4052 / What special rules apply to tax sheltered annuities for church employees?

A duly ordained, commissioned, or licensed minister of a church or a lay person who is an employee of a church or a convention or association of churches, including a tax-exempt organization controlled by or associated with a convention or association of churches, may be able to increase excludable tax sheltered annuity contributions under the special rules explained below.

For these purposes, a duly ordained, commissioned, or licensed minister who is self-employed or who is employed by an organization other than one described in IRC Section 501(c)(3), but with respect to which the minister shares common religious bonds, is considered a church employee.¹ This definition includes chaplains.

A church employee may make an election that may provide a higher IRC Section 415 annual additions limit than discussed in Q 4043. This employee may elect an annual addition limit of as much as $10,000 in any one year. Employer contributions under this election, that is, payments in excess of the otherwise applicable annual addition limit, may not aggregate more than $40,000 over the employee’s lifetime.²

A church employee with 15 years of service is eligible for the higher elective deferral limit explained in Q 4047.

Contributions to a defined contribution program (a “retirement income account”) established or maintained by a church are considered contributions for a tax sheltered annuity contract. A program in existence on August 13, 1982, will not fail to be a tax sheltered annuity merely because it is a defined benefit plan even if it is later amended or extended to other employees.³

Retirement income accounts can be established for self-employed ministers and chaplains and ministers who are employed by an organization other than one described in IRC Section 501(c)(3) but with respect to which the ministers share common religious bonds. The SECURE Act clarified that employees of a non-qualified church-controlled organization may be covered under a Section 403(b) plan.

The final 403(b) regulations clarify that retirement income accounts will be expected to be maintained pursuant to a plan that affirmatively states the intent to be a retirement income account.⁴

Contributions made by a minister to a retirement income account after 2001 are allowed to the extent they do not exceed the limit on elective deferrals or the limit on annual additions.⁵

A church plan does not have to meet the participation and nondiscrimination requirements applicable to other employer tax sheltered annuity plans ( Q 4038)⁶ if it meets certain requirements of being a church.

In figuring the Section 415 annual additions limit, a church employee must count all years of service with organizations that are part of a particular church as years of service with one employer. Similarly, the church employee must treat contributions by the churches as made by one employer.⁷ In the case of a foreign missionary, contributions and other additions for an annuity contract or retirement income contract, when expressed as an annual addition to the employee’s account, are not treated as exceeding the IRC Section 415 annual additions limit if the annual addition is not in excess of the greater of $3,000 or the employee’s includable compensation under IRC Section 403(b)(3).⁸