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Nonprofit Law/2014 Pastor Compensation/Benefits

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QUESTION: Happy new year to you and thank you for your service.

For 2014 taxes, may a church (small, 2 employees) directly pay or reimburse pastor/employees and their spouses for their medical insurance and not have it count as taxable income?  It is my understanding that this is permissible.

In addition, may a church directly pay or reimburse pastor/employees and their spouses for reasonable medical expenses not covered by insurance (i.e. deductibles)?

I am asking this largely because of any effect of the ACA.  

Thank you very much.

ANSWER: See IRS Publication 517 "Social Security and Other Information for
the Members of the Clergy and Other Religious Workers" at:
http://www.irs.gov/pub/irs-pdf/p517.pdf and you will see that it is marked under the title on page 1, "For use in preparing 2013 Returns".  Usually, by February 1st the IRS will post the next year's guide.

But you can read, starting on page 9 under "Income tax: Income and Expenses" and you will see nothing special related to church employees as to medical in relation to employees of other organizations. I have in my profile that this free forum is only for general questions about IRS federal exemption issues of 501(c)(3) organizations. Your question is related to normal employment tax law questions for individuals, and, therefore, that is beyond the scope of this free forum.  The church certainly may pay for such, but then the question is whether it is taxable.  If it is taxable then it is part of the compensation given to the employee.

Harvey Mechanic
Attorney at Law
Harvey108@hotmail.com

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.

---------- FOLLOW-UP ----------

QUESTION: Thank you Mr. Mechanic,

What about if the church has a HRA/IRC 105 plan written up that specifies insurance and medical expenses are to be covered?  I thought this was permissible.

Again, thank you very much!!

ANSWER: The IRS Publication 15-B discusses taxable and non-taxable fringe benefits for all employees (not just church employees) and is available at http://www.irs.gov/pub/irs-pdf/p15b.pdf and specifically on the right side of page 6 is a discussion of "Accident and Health Benefits" (exclusions from income).  There you see listed are

"Contributions to the cost of accident or health insurance including qualified long-term care insurance."

"Payments or reimbursements of medical expenses."

" that provides benefits for your employees, their spouses, their dependents, and their children (under age 27) in the event of personal injury or sickness. The plan may be insured or noninsured and does not need to be in writing."

You are welcome.

Harvey Mechanic
Attorney at Law
Harvey108@hotmail.com

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.

---------- FOLLOW-UP ----------

QUESTION: Hi Mr. Mechanic,

In my original question, I asked about reimbursements being affected by the ACA.  I am thankful for your clarification to my follow-up question, but I am still wondering about the ACA.  You refered me to pub 15-B which helps, but I have read about "IRS Notice 2013-54 [that] communicated reimbursements [for health care coverage] could no longer be made on a tax-free basis beginning January 1, 2014 due to ACA market reforms." (ECFA.ORG).

So, I'm still wondering if the payments and reimbursements made to pastors for 2014 are taxable, and if they are taxable in 2015.

Thank you very much.

Answer
I have in my profile that this free forum is only for general questions about IRS federal exemption issues of 501(c)(3) organizations. The question you ask is not about exemptions but about employer tax responsibilities.  Nonetheless, I have given you some links.  Here is another
http://www.irs.gov/pub/irs-drop/n-13-54.pdf which is that IRS notice 2013-54 that you referred to. You may find, though, that the IRS notice applies only to businesses that are subject to mandates on insurance.  Note that there have been some delays ordered by President Obama. http://goo.gl/BORDR4

Harvey Mechanic
Attorney at Law
Harvey108@hotmail.com

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.

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Harvey Mechanic

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I am an attorney and I volunteer time to answer general questions about U.S. Federal income tax issues of nonprofit 501(c)(3) public charities only. Those questions could be about establishing and maintaining legal requirements for such non-profit organizations in the United States, including Internal Revenue service filings and requirements. I will not be working on this free forum to answer questions about Nonprofit's possible unrelated or for-profit businesses or how to fill out forms. This forum is only for general questions about federal tax law, not as the law applies to your specific situation. If you do not make your question public then I will not be spending much of my donated time on answers that would not benefit the public. If you have other questions, please contact me at Harvey108@hotmail.com I will reply from my email. In any case, do not reveal confidential information to me until after I have contracted with you to provide personal legal services. My responses on this forum are intended to be general statements of law, should not be relied upon as legal advice, and do not create an attorney/client relationship. For me to consider your individual situation and how the law applies, I would need to gather extensive information about the situation. To search my previous answers you can do a Google search by "site:allexperts.com/q/nonprofit" without the quotes and then add your search terms before hitting enter.

Experience

I have been practicing law and especially the law of nonprofit organizations since 1990 when I was admitted to the New York Bar and I have maintained my status with the Bar since that time.

Education/Credentials

B.S. Columbia University in New York City, 1970

J.D. (Law Degree) Brooklyn Law School, 1990 -- Cum Laude.


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