10 Options for Church Boards to Consider Regarding Retirement Benefits

The Bible teaches us that pastors are God’s gift to the church (Ephesians 4:11-12). Although the church as a whole is expected to care for a pastor, most churches delegate that stewardship to the church board. Any business owner will tell you that establishing a compensation package for the staff is one of the most challenging things to do. For a church, the issue can be compounded by the unique way that the IRS classifies pastors and clergy, treating them as self-employed individuals.

As part of the compensation package, the consideration of what benefits package to offer also causes some boards to struggle. A retirement plan is a common part of most benefit packages but is often left out in the church context as it is seen as too expensive or an issue for the pastor to deal with on their own.

The following 10 options are excerpted from the book, Stewarding the Future, by Gene Roncone, Network Superintendent for the Rocky Mountain Ministry Network and Darren Mullenix, CFP®, ChFC®.  We hope that you will find them helpful as you consider how to structure compensation and retirement benefits for your pastor.

  1. Adopt a 403(b) retirement plan for the pastor and staff. Establishing a 403(b) retirement plan can be done without cost for the church. Doing so provides a mechanism for the pastor (and any other church staff) to contribute to their own retirement on a pre-tax basis. Additionally, the availability of a retirement plan can be beneficial when recruiting new staff. A retirement plan option should be provided when the church creates its very first salary policy. The team at Church Extension Plan can meet with the church board to facilitate the plan adoption.

  2. Ensure your pastor is taking advantage of the District/Network retirement contribution offer. If your District or Network provides a retirement contribution to the ministers in the District, make sure your pastor is taking advantage of that offer. This does not require the pastor to establish a second account if they already have a retirement account. It is a simple process of completing the necessary form and notifying the District or Network office.

  3. Make an annual fixed contribution to a retirement account. If there is uncertainty about the consistency of income for the church, consider an annual contribution at year end. This can be structured as part of the retirement plan and allows for flexibility in the future. As the church grows and develops financial stability, the contribution can be changed to a percentage of salary.

  4. Establish a pastoral retirement gift option for the congregation. The church could create a contribution account as part of the giving options for the congregation. This would allow members to give directly to the pastor’s future retirement which can be contributed to their retirement account each year.

  5. Add a matching contribution to the pastor’s retirement account. Consider encouraging the pastor by offering a matching program. For example, the plan can be designed with a matching contribution up to a stated percentage of salary such as 3 percent.  In this example, if the pastor took a 3 percent employee deduction from their payroll, the church would match that 3 percent which would result in a monthly contribution of 6 percent. This allows the contribution to grow as the pastor’s compensation grows. Even a small amount, consistently invested over time, can make a significant difference to the financial retirement of a pastor.

  6. Cover the employer portion of Social Security payroll tax. By assuming the employer portion of payroll taxes, the pastor can take that amount which they were having to pay and contribute it to a retirement account. This can have a significant impact over time. Assuming that the pastor is being paid a very modest $1,700 per month in salary. The employer portion of payroll tax is approximately $105 each month. Contributing just $105 per month for 25 years, earning an average of 7%, results in a nest egg in the future of $86,000. If the pastor already contributes $100 per month, the nest egg will grow to $167,000.

  7. Convert a portion of housing allowance to salary. Retirement plan contribution calculations are based on taxable income. If a pastor currently receives all their income as housing allowance, discuss converting a portion of it to regular salary.  This allows the pastor to contribute to their retirement account; and because the contribution is made pre-tax, there will still be no income tax due.

  8. Consider gifting towards a financial consultation with a financial planner of the pastor’s choice. While a full financial plan prepared by a Certified Financial Planner can be expensive, some may be willing to do a limited consultation on retirement preparedness. This consultation can provide a pastor with a snapshot of their current situation and a plan with options to meet their future retirement goals. Church Extension Plan has provided this service and helped many pastors remain focused on their retirement plans throughout their ministerial careers.

  9. Consider budgeting for an employer retirement contribution rather than a raise. One way to quickly onboard a retirement benefit is to budget for a monthly retirement contribution rather than giving the pastor a raise. Not only will this help the church launch a retirement benefit, but it will also bless the pastor with a pretax benefit, lower their taxable income, and multiply its impact by being compounded over the years. For example, a $50-a-month raise given as an employer retirement contribution will add up to $6,000 over ten years. However, as a retirement contribution compounded at 7 percent interest, it will increase the pastor’s retirement contribution by $8,704 in that same amount of time.

  10. Consider a deferred compensation plan. If the church experiences a windfall gift or perhaps receives a large settlement from the sale of property, consider establishing an account for the benefit of the pastor at retirement. This type of account, often called a Rabbi Trust, remains an asset of the church and has certain restrictions built into the plan. The church can bless the pastor with this account when the pastor retires. The pastor can then use the proceeds to fund their retirement future. A deferred compensation plan should be considered with the advice of the church’s tax and legal advisors.

In the long run, a pastor with healthy finances (even if not a large income) will have lower stress and will be able to minister more effectively; and the church is healthier if the pastor is not put in a position of needing to continue to minister well past their effectiveness because they cannot afford to retire.

To receive a free copy of the book Stewarding the Future: Church Boards and Pastoral Retirement, complete the form below. Also available for free, Minister Retirement: Bringing Clarity to Retirement Planning.

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By Gene Roncone & Darren Mullenix