Published Jan 07, 2021
Every year, churches need to approve housing allowances for eligible ministers as well as accountable reimbursement plans for their pastors and other employees. Many churches are still doing things incorrectly by giving their pastors undocumented auto allowances and improper reimbursements for personal health insurance.
Income tax-free reimbursements for individual health insurance premiums were prohibited beginning January 1, 2014, with the full implementation of the Patient Protection and Affordable Care Act, otherwise known as Obamacare. Churches can be fined up to $36,500 per year ($100/day) for violating this provision. However, beginning in 2020, changes to the Department of Labor and IRS regulations regarding Health Reimbursement Arrangement (HRA) plans now permit churches to adopt an Individual Contribution Health Reimbursement Arrangement (ICHRA) which allows churches to reimburse employees for up to 100% of their insurance premiums as a tax-free benefit. The church must adopt a compliant plan document and cannot reimburse employees for health insurance premiums subsidized with Advance Premium Tax Credits obtained by purchasing individual health insurance through Covered California.
Despite changes to tax law in the Tax Cuts and Jobs Act of 2017, many churches continue to provide pastors and other employees with a monthly auto allowance. These flat-dollar payments are given without requiring employees to keep track of and report their actual ministry miles to the church. When that is true, such allowances are known as nonaccountable reimbursement plans, and those plans were prohibited beginning January 1, 2018. All such payments under a nonaccountable reimbursement plan must be added to taxable income and reported on the employee’s Form W-2.
The proper way to reimburse pastors and other employees for the business use of their personal auto is to adopt an annual accountable reimbursement plan. This requires a specific line item in the church’s budget and/or a resolution passed by the church Board of Directors or the church at-large authorizing such payments. Business use of one’s auto may be reimbursed at the rate of $0.575 per mile in 2020. That rate is being reduced to $0.560 in 2021. Commuter miles – driving between work and home – and other personal driving cannot be reimbursed. All miles must be strictly accounted for, and may be accomplished with a written log of ministry miles driven, starting and ending odometer readings and a description of the purpose of the trip. There are several smartphone apps for this purpose which simplifies the reporting process.
Few pastors are provided with a church-owned parsonage for housing. Instead, most pastors must purchase or rent their homes. The Internal Revenue Code provides for the ability of ministers to receive a housing allowance as an income tax-free benefit. This privilege was upheld by the Seventh Circuit Court of Appeals when it ruled against the Freedom From Religion Foundation in early 2020, and it is unlikely to be overturned in the future – the decision was not appealed to the US Supreme Court. A pastor can receive up to 100 percent of his compensation as housing allowance.
Note: SBC pastors who contribute a portion of their taxable income to the GuideStone Church Retirement Plan may later withdraw some or all their retirement funds as tax-free housing allowance. Normally, all pre-tax contributions to a qualified retirement plan are fully taxable when withdrawn. Senior pastors who contribute at least $50 per month to their GuideStone retirement account, and whose churches contribute at least $50 per month through CSBC for the Cooperative Program, also receive the GuideStone Protection Benefit at no additional cost.
However, for a church to provide housing allowance to its pastors or other ministers, it must also specifically provide for this in its annual budget and/or pass a resolution authorizing such payments. The allowable allowance is the lesser of the minister’s actual housing expense, including mortgage payments, utilities, property taxes, maintenance, insurance, and even replacement of household furnishings, or the fair rental value of the home as a furnished, utilities-paid residence. The church should provide the minister with a worksheet to calculate his/her permissible allowance in advance. Although the amount of housing allowance may be adjusted at any time during the year, it CANNOT be granted retroactively – a minister cannot say to the church in December, “I should have received $25,000 of my compensation as housing allowance this year.” Housing allowance may only be approved prospectively.
Finally, the IRS introduced a new Form W-4 in 2020. Existing employees were not required to submit the form in 2020. But any new or existing employee who did not submit a new W-4 to the church in 2020 must do so in 2021. The new W-4 has worksheets designed to more accurately determine the number of tax exemptions a taxpayer may claim to avoid being underwithheld for the year.
For more information about any of these items, please contact the HR & Church Compliance Ministry by email at email@example.com or by phone at 559-256-0858.