No. A fixed annuity plan makes fixed dollar payments for the term of the annuity. The Pension Boards sponsors an Internal Revenue Code § 403(b)(9) church retirement income plan. The annuity that is paid is a variable annuity, not a fixed annuity. Payments may be adjusted up or down depending on the overall investment experience of the underlying assets. Since the inception of the Basic and Participating Annuities in 2006, there have been no decreases.
A defined benefit plan is a type of retirement plan that computes an annuity at retirement based on a formula that typically takes into account salary and years of service. The benefit is usually expressed (or “defined,” hence the term) in terms of an annual annuity payable at age 65. There may be other payout options and starting dates, which would require adjustment to the annual amount. The advantage of a defined benefit plan is that the annuities are “pooled” so that benefits can be paid for an individual’s lifetime without the risk of outliving one’s retirement savings.
A defined contribution plan does not “define” the benefit but rather “defines” the contribution. Money is contributed to an account that grows with investment earnings during an individual’s working years. At retirement, a typical defined contribution plan (such as a 401(k)) allows for the complete or partial distribution of the account balance. Assets are not pooled and the individual is expected to “draw down” his/her own balance during retirement years. The obvious challenge is to achieve meaningful returns while taking monthly withdrawals and, all the while, not running out of money.
The Annuity Plan can best be described as the perfect combination of “defined contribution” and “defined benefit.” There is flexibility and choice during the accumulation phase (the defined contribution part), and the protection of lifetime income during the retirement phase (the defined benefit part). The retirement industry is grappling with ways to provide exactly what the Annuity Plan does. Unfortunately, defined contribution plans governed by ERISA are not permitted to “self-annuitize” the way the Annuity Plan and other denominational church plans do.
Yes, and this is an important distinguishing feature of the Annuity Plan. Twenty percent (20%) of employer contributions (along with 100% of personal or employee contributions) may be withdrawn in the form of a lump sum at that time. At annuitization, members must convert at least 80% of employer contributions to an annuity.
Withdrawal is limited to 20% of employer contributions, not employee contributions. (See #5, above.) The ultimate goal of the Pension Boards retirement program is to provide meaningful lifetime benefits to a member and his/her joint annuitant (if any) or beneficiary(ies), which requires annuitization of a meaningful account balance. The restriction to only allow 20% of employer contributions to be withdrawn is done in an effort to achieve this goal.
Whenever you choose to begin receiving your annuity, you have the option of taking a lump sum distribution of up to 20% of employer contributions (as well as a lump sum distribution of up to 100% of personal contributions) and either keeping the distributable amount invested in a Retirement Savings Account (RSA) with the Pension Boards or rolling the distribution over to an IRA or other qualifying plans. In either case, tax deferral is preserved and money can be withdrawn when needed.
When an account balance is converted to an annuity, there are two required assumptions: a mortality table (or longevity assumption) and an interest rate. The mortality table is based on the overall experience of the persons in the plan. The interest rate has been chosen so that the Pension Boards can reasonably expect to earn 4% over time using a bond portfolio in the Basic Annuity and a diversified portfolio in the Participating Annuity. When an account is annuitized, each annuity payment is comprised of two pieces: earnings based on 4% and a return of a portion of principal (think of a reverse mortgage). Recall that the annuities provided are, in fact, variable annuities. So, to the extent that returns exceed 4% over time, annuity increases can be granted.
Remember that the Pension Boards program is a retirement income plan. Its goal is to provide income during retirement years to both the member and his/her joint annuitant. It is not designed to be a savings vehicle for college education, a “rainy day” fund for unexpected expenses, or other purposes. It should be noted that there are over 870 members over the age of 90 and 36 over the age of 100 currently in the Annuity Plan. So, while it is human nature to believe that one will not live an especially long life, the reality is that approximately 50% of members live less than the expected and the other 50% live longer. Statistics on life expectancy indicate that, for a married couple age 65, there is a 50% probability that at least one spouse will be alive 25 years later and a 25% probability that at least one will be alive 30 years later.
As discussed above, the purpose of the Annuity Plan is to provide retirement income. Once annuitized, the money is no longer available for other purposes. This is the only way that pooled assets can provide lifetime income. The plan does provide access to a lump sum distribution of up to 20% of employer contributions and up to 100% of employee contributions.
The church can set up its own 403(b) plan, but not without consequences. Federal law requires the church to be legally responsible for the plan, which includes the preparation and maintenance of a plan document, being a fiduciary with respect to the plan, and ensuring proper administration of the plan (which includes recognizing plan limits for contributions and ensuring that plan distributions are consistent with IRS requirements). The Pension Boards does these things for the Annuity Plan so that participating churches and employers do not have to.
Internal Revenue Code § 107 provides that gross income for a minister does not include:
The amount of a minister’s housing allowance cannot exceed the least of:
The minister’s housing allowance is much more than a “tax break” as that term is currently understood. The minister’s housing allowance is a complete exclusion of income for federal income tax purposes for those costs that legitimately come within its purview.
The Pension Boards, in its 100-year history, has never missed a pension payment calculated in accordance with the annuity selected. In the past, the Pension Boards offered annuities that adjusted every six months based on market values. Some of those annuities still exist because they were grandfathered when the holders of the annuities chose to not migrate to new annuities that were introduced in 2006. While such annuities do go down when the market goes down, they also go up when the market goes up.