated with that church, and the new church for which he works does not have a 403(b) plan. Can the minister’s new employer designate a housing allowance when he retires so his distributions from the 403(b) plan will be tax-free?

A. Let’s look specifically at housing allowance for retired clergy (or as section 107 of the Code indicates for “ministers of the gospel.” In order to claim the distribution as housing allowance and to make sure it is excluded from income, two things must occur.

1. The portion of the distribution that the minister is claiming as nontaxable and must be attributable to services that were provided that are ordinarily duties of a minister. So for example, if the participant worked early in their career for a for-profit company and participated in a 401(k) plan (maybe while in college), those assets would not be attributable to duties of a minister. Therefore, if the 401(k) assets were rolled over to a 403(b) later, these would not be available for the housing allowance distribution upon retirement.

And

2. The housing allowance must be designated before retirement. Typically, this is part of an employment agreement with the minister. Also, many financial institutions won’t track this for incoming rollovers, nor will they report the amounts on the Form 1099R as “taxable amount not determined.”

So it is also a matter of how the financial institution handles the plan, as well and the options that are on the distribution request form.