Over the past six years working at the Board of Retirement, I have had many discussions with ministers about opting out of Social Security. Some of those discussions were with young ministers contemplating the possibility, while other discussions were with older ministers who wished they hadn’t opted out. In these discussions, I learned most people do not fully understand what it means to opt out of Social Security, and what they should do if they make the choice to do so.
Decision of a Lifetime
This is not a decision to make with haste or to take lightly. It is one of the most important financial decisions a minister will make. The decision lasts a lifetime. Under current law, opting out of Social Security is irrevocable. Because it is irrevocable, it can have great financial consequences. (A bipartisan bill, the Clergy Act of 2020, was proposed last year in the House of Representatives and referred to committee. No action has been taken since then. If Congress passes this legislation, it will be only the second time they have allowed an opt-in window in the past 20 years.)
How Does Opting Out Work?
U.S. tax code makes a provision for ordained ministers to opt out of Social Security using Form 4361, which exempts them from paying the 15.3% self-employment tax on their ministerial earnings. Ordained ministers must do this by the second year in which they had ministerial income of at least $400. Keep in mind, this is only for ministerial income and not income a minister may earn from a secular job.
Unfortunately, many have chosen to opt out because they listened to bad advice. Many ministers considering it, or who already opted out, did so because they wanted to save on taxes or didn’t think Social Security would be around for them to benefit. These are not valid (or legal) reasons to do so. In fact, they both incur perjury. IRS Form 4361 states:
I am conscientiously opposed to, or because of my religious principles I am opposed to, the acceptance (for services I perform as a minister…) of any public insurance that makes payments in the event of death, disability, old age, or retirement; or that makes payments toward the cost of, or provides services for, medical care. Under penalties of perjury, I declare that I have examined this application and to the best of my knowledge and belief, it is true and correct.
Ordained ministers cannot opt out of Social Security because they think it is a bad investment, or they don’t want to pay taxes. The only legal reason ministers can opt out is because they certify opposition on the basis of religious principle to acceptance of public insurance. (For more information, see IRS Publication 517.)
What It Means
Ministers need to understand the implications of this irrevocable choice. A minister should not only consider ethical and legal implications but financial ones as well. It could leave them and their families woefully unprepared financially later in life. When a minister opts out of Social Security, he forfeits much more than a retirement benefit. These ministers not only lose the retirement benefit, they forfeit Medicare coverage, disability benefits if they become disabled, and survivor benefits for their spouse and children.
Ministers who are thinking about opting out (or who have opted out already) should really consider putting the following in place to protect themselves and their families:
- Retirement savings plan. Since you won’t be receiving a Social Security check, you will need a retirement savings plan like the 403 (b)(9) at the Free Will Baptist Board of Retirement. You could take the money you are not paying for your self-employment taxes and invest it in a retirement account. Experts suggest you save 15% to 20% for retirement. If that amount is too much at first, start lower but work towards achieving that goal.
- Term life insurance. If something happens to you, and you have opted out of Social Security, your family will not be eligible to receive survivor benefits.
Therefore, you should have term life insurance to help care for your family. It is typically advised to have eight to ten times your annual income in life insurance, but you may need more than the average person.
- Long-term disability insurance. You will be ineligible for the safety net of disability insurance. It would be wise to maintain long-term disability insurance to protect your family in the event of an accident or injury that keeps you from working.
- Long-term care insurance and health insurance. Opting out of Social Security also means you are not eligible for reduced-cost Medicare coverage. Health care costs are expensive and could be your biggest expense in retirement. Consider long-term care insurance to cover the cost if you need to live in a long-term care facility. You also may need to secure health care coverage to replace Medicare.
Before making the choice to opt out of Social Security, a minister should carefully consider what it means and the long-term implications. It would be wise to consult a tax or legal professional. If you would like more information about ministers and Social Security contact us at 877-767-7738, or visit the Social Security Administration at SSA.gov.