Understanding 403(b)(9) Plans: The Retirement Solution Designed for Churches
Many pastors reach retirement age only to discover they lack adequate resources to step back from ministry—but it doesn't have to be this way. After decades of faithful service, shouldn't those who have shepherded congregations be able to retire with dignity and financial security?
Unfortunately, most churches and pastors remain unaware of the specialized retirement options designed specifically for them. Generic retirement plans often miss critical advantages that could significantly benefit ministry leaders and staff.
This is where 403(b)(9) plans enter the picture. These church-specific retirement plans offer unique advantages that can help ensure pastors retire with dignity while maximizing tax benefits that aren't available through standard retirement vehicles.
At Shepherd’s Wallet Financial Services, we've helped numerous churches implement these plans at minimal cost while maximizing benefits for their ministry staff. Let's explore how these specialized retirement solutions can benefit your church and the pastors and staff who serve your congregation.
The Basics of 403(b)(9) Church Retirement Plans
What is a 403(b)(9) plan?
A 403(b)(9) retirement plan is a tax-advantaged retirement plan specifically designed for churches and qualified church-controlled organizations. While it shares some similarities with traditional 401(k) and 403(b) plans, it includes church-specific provisions created by Congress to address the unique situations ministers face.
The plan gets its name from the section of the Internal Revenue Code that establishes its legal foundation. This specific code section was created to acknowledge the distinct financial circumstances of religious organizations and their employees.
Unlike standard retirement plans, a 403(b)(9) plan is designed with ministers' specific needs in mind, particularly around housing allowance benefits, which we'll discuss in more detail shortly.
Who qualifies to establish a 403(b)(9) plan?
Eligibility to establish a 403(b)(9) retirement plan is limited to churches and qualified church-controlled organizations. For retirement plan purposes, the IRS defines a "church" rather broadly to include:
Traditional churches and houses of worship
Conventions or associations of churches
Integrated auxiliaries of churches
Religious orders
Ministries with church affiliations that share common religious bonds and convictions
Church staff members, including pastors, administrative personnel, and other employees, can participate in these plans. This inclusive approach allows churches to provide consistent retirement benefits across their organization, from senior pastors to support staff.
The Unique Advantages of 403(b)(9) Plans
ERISA Exemption Benefits
One of the most significant advantages of 403(b)(9) plans is their exemption from the Employee Retirement Income Security Act (ERISA). ERISA establishes standards for retirement plans in the private sector, but compliance comes with substantial administrative requirements and costs.
Churches using 403(b)(9) plans can avoid:
Costly annual compliance testing
Complex reporting requirements
Certain fiduciary obligations that add administrative burden
Extensive plan documentation requirements
This exemption translates to meaningful savings. Our church clients typically save thousands of dollars annually in administrative costs compared to ERISA-governed plans. These savings can be redirected toward ministry priorities while still providing excellent retirement benefits.
Housing Allowance Preservation in Retirement
Perhaps the most valuable feature of 403(b)(9) plans for ministers is the preservation of housing allowance benefits into retirement. As you likely know, active ministers can receive a portion of their compensation as a tax-free housing allowance. What many don't realize is that this benefit can continue in retirement—but only under specific conditions.
When ministers receive distributions from a 403(b)(9) plan, they can designate distributions as housing allowance, maintaining this significant tax advantage. This benefit is not available with standard retirement plans or IRAs.
Let's consider an example of how impactful this can be:
Pastor James retires after 30 years of ministry with $500,000 in his church's 403(b)(9) plan. He withdraws $30,000 annually and properly designates it as housing allowance. With qualifying housing expenses, this allows him to receive this income tax-free (though self-employment taxes may still apply). Over 20 years of retirement, this could save him more than $120,000 in income taxes compared to a traditional retirement plan.
This benefit alone makes 403(b)(9) plans worth serious consideration for any church with ordained ministers on staff.
Denominational and Values-Based Investment Options
Many 403(b)(9) providers offer investment options aligned with faith values. These can include:
Denominational investment funds that support church-related initiatives
Socially responsible investment options that avoid companies involved in activities contrary to the church's values
Faith-aligned investment choices that support positive impact
These options allow church employees to build retirement savings while maintaining consistency with their faith convictions. Rather than choosing between financial growth and values alignment, 403(b)(9) plans can offer both.
Implementation and Administration
Cost Structure
Understanding the cost structure is crucial for churches considering a 403(b)(9) plan. At Shepherd’s Wallet Financial Services, we believe in transparent pricing to help churches make informed decisions.
Typically, implementation involves:
A one-time setup fee (our standard fee is $950)
Administrative costs that can be structured in various ways
Investment management fees based on assets in the plan
What surprises many churches is that through our partnerships, we can often implement these plans at zero ongoing cost to the church itself. This makes providing this valuable benefit feasible even for smaller congregations with limited budgets.
Our sliding scale for investment management helps ensure that as your plan grows, the percentage costs decrease:
For plans under $500,000: 1.65%
$500,001-$1,000,000: 1.35%
$1,000,001-$2,500,000: 1.20%
And continuing to decrease as assets grow
PATH Act Advantages for Plan Transitions
For churches with existing retirement plans looking to transition to a 403(b)(9) plan, the PATH Act (Protecting Americans from Tax Hikes Act) provides significant advantages. Prior to this legislation, transitioning from an ERISA plan to a non-ERISA plan was complicated and required individual participant actions.
The PATH Act allows for direct transfers from existing ERISA-governed plans to church 403(b)(9) plans without requiring individual participants to make the transfers themselves. This streamlines the transition process substantially.
This provision eliminates one of the major barriers churches previously faced when considering a switch to a more appropriate retirement plan, allowing for seamless transitions that preserve existing retirement assets.
Administrative Simplicity
One concern we often hear from churches is about administrative burden. Fortunately, 403(b)(9) plans can be structured to minimize the workload on church staff.
Through partnerships with third-party administrators, we help churches establish systems that handle:
Contribution processing
Participant enrollment and education
Compliance monitoring
Distribution management
Reporting requirements
Our goal is to provide a retirement solution that doesn't create additional work for your already busy church staff, allowing them to focus on ministry rather than plan administration.
Common Questions and Concerns
1. "Isn't a 401(k) just as good for our church?"
While 401(k) plans work well for businesses, they aren't optimized for churches. Key differences include:
Administrative costs: 401(k) plans typically cost more to maintain due to ERISA compliance requirements.
Housing allowance benefits: 401(k) plans cannot offer the housing allowance in retirement feature that can save pastors significant money in retirement.
Compliance complexity: Churches using 401(k) plans face more regulatory hurdles and testing requirements.
Over a 20-year period, the combined impact of higher administrative costs and lost tax benefits can easily exceed $100,000 per pastor—money that could otherwise support ministry or provide better retirement security.
2. "Are our investment options limited with a church plan?"
Not at all. Modern 403(b)(9) plans offer robust investment menus including:
Low-cost index funds
Actively managed investment options
Target-date funds for simplified investing
Faith-aligned investment choices
Participants typically have access to diversified investment options across asset classes, allowing for appropriate risk management and growth potential based on individual needs and time horizons.
3. "What happens if a pastor changes churches?"
Retirement funds in a 403(b)(9) plan belong to the individual participants, not the church. When a pastor changes churches, they have several options:
Leave the funds in the former church's plan (if the plan allows)
Roll the funds to their new church's 403(b)(9) plan
Roll the funds to an IRA (though this would lose the housing allowance benefit for future distributions)
This portability helps ensure that pastors maintain their retirement savings even as they follow God's calling to different ministry settings.
Getting Started: Your Church's Path Forward
Step 1: Initial Church Consultation
The first step is a comprehensive consultation to understand your church's specific needs. We recommend involving:
The senior pastor and any other ministerial staff
Church business administrators or treasurers
Finance committee or board members with financial oversight
Before this meeting, gather information about:
Any existing retirement plans
Current contribution patterns
Staff composition, especially ordained ministers
Budget considerations for retirement benefits
Step 2: Plan Design & Analysis
Based on the consultation, we'll design a customized plan that addresses your church's unique needs. This involves:
Collecting census data on potential participants
Reviewing investment options aligned with your values
Analyzing cost structures and administrative needs
Preparing recommendations for leadership review
This analysis typically takes 2-3 weeks and provides the foundation for an informed decision about moving forward.
Step 3: Implementation Roadmap
Once your church decides to proceed, implementation follows a clear roadmap:
Completing and executing plan documents
Setting up administrative systems and processes
Developing employee communication and education materials
Establishing contribution mechanisms
Training relevant staff on basic procedures
From start to finish, the process typically takes 4-6 weeks, with our team guiding you through each step.
Conclusion
The 403(b)(9) church retirement plan represents one of the most powerful financial planning tools available specifically for churches and ministry staff. By taking advantage of this specialized option, churches can:
Reduce administrative costs and compliance burdens
Help ensure pastors maintain valuable housing allowance benefits in retirement
Provide faith-aligned investment options for all staff
Create a sustainable path to retirement for those who serve the church
At Shepherd’s Wallet Financial Services, we believe in the biblical principle found in 1 Timothy 5:17: "The elders who direct the affairs of the church well are worthy of double honor, especially those whose work is preaching and teaching." One practical way to honor those who serve in ministry is to help ensure they have financial security for their future.
We invite you to schedule a consultation to explore how a 403(b)(9) plan could benefit your church and pastoral staff. Our team specializes in helping churches navigate these decisions with clarity and confidence, with the goal of strengthening both your ministry's financial foundation and the long-term well-being of those who serve.
About the Author
Seth Scott, AAMS®, is the Founder and Lead Financial Planner at Shepherd’s Wallet Financial Services. With over 20 years of ministry experience as a worship leader and church board member, Seth combines financial knowledge with a deep understanding of ministry contexts. He holds a Series 65 license, is a CTEC-certified tax preparer, and is currently pursuing his Certified Kingdom Advisor designation. Seth is passionate about serving as a "financial armorbearer" for those who provide spiritual covering through their ministry work.