Parsonage allowance alert

Parsonage allowance alert

A legal alert concerning retired ministers

Thomas E. Wetmore, Associate General Counsel, General Conference of Seventh-day Adventists

Your help is needed to contact your U.S. senator or representative to urge their support for a legislative solution to counteract a change in position that the Internal Revenue Service has taken with respect to self-employment (SECA) tax and the amount of the pension benefit excluded as a housing allowance by a retired minister.

Churches and ministers have generally interpreted the provisions of the Internal Revenue Code so as to allow an amount received by a retired minister from his or her church retirement plan to be excluded from his or her gross income as a housing allowance. It has also been understood that it was not subject to self-employment (SECA) tax, which active ministers must pay on their housing allowance exclusion. These interpretations had been supported by the IRS in its rulings and its own Publication 517.

However, in the past several years, the IRS has taken a contrary position by determining in audits of ministers that the amount of the pension benefit excluded as a housing allowance by a retired minister is subject to self-employment (SECA) tax. The IRS has recently is sued examination guidelines to be used by its auditors when auditing a minister that instruct IRS auditors to take this position. The IRS did not, however, change its Publication 517 which instructs ministers not to include "in gross income for figuring net earnings from self-employment... pension payments or retirement allowances you receive for your past qualified services."

Representatives Clay Shaw and Ben Cardin have introduced legislation (H.R. 528) in the U.S. House of Representatives that contains a provision that clarifies that the amount of retirement benefits taken as a parsonage allowance is not subject to the self-employment tax. Senators David Pryor and Charles Grassley have introduced similar legislation (S. 881) in the Senate. These bills, entitled "The Church Retirement Simplification Act of 1995," contain provisions that are supported by Church Alliance, a coalition of approximately 30 denominational benefit boards, and that will greatly simplify the rules to which church benefit plans are subject. Ministry magazine encourages active and retired ministers to write to their members in Congress and urge them to support and cosponsor the efforts of Representatives Shaw and Cardin and Senators Pryor and Grassley. The sample letter below is for your reference.

Sample Letter

The Honorable __________                                or                  The Honorable _____
United States House of Representatives                                  United States Senate
Washington, D.C. 20519                                                           Washington, D.C. 20515


Re: The Church Retirement Benefits Simplification Act

Dear Representative [or Senator] ____________:
I am writing to ask you to cosponsor the Church Retirement Benefits Simplification
Act of 1995 (H.R. 528) introduced by Representatives Ben Cardin and Clay Shaw [or (S.
881) introduced by Senators Charles Grassley and David Pryor]. Hearings have been held
by both the House Ways and Means Committee and the Senate Finance Committee on
similar bills that were introduced during the past three congresses.

A provision of this bill clearly represents the need for this comprehensive piece of
legislation. For almost 40 years the various denominations and the IRS have interpreted
the Internal Revenue Code so as to allow an amount received by a retired minister from his
or her church retirement plan to be excluded from his or her gross income under IRC
Section 107 and also not subject to the self-employment (SECA) tax that active ministers
must pay on their housing allowance exclusion. However, the IRS has recently issued
examination guidelines to be used by its auditors when auditing a minister that state that
the housing allowances of retired ministers' church pension benefits "are includable in net
earnings from self-employment and are subject to self-employment tax." This position is
contrary to IRS's own Publication 517. These examination guidelines, if allowed to stand,
effectively increase a retired minister's tax burden without congressional approval. This is
the type of bureaucratic interference that H.R. 528 [or S. 881] would prevent.

The legislation would also bring uniformity and consistency to the rules that apply to
church retirement plans by locating them in one place in the Internal Revenue Code, would
avoid inadvertent change to those rules, would clarify that chaplains can participate in
their denomination's retirement program when they are serving the denomination outside
the local church (for example, in a prison or secular hospital), and would clarify that SECA
tax is not payable upon the portion of a retired minister's pension that is claimed as parson
age allowance.

I am aware that the revenue impact of legislation is very important to you. The staff of
the joint Tax Committee has previously estimated the revenue effect of similar legislation
that was introduced in the last Congress. The staff determined that there would be only
negligible effect upon revenue.

Again, we urge you to cosponsor H.R. 528 and support Representatives Cardin and
Shaw [or S. 881 and support Senators Pryor and Grassley] in their efforts to simplify and
make consistent the rules that apply to church retirement programs.

 

Sincerely yours,

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Thomas E. Wetmore, Associate General Counsel, General Conference of Seventh-day Adventists

November 1995

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