403(b) Retirement Distributed as Housing Allowance

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Question:

A pastor recently left his ministry to start a business. While in the ministry, he had a 403(b)* plan which he contributed to for over 12 years. When he retires, are the distributions from this 403(b) eligible for housing allowance, or will the IRS see this as not housing allowance eligible since he is no longer a minister?
Answer:
The 403(b) plan will be eligible for housing allowance, as long as the church designates it as such. A previous blog post provided some additional information on this issue. Excerpts and a link to the post merit revisiting:"A retired minister may receive part of his or her pension benefits as a designated parsonage allowance based on past services. Trustees of a minister’s retirement plan may designate a portion of each pension distribution as a parsonage allowance excludible under IRC § 107 (Rev. Rul. 63-156, 1963-2 C.B. 79, and Rev. Rul. 75-22, 1975-1, C.B. 49)" (IRS "Minister Audit Technique Guide" published in April 2009). 
http://ministrycpa.blogspot.com/2010/09/housing-designation-of-403b-plan.html Since it may be a long time between the pastor’s discontinuance of his employment at the church and the time when he receives distributions, he must reestablish contact with its leadership and request a formal housing designation in writing.  We generally recommend that the church designate 100% of all future distributions from the 403(b) plan as housing allowance. The minister must then exclude only that portion of the distributions from income for which he has met the three-part test for housing allowance. (See other postings on this blog for a refresher of these rules.)
http://ministrycpa.blogspot.com/2008/02/ministers-retirement-distributions.html

* 403(b) plans are described in the Internal Revenue Code Section 403, subparagraph b, hence the name "403(b) plans."