In the case of employees and employers, the combined annual contribution limits for tax year 2016 are:
The lesser of $53,000 or 100% of the employee’s church or church-related employer taxable compensation (this would exclude Housing Allowance) - IRS Code 415(c)
Annual contributions can come from three sources:
- Church/Employer Contributions - Plan classification type “D”
- Participant Before-Tax Contributions - Plan classification type “A”
- Participant After-Tax Contributions - Plan classification type “G”
Combined contributions from all three sources cannot exceed the annual contribution limit. A qualified rollover from another retirement plan does not count against the annual limit.
1. Church/Employer Contributions (Plan classification type “D”)
- Paid and remitted by the church/employer as a fringe benefit (i.e. above and beyond the employee’s salary or regular wages)
- Not reported to the employee as income on the annual Form W-2
2. Participant Before-Tax Contributions (Plan classification type “A”)
- Subject to a limit of $18,000 for tax year 2016 (there are exceptions (see below))
- Paid (via salary reduction) by the participant and remitted by the church/employer based on a salary reduction agreement between the employer and employee. The salary reduction agreement, which must be kept on file by the employer, allows the participant to reduce currently taxable income and, therefore, current tax liability - IRS Code 402(g).
- Reported on the W-2 Form in Box 12 (Code E), but NOT included in Box 1 as a part of wages. For non-ordained (lay) employees, this amount would, however, be reported and taxed as a part of Social Security Wages and Medicare Wages in Boxes 3 and 5.
3. Participant After-Tax Contributions (Plan classification type “G”)
- Paid by participant on a personal check, typically. Could also be remitted on a church/employer check if withheld from net pay (after taxes) rather than from gross pay.
Plan participants over 50 years of age are allowed to increase their participant before-tax contribution limit by $6,000 for tax year 2016. This means they can contribute $18,000 plus $6,000 for a total of $24,000. In this case the annual contribution limit is increased to 100% of taxable compensation (this would exclude Housing Allowance) or $59,000, whichever is the lesser - IRS Code 414(v).
Plan participants with at least 15 years of service to the Church of God are allowed to increase their participant before-tax contributions by up to $3,000 in any one year. Maximum life-time contribution under this ruling is $15,000. This means they can contribute $18,000 plus $3,000 for a total of $21,000. The fifteen years of service can be aggregated periods added together. There is no age factor involved. The annual compensation limit remains unchanged in this case - IRS Code 402(g).
Plan participants over 50 years of age and with at least 15 years of service to the Church of God qualify under both of these exceptions to the general participant before-tax contribution limit rule. They could contribute up to $27,000 by this method to the plan. However for both catch-up contributions limits (i.e. Age 50 catch-up and the 15 years of service) there is a required ordering of elective deferrals. The required ordering is:
- First, utilize regular 402(g) limits ($18,000 for 2016);
- Next, special “15 years of service” catch-up contribution limit (maximum $3,000/year with $15,000 lifetime limit - if you have 15 years of service); and
- Finally, “Age 50” catch-up contributions ($6,000 for 2016, if age 50 or older).