A fringe benefit is any cash, property, or service that clergy employees receive from a congregation in addition to salary. All fringe benefits are taxable income to employees unless specifically exempted by the Internal Revenue Code.
Many fringe benefits can be provided by a congregation to clergy without any dollar limitation (health insurance is an example), while other fringe benefits are subject to annual limits (dependent care is an example).
To qualify for exclusion from income, many fringe benefits must be nondiscriminatory. In other words, the benefits must be offered to all employees or employees in certain classes. Other fringe benefits may be offered to some employees and not to others.
Some of the most important fringe benefits for ministers includes:
• Health insurance. If the congregation pays the group medical insurance premiums (2 qualifying employees or more) directly to the insurance carrier or reimburses clergy for the premiums based on only one qualifying employee, the premiums are generally tax-free to clergy.
• Disability insurance. If the congregation pays the disability insurance premiums (and clergy is the beneficiary) as a part of the compensation package, the premiums are excluded from income.
• Group-term life insurance. If the group life coverage provided under a nondiscriminatory plan does not exceed $50,000 for clergy, the life insurance premiums are generally tax-free to clergy.
• Out-of-pocket medical expenses (all of the following plans are subject to the nondiscriminatory rules):
‣ Flexible spending account (FSA). The FSA should generally be the plan of choice for clergy and congregations. The FSA is simple to establish and easy to administer by the congregation.
‣ Health savings account (HSA). Within limits, HSA contributions made by congregations are excludable from income tax and social security wages (HSA contributions may not be funded through salary reduction). Withdrawals from HSA’s to pay medical expenses are tax-free.
‣ Health reimbursement arrangement (HRA). The same HRA benefit must be provided to all employees. This makes this concept very limiting since out-of-pocket costs significantly vary employee-to-employee.
‣ Cafeteria plan. Some congregations can justify establishing and maintaining a cafeteria plan. These plans can cover much more than medical expenses—for example, dependent care, life insurance, and disability insurance.
Properly focusing on tax-free and tax-deferred fringe benefits can make a significant difference in the stewarding of funds expended by a congregation on behalf of clergy. Federal tax laws help congregations and clergy by subsidizing tax-free fringe benefits and delaying the taxation of tax-deferred benefits.
Source – ECFA
Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
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