Presented by Elliot Johnson at the 2012 Covenant Midwinter. Topics covered: • Financial & Tax Issues for Ministers • Covenant Benefit Programs • Investment/Retirement Considerations • Covenant Financial Resources

1. $treet $mart Finance$
for Covenant Pastors
Facilitated by: Elliott Johnson, Controller;
& Assistant Director of Pensions
Today we will be
covering the
following topics:
H. Financial & Tax Issues for Ministers
I. Covenant Benefit Programs
J. Investment/Retirement Considerations
K. Covenant Financial Resources

2. 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

3. Objectives for this seminar
Covenant Benefit Programs
Pension Plan
 Bethany Benefit Service
C. Investment Considerations
 Retirement Planning
D. Covenant Financial Resources
 Covenant Trust Company
 National Covenant Properties
E. Q & A

4. Resource Materials
Handouts:
Retirement Planning for Covenant Pastors &
Missionaries
Minister’s Guide for Income Tax – Conrad Teitell
Covenant Pension Plan – Summary Plan Description
Covenant Pension Plan – “All you wanted to know…”
Bethany Benefit Service –An Overview
Covenant Trust Company
National Covenant Properties
Resource Materials:
The 2011-12 Compensation Handbook for Church
Staff –Cobble & Hammer
Church & Clergy Tax Guide – Richard R. Hammer

5. 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.

6. 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.

7. 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).

8. Definitions continued
Employer 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.

9. Financial Reporting
Tips 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.

10. Financial Reporting
Tips 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?!)

11. Financial Reporting
Tips 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.

12. Scriptural
Considerations
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.

13. 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.)

14.  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).

15.  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.

16. Example of Pastor vs
Non-Pastor Taxes
Pastor Janitor
Joe 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

17. Example of Pastor vs
Non-Pastor Taxes
Pastor Janitor
Joe John
Base Salary $28,825 $50,000
Optional
(Include
Federal W/H $8,800 SECA) $5,000 10.00%
FICA & Self
Medicare W/H - 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

18. 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

19. 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.

20. John Jones W-2
36-1234567 50,525.00 5,000.00
Evangelical Covenant Church 50,525.00 3,100.00
1234 Main Street 50,525.00 725.00 *
Anywhere, IL 60060
123-45-5678
John Jones c 25.00
28678 Main Street
Libertyville, IL 60055
IL 36-1234567 50,525.00 1,500.00
2011
*Assumes 7.65% rate (not in 2011)

21. 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

22. 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.

23. Pastor Joe Smith W-2
36-1234567 28,825.00 8,800.00
Evangelical Covenant Church
1234 Main Street
Anywhere, IL 60060
123-45-5678
Joe Smith
c 25.00
678 Oak Street
Libertyville, IL 60055 Housing Allowance
25,000.00
IL 36-1234567 28,825.00 865.00
2011

24. 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.

25. 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.

26. 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.

27. 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.

28. 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.

29. 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.

30. Sample Letter Requesting
Housing Allowance
To: Elliott Johnson
ECC Business Office
From: ____________________________
For the calendar year 2012, I request that my
housing allowance be $____________________.
2011 amount: $_____________________
Signed:
______________________________________
Date: ___________________

31. 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

32. 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!

33. Covenant Benefit Programs
Covenant Pension Plan
Bethany Benefit Service
Retirement Planning

34. Covenant Pension Plan
Mission 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.

35. 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.

36. 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%).

37. 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.

38. 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.

39. 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.

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

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

42. 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.

43. 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.

44. Bethany Benefit Service
Governed 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.

45. Bethany Benefit Service
Medical
Dental (including Orthodontia)
Prescription Drug Benefit
Long-Term Disability
Life Insurance
Vision
Long-Term Care
Employee Assistance Program

46. Investment Considerations
Asset Allocation

48. Investment Considerations
Asset Allocation
Timing

50. Investment Considerations
Asset Allocation
Timing
Some Key Principles

51. Time is Money!
Jane started saving at age 25
and put aside $25 weekly
until age 65.
400000
350331
John saved $25 a week too, 350000
but waited until age 35 to 300000
start. 250000
200000
153197
Jane put aside only $13,000 150000
more than John, but at 100000
age 65 had accumulated 50000
$197,134 more than John! 0
Age 65
John Jane

52. Key Principles for Investors
Save 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.

53. 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.

54. Investment Considerations
Asset Allocation
Timing
Some Key Principles
Possible Investment Vehicles

55. Possible Investment Vehicles
403(B) – Regular and Roth
Traditional IRA
Roth IRA
Non-tax advantaged

56. Comparison of Popular
Investments
Payroll Pre-tax Earnings Required Taxability of
Deduction Contribution Grow Tax Distributions Distributions
Deferred
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 No No No No Ordinary/
advantaged Capital Gains

57. Retirement Considerations
Life 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.

58. 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.

59. Retirement: the 3-legged stool
Three major sources of retirement
income:
 The employer
 The government
 The individual

60. 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.

61. 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.

62. 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

63. 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.

64. Examples of Different
Retirement Savings Methods
Roth Roth
Activity 403(b) 403(B) 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

65. 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/moneymag
Web 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 have
good web sites.

66. 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

67. Thank you!
Please don’t hesitate to contact me if you
have any questions.
elliott.johnson@covchurch.org
773-907-3362