403(b) Retirement Plans – What Ministries Need to Know

Achieving the goal of retirement takes planning. For many ministry workers, retirement plans come in the form of a 403(b). The 403(b) plan is commonly used by employees of public schools, churches and religious schools, and other tax-exempt organizations.

There are a variety of 403(b) plans, including tax-sheltered annuities (TSAs), custodial accounts, and retirement income accounts. In a TSA, employees make non-taxable annuity contributions to their 403(b) account through an insurance company. Employees aren’t taxed for their earnings or gains on their accounts until they begin to withdraw from them.

TSAs were the only retirement fund option available until 1974, when Congress altered the tax code to allow employees of qualified organizations to invest their 403(b) with a mutual-fund company. The mutual-fund company then manages their investments and invests the funds professionally. This is commonly referred to as a custodial account.

The third type of 403(b) plan, the retirement income account, features elements of TSAs and custodial accounts, and allows employees to choose which one they would like to use.


There are several advantages to using 403(b) plans as opposed to other retirement funds, especially tax advantages that delay the taxing of contributions until after the employee retires and begins withdrawing funds. The same tax advantage applies to any interest a 403(b) may earn. And, if payments are made through salary reduction, the employee also may be eligible for tax credit.


Organizations may maintain a 403(b) plan only if they are a public school, a tax-exempt organization (such as churches or other religious organizations), or a non-tax-exempt organization that employs a minister to perform ministerial services. For example, a minister serving as a chaplain for a secular business would be considered eligible for a 403(b) plan. Self-employed ministers also are eligible for a 403(b) plan because they are considered their own employer and thus are considered a tax-exempt organization by section 501(c)(3) of the tax code.


The most common method of funding a 403(b) plan is through an elective deferral. Elective deferrals allow the employer to withhold money from an employee’s paycheck to be placed directly in the employee’s 403(b) account. Another way to fund the account is through a nonelective contribution. In this approach, employers contribute to the account using a matching contribution, discretionary contribution, or mandatory contribution. No salary reduction is made. The final way to put funds into a 403(b) is through after-tax contributions. Here, employees can invest part of their income in the retirement fund when they receive a salary payment for which income tax has been withheld. However, after-tax contributions are not excluded from income and cannot be deducted on a tax return. Employees can choose to combine these three contribution methods in any way they choose.

To determine the maximum contribution amount to the 403(b), users must find the lesser of (1) the limit on annual additions or (2) the limit on elective deferrals. The limit on total contributions can change each year—click here for the most current information. Includible compensation is the total amount of taxable compensation given by the employer to the employee in one year, whether through salary, benefits, or account donations.

Housing Allowances and 403(b) Plans

In most cases, housing should be excluded from compensation for retirement plans due to the special tax treatment of housing allowances. Section 107 of the tax code specifies that housing allowances are not included in gross income and, therefore, not considered includible compensation. For example, if a minister is given $20,000 every year as a tax-free housing allowance, this money would not be included in his gross income for the year and would not be added to includible compensation. If the housing allowance is a significant portion of the minister’s overall compensation, then the amount allowable may be limited to an annual addition or elective deferral.

The limit on elective deferrals is the limit on the amount of money that can be contributed to a 403(b) account through a salary reduction agreement. The IRS may update this figure annually. General limits can be found here. This applies to all elective deferrals contributed, even if they were made through different employers in the same year. If the annual elective deferral is more than the includible compensation amount, then the lesser amount (includible compensation) applies.

Make Changes to your Deferrals if Needed

Ministries should take care when utilizing a 403(b) or any retirement plan. It’s a good idea to work with the retirement plan provider to determine if changes need to be made to how MinistryWorks calculates your deferrals and matches.

The information in this article is intended to be helpful, but it does not constitute legal advice and is not a substitute for the advice from a licensed attorney in your area. We strongly encourage you to regularly consult with a local attorney as part of your risk management program.

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