$treet $mart Finance$ for Covenant PastorsFacilitated by: Elliott Johnson, Controller; & Assistant Director of Pensions

Today we will be Today we will be covering the covering the following topics:following topics:

A. Financial & Tax Issues for MinistersB. Covenant Benefit ProgramsC. Investment/Retirement ConsiderationsD.Covenant Financial Resources

Objectives for this seminar

A. Discuss financial & tax issues pertaining to those serving as ministers. What you need to know about:

Financial reporting-budgets Compensation Taxes/Self-employment taxes Housing allowance Ministerial expenses

Objectives for this seminarB. Covenant Benefit ProgramsC. Pension Plan

Bethany Benefit ServiceC. Investment Considerations

Retirement PlanningD. Covenant Financial Resources

Covenant Trust Company National Covenant Properties

E. Q & A

Resource MaterialsHandouts:

Retirement Planning for Covenant Pastors & MissionariesMinister’s Guide for Income Tax – Conrad Teitell Covenant Pension Plan – Summary Plan DescriptionCovenant Pension Plan – “All you wanted to know…”Bethany Benefit Service –An OverviewCovenant Trust Company National Covenant Properties

Resource Materials:The 2011-12 Compensation Handbook for Church Staff –Cobble & HammerChurch & Clergy Tax Guide – Richard R. Hammer

Glossary of Definitions

SECA – Self-Employment Contributions Act for Social Security purposes. Paid by the self-employed individual at the rate of 12.4%. (For 2011 only, rate is 10.4%)

FICA - Taxes on non-self-employed persons for Social Security purposes is paid equally by the employee and the employer at 6.2% each. (Except for 2011, employee pays only 4.2%)

SECA Medicare Tax - Paid by the self-employed individual at the rate of 2.9%.

Medicare Taxes - Paid equally by the employee and the employer at 1.45% each.

Housing Allowance - The amount of compensation that a pastor designates prior to the beginning of each year and has the church pay is not subject to income tax up to certain limitations. The designation of the housing allowance must be approved by the church council prior to the year starting.

Definitions continued

Parsonage - The church furnishes a pastor a church-owned home to live in during their employment. The pastor is required to pay SECA taxes on the fair rental value of the parsonage.

Accountable Expense Plans – A church requires the pastor to submit documentation for reimbursement of expenses and mileage.

Non-accountable Expense Plans – Churches pay the pastor a set amount each month for items such as books or auto expense. They amounts are taxable to pastor. These can be deducted as unreimbursed employee expenses as itemized deductions.

Definitions continued

Retirement Plans

IRA – Individual Retirement Account. There are 2 types:

Regular IRA, which allows you to reduce your taxable income on your tax return. Any withdrawals are taxable and must start by age 70 ½.

Roth IRA: does not allow you a current reduction of taxable income, but withdrawals are tax free (including earnings) and are not forced by age limits (i.e. do not have required distributions).

Definitions continuedEmployer Retirement Accounts.

There are 2 types:

Defined contribution accounts such as 401k (generally for-profit companies) and 403b for non-profit companies. These accounts are structured so that each account is yours personally and any earnings or losses are credited to your account based on your investment decisions. This can also be done as a “Roth.”Defined benefit accounts are accounts set up by employers that pay a pension to you based on years of service and your salary. All investment decisions are made by the employer.

Financial ReportingTips for Ministers

Don’t be intimidated by accounting reports. The goal is not accounting expertise—it’s leadership.

A leader’s job is not to calculate a profit and loss statement. A leader’s job is to know how to read and then use the information to make leadership decisions.Get help where you need it. The only “dumb question” is the one you don’t ask.

Financial ReportingTips for Ministers

Things to consider: “Tone at the top” regarding accountability. People are watching! Internal controls, checks and balances. Qualifications of staff. Is outside help needed

and if so, how often and for what purposes? Budgeting. Financial reporting, monitoring process. Risks of fraudulent reporting and/or

misappropriation of assets (stealing in a church?!)

Financial ReportingTips for Ministers

Remember that for management purposes, there is no “right” or “wrong” system per se – use what works best in your situation.

Goals of financial reporting: Measure financial performance and

monitor changes therein. Target operational changes.

ScripturalConsiderations

Maintain a high level of public accountability - 2 Cor. 8:20-21.Keep fiscal behavior above reproach –

Acts 24:16, 1 Cor. 4:2.Ensure that dollars remain the servant and not the master of the ministry –

Matt. 6:24, 33.Remember that “counting the

cost” is a biblical principle – Luke 14:28-30.

Compensation What’s considered taxable?

Base salary.Non-accountable expense

reimbursements.Reimbursement of non-deductible

moving expenses.Special occasion “gifts” from the

church.Social Security supplement (for

pastors).(cont.)

Bargain purchase of church property.Personal use of church-provided

automobiles. Annual lease valuation rule Taxation of automobile allowances

Premiums on group term life insurance in excess of $50,000 (BBS $100,000).

What’s considered non-taxable?Accountable expense reimbursements.Group term life insurance of $50,000

or less.Group insurance premiums paid by

church.403 (b) contributions.Qualified moving expenses.Parsonage or housing allowance.Cafeteria (I.R.C. Sec. 125) plans,

medical reimbursement plans.Contributions to Covenant Pension

Plan.

Example of Pastor vs Non-Pastor Taxes

Pastor Joe

Janitor John

Salary

$50,000    

$50,000  

FICA or SECA contribution

$3,825 7.65%  

$3,825 7.65%

Total Compensation

$53,825    

$53,825  

Housing Allowance

$25,000        

Base Salary

$28,825    

$50,000  

Example of Pastor vs Non-Pastor Taxes

Pastor Joe

Janitor John

Base Salary

$28,825  

$50,000  

Federal W/H

$8,800

Optional (Include SECA)

$5,000 10.00%

FICA & Medicare W/H

-

Self Employed

$3,825 7.65%

State W/H $865 Optional

$1,500 3.00%

Housing Allowance

$25,000  

-  

Net Take Home

$44,160  

$39,675  

Taxability of Income Non Pastor

Income Taxes FICA

Base Salary $50,000

$50,000

Housing Allowance

Excess Life Insurance $25 $25

Year end gifts $500 $500

Excess Housing Allowance

Total Income $50,525 $50,525

Taxability of Income Non Pastor (cont.)

Income Taxes FICA

Total Income $50,525 $50,525

FICA Taxes @7.65%* $3,865

Adjusted Gross Income $50,525

Itemized Deductions & Exemptions $21,000

Taxable Income $29,525

Income Taxes $4,855

Total Taxes $ $8,720

* Except for 2011 which is 5.65% and 1st 2 months of 2012 unless extended by Congress.

John Jones W-2

Evangelical Covenant Church1234 Main StreetAnywhere, IL 60060

123-45-5678

36-1234567

John Jones

28678 Main StreetLibertyville, IL 60055

50,525.00 5,000.00

50,525.00 3,100.00

50,525.00 725.00

IL 36-1234567 50,525.00 1,500.00

25.00c

2011

*Assumes 7.65% rate (not in 2011)

*

Taxability of Income Pastor

Income Taxes SECA

Base Salary $28,825 $28,825

Housing Allowance 25,000

Excess Life Insurance 25 25

Year-end Gifts 500 500

Misc. items from Church 150 150

Honorariums 1,000 1,000

Excess Housing Allowance 3,000  

Total Income $33,500 $55,500

Taxability of Income Pastor (cont.)

Income Taxes SECA

Total Income $33,500 $55,500

Subject To SECA Tax @ 92.35% $51,254

SECA Taxes @15.3%* $7,842

50% SECA Taxes ($3,921)

Adjusted Gross Income $29,579

Itemized Deductions & Exemptions $21,000

Subject to Income Tax $8,579

Income Taxes @ 10% rate $858

Total Taxes $ $8,800

* Except for 2011 which is 13.3% and 1st 2 months of 2012 unless extended by Congress.

Pastor Joe Smith W-2

Evangelical Covenant Church1234 Main StreetAnywhere, IL 60060

123-45-5678

36-1234567

Joe Smith

678 Oak StreetLibertyville, IL 60055

28,825.00 8,800.00

Housing Allowance25,000.00

IL 36-1234567 28,825.00 865.00

25.00c

2011

Ministerial Wages-Miscellaneous Rules

Income tax withholdings are voluntary, not mandatory.Ministers’ wages are NEVER subject to FICA.Ministers are considered self employed for Social Security tax - subject to SECA on Total Compensation (base plus housing).Reimbursement of SECA by church is taxable for both income tax and SECA.

Housing Allowances -Who Qualifies?

Credential “hoop” Must be licensed, commissioned, or

ordained. How does this work in the ECC?

Performance “hoop” Must perform qualified services. Administration of sacraments. Considered a religious leader by the church. Conduct religious worship. Management responsibility in the control,

conduct, or maintenance of the church.

Housing Allowances -The Effect on Taxes

Excluded from federal and (most) state income tax.Double dip - ministers can deduct interest & property taxes as itemized deductions in addition to reducing taxable income.

Housing allowance is subject to Social Security. SECA not FICA.

Housing Allowances -The Effect on Taxes (cont.)

IRS does not require housing allowance to be listed on Form W-2; however, the church can include it in box 14.

Most churches exclude it completely from Form

W-2 and issue a letter instead.

Housing Allowances -Miscellaneous Rules

Designation must be prospective, by the church, and in writing. It may be amended. Who should determine the amount? Pastor.

Income Tax compensation. Total compensation less housing allowance. This will be called base salary. The amount of base salary goes on line 1 of

your W-2. Other items that will be discussed later can

be added to line 1 on your W-2.

Housing Allowances -Miscellaneous Rules

Housing allowance is limited to the lesser of: The amount prospectively designated, the amount of actual expenses in the

calendar year, or the fair rental value of the residence,

plus utilities & furnishings.

Any excess of housing allowance over the limit must be reported as income on IRS form 1040.

Sample Letter Requesting Housing Allowance

To: Elliott Johnson ECC Business OfficeFrom:____________________________For the calendar year 2012, I request that my housing allowance be $____________________.2011 amount: $_____________________Signed: ______________________________________Date: ___________________

Reporting Of Excess Housing Allowance

Mortgage Payments $ 14,000.00

Real Estate Taxes $ 2,000.00

Property Insurance $ 500.00

Utilities $ 2,400.00

Furnishings $ 1,500.00

Home Repairs $ 1,600.00

Total Housing Allowance Expenses $ 22,000.00

Designated Housing Allowance $ 25,000.00

Excess to be reported as income $ 3,000.00

Where to go for help…

Church & Clergy Tax Guide

by Richard Hammer, J.D.

1-704-821-3845

www.churchlawtoday for more useful

information, including

Church Law & Tax Report and

Church Treasurer Alert!

Covenant Benefit Programs

Covenant Pension Plan

Bethany Benefit Service

Retirement Planning

Covenant Pension PlanMission statement: -to provide retirement benefits to Covenant pastors, missionaries and surviving spouses and -to make available medical, dental, prescription drug, life, vision and long-term disability benefits programs to Covenant pastors, missionaries, retirees, surviving spouses & office workers.

Summary Plan Description.

What is the Covenant Pension Plan?

It is a “defined benefit plan”. The Pension Board (not the

participant) assumes responsibility for achieving investment returns needed to pay retirement benefits.

Participants cannot “outlive” their benefits.

Professionally managed.

How are payments calculated?

“Considered compensation”-the cumulative base salary & additional income from employer for all years of service.12.5% of annual considered compensation. (*Where a parsonage is provided, base salary for purposes of calculation is increased by 33%).

Pre-retirement communication

At age 59, you will receive a “heads up” letter from the Pension Department.At age 61, you will receive a letter detailing early retirement procedures.At age 64, you will receive a letter & forms to complete in anticipation of receiving benefits the month following 65th birthday.

Important pension terminology

Vesting – 5 years (in the past, up to 25 years).Normal retirement age is 65. Pastors can continue to work & still collect pension benefits. NOTE: When you stop working, monthly payment is recalculated.

Early retirement age is 62. However with a decrease of 0.5% for each month before age 65.Surviving spousal benefit is automatically 65% of retiree benefit. Optional selection of 75% or 100%.Housing allowance for retiree only can offset some or all of retirement payment.

Long-term disability – through Bethany Benefit Service.Minimum payment – for less than 25 years of service (or surviving spouse) $989/$742 respectively.

Pension payment increases

Since 1996, minimums raised from $480 to $989 (spouse: $320 to $742)Overall benefits raised 34% since 1996Surviving spouse benefit raised from 50% to 65%.

The Plan’s Professional Management

A “selection advisor” assists in performance evaluation; asset allocation; investment manager selection.An “actuary” annually determined the liability of the Plan; financial soundness.Outside auditing firm conducts thorough yearly audit.

Professional Management cont.

Investment Managers: currently 27 different professional investment managers oversee investment of assets.Investment Committee (Pension Board & Covenant staff) – regularly review, analyze; meet 3 times yearly.

Bethany Benefit ServiceGoverned by the ECC Board of Pension and Benefits.Covenant office staff manage the program, provide help with any complicated claim issues.Lower than “marketplace” rates.Coverage available for Covenant pastors, missionaries, surviving spouses & office workers.

Bethany Benefit ServiceMedicalDental (including Orthodontia)Prescription Drug BenefitLong-Term DisabilityLife InsuranceVisionLong-Term CareEmployee Assistance Program

Investment Considerations

Asset Allocation

Investment Considerations

Asset Allocation

Timing

Investment Considerations

Asset Allocation

Timing

Some Key Principles

153197

350331

0

50000

100000

150000

200000

250000

300000

350000

400000

Age 65

John Jane

Jane started saving at age 25 and put aside $25 weekly until age 65.

John saved $25 a week too, but waited until age 35 to start.

Jane put aside only $13,000 more than John, but at age 65 had accumulated $197,134 more than John!

Time is Money!

Key Principles for InvestorsSave regularly (wherever possible).Start at an early age and even if you are not young, start now (if you can). The power of compound investment returns over many years is very substantial.Invest on a tax-advantaged basis where it is consistent with your personal financial objectives.

Examples are a 403(B), Roth IRA, etc.

More Key Principles for Investors

Develop an asset allocation strategy, consistent with your desired risk/return tradeoff, in order to achieve the benefits of diversification.If you are an inexperienced investor, consider the benefits of a fund such as Vanguard Star Fund, which is a fund of funds—investing in 6 domestic equity funds, 2 international equity funds, 2 bond funds and one short-term fund. In this way, the purchase of one fund provides built-in diversification and asset allocation. Other fund complexes offer similar vehicles.Successful investing requires doing well in good markets and not losing too much in adverse markets.

Investment Considerations

Asset Allocation

Timing

Some Key Principles

Possible Investment Vehicles

Possible Investment Vehicles

403(B) – Regular and Roth

Traditional IRA

Roth IRA

Non-tax advantaged

Comparison of Popular Investments

Payroll Deductio

n

Pre-tax Contributio

n

Earnings Grow Tax

Deferred

Required Distributio

ns

Taxability of

Distributions

403(B) Yes Yes Yes Yes Ordinary

Traditional IRA

No Yes Yes Yes Ordinary

Roth IRA No No Yes No None

Roth 403 (B) No No Yes No None

Non-tax advantaged

No No No No Ordinary/Capital Gains

Retirement ConsiderationsLife Expectancy defined as “that age at which there is a 50% chance you will still be alive.”In 1900 = 47.3 yrs. Today = 78.1 yrs.

The U.S. Census Bureau predicts that 35 years from now there will be more than 800,000 over age 100.Some may spend up to 1/3 of life in retirement.

Inflation & Retirement

Inflation is defined as “rate of change in the prices of goods and services people purchase.”Average = 3% yearly.Medical care/prescription drugs much higher than general inflation rate.Can be financially catastrophic for those on fixed income.

Retirement: the 3-legged stool

Three major sources of retirement income: The employer The government The individual

Employer: Retirement pension Survivor’s pension Death benefits Disability benefits

NOTE: All of the above available to Covenant pastors & missionaries through Covenant Pension Plan or Bethany Benefit Service. Bethany also offers a Medicare Supplement Policy.

Government: Social Security Medicare/Medicaid

Social security:

•Early Retirement (currently 62)-significant decrease: 25% or more

•Full Retirement-FRA (currently 66)-no earnings limitation

•Delayed Retirement (up to age 70)-increases your benefit by 8% per year over the amount at your FRA.

Individual Savings/investments Defined contributions (403b) Traditional or Roth Individual

Retirement Accounts (IRA) Spouse assets/benefit programs Medicare Supplement Life Insurance/Annuities Working into retirement

Balancing the 3-legged stool

Balance in each of the above 3 areas of retirement planning. Lack of support from any of the three creates instability. The Covenant benefit programs are stable & strong.

Examples of Different Retirement Savings

Methods

Activity 403(b)Roth 403(B)

Roth IRA IRA Taxable

Out of Pocket Cash $2,850 $5,000 $5,000 $3,600 $5,000

Tax Savings $2,150 $1,400

Annual Contributions $5,000 $5,000 $5,000 $5,000 $5,000

Tax Savings 43% 28%

2012 Contribution Limits $17,000 $17,000 $5,000 $5,000 None

Over Age 50 additional amounts $5,500 $5,500 $1,000 $1,000

Suggested Investment Reading List

Newspapers USA Today – money section

www.usatoday.com/money/index Wall Street Journal – www.Smartmoneycom

Magazines Money – Subscription: 800-633-9970

http://money.cnn.com/magazines/moneymagWeb Sites (large mutual fund organizations) Vanguard.com: Lowest expense fund provider,

emphasis on index and managed funds. Fidelity.com: Largest provider of mutual Funds.

Many other major mutual fund companies also havegood web sites.

Spread the word…..

Credit for church health insurance premiums.

Your church can qualify for an IRS refund check up to $3,000 per covered employee. For information, stop at the Bethany Benefit Service booth today or contact Elliott Johnson 773-907-3362 elliott.johnson@covchurch.org

Thank you!

Please don’t hesitate to contact me if you have any questions.

elliott.johnson@covchurch.org773-907-3362