“True leaders with integrity foster and inspire loyalty. Beware of leaders that demand it without question.” — Ken Saxe
Ken Saxe, Connections Pastor
Shrewsbury Assembly of God
- Is the rate of worship attenders to conversions / baptisms growing or declining?
- Is the percentage of worship attenders who also attend Sunday school / small groups growing or declining?
- Do you have a clearly defined disciple-making strategy? And is the average attender familiar enough with it to repeat it?
- Are you multiplying leadership?
- Have you become an internally focused church?
Source: ECFA Facts & Trends 5-6/15
By now most churches have figured out that they can no longer continue to pay the pastor’s or other employees’ health insurance premiums the same way that they used to. A common practice amongst many smaller churches and ministries is to help their employees offset the cost of healthcare by either reimbursing them for the cost of insurance premiums, or paying health insurers directly for the cost of private health insurance that employees obtain. Churches can no longer do that because the Affordable Care Act (ACA) amended the law to no longer allow (with one exception) churches and ministries to reimburse the pastor or other employees their health insurance premiums as a tax-free benefit.
Let us start from the beginning
In 2010, the ACA was passed by Congress and signed into law by President Obama. The ACA required all “applicable individuals” to maintain “minimum essential” healthcare coverage by 2014 or pay a penalty. In addition, it mandated all employers with 50 or more full-time employees to provide health insurance to their employees or pay a fine. This mandate was initially set to begin in 2014, but was delayed until 2015 and 2016.
There are two provisions in the ACA that affect churches. They are as follows:
- The employer mandate: This mandate requires all churches and ministries with 50 full-time employees to provide healthcare coverage. Since most churches and ministries across America have less than 50 full-time employees, they are not affected by the “employer mandate” of the ACA.
- Employer payment plans: These are more commonly known as medical reimbursement plans. Many churches have relied on the convenience of section 106 as a way to offer pastors and other church employees tax-free medical reimbursements. However, in 2013 the IRS addressed the continuation of section 106 medical reimbursement plans, in accordance with the ACA, via IRS Notice 2013-54. The latest ruling is that employer payment plans do not meet the requirements of the ACA.
Costly penalty for failing to comply
If your church has been reimbursing the pastor or other church employees for their healthcare insurance premiums, it is subject to a penalty of $100.00 per day. However, that penalty does not begin until June 30, 2015. This temporary transitional relief only applies to employers with fewer that 50 full-time employees. Therefore, if your church currently provides an employer payment plan (section 106 medical reimbursement) to your employees, then you must stop or have an alternative option that complies with the ACA by July 1st, 2015.
An exception to the rule
You may be wondering if there are any exceptions to the costly penalty of $100 per day, per affected employee. Well, there is some good news to some employers that provide employer payment plans.
According to IRS Notice 2013-54, “The market reforms do not apply to a group health plan that has fewer than two participants who are current employees on the first day of the plan year.” Therefore, since many smaller churches and ministries are generally only able to pay the pastor, the $100-per-day penalty would not be applicable for providing a section 106 medical reimbursement plan (employer payment plan) to the pastor. Remember,this is only true if the church has one employee, such as the pastor or church secretary.
Additionally, you want to keep in mind once your church or ministry has 2 or more employees that you will no longer be able to provide such employer payment plan benefits to the pastor or any other employee.
Solution for churches with 2 or more employees
Many pastors and leaders have wondered if there are any answers or strategies for small churches and ministries to consider.
The IRS actually gives a solution for such organizations in Notice 2015-17. The IRS states that as long as the employer (church) “does not condition the payment of additional compensation on the purchase of health coverage”, it will not be considered a group health plan as described in IRS Notice 2013-54. In other words, the church may give a raise to its employees to help offset the coverage of health insurance, but it may not designate the additional compensation for health coverage purposes. Let me give you an example:
Church XYZ Pays Pastor B a salary of $60,000.00 per year. They also provide Pastor B a medical reimbursement plan that reimburses his healthcare insurance premiums in the amount of $12,000.00 per year. Church XYZ realizes that it can no longer provide Pastor B the $12,000.00 medical insurance reimbursement because of the new requirements of the ACA. What can they do to help the pastor with his insurance premiums? The only viable option is for the church to give Pastor B a raise of $12,000.00 and then let him use $12,000.00 to pay for his insurance.
This does, therefore, raise another question. Will Pastor B have to pay taxes on the $12,000.00? The answer is YES! However, under the new provisions of the law, it appears that his health insurance premiums after rebates will leaver Pastor B with enough money to pay the new taxes. The bottom line is that under the new requirements of the ACA, it is entirely possible that many pastors will still break even.
Reimbursements can save your organization from a tough spot by allowing staff the freedom to make needed purchases for ministry operations when a church debit/credit card or check is not available. But reimbursements can also get you into a world of trouble if you do not handle them properly.
When done right, the ability to receive reimbursements can be very convenient to an organization. With a well-established reimbursement policy, your staff knows when expenses are reimbursable and when they are not. This plan also keeps the board from making costly mistakes that can jeopardize a nonprofit’s tax-exempt status.
The accountable reimbursement plan
The IRS defines reimbursements as “a system or plan that an employer uses to pay, substantiate, and recover the expenses, advances, reimbursements, and amounts charged to the employer for employee business expenses.”
Simply put, reimbursements are a way for staff members to recover personal expenses made on behalf of their employer’s business.
The key here is that any employee expense that is reimbursed must be substantiated, i.e. there must be proof that the expense was a necessary business expense. Documenting the “when, where, and why” of an expense holds the employee or staff member accountable for the reimbursement he or she is requesting. This documentation is the proof that the employee’s funds were truly used for a business expense necessary to keep your organization going. The fact that the employee’s expense on behalf of the business was “accounted for “makes the reimbursement nontaxable.
What can be reimbursed?
Your organization can reimburse legitimate business expenses needed in order to operate your corporation. There must be a business related reason for the expense to be reimbursed.
Even with this understanding, determining where to draw the line with reimbursements can be fuzzy. Sometimes your ministry may not have funds to reimburse every expense. If you have an established budget, this makes managing reimbursements much easier. Those with access to spending accounts should know the types of purchases they are authorized to make. Clearly communicating to the staff that only expenses made according to the church’s budget will be reimbursed helps ensure that everyone is on the same page.
What cannot be reimbursed?
Remember that every reimbursed expense must be substantiated. Usually, substantiation is proved using receipts; however, the receipts should be accompanied by a log detailing where all monies were spent in order for the expenditure to be considered accountable. If an expense is made, but no receipt is retained and no log is kept, then there is no way to validate the expense and therefore, it cannot be considered accountable.
When reimbursed funds are not returned
If an employee receives too much of a reimbursement, or if he or she receives an advanced reimbursement and does not use the entire amount, the unused funds must be returned to the church/ministry. Any unreturned funds must be counted as taxable income for the person who received them because there is no substantiation to prove that the funds were used for church purposes.
Any advanced reimbursement that is not used must also be returned in a timely manner. The IRS states in the above mentioned Publication 463 that you have 120 days to return the funds. After that time frame the reimbursement must be considered taxable income and listed on the employee’s W2, or on the 1099 for an independent contractor.
What are non-accountable reimbursements?
Many churches and ministries are guilty of allowing non-accountable reimbursements. Here is one example. A church gives the pastor a gas allowance of $100.00 per month. The church board does it to cover the pastor’s gas as he uses his personal car to do church ministry. Every month, the church issues him a check for $100.00 and writes “gas allowance” on the memo, assuming that he is being reimbursed for his gas. While that may be true, the IRS considers this a non-accountable reimbursement because there is no official record of the actual miles for which he is being reimbursed. Under current regulation, non-accountable reimbursements must be treated as gross income and must be reported on the recipient’s tax return as wages.