clergy and church

[TAXMAN]

Anyone dealing with clergy and church? How are we to handle health ins in this matter. Clergy has their own health in. We have been reimbursing for this. I see we can no longer do this. I think we have to increase salary and calculate FICA on this increase. Do you agree? or what is your response? Thanks to anyone who can steer me right.

[RitaB]

I hope somebody will chime in on this.  I read a lot about it at the end of 2014.  I am still confused.  I may have posted on here - I don't remember.  I think you are correct that the church has to avoid even the appearance of paying the health insurance, unless perhaps there is only one employee, and the way to do that would be to increase his salary, and tell him to get his own insurance and leave the church out of it.  However, I don't think the church has any responsibility for FICA.  I remember reading this and bookmarking it.  To quote Don Henley, "The more I know, the less I understand."

http://www.forbes.com/sites/anthonynitti/2015/01/18/large-penalties-await-employers-who-reimbursed-certain-employee-health-insurance-premiums-in-2014/

[JJStephens]

Church/clergy issues are my bread and butter. Perhaps I can help.

Churches (and other employers) have historically done premium and other medical cost reimbursements in the form of a Medical Expense Reimbursement Plan (MERP) and more recently using a Section 105 Health Reimbursement Arrangement (HRA). One provision of the ACA made stand-alone HRAs illegal as of 1/1/2014; as of that date HRAs are permitted only if the employer offers it in conjunction with an ACA compliant group health insurance plan (such plans are known as integrated plans). Many employers (including scads of churches) didn't get the memo and continue offering obsolete MERPS and stand-alone HRAs.

The bottom line is the reimbursement must be treated as additional income. That will likely require amended 941s and W2. It will also require a change in procedure for future activities. By the way, it is important to note that the employing church/ministry cannot designate any portion of the reimbursement-recategorized-as-salary as clergy housing allowance because the law prohibits making housing allowance designations retroactively (there is one exception to the general rule but it is so rare that I'll not bore you with the details). 

Rita is correct--clergy are not subject to FICA. Clergy have what is often called a 'dual tax status'. That is, they are (almost always) considered an employee of the church for income tax purposes but are always (100% of the time) considered self-employed for social security tax purposes. I.e., they must pay self-employment tax--unless they opted out of SECA by filing Form 4361--but that's a different conversation. Therefore, the employing church/ministry should never withhold FICA on clergy compensation. The clergy person should make quarterly estimated payments to cover their SECA liability. However, as an alternative strategy, the IRS permits (and even encourages) the clergy taxpayer to have his/her employing church/ministry withhold extra income tax in an amount equal to the SECA tax liability.

Hope this helps.

[RitaB]

That was great information, JJ.  What do you think I need to do about the church I do books for?  I've told them more than once I thought they ought to pay pastor and let him get his own insurance, and gave them articles where I researched.  They are STILL paying his premiums out of the church account.  He's not the only employee, but he's the only one for whom they pay insurance.  Should I just document that I've told them repeatedly, warn them about the penalty that could happen, and prepare the reports as if the payments for health insurance were salary payments to the pastor?

[TAXMAN]

JJ I agree with your info. Can you answer Rita's question. The bookkeeper for the church figures out what the salary will be and pays one half of this number to the clergy which also gets included in her wages(w-2). Bookkeepers question was does she now include the insurance number in this figure also for calculation of the Fica tax? They were warned and now are changing how they do this. Problem may be what do they do about first 6 months of 2015? Thanks for your help?

[MAMalody]

Per Notice 2013-54 they may be subject to a $100 per day excise tax per applicable employee under IRC 4980D so it is imperative that this change be made. Rita I don't know if you can arbitrarily change what you are given by the church. You would have to determine what they have hired you to do.  If they are giving you line item budget figures to formalize for them, I don't know if you can change them.  If they have hired you to to do their books, based on the information provided, then you would probably be okay listing the medical premium payments correctly as salary on the books. After all that is what they are paying you do do. 

[JJStephens]

MAMalody is absolutely correct about the excise tax on unauthorized HRAs. The Evangelical Council for Financial Accountability did a free webinar on this awhile back. Here's a link https://www.ecfa.org/WebinarRecordings.aspx?ProductID=61 Frankly, it was not the most inspiring webinar I've ever viewed, but it does cover the subject.

Taxman--the decision making authority (usually the church board) needs to re-categorize the reimbursement as taxable income. That would likely require amending prior 941s and possibly W2s if it pre-dates this year. Henceforth, the re-categorized amount would be included in the amount subject to income tax withholding. However, as I stated in a previous post, churches should never withhold FICA tax on clergy income. Alas, many churches continue to do that (withhold FICA). I've written a white paper on how to fix clergy FICA withholding when it happens. PM me if you'd like a copy.

Rita--I suggest you show them copy of Notice 20-13-54 http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CB8QFjAA&url=http%3A%2F%2Fwww.irs.gov%2Fpub%2Firs-drop%2Fn-13-54.pdf&ei=po1oVayVCpGbyQSzmoLoCw&usg=AFQjCNGPoEXU2frrtxhaQcLsxamwrlzD5A&sig2=ufVMeodfa_dl5YLTb5Yohw . $100 per day should get their attention. I'm also not sure who it is you're telling. Perhaps you should carefully/respectfully go up the chain of command with your concerns. Your advice should be good enough, but it can sometimes also be helpful to get an 'outside expert' to say the same thing you've been saying (the 'prophet without honor in his own hometown' syndrome). If you think it would help, I'm sure either Michael Malody or I would be happy lend a hand. PM either of us if you wish to go that route.

[RitaB]

 Your advice should be good enough, but it can sometimes also be helpful to get an 'outside expert' to say the same thing you've been saying (the 'prophet without honor in his own hometown' syndrome). If you think it would help, I'm sure either Michael Malody or I would be happy lend a hand. PM either of us if you wish to go that route.

​Man, I love it when somebody volunteers to be the heavy for me.  Just like back in the day when Sharon Large Forward tripped the gal that busted my lip in the regional basketball tournament on an obvious charge and the ref completely missed it. 

[JohnH]

I keep getting confused (not very hard to do) on this issue of Medical Insurance and/or MERP when there is only one employee.   I've seen advice on some forums that suggests it's acceptable to continue the MERP and to pay the Med Insurance while excluding both from income in that situation alone.  Based upon what Mike, JJ, and Rita are saying, I take it that this advice is dead wrong.

[RitaB]

I keep getting confused (not very hard to do) on this issue of Medical Insurance and/or MERP when there is only one employee.   I've seen advice on some forums that suggests it's acceptable to continue the MERP and to pay the Med Insurance while excluding both from income in that situation alone...

​I have seen that advice as well, and it's in the Forbes article in my post up there.  Hard to spot, but it's there, near the end.  I really wish I knew.  The church I keep books for has five employees besides the Preach, all part time.  Maybe there's an exception for that, too.  But, y'all know - we all took classes about ACA that contradicted each other.  It's frustrating.

[JohnH]

I got some clarification from an "Employee Benefits" forum I stumbled upon a couple of days back.  I'm still digesting the info, but it seems there is a subtle difference between "one employee" and "one participant".  I haven't sketched out all the code sections and such because at the moment I'm just trying to get a definitive answer for a specific situation.  But I've come to the conclusion that I'm adding apples & oranges on this whole issue.  There are requirements related to benefits, and then there are requirements related to ACA - some of them intersect and some of them come close to contradicting one another.

One thing has become clear (I think).  A Health Care Sharing ministry is not an insurance plan.  So even though a participant in a qualifying HCSM can escape the ACA penalties on their personal return, the ministry they work for cannot exclude the HCSM payments from gross income on their W2, even if it's a "single participant" employer. Doing so can expose the employer to the $100 per day penalty. It would be wise for any church or non-profit to heed this warning.

I've also read that there has been at least one bill introduced in Congress to provide some relief to this mess. Nothing has been voted on and who knows what the final outcome will be once the sausage is made. But in any event this may not be over.

Edited June 19, 2015 by JohnH

[Lion EA]

When the DOL weighed in on top of/along side of the IRS and ERISA and people trying to interpret what Congress meant in the ACA, things got really muddy.  More than one employee is probably a big problem, and is not synonymous with one participant.  I vaguely remember the IRS promising clarification this summer/July for 2015.  S-corps are particularly problematic.