MINISTER HOUSING EXPENSE EXEMPTION FAQs

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PLAN ID #89560

1

What is the ministerial housing allowance tax exemption and how does it reduce my federal income tax?

After turning 59½, you may begin making penalty free withdrawals from your EPC 403(b)(9) retirement account. As an ordained minister, monies drawn from the account and used for allowable housing related expenses can be excluded from your income in that year, and will therefore, not be subject to federal income taxes. For example, if you are in the ~20% federal income tax bracket and you draw out $10,000 to cover housing expenses from your EPC 403(b)(9) account during the course of a tax year, you will be able exclude that $10,000 from your income saving you ~$2,000 in federal income taxes. Without the exclusion, your withdrawal of $10,000 would require you to pay ~$2,000 in taxes leaving you with only $8,000 to spend on housing expenses.

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2

Who qualifies?

You must be an ordained minister, according to IRS rules. (The same benefit is available to minister-equivalents in other faiths.)

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3

I receive a housing allowance now while actively employed; is that the same thing?

No, here we are talking about when you will be drawing funds from your EPC 403(b)(9) retirement account to cover housing expenses that are not otherwise being reimbursed. This will likely not occur until you are at least 59½ (otherwise you would be subject to a 10% early withdrawal penalty, even if used for housing expenses) and when you are no longer living in church-provided housing or receiving a tax advantaged housing allowance under your terms of call. You cannot receive a housing allowance and also claim those same housing expenses as tax-exempt when withdrawing funds from your EPC retirement account. The IRS is not fond of double dipping!

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4

How am I eligible for housing allowance if I’m no longer an active Minister/Teaching Elder?

Each year during your time as an employed EPC ordained minister, a recommendation was adopted by vote at General Assembly that allows EPC ordained ministers drawing retirement income from the EPC’s 403(b)(9) Defined Contribution Retirement Plan to designate up to 100% of those withdrawals for housing expenses. Of course the actual amount you can claim for housing expenses in any given year is subject to Internal Revenue Service Code restrictions. That Code extends this provision to both active and retired ministers provided that the funds being withdrawn were contributed while the minister was actively employed as a minister. Therefore, funds withdrawn over time even after retiring from active service may be used to pay for allowable housing expenses and should be designated as such to our Plan Recordkeeper (Fidelity Investments) at the time of withdrawal.

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5

What portion of my 403(b)(9) account balance does the EPC designate as eligible for housing allowance?

The EPC designates 100%. Both your church’s contributions and your contributions plus earnings are eligible. Do keep in mind that the amount you may legally withdraw to use for housing expenses in any given year is subject to IRS code limitations.

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6

How exactly is it that my taxes will be lower if I keep my funds in the EPC 403(b)(9) plan?

The EPC 403(b)(9) is a defined contribution plan specifically designated for the unique needs of religious organizations. The (9) in 403(B)(9) designates it as a church plan that includes the ministerial housing allowance provision and also adds other unique provisions, such as allowing self-employed EPC ministers working in fields such as church planting or other ministries to participate in the Plan as well as EPC ministers working out-of-bounds. Any money ministers withdraw from the EPC 403(b)(9) Retirement Plan to cover housing expenses in accordance with IRS regulations qualifies to be excluded from income when computing your taxable income. Keep in mind that if you roll your money out of a 403(b)(9) to an IRA or any other type of retirement account you will permanently forfeit the housing expense tax exemption at the time those funds are placed in the other account.

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7

What are a minister’s responsibilities in being prepared to report housing allowance expenses?

As a taxpayer, a minister must:

1. Determine if he or she is eligible for the housing allowance expense exemption;
2. Keep records to substantiate the cost of everything they exclude from income as housing expenses;
3. Report and pay taxes on any portion of income withdrawn from the 403(b)(9) that exceeds the lesser of actual housing expenses or fair market rental value of the home (furnished, plus utilities).

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8

Are there limitations to the amount of housing expenses I can exclude from income each year? 

Yes, there are three qualifiers. You may designate as your housing allowance expenses the lesser of:

• Housing allowance designated by the EPC. (The EPC designates 100% of the money your church employer or you contribute to your EPC retirement account while employed as Housing Allowance.)
• Actual housing expenses. (See listing of eligible expenses in Question 9 below.)
• The fair rental value of your home (including furnishings, plus the cost of utilities).

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9

What qualifies as a housing allowance expense that can be excluded from income?

The list below is not intended to be all-inclusive:

• Mortgage Payments.
• Down payment, closing costs (not purchase price).
• Rent.
• Real estate taxes.
• Home/renter’s insurance.
• Homeowners association dues/condo fees.
• Home improvements.
• Structural maintenance and repairs (roof, paint, deck).
• Upkeep of home and contents.
• Utilities: heat, electric, water, sewer, garbage, gas, internet, cable, home telephone service.
• Furniture, appliances.
• Pictures, rugs, bedding, towels, household supplies.
• Yard care equipment, supplies, services, pest control.

Remember, there are limitations on the total dollar amount of expenses you can exclude (see Question 8 above).

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10

What housing expenses are NOT eligible?

The list below is not intended to be all-inclusive.

• Purchase price of a residence.
• Cleaning Services.
• Food.
• Domestic Help.
• Second Home, Vacation Home, Business Property, Farm.
• Home equity loan payments when the original loan was used to pay for things other than housing expenses such as tuition, car purchase, debt reduction, etc.

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11

How do I calculate the fair rental value of my home?

A suggested method is as follows:

1. Search online websites such as those that market rental properties in your area to find the monthly rental rates for a property comparable to yours, or talk to a local real estate broker. If you are renting your home, you already have the answer.
2. Estimate the monthly rental value of your furniture, appliances, and other furnishings. There may be furniture rental companies in your area that you can use as a resource.
3. Calculate the total of your average monthly utility bills (electric, gas, water, sewer, trash pickup, HOA dues, etc.).
4. Add the above three items together and multiply by 12 to estimate annual fair rental value.

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12

Can I use funds from my EPC 403(b)(9) to purchase a home and claim tax exemption on the full amount? 

No. You can use funds from your account for a down payment, but the total amount allowed will be subject to the normal annual restrictions referenced in Question 8 above.

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13

I don’t own my home; I rent. Does my monthly rent payment qualify as a housing allowance expense?

Yes. See more detail in Question 9 above.

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14

When can I start withdrawing funds to cover housing expenses without paying a penalty or income taxes?

Withdrawals from retirement accounts are allowed without penalty once you have reached age 59½. If you are age 59½ or older, funds you withdraw from your EPC 403(b)(9) retirement account that are used for allowable housing related expenses will be excluded from your income in that year and therefore not subject to federal income tax. (This assumes you are not still living in church-provided housing and/or being reimbursed for your housing expenses.)

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15

What is the process of taking a distribution from my EPC 403(b)(9) retirement plan that I will use for housing expenses?

Complete the Distribution Form on the EPC website, available by clicking here. Note the following instructions:

• In Step 2, select the option for “EPC Minister Housing Allowance.”
• In Step 4, select the option for “Payable to me.”
• Check the box underneath “I certify that I am eligible for the EPC Minister Housing Allowance.”

When you follow this process, Fidelity will not withhold federal income taxes from you when making the distribution to you. Be sure to use the Withdrawal Form on the EPC website because it contains the ministerial housing allowance related questions. The standard withdrawal Form issued through Fidelity does not include reference to ministerial housing allowance so it does not provide an option to opt out of having taxes withheld.

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16

When issuing my 1099-R (Distributions from Retirement Plan Year-end Tax Form), how does Fidelity know how much I have taken out of my EPC 403(b)(9) retirement plan for housing expenses and how much for other purposes?

That information is not broken out on the 1099-R. But if you told Fidelity on your withdrawal forms when the distribution was taken that it was to be used for housing expenses, then they would not have taken out federal income taxes on those distributions. Simply look at the payment you received—if it is the full amount requested then no taxes were withheld. If you withdrew money during the year for other non-housing expenses and did not designate them as for housing expenses, then Fidelity would have taken out federal income taxes. The tax amount is usually 20%. (So if you took out $1,000 and received ~$800 then you know federal taxes were withheld.)

The 1099-R will show the gross amount you took out of your retirement account for the year, the federal income taxes withheld, and it will designate in Box 2b “Taxable amount not determined.” At this point it is important that you have kept records of all your housing expenses because you will need that information to determine the non-taxable portion of your gross distribution. When you or your tax service prepares your federal tax return, you should be asked if you are a minister and about the Retirement Distributions, and as a minister participating in an approved Plan about the amount of your actual housing expenses for the year. (See answers to Questions 7, 8, and 9 above regarding keeping records and allowable housing expenses.) Your tax preparer or preparation App will then insert your housing expense information which will reduce your taxable income for the year by the amount of your allowable housing expenses and you will not pay taxes on that portion of your withdrawals.

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17

Is a surviving spouse who is not a minister eligible to use some or all of their spouse’s housing allowance?

Unfortunately, no. Ministers are eligible for housing allowance with respect to the ministerial services they had provided. IRS Code does not contemplate that one person can receive housing allowance based on another person’s service.

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18

Can I use funds I rolled into my 403(b)(9) from other retirement accounts for tax-exempt housing allowance withdrawals?

If your prior employer was not a religious institution, then the answer is no. Or if it is an IRA, the answer is no. You can only use funds rolled into the EPC 403(b)(9) from another 403(b)(9) or other religious employer sponsored Retirement Plan that is specifically qualified to allow for the ministerial housing allowance exemption. If you roll in funds to the EPC Plan from a Plan that qualifies under IRS guidelines for the housing allowance tax exemption, then you will be able to use those funds for tax-exempt housing expenses. If your former Plan is not a 403(b)(9), ask to see your prior employer’s Plan Document. Look to see if it contains specific provisions indicating that the plan qualifies under IRS Code for the ministerial housing allowance exemption. See if it defines and uses terms like “minister.” That plan sponsor should also have been annually declaring the portion of distributions allowed for use as housing expenses. If you see none of those references, then those funds when withdrawn would not be eligible to pay for housing expenses on a tax-exempt basis.   

You can roll funds from any retirement account into the EPC Plan if you wish to consolidate your retirement investments. You designate the source when you roll the funds in. If they do not qualify for the housing expense exemption, Fidelity will earmark those funds and earnings and track them into the future for you. They will keep track of how much your church and you contributed while working in an EPC ministry, and how much came from other non-qualifying sources.

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19

Is there a difference between a 403(b) and a 403(b)(9)? Does a 403(b) qualify for tax-exempt housing allowance withdrawals for ministers?

There is a difference. A 403(b)(9) is a defined contribution plan specifically designated for the unique needs of religious organizations. Withdrawals from a 403(b)(9) will always qualify to be used for allowable housing expenses on a tax-exempt basis. Most 403(b) plans will not qualify unless the Plan Document includes specific provisions indicating that the plan qualifies under the IRS Code for the ministerial housing allowance exemption. If you are uncertain if your plan qualifies, ask for a copy of the 403(b) Plan Document and search for words such as minister, housing, rental, allowance, etc. If you don’t find anything specific, then the Plan does not qualify under IRS guidelines.

Keep in mind that if you roll your money out of your EPC 403(b)(9) to an IRA or a defined contribution plan that does not qualify for the housing allowance exemption under IRS regulations, you will forfeit the housing expense tax exemption at the time the funds are rolled out.

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20

Do I need to withdraw my 403(b)(9) funds and close my account upon leaving my employment at the EPC?

No, you can leave funds in your EPC 403(b)(9) account indefinitely. You own the account and can manage it as you please. You can choose your investments from 23 different investment options, as well as a brokerage link that gives you access to thousands of other investments. There are now provisions to annuitize funds in your account as well. Free professional point-in-time advice on your account and investment selections is available anytime through Fidelity by calling 877-895-5986 and making an appointment. Important note: If you are a minister who qualifies for the ministerial housing allowance tax exemption, you will lose that exemption on any monies you rollover into a retirement account that is not a 403(b)(9). See Questions 18 and 19 above for additional details.

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21

My financial advisor told me I can roll funds out of my EPC 403(b)(9) into a retirement account such as an IRA or retirement annuity and I will not have to pay any penalty or tax. Is that correct?

There is no tax or penalty assessed when moving funds from one qualified retirement plan to another, or into an approved retirement annuity. Federal income tax is assessed only at the time distributions are taken. However, if you are a minister it is very important to understand that the ministerial housing allowance tax exemption can only be taken on funds distributed from a 403(b)(9) or other qualifying Defined Contribution Retirement Plan account. See Questions 18 and 19 above for additional details. Once you move your funds out of the EPC 403(b)(9) account to an IRA or non-church defined contribution plan, you will no longer be able to claim exemption from federal income tax on monies you withdraw to cover housing expenses—even if earned while you were a minister. You will have essentially reduced the value of your retirement savings by 20% when you rolled the funds out.

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22

Can I use funds rolled into my EPC 403(b)(9) from another workplace retirement fund such as a 401(k) or 403(b) to claim housing exemption?

No. Only funds rolled in from another church plan that included specific provisions allowing tax-exempt withdrawals of funds for housing expenses are able to be rolled in and retain the exemption. However, you can roll funds from any retirement account into the EPC Plan if you wish to consolidate your retirement investments. Fidelity will earmark those funds and earnings and track them into the future for you. They will keep track of how much your church and you contributed while working in an EPC ministry and how much came from other sources.

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23

Are both employer and employee (my) contributions to my account allowed to be used to cover housing expenses on a tax-exempt basis when withdrawn?

Yes, both employee and employer contributions can be counted.

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24

Fidelity automatically withholds income taxes when I make withdrawals. How do I draw out funds to cover housing expenses and not have taxes withheld?

You tell Fidelity! Whenever you make a withdrawal to be used to pay housing expenses, you instruct Fidelity not to withhold any federal income taxes on the portion you will be using to pay housing expenses. Normally, 403(b) and 401(k) Plan Administrators are required to withhold 20% for federal income taxes on distributions unless otherwise instructed, so be sure to tell them. See Question 15 above for more details.

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25

How do I report my housing allowance distribution when filing my taxes?

If you take a distribution for the purpose of housing allowance and meet the eligibility requirements, Fidelity will provide you with a Form 1099-R at the end of the year with the note “taxable amount not determined.” Make sure to have your 1099-R available when filing your taxes. If you did not receive a 1099-R and made a withdrawal for the purpose of housing allowance, contact Fidelity at 800-343-0860. See Question 16 above for more details.

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26

How do I declare my allowable housing expenses when I file my annual federal tax return so they are deducted from my income when calculating my taxes?

There are provisions in the federal tax code related to the ministerial housing allowance. When preparing your tax return—whether you use tax software or a professional preparer—questions about whether or not you are a minister will come up. When answering yes, you will be taken to other questions to help you properly complete forms such as entering your 1099-R reported income so you can take advantage of any available tax savings. If completed properly, your tax will be calculated based on your income after being reduced by your allowed housing expenses. See Question 16 above for more details.

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Information provided in this web site does not constitute legally binding advice. EPC benefits are subject to the provisions of the Medical Plan and Retirement Plan documents available on this web site or in print from EPC Benefit Resources, Inc. (BRI), 5850 T.G. Lee Blvd., Suite 510, Orlando FL 32822. For more information, contact BRI at benefits@epc.org or 407-930-4492 (voice and fax).