Should a Minister Revoke an Exemption from Social Security Coverage?

An ethical question.

Many ministers exempted themselves from social security coverage because of the advice of a consultant that they would be “better off financially” if they did not enter the system. In other words, the basis for their exemption was purely financial. Should such a minister take advantage of a provision in the Tax Reform Act of 1986 that gives ministers a limited opportunity to revoke an exemption? This is a question that I have been asked repeatedly over the past several months.

It is my opinion that a minister who claimed an exemption for which he or she was not eligible has an ethical duty to re-enter the system. This is the very reason that Congress has given ministers a limited opportunity to revoke an exemption. Congress recognized that the vast majority of ministers who obtained an exemption were in fact not eligible. To be eligible for the exemption, a minister must be conscientiously opposed, because of religious principles, to accepting social security benefits for services performed as a minister. The opposition is not to the payment of the tax, or to the perceived inadequacy of social security benefits. Opposition to receiving benefit checks upon one’s retirement or disability, and not to paying taxes to finance those benefits, is indeed an extraordinary position.

Ministers may revoke an exemption by filing a Form 2031 (revised) by April 15, 1988. Ministers electing to revoke their exemption will not be liable for back taxes and will not be asked to explain the basis for their action. One final thought—ministers should decide as early as possible whether or not to revoke an exemption from social security coverage, since they will be liable for the self-employment tax for all of 1987 if they do elect to revoke the exemption. Many ministers who put off the decision until late 1987 or early 1988 may be forced to maintain their exemption because of an inability to pay the substantial accumulated tax for all of 1987.

Ministers approaching retirement must consider an additional factor. They will not be eligible for most social security benefits unless they have ten years (forty quarters) of covered employment. Revoking an exemption within a few years of retirement therefore makes little sense. Such a minister would be paying into a system from which he or she ordinarily will receive no benefits, Ministers who plan to work at least ten more years must also recognize that under current law their benefits generally are computed on the basis of their thirty-five highest years of taxable wages. Ministers who revoke an exemption and then work only ten or twenty years prior to retirement will find their benefits reduced accordingly.

Ministers who worked at least ten years in secular employment do not lose social security benefits based on their secular earnings, even if they continue to be exempt from coverage as a clergyman. Again, however, they should recognize that each year of exempt wages will have the effect of reducing their benefits.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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