Our senior pastor and his wife have served our congregation for more than 30 years. Although they will still be employed for a few more years, we are trying to prepare for his retirement ahead of time. Being a small church, we have never established a 403(b) or any other form of retirement. Is it possible to continue the same current compensation in a weekly or monthly check to him for the rest of his life during retirement? Can he still have a housing allowance designated for these funds? We are not familiar with any IRS or state laws that govern what a church is allowed to do for their long time minister at retirement, but would like to take care of them as long as they live.
In retirement they will continue guest speaking and have considered establishing their own ministry organization, like a 501(c)3. Any advice or suggestions to provide and take advantage of any tax reduction strategies would be very helpful.
The above described scenario is all too common in the church community. Unfortunately, churches tend to consider the retirement needs of their pastors when retirement is an imminent possibility rather than when there are many years to utilize great vehicles for retirement as well as the potential to capitalize on the wonder of the compounding of money. There are many plans that are available with excellent tax incentives and churches should actively seek these for all of their pastoral staff.
The plan to continue to pay a pastor for his remaining years is filled with many dangers, both for a church and for a pastor. There are several laws that affect these types of plans that are known as nonqualified deferred compensation plans. Not only must a church navigate the specific rules surrounding nonqualified deferred compensation plans, but it must also consider the effect of compensation limitations placed on nonprofit organizations. A church should not enter into this type of arrangement with a pastor without seeking qualified legal counsel. The legal counsel should be as familiar with the laws governing organizations under IRC Sec. 501(c)(3) as they are with the laws regarding the nonqualified deferred compensation plans. Experience in one area without experience in the other area will be detrimental to either the church, the pastor or to all parties involved.