Copyright © 2002, United States Conference of Catholic Bishops, Inc. All rights reserved.
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IV. Compensation of Priests: Pension
and Other Post-Retirement Benefits
IntroductionCanon law stipulates that the diocesan bishop must provide suitable support and housing for all clergy upon their retirement from active service. In the United States, the USCCB has promulgated a set of norms in light of this provision of canon law. In adhering to these norms, each diocese has developed its own approach to providing for the well-being of its retired priests. Many dioceses have adopted defined benefit plans to provide pension benefits for retired priests. In some cases, dioceses sponsor tax-sheltered annuity plans or other forms of defined contribution plans. Additionally, dioceses may provide other post-retirement benefits, such as medical and dental benefits, long-term care, and housing allowances. Although there are numerous types of benefit programs, all dioceses are obligated to provide financial support for retired priests in accord with the gospel spirit and the charisms of a given faith community.
The accounting treatment for pension and post-retirement benefit plans is specified in the following Statements of Financial Accounting Standards (SFAS):
Adherence to these pronouncements is required by generally accepted accounting principles (GAAP) for all entities, including the Catholic Church. (These pronouncements apply to lay employee plans as well as clergy plans.)
- SFAS No. 87—Employers' Accounting for Pensions
- SFAS No. 88—Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination of Benefits
- SFAS No. 106—Employers' Accounting for Postretirement Benefits Other Than Pensions
- SFAS No. 132—Employers' Disclosures About Pensions and Other Postretirement Benefits, an Amendment of FASB Statements No. 87, 88, and 106
Accounting Treatment: Discretionary Payments vs. Plan ObligationsRetired priests' benefits may or may not be formalized in a written plan document. In the case of benefits provided without a written plan document, it is important to distinguish between benefits that are provided on a consistent basis over time and those benefits that are discretionary. Benefits that are provided on a case-by-case basis, without any consistency or expectation thereof, represent discretionary payments and may be accounted for on a pay-as-you-go (cash) basis.
The regular, systematic practice of providing certain benefits to retired priests (such as monthly pension payments, payment of premiums for Medicare supplemental insurance policies, payment of medical and dental bills, housing subsidies, etc.) is evidence of a post-retirement benefit plan, whether or not a written plan document exists. The benefits may be in the form of a reimbursement to the retiree or direct payment to a provider. Under these circumstances, benefits are viewed as deferred compensation arrangements whereby the diocese agrees to future benefits in exchange for current services. Therefore, the expected cost of providing pension and other post-retirement benefits to priests is to be recognized over their years of active service in the diocese. The obligation of the diocese for pension and other post-retirement benefits is to be fully accrued by the date that full eligibility for benefits is attained. The Practitioners Publishing Company's Guide to Preparing Nonprofit Financial Statements summarizes the standards on accounting for pension costs and other post-retirement benefits.
An analysis of payments made to, or on behalf of, retired priests should be conducted to determine whether—despite the absence of a written plan—there is a pattern of payments that represent a systematic practice of providing benefits that should be accounted for in accordance with SFAS Nos. 87 and 106. Additionally, consideration should be given to formalizing existing practice in a written plan document. This provides clarity to the priests and eliminates misunderstandings as to exactly what benefits they can expect.
Status of Priests' Retirement PlansConsultation with diocesan legal counsel or pension counsel is necessary to determine whether a diocesan retirement plan (for lay employees or priests) meets the requirements of the Internal Revenue Code (IRC) either as a qualified defined benefit or defined contribution plan or as a section 403(b) tax-deferred annuity, and whether the plan qualifies as a "church plan" under section 414(e) of the Code. Although qualified church plans are not subject to ERISA (Employee Retirement Income Security Act) vesting, participation, and funding rules and are not required to file annual Form 5500, such plans must nonetheless comply with numerous technical requirements, including certain pre-ERISA standards. Because pension legislation is amended frequently, periodic compliance reviews of diocesan priests' retirement plans are advisable.
Housing Allowance DesignationIRC section 107 provides an exclusion from gross income for a parsonage (housing) allowance provided to clergy (active as well as retired). This includes the rental value of a home furnished to him as part of compensation or a housing allowance, to the extent that the payment is used to rent or provide a home. In order to qualify under IRC section 107, the trustees of the priests' retirement plan, or the bishop, must designate a portion of each payment as a housing allowance excludable under IRC section 107.
The amount excludable from gross income as a housing allowance is limited to the least of the following three options:
The sum of all pension payments issued in a calendar year are to be reported as the gross distribution amount on form 1099-R. If the diocese has properly designated all, or a portion of the pension payments as a housing allowance, the taxable portion of the total payments cannot be determined by the diocese, since the amount excludable from income as a housing allowance has to be determined by the taxpayer based on the three options shown above. Therefore, the taxable amount on form 1099-R should be left blank and the box “taxable amount not determined” checked.
- The amount actually used to provide a home (including rent, furnishings, repairs, insurance, taxes, utilities—but not food or entertainment)
- The amount officially designated as a housing allowance
- The fair rental value of the home, including furnishings, utilities, garage, etc.
The exclusion from income for federal income tax purposes applies to both active and retired clergy. The exclusion from income for Self-Employment Contribution Act purposes applies only to retired clergy.
Funding PlansThe method of funding these benefit plans, which is varied and often complex, does not impact the accounting treatment. Some dioceses fund pension and other post-retirement benefits on a pay-as-you-go basis, while others pre-fund these obligations. Pre-funding can take several forms. Some dioceses set money aside in a separate account or simply designate a portion of their unrestricted net assets. Some dioceses establish a separate trust arrangement, thereby transferring the assets off the balance sheet and legally restricting the use of the assets.
Consideration should be given to pre-funding pension and post-retirement benefit plans. Insufficient liquid assets may result in the diocese's inability to meet its obligation to retired priests. Health care costs are expected to increase each year. Medical costs as a percentage of GNP are also expected to increase. In addition, the increase in life expectancy has also resulted in an increase in projected benefit payments to retirees. The issue of recognizing and funding these future obligations is more critical today than ever. Furthermore, when pension and post-retirement plans are pre-funded, assets are invested so as to generate a return on investment that will then reduce the amount of future funding needed.
Only assets that are segregated and legally restricted for pension and post-retirement benefits qualify as plan assets under the provisions of GAAP. Assets that are not segregated in a trust or otherwise effectively restricted so that they cannot be used by the diocese for other purposes do not qualify as plan assets.
Some dioceses impose assessments or sponsor collections for the purpose of generating funds to provide these benefits and/or fund the future obligation. Regardless of the source or timing of funding, the net present value of the future liability for accrued pension and post-retirement benefit obligations should be recorded on the financial statements of the entity that has the future liability.
Guidelines for the Retirement of BishopsA bishop gives outstanding proof of fraternal charity and collegial affection when in accordance with the venerable example of antiquity he readily and to the best of his ability (cf. LG 23) assists his brother bishops, sympathetically noticing their need and coming to their help . . . Directory on the Pastoral Ministry of Bishops, Congregation for Bishops, May 31, 1973, no. 53)
Additional Basic Benefits
- Beginning July 1, 2001, the stipend recommended for bishops in retirement will be a minimum of $1,500.00 per month, to be adjusted as the level of retirement support for the priests of the diocese is adjusted.
- In addition to the monthly stipend, it is also recommended that in fraternal charity and solicitude each diocese also provide the following:
- Appropriate housing and board
- Health and welfare benefits, including major medical and the full cost of all medical and hospital care. This includes any applicable coverage for home health care, assisted living facilities or long-term care facilities
- An office with secretarial assistance commensurate with the retired bishop’s needs
- Suitable funeral and burial
- Transportation including an automobile for personal use
- Travel expenses (i.e., transportation, lodging, food, etc.) to allow the retired bishops to attend:
- Provincial meetings and workshops
- Regional meetings, workshops and retreats
- Meetings of the USCCB
- Ad limina visits to the Holy See
It is further recommended that the official residence provided by the diocese is for the use of the diocesan bishop.
If it seems advisable in order to seek some degree of uniformity, the dioceses of a given region or province, in a spirit of subsidiarity, should take upon themselves the responsibility to interpret and implement these guidelines, taking into account the local economy. Only in this way can the differing living costs in the various regions of the country be factored into the consideration of retirement benefits.
The U.S. Conference of Catholic Bishops will review these guidelines again in 2005 to ascertain the continuing validity.