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403(b) Benefits For Clergy Members

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As a rep with a TPA firm who is looking a propsed takeover of a local church with upwards of 100 clergy members, the church mentioned there were several plan advantages to clergy members ONLY available with the use of a 403(b) plan as opposed to a 401(k) plan..Anyone well versed on what these may be?

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Guest Chuck Yanikoski

There are a couple of special 403(b) rules related to contribution limits for church plans. One affects low-paid members, and allows up to $10,000 a year to be contributed on their behalf, even if their pay is less than that -- with a $40,000 lifetime cap on excesses above the normal limit. This only works, though, if the employer is making contributions, since salary deferrals obviously cannot exceed 100% of salary.


Another benefit relates to the extra $3000/year that employees with 15 years of service can contribute (subject to a $15,000 lifetime limit). For, say, a school teacher, the 15-year clock starts over again if they switch to another school district. But for a minister, the clock does not start over as long as the new church is of the same denomination.


Neither of these applies to 403(b) plans.


Church 403(b) plans, unlike non-church plans, can also set up their own investment funds, and are not tied to products offered by insurance and mutual fund companies. Note that the church has to do this, though -- it is not an option for individual members. It would perhaps also not be practical for an organization with only 100 members, but if this group is part of a larger denomination, such a fund might already be set up (the United Methodist Church, for example, has a huge fund of this kind, operated out of Evanston, Illinois). I mention this separately, though, because even though it is permitted under a special provision in section 403(b) of the Internal Revenue Code, I suspect that a similar thing could be done for a 401(k) plan, though I don't know it for a fact.


You should also keep in mind that 403(b) plans in general have some small but significant advantages over 401(k) plans, regardless of the whether or not the sponsor is a church organization. Among these are the higher contribution limits for long-term employees, and the fact that in 403(b) the account is owned by the participant.


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