Housing Allowance FAQs

General Questions

Is the pastor housing allowance designation dependent upon the member being ordained by an ABCUSA church?
The housing allowance designation is not dependent upon the minister’s ordination being recognized by the ABCUSA. As long as the minister was ordained by a church—regardless of the church’s denominational affiliation, if applicable—the housing allowance designation applies.

When a deemed distribution occurs as a result of a loan default, will the amount of the deemed distribution listed in the 1099-R be eligible to be excluded from taxable income if used for housing for clergy?
No.

If a clergy member decides to pay back to his/her retirement account the amount of deemed distribution as a result of a loan default, will the payment be eligible to be excluded from taxable income for housing purposes at the time distributions occur?
No.

How is the pastor housing allowance reported to the IRS?
The housing information appears differently on 1099s prepared by State Street and ACS. On 1099-Rs prepared by State Street, the following statement is printed: “IRS Ruling 4/29/80** Up to 100% Clergy Housing Eligible.”

On 1099s prepared by ACS, the portion of the gross distribution that can be applied to the housing allowance is printed as well as the IRS Code (e.g., “Housing Allowance $1,613.09 IRS Code S107”).

Can a pastor designate their entire church compensation as a housing allowance?
In some cases this would be appropriate. For example, John is the pastor of a small church that is only able to pay him $5000 per year. John also works a part-time secular job to support himself. If John has at least $5000 of housing expenses, it would seem perfectly reasonable and appropriate for his church to designate his entire salary as a housing allowance. No court (or the IRS) has ever ruled that a housing allowance designated by a church cannot be fully claimed be a pastor who has secular earnings.

We have a part-time associate pastor who has asked the church to designate his entire salary as a housing allowance for ministers. Do we need to issue him a W-2 form at the end of the year reporting new income?
This is a surprisingly complex question. Here’s why.

In 1974, Congress enacted a massive pension law (the Employee Retirement Income Security Act, or ERISA). This law added the following phrase to section 6051: “Every employer engaged in a trade or business who pays remuneration for services performed by an employee, including noncash payments, must file a Form W-2 for each employee.” Unfortunately, the legislative history contains no explanation of why this language was added. In any event, it was broad enough to require churches to issue a Form W-2 to ministers even though they are not subject to tax withholding.

The 1974 amendment created some ambiguities, and the stated question highlights one of them. Read literally, the revised section 6051 requires a church to issue a Form W-2 to a minister even though all of the minister’s income is designated as a housing allowance, no amount is shown in box 1 (wages), and no withholdings of income taxes or Social Security or Medicare taxes are reported. Why? Because the church is an employer “engaged in a trade or business who pays remuneration for services performed by an employee, including noncash payments.” Of course, submitting to the IRS a Form W-2 that identifies a minister by name and Social Security number but has blank boxes for income and withholdings is not consistent with the purpose of the form, which is to report wages and withholdings to the IRS to ensure that the correct amount of taxes are paid. This purpose is not furthered by submitting blank forms. This, however, does not necessarily mean that a church is relieved of obligation to issue a Form W-2.

There is an IRS Revenue Ruling (IRS Revenue Ruling 2000-6) which suggests that a church may not be required to issue a W-2 to a part-time pastor whose entire income is designated as a housing allowance.

The IRS operates a centralized call site to answer questions about reporting information on W-2 forms at 866.455.7438.

Ministers Prior to Retirement

What portion of compensation can be excluded from taxable income for housing?
Clergy eligible for the pastor housing allowance designation can exclude from taxable income the lesser of:

1. The amount of housing allowance designated by the employer,
2. The actual housing expenses, or
3. The fair rental value of the housing furnished, plus utilities.

How does a clergy person determine the rental value of his home?
One option is to have a realtor give the pastor an assessment of what is considered the fair market value of the home and determine that the monthly rental value would be approximately 1% of the market value.

What if the actual housing expenses and fair rental value of the housing (furnished, plus utilities) is less than what the church has designated as housing allowance?
The amount not justified as housing must be reported as taxable income on the minister’s Form 1040. The amount is reported on the line titled “Other income” under taxable income on the first side of the form. Suggested wording for the form is “ Excess allowance.”

If a member’s ABCUSA ordination recognition has been revoked or suspended, does the housing allowance for ministers still apply?
Yes. It is assumed that the contributions were made while the member’s ordination was in good standing.

What makes an organization identified as a non-steeple entity eligible to declare pastor housing allowance for clergy staff?
Organizations that do not qualify as a “steeple” employer are permitted to designate a part of a minister’s compensation as housing if the employer is an integral part of a religious organization such as a local church, region or denomination. A number of criteria that would be considered to determine whether the employer is an integral part of a religious organization include:

1. whether the religious organization incorporated the institution,
2. whether the corporate name of the institution indicates a church relationship,
3. whether the religious organization continuously controls, manages, and maintains the institution,
4. whether the trustees or directors of the institution are approved by or must be approved by the religious organization or church,
5. whether annual reports of finances and general operations are required to be made to the religious organization or church,
6. whether trustees or directors may be removed by the religious organization or church,
7. whether the religious organization or church contributes to the support of the institution, and
8. whether, in the event of dissolution of the institution, its assets would be turned over to the religious organization or church.

While not all criteria may need to be met, a majority probably will have to be satisfied for the organization to be eligible to declare a part of clergy staff compensation as housing allowance

Are there limits to clergy engaged in ministry outside their denomination (Wandering Ministers) being eligible for the housing allowance for ministers designation?
It is often presumed that clergy “engaged in ministry” outside their denomination are automatically eligible to exclude from taxable income a portion of their compensation designated as housing allowance.

The applicable tax regulations state that housing allowance can be provided in payment for “services which are ordinarily the duties of a minister of the gospel.” The definition of services that are ordinarily the duties of a minister of the gospel is found in the relevant income tax regulations which provide that such service include:

• The performance of sacerdotal functions;
• The conduct of religious worship;
• The administration and maintenance of religious organizations and their integral agencies; and
• The performance of teaching and administrative duties at theology seminaries.

Are there wandering ministers who do not qualify for the pastor housing allowance designation even if performing sacerdotal functions or conducting religious worship?
IRS Publication 517 states that the following will not be eligible for the housing allowance designation:

• Clergy as an employee of the United States, the District of Columbia, a foreign government, or any other political subdivisions (chaplain in the Armed Forces of the U.S.).
• Clergy performing services in a government-owned and operated hospital.

On the other hand, services performed at a church-related hospital or health and welfare institution, or a private nonprofit hospital, are considered to be part of the ministry.

How do the services which are ordinarily the duties of a minister of the gospel apply to clergy engaged in ministry in settings outside of the church?
IRS Publication 517 states that clergy performing services for a nonreligious organization assigned or designated by their church would be eligible for the housing allowance designation. Their assigned or designated services qualify even if they do not involve performing sacerdotal functions or conducting religious worship. If services are not assigned or designated by the church, they are qualified services only if they involve performing sacerdotal functions or conducting religious worship for the purpose of being eligible for the housing allowance.

Are there examples of situations which indicate clergy are either eligible or not eligible for the housing allowance for ministers designation?
There have been a number of IRS rulings where the IRS has indicated whether or not clergy in their specific situations were eligible for the housing allowance exclusion. While the rulings dealt with specific situations, they give some clues as to what kinds of conditions might or might not qualify for the housing allowance exclusion.

Here are some examples where the housing allowance designation would or would not apply based on IRS Private Letter rulings:

• A prison chaplain’s church was not actively involved in the day-to-day operation of the chaplaincy program and did not supervise the chaplain. The church’s involvement was limited to endorsing the chaplain. Therefore, the chaplain was not eligible for the housing allowance designation.
• Ministers employed by a nondenominational organization working with churches and people of faith throughout the world to serve the poor and develop work for the organization by their local churches or denominations were eligible for the housing allowance designation.
• An ordained minister teaching religion, ethics and theology at an independent Christian college. Although the church approved the minister’s work and annually gave him permission to continue teaching, the IRS denied the housing allowance designation. The IRS ruling states the assignment must be more than a formality and must be significant.
• A minister was involved as pastoral counselor employed by a counseling center. The minister had obtained endorsement from his church as a counselor in order to further the efforts and mission of the church. The IRS concluded that the church’s general indication of support did not constitute evidence that the church specifically assigned the minister to perform on its behalf. The services were free from the church’s control.

What are some key factors that might help determine whether clergy engaged in ministry outside their denomination are eligible for the pastor housing allowance designation?
The IRS rulings suggest that the IRS takes a narrow view of the availability of the housing allowance exclusion in the case of clergy serving outside the church. Generally, the functions performed by the minister outside the church must be duties considered to be ordinarily performed by a minister of the gospel. On the other hand, there have been rulings that indicate that if there is an appropriate assignment or designation, the ministers’ duties need not involve the conduct of religious worship or the ministration of sacerdotal functions. The key observation made is that the assignment should not be pro forma or perfunctory. It must be directly related to accomplishing the purposes of the assigning church. Thus, it is important that clergy serving outside the church have a valid, “significant” denominational assignment, clearly related to the accomplishment of the purposes of the church, if they want to claim their eligibility for the housing allowance designation.

Is it permissible for a church to report a portion or all of a minister’s rental value of the parsonage and utilities as taxable income?
A church can declare a portion of a minister’s rental value of the parsonage as taxable income on the minister’s IRS Form W-2.

Ministers In Retirement

Do clergy members have to have part of their compensation designated as housing to have their retirement contributions eligible for the pastor housing allowance when distributions, including annuities, occur?
No. The key is the employer’s eligibility to designate housing allowance as well as the clergy member’s eligibility for housing allowance. For example, it is possible that a clergy person could be employed at a non-steeple employer who is eligible to designate a part of the individual’s compensation as housing allowance, but has decided not to do so.

What payments made in retirement are not eligible for the housing allowance for ministers designation?

1. Distributions to members from rollovers from retirement accounts that were not the result of church-related income.
2. Distributions that are directly rolled over to another retirement account.
3. Distributions that represent contributions made on behalf of clergy while they were not eligible to have a portion of their compensation designated as housing allowance because of the nature of their employment. This would usually occur for clergy classified as Wandering Ministers.
4. Deemed distributions resulting from defaulted loans.

If clergy are engaged in ministry as Wandering Ministers, why wouldn’t their contributions made while they are involved in that work be eligible for housing allowance for ministers designation when they receive distributions?
See the Housing Allowance for Ministers Prior to Retirement tab for an explanation.

Many ministers move into a retirement home following their retirement from ministry. Can the lump sum entrance fee charged by the retirement home be claimed as housing over a number of years?
No. The IRS has ruled that a lump-sum entrance fee paid by a retired minister to gain admission to a retirement community cannot be prorated over several years and claimed as a housing expense in those years. It can only be treated as a housing expense in the year it was actually paid.

Can nursing home expenses be used toward the pastor housing allowance?
Clergy temporarily in a nursing home would use their primary home for the housing allowance. In this case, the nursing home expenses could not be used toward the housing allowance.

If the member is a permanent resident of the nursing home, the housing allowance applies to the nursing home because the nursing home is the member’s primary residence. Clergy as residents of retirement centers can consider that portion of their monthly payment that represents housing costs to determine their housing allowance exclusion. The charges for food and medical care are not considered housing expenses. They would have to obtain from the administrator of the residence the portion of their monthly payments that represents housing costs (rental, utilities, etc.). Any housing expenses for the home where the member’s spouse resides would not apply to the housing allowance.

An annuitant and his wife are living at a retirement complex that includes apartments, an assisted living facility and a nursing home facility. The annuitant is an ordained minister and is moved to the nursing home facility because of his health. Can the cost of the annuitant’s nursing home and the spouse’s apartment be covered under the housing allowance for ministers designation of his annuity?

• Yes, if the contract the annuitant has with the retirement facility states that when the annuitant or spouse is moved from their apartment to the assisted living facility or nursing home facility of the retirement complex, there is no change in their monthly cost to the retirement complex. The cost of the spouse’s apartment, along with the nursing home cost, would qualify as housing expenses for justifying the housing allowance designation.
• If the contract the annuitant has with the retirement facility indicates that their monthly cost is increased to cover the added cost of the nursing home facility, then only the portion of the nursing home facility will be eligible for expenses. None of the spouse’s apartment housing cost will be eligible to be excluded from taxable income.

Are all commissioned missionaries eligible for the housing allowance for ministers designation?
No. Commissioned missionaries who are not licensed, commissioned or ordained as a minister are not eligible for the housing designation on annuity payments and distributions in retirement.

Can a pension from non-church institution have the pastor housing allowance designation?
No. Clergy receiving a pension from a non-church institution cannot have the institution designate their pension as housing allowance even if contributions to that pension account came as result of the clergy’s employment by a church.

The IRS has provided private letter rulings to denominations regarding the designation of annuity payments and other distributions from the denominations’ pension plans. There is no private letter ruling from the IRS that allows a non-church institution to designate its pension as housing allowance.

What housing expenses can be applied toward the annuity and distributions for clergy annuitants who die in the middle of the year?
If a clergy annuitant dies in the middle of the year, the housing allowance designation applies only for the months during which s/he was alive. The annuity payments to the surviving spouse for the remaining months will not be designated as housing allowance. The expenses and rental value criteria would only apply for the months during which the clergy annuitant was alive.

Does a surviving spouse of a clergy member receive the pastor housing allowance designation?
No. The housing allowance designation is not available on the deceased member’s annuity payable to the surviving spouse of the minister. If the surviving spouse is clergy and is receiving annuity payments and distributions based on his/her own membership, those payments will have the housing allowance designation.

A clergy annuitant has two residences and lives in each residence essentially an equal amount of time during the year. Can the pastor housing allowance be applied to both residences?
No. The housing allowance would apply to the home which is considered the annuitant’s legal residence (i.e., where s/he is registered to vote).

MMBB-Specific FAQs

Can rollovers to MMBB be designated as housing allowance for ministers when distributed to the member?
If the rollover account was the result of retirement contributions made while clergy persons were eligible to have a portion of their compensation designated as housing allowance, distributions from that amount rolled over to MMBB can be designated as housing.

Are MMBB distributions prior to retirement designated as eligible for the housing allowance for ministers?
Yes.

Are there limits on the amount of distributions that can be excluded from taxable income for clergy members while they are serving an employer that has designated a part of their income as pastor housing allowance?
Yes. If the church designates the distribution as eligible for housing allowance, clergy members are still limited by the rules that state that the amount that can be excluded from taxable income is the lesser of:

• The amount designated as housing allowance (income from employer and distribution from MMBB),
• The fair rental value of the furnished house, plus utilities, or
• The actual housing costs (mortgage payments, down payment on a house, utilities, property taxes, repairs, purchase of furnishings, yard expense, home insurance, etc.).

Is there an advantage for the minister to having the distribution declared as housing allowance by the employer over having the church designating a larger portion of the member’s compensation as housing allowance for ministers?
Yes. If the minister’s compensation has a larger amount designated as housing allowance, it may have an effect on the amount of contributions that can be made to his or her retirement plans during the year. Even if the Special Church Election came into play as a result of reducing the minister’s includible compensation due to the higher housing allowance designation, the member’s lifetime cap could be met sooner.

Are persons licensed as lay preachers in ABC eligible to have the housing allowance for ministers designation?
The IRS code and regulations stipulate that the person must be ordained, licensed or commissioned as a minister to be eligible for the housing allowance designation. As result, a person with the license as a lay preacher would not be eligible for the housing allowance.

Does a church with a lay preacher living in its parsonage have to report the rental value of the parsonage and utilities as taxable income?
No. Employees required to live in employer-designated housing do not have to have their housing reported as taxable income for federal income tax purposes. For example, a church that requires a janitor to live in an apartment at the church does not report the janitor’s apartment rental value and utilities as taxable income. The rental value of the apartment and utilities would be included as income for determining FICA taxes.

Does a person who is licensed or commissioned as minister by a local church continue to be eligible for the pastor housing allowance when switching from the church that has granted the status to another church?
The licensed or commissioned as minister status applies to the ministry at the church which has granted the license or commission. When a person moves from that church to another church, the new church must grant the license or commission as minister status for the individual to be eligible for the housing allowance designation by the new church.

How does eligibility for pastor housing allowance apply to individuals who are licensed or commissioned as a minister by a region?
The license or commission as a minister status applies while the person is engaged in ministry within the region that has granted the ministerial status for the individual. Thus, the person does not have to have the individual church grant the ministerial status in order to be eligible for the housing allowance designation. If persons move from that region to another region, then they will have to have the new region or the local church grant to them the ministerial status to be eligible for the housing allowance designation.

Do disability benefits received by clergy members qualify for the housing allowance for ministers designation?
Yes. MMBB has Aetna declare the full amount of the disability benefits for clergy members as housing allowance. Education grants issued by MMBB are also eligible for the housing allowance designation. There could be situations where the full amount of disability benefits will not be able to be excluded from taxable income even though the benefits will be designated as housing. MMBB will notify the members when this will occur.

Will ABCUSA clergy with endorsement status as a chaplain or pastoral counsel be qualified for the pastor housing allowance designation?
The ABCUSA Board of National Ministries’ Chaplaincy and Pastoral Counselors Committee endorses clergy to serve as Military Chaplains, Institutional Chaplains and Pastoral Counselors. Their endorsement affirms the fitness of these persons to function as American Baptist clergy in specialized settings. They may be eligible for the housing allowance designation if the employer is agreeable, but the endorsement does not necessarily mean they will be eligible for the housing allowance exclusion. What the endorsement does is give them more validity than if they took on a job without any kind of endorsement, assignment or designation by a church.

What payments are eligible for the housing allowance for ministers designation in retirement?
Clergy in retirement receive the housing allowance designation on 100% of Retirement Plan, TDA, TAS and Nonqualified Deferred Annuity (NQDC) annuity payments, required minimum distributions, partial and complete distributions.

The amount of the payments that can be excluded from taxable income is the lesser of:

1. The fair rental value of the housing furnished, plus utilities, or
2. The actual housing expenses.

If a clergy person’s ordination recognition has been revoked or suspended, does the pastor housing allowance still apply when payments are made in retirement?
Yes. It is assumed that the contributions were made while the member’s ordination was in good standing.

A member is receiving an annuity from MMBB as well as another denominational pension board. Can the member use both annuities to determine what amount can be excluded from taxable income based on the lesser of (1) the fair rental value of the furnished home, plus utilities, or (2) actual housing expenses?
Legal counsel indicates it is possible to use annuities from two separate denominational pension boards for housing.