Evaluate Property Tax Exemptions Annually

In many states, the first part of the year is the time to address property tax exemptions.

Most jurisdictions provide relief from property taxes to qualifying churches that own real property (e.g., land and buildings) and/or personal property (e.g., furniture, equipment, leasehold improvements) located in that jurisdiction. Generally, exemptions are based on the ownership and use of the property, although different states have different rules regarding what types of entities and what uses qualify for exemption.

While property taxes are assessed and exemptions are evaluated differently in various states, in many states, the early part of the year is the time to address property tax exemption applications or renewals. Therefore, if your church has not already done so, Batts Morrison Wales & Lee recommends reviewing the practical reminders and recommendations below to determine whether further analysis and evaluation of your church’s property tax exemptions are required.

Practical Reminders and Recommendations

  • Review your church’s prior year tax bill or online account to determine whether the church has historically received exemption based on its nonprofit status. If not, consider whether the property might qualify for exemption and, if so, the related exemption application filing requirements and due dates.
  • For property that has historically been granted an exemption, determine the implications of any changes to the use of that property, along with the related notification requirements.
  • Determine the potential filing requirements and exemption application due dates resulting from the purchase of new property.
  • If uncertain about the available exemptions in your state, consider contacting your local taxing jurisdiction (or visiting its website) to anonymously inquire about potential property tax exemptions that may be available to your church (specifically inquire about any property tax exemption application deadlines and the necessary documentation that must be submitted in order to qualify).
  • Contact your tax counsel if you are being notified that your property tax exemptions are being reduced or removed for the upcoming tax year, or if you need assistance in addressing any of the property tax exemption issues noted above.

Understanding the available exemptions and the necessary filing requirements is proving to be more important than ever for churches. Our firm has noticed a recent trend in denials of property tax exemptions in numerous jurisdictions across a number of states as cities and counties look for ways to meet operating budgets.

Adapted from a Nonprofit Special Alert originally published by Batts Morrison Wales & Lee (BMWL). Used with permission.

Q&A: Can a For-Profit Food Truck Make Money on Church Property?

Receiving more than $1,000 from a vendor could be considered unrelated business income.

Q: We currently have our food service sell dinner for our congregation before services on Wednesday nights. We only have this option at one of our campuses. We’re wondering if we could allow food trucks to come to our other campuses to provide food before service. This would be for the convenience of our congregants, but could it be a problem to have a for-profit business making money on our nonprofit exempt property?

This is a practical question that comes up from time to time. The place to start is with the constitution and/or bylaws of your church. I’m going assume that your main purpose is something like, “to share the good news of Jesus, to bring religious education to our children, to reach our community.” Those may not be your exact words but most churches have the gist of it.

Having food trucks periodically serve your congregants doesn’t meaningfully impair or overshadow the religious purpose that is the basis of your exempt purpose. Rather, as you say, this is a service provided “for the convenience” of your congregants— a convenience that may make it possible for members and visitors to attend given the demands of today’s fast-paced society.

You would encounter a problem if you became “The First Church of Food Trucks.” If your purpose became “food trucks for profit for the city,” then you would no longer be a nonprofit entity, but a for-profit business.

It would be important to know if your church is receiving rental fees or a percentage of the sales. If so, there could be concerns about receiving unrelated business income. Keep in mind that if you receive more than $1,000 from any one vendor, this could be considered unrelated business taxable income (UBTI).

UBTI can be a tricky and complex topic. For a professional’s insights, we reached out to CPA and tax attorney Ted Batson. Here is what he had to say:

If the church is receiving a fee from the food truck operators, then the analysis must consider whether this has become an unrelated business activity. I think that the real property rental exception could come into play so long as the church isn’t providing substantial services—such as utilities, bathrooms, and security. But even then, since this activity occurs at the same time and place as a church function, the exception for trade or business services provided as a convenience for our members should preclude any amount you receive from being UBTI. This is the same exception we use to argue that a church’s café that operates around church services doesn’t generate UBTI. This scenario could conceivably create a more heightened degree of concern about the church’s property tax exemption if it is receiving a rental fee, percentage of sales, or both. But even then, I suspect that a conversation with the county property tax authority about the occasional, transient use of the property by the food trucks—coupled with the food trucks serving food during church events—would result in no change to the property tax status. If the church isn’t receiving any remuneration, then I would say that having food trucks on the property is comparable to catering a meal. Under this condition, there would be no UBTI because the church isn’t receiving remuneration. I think in most states the transient use of the church property (and perhaps utilities) during these limited time periods that are attached to church functions should not infringe on the church’s property tax exemption either.

I would like to add one other thought—and a caution: If anyone on your church staff has a personal or family interest in the food trucks, they should disclose that information. That person cannot take part in deciding what trucks will sell food. That would be a conflict of interest.

To gain a better understanding of UBTI, I encourage to you explore these articles and books from Church Law & Tax:

David Fletcher has more than 35 years of experience as a pastoral leader in churches. In 2003, he founded XPastor, a resource website for executive pastors, and XP-Seminar, an annual church leadership conference.

“Parking Lot Tax” Officially Repealed

A controversial 2017 provision affecting churches nixed through spending packages signed in late 2019.

Editor’s note: For churches that filed Form 990-T for any period prior to the repeal of this law, an amended return may be filed as long as the statute of limitations has not closed on the return. The statute of limitations will generally run for three years after the date a return is filed with the IRS. Since the statute of limitations for 2018 returns may be closing soon for most churches and other organizations, amended returns should be filed as soon as possible to claim a refund for taxes paid for that calendar year.

The controversial “parking lot tax” provision included with the Tax Cuts and Jobs Act of 2017 (TCJA) was officially repealed on December 20, 2019, after then-President Trump signed into law two bipartisan-supported spending packages worth a combined $1.4 trillion.

The potentially costly provision (Internal Revenue Code (IRC) Section 512(a)(7)) placed a tax on qualified transportation fringe benefits provided by nonprofit employers, including employer-provided parking meeting certain criteria. The tax was assessed utilizing the unrelated business income tax system. Churches and other tax-exempt nonprofits were affected by this change. Widespread criticism from across the nonprofit sector erupted almost immediately after the TCJA was passed in December of 2017.

Along with the criticism, the provision also created much confusion in the church community. To help weed through the confusion, the Internal Revenue Service (IRS) issued IRS Notice 2018-99, offering guidance for implementing the provision. If certain criteria were met, churches and nonprofits then needed to go through a four-step analysis to determine how much tax they owed on their employer-provided parking.

The repeal operated retroactively, “as if the tax was never in the original law,” noted national CPA firm Batts Morrison Wales & Lee (BMWL). After the repeal, churches and other tax-exempt organizations that paid this tax were able to file an amended Form 990-T and subsequently receive a full refund or credit for any tax paid.

The backstory

When Congress developed the TCJA, the goal was to cut both individual and corporate tax rates. But such a tax cut meant a revenue shortfall. As part of its effort to make up for the revenue loss, Congress chose to disallow the tax deductions that for-profit employers could claim related to any transportation fringe benefits provided to employees.

Taxing for-profit employers, however, would not have accomplished the entire revenue goal Congress needed to replace the tax cuts. Almost one-third of American employees work for tax-exempt employers, either through nonprofit organizations or governmental entities. Since these employers do not pay federal income taxes, the disallowance of an expense deduction they would not claim anyway meant no additional revenue generation.

So, to apply the tax burden equally to all employers, and to capture as much tax revenue as possible from all transportation benefits provided to employees, Congress classified the costs of providing the targeted fringe benefits as “income” considered as unrelated business taxable income (UBTI) for tax-exempt employers.

As a result, exempt employers also were required to follow the formula determining if parking provided to their employees triggered the tax. If triggered, the exempt employers then had to calculate how much UBTI resulted on Form 990-T and pay tax on it at the corporate tax rate of 21 percent.

This planned revenue stream, however, ultimately failed, allowing affected churches and other nonprofits to seek refunds through amended Form 990-Ts. The IRS provided details on the refund process through these instructions.

Elaine L. Sommerville, a senior editorial advisor for Church Law & Tax, is licensed as a certified public accountant by the State of Texas. She has worked in public accounting since 1985.

Frank Sommerville, a senior editorial advisor for Church Law & Tax, is an attorney and shareholder in the law firm of Weycer, Kaplan, Pulaski & Zuber, P. C. in Houston and Dallas, Texas, and an Editorial Advisor for Church Law & Tax.

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Why Using Windows 7 Is a Security Risk

Earlier this year, Microsoft ended tech support for it—here’s what your church needs to know if you’re still using it.

Support for Windows 7 ended last January.

Still, many continue to run Windows 7. I was at a major Hollywood studio not long ago and noticed several offices with computers still using it. If a Hollywood film studio hadn’t upgraded then, it’s safe to assume many ministries haven’t, either.

So, what’s a church to do?

To answer that question, let’s first clear up a misunderstanding.

As you’ve noticed if you’re using Windows 7, it is still running on your machines. There was no “kill switch” in which a computer exploded or just stopped working. Microsoft’s decision means there is no longer any support for the operating system. No security patches. No updates with fixes. Should a new flaw emerge in Windows 7, Microsoft says it will not patch it—and anyone running Windows 7 is vulnerable to the latest malware, ransomware, and other security risks.

Now, in light of this news, it’s also important to keep this in mind: When Microsoft phased out previous operating systems, dating all the way back to Windows XP, it still provided periodic patches for major vulnerabilities long after support for those operating systems technically expired.

Microsoft has to carefully encourage users and organizations to upgrade to the latest, supported versions without recklessly exposing the millions who have yet to upgrade to new vulnerabilities. But also bear in mind that the few times Microsoft provided those patches, they were for specific, massive security issues. Other, lesser threats and problems went unaddressed.

Options for upgrading

There are many affordable ways to upgrade from Windows 7 to Windows 10.

Buying new hardware that comes with Windows 10 is the easiest way, and as the costs for technology continue to decrease, such a strategy might prove beneficial.

If you prefer to keep your church’s existing hardware, then an alternative is to check to see whether you have any sort of licensing arrangement directly with Microsoft. If so, then you probably already have an upgrade to Windows 10 available. Review your Microsoft licensing agreements to find out how to get the upgrade. If no upgrade is available through an agreement, though, then you will have to start over and purchase a license for Windows 10.

Microsoft’s free upgrade from Windows 7 and 8 to Windows 10 expired in 2016. If you have a machine you would like to upgrade to Windows 10, Microsoft will sell you a Home license for $139.00 or a Pro license for $199.99. They cleverly state on their Upgrade to Windows 10 FAQ page “. . . the best way to experience Windows 10 is on a new PC. Today’s computers are faster and more powerful and come with Windows 10 already installed.” Volume Licensing upgrades for larger organizations vary widely in cost depending on your specific arrangement with Microsoft and are often more affordable than expected.

Do we really have to upgrade?

I’m frequently asked whether an upgrade is really necessary. The short answer is yes. Any computer running Windows 7 that is connected to the internet, even behind a firewall, is a target and a security vulnerability for your entire network. Phishing and spam emails will target weaknesses in Windows 7—and phishing email scams are particularly problematic because getting them through a firewall is easy. The bad actors will take note of any additional security holes discovered and start exploiting them because they know a patch most likely won’t be forthcoming.

Some exceptions

As with everything in technology, there are some exceptions. When support for Windows XP ended in 2014, I received a ton of questions about legacy systems that would only run on Windows XP, such as HVAC systems, lighting controllers, and access control systems.

Your church still can run Windows XP, Vista, and Windows 7 for these sorts of legacy applications and hardware—but again, make sure these machines are not on the internet and that users cannot access the internet with the machines. This ensures any security holes found after the end of support cannot be exploited, since the only way to use the machine running an unsupported version of Windows is to be physically at the machine.

Looking ahead

The end of support for Windows 7 serves as a larger reminder. With technology, the clock is always ticking. The longer a church waits to make changes and upgrades, the larger the gaps become, and that often leads to a massive drain on resources trying to get current—rather than simply keeping current. Once your church successfully retires Windows 7, the next step should be to set a plan to keep current. At some point, all technology eventually becomes irrelevant and falls out of support. Plan for future success so you aren’t scrambling to manage a crisis.

Jonathan Smith is an author, conference speaker, and the director of technology at Faith Ministries in Lafayette, Indiana. You can reach him at jsmith@faithlafayette.org and follow him on Twitter @JonathanESmith.

Holiday Questions Only Church Administrators Consider

Why gifts to staff have strings attached and copyright laws still apply.

The Christmas season is here and with it comes questions about gift-giving to staff, safety concerns, copyright issues, and more. The editors have pulled together this collection of articles with the answers you need to breeze through this busy month of December.

Q&A: Can an Insurance Carrier Exclude a Disabled Pastor’s Housing Allowance from Benefit Calculations?

A pastor’s housing allowance should always be considered part of a pastor’s total salary.

Our full-time minister has cancer and we filed a disability claim. The insurance carrier has refused to include his housing allowance as part of base salary benefit calculations. Instead, the carrier is only basing benefits upon $57,000—his salary minus his $24,000 housing allowance designation.

While the insurance policy salary/benefit limit is $81,000, the claims department points to language in the policy that is interpreted as meaning the housing allowance doesn’t qualify as part of the pastor’s salary. We have exhausted our “friendly negotiation” options and are wondering about next steps. Would it be wise to involve legal counsel in hopes of having the housing allowance included in the salary?
Our firm had a similar issue arise with regard to a disabled pastor we represented. As with your situation, the insurance carrier declined to include the housing allowance in determining compensation. The disabled pastor ended up suing and received a significant settlement from the insurance carrier.
With that said, I believe it may be wise for you to seek legal counsel to resolve this issue.
I would also like to offer some advice for anyone reading this who might find themselves needing to file an insurance claim for a disabled pastor.
Clearly, the housing allowance is a part of the compensation/salary paid. Therefore, a claim should be filed for the total amount of a pastor’s compensation—without creating a possible issue by separating the housing or parsonage designation from the overall salary amount.
In the situation involving the disabled pastor we represented, it became an issue because the pastor brought it up to the insurance company. He asked because he wanted to make sure he was correctly calculating his salary, and he wasn’t certain his allowance could be included for the purpose of the claim. Had he not discussed the allowance portion of his salary with the insurance carrier, it is possible that the matter would not have even come up.
As a lawyer, I want to stress that there isn’t anything ethically or morally wrong with this approach. Insurance companies unfamiliar with housing or parsonage allowances simply may not understanding how tax exemption and compensation work for clergy.
As our firm’s case shows, a disabled pastor could ultimately win the case. But why put yourself through litigation if you don’t have to? The bottom line: When it comes to a claim, a disabled pastor should simply report his compensation, not separating his allowance from the rest of his compensation.
For information on how to properly designate housing and parsonage allowances, see:
Lisa A. Runquist has more than 40 years of experience as a transactional lawyer, both with nonprofit organizations and business organizations.

Q&A: How Should We Handle a Retirement Account Donation?

Why an acknowledgement letter works better for documenting a retirement account donation.

Q: Our church received a check made directly from a member’s retirement account for church general operation needs. Should our church issue a tax-deductible contribution receipt to the donor or just give the acknowledgement for receiving the check?


This is a fairly common occurrence for distributions made from individual retirement accounts (IRAs). It is known as a qualified charitable distribution (QCD). This special provision is a great way for individuals with IRAs to contribute to the church or other charities. Reminding your older donors about this option for donating can help them not only express their generosity but also allow them to reach required minimum distribution (RMD) amounts they may need to meet annually.

Here’s how a QCD works. Individuals over the age of 70½ are able to direct their IRA custodian to make a distribution directly to a church or qualifying charity. Churches and donors must understand that there would be no benefit to having the IRA custodian send the donation if the individual is below 70½.

The donor making the QCD should not receive a tax-deductible receipt for this transaction because this distribution is not treated as taxable. However, an acknowledgement letter should be provided to both the IRA custodian as well as to the donor.

In the annual Church & Clergy Tax Guide, attorney Richard Hammar lists what should be included in a contemporaneous written acknowledgment of $250 or more. Here are the items on the list (adapted) that are pertinent for a QCD:

  • Name of church receiving donation;
  • Amount of cash contribution; and
  • Statement that no goods or services were provided by the church in return for the contribution.

Here are several key points to keep in mind about QCDs:

  • The distribution must go directly from the custodian to the charity. It cannot go to the owner and then to the charity.
  • The maximum yearly amount for a QCD made by an individual is $100,000. Married couples filing jointly can each make a QCD up to the $100,000 limit from his or her IRA.
  • The amount should not be included in the church’s donor system as a tax-deductible gift and neither should a tax-deductible receipt be issued.
  • No benefits (“goods or services”) can be given by the church in return for receiving a QCD.
  • IRA owners ages 72 and older can make QCDs from their IRAs that will be considered part of their RMDs. A QCD can “satisfy all or part [of] the amount of [a] required minimum distribution from [an] IRA,” according to the Internal Revenue Service’s (IRS) frequently asked questions page about retirement plans.
  • Note that RMDs are not required for owners of Roth IRAs, according to the IRS. Roth IRA owners are allowed to make QCDs beginning at age 70½.
  • The IRA custodian will issue a 1099-R at the end of the year including all distributed amounts, but the charitable distribution amount will be excluded from the taxable box.
  • For the individual or married couple, the QCD should be reported when filing income taxes on Form 1040 (on the line for IRA distributions). If the full amount of the distribution was a QCD, then the amount shown on the taxable amount line is zero and “QCD” should be entered next to it, according to the IRS.
  • The IRS says a Form 8606 also must be filed when either the QCD was made from a Roth IRA or the QCD was made “from a traditional IRA in which [the donor] had basis and received a distribution from the IRA during the same year, other than the qualified charitable distribution.”

Note. For additional details on tax rules related to charitable donations, see IRS Publication 526; for specific rules related to QCDs, see IRS Publication 590-B.

Vonna Laue has worked with ministries and churches for more than 20 years. Vonna was a partner with a national CPA firm serving not-for-profit entities through audit, review, tax, and advisory services. Most recently, she held the role of executive vice president for a Christian ministry that works to enhance trust in the church and ministry community.

Designating a Housing Allowance for 2024

Designating a housing allowance is a critical part of every church’s pastoral compensation package and a key tax benefit for pastors.

Last Reviewed: November 14, 2023

The housing allowance is the most important tax benefit available to ministers.

But many ministers do not take full advantage of it because they (or their tax adviser or church board) are not familiar with the rules.

What can church leaders do to help? Consider the following guidance.

Designating a housing allowance for ministers in church-owned parsonages

Ministers who live in a church-provided parsonage or manse can exclude from their income for federal income tax reporting purposes (1) the fair rental value of the parsonage, and (2) the portion of their compensation designated in advance by the church as a “parsonage allowance”—to the extent that it is used to pay for parsonage-related expenses such as utilities, repairs, and furnishings and does not exceed the fair rental value of the home (furnished, plus utilities).

Recommendation. If your pastor lives in a church-provided parsonage or manse, and incurs any out-of-pocket expenses living there (for example, for utilities or furnishings), then have the church designate a portion of the pastor’s 2024 compensation as a “parsonage allowance.” This should be done in December 2023 so that it will be effective for all of 2024. Parsonage allowances cannot be designated retroactively.

Example. Your youth pastor lives in a church-provided parsonage. He is expected to pay his utilities and provide his furniture. His compensation for 2024 will be $35,000. In its December 2023 meeting, the church board designates $3,000 of this amount as a “parsonage allowance.” The youth pastor has parsonage expenses of at least $3,000 in 2024 (for utilities and furnishings). At the end of the year, the church treasurer issues the youth pastor a W-2 reporting only $32,000 as church compensation. The parsonage allowance is not taxable (assuming that it was used for parsonage expenses) for income tax reporting purposes.


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Designating a housing allowance for ministers who own their home

Many ministers own their homes. The portion of their compensation that is designated in advance by the church as a “housing allowance” is not subject to income tax to the extent it is used for housing expenses and does not exceed the home’s annual fair rental value (furnished, plus utilities).

Recommendation. If your pastor owns a home, have the church designate a portion of the pastor’s 2024 compensation as a housing allowance. This action should be taken in December 2023 so that it will be effective for all of 2024. Housing allowances cannot be designated retroactively.


Tip. Use the form in “Sample Housing Allowance Resolution for Pastors.”


Key question. Who should designate the housing allowance? In most churches, it will be the governing board. But this is not always the case. Some church boards delegate this authority (and other compensation decisions) to a personnel or compensation committee. In other churches, the membership approves all compensation decisions at the annual business meeting. Whichever method your church uses, be sure that the allowance is designated in advance, and that the action is in writing.

Designation a housing allowance for ministers who rent a home

Many ministers rent their homes. The Apostle Paul did for a brief time during his ministry. Acts 28:30 states that “for two whole years, Paul stayed there in his own rented house.” Perhaps your minister is renting a home or apartment. If so, you should understand that the portion of your minister’s compensation that is designated in advance by the church as a housing or rental allowance is not subject to income tax to the extent that it is used for rental expenses and does not exceed the fair rental value of the home (furnished, plus utilities). See the above recommendations and tips for ministers who own their homes.

Determining the amount of the allowance

How does your church determine the appropriate amount for a parsonage, housing, or rental allowance? A common practice is for churches to provide their pastor with an “estimated expense form” prior to the end of the year. The pastor estimates likely expenses for the following year on this form, and returns it to the board or other body that designates housing allowances. The allowance is based on the pastor’s estimated expenses.

Tip. Sample expense forms are reproduced at the end of chapter 6 in the annual Church & Clergy Tax Guide. There are separate forms for computing parsonage allowances, housing allowances, and rental allowances. This is a simple and convenient way for your church to designate an appropriate allowance.

Tip. Your church should not be too conservative in designating a housing allowance. The pastor cannot exclude from taxable income an amount more than the church-designated allowance. So, your church may want to designate an allowance in excess of a pastor’s estimated housing expenses for the new year.

Tax reporting

Most churches reduce the pastor’s W-2 by the amount the church designated as a housing allowance. But remember that the allowance is not necessarily nontaxable for income tax reporting purposes. For ministers who own or rent their home, the allowance is nontaxable only to the extent that it does not exceed actual housing expenses or the annual rental value of the home (furnished, plus utilities). It is the minister’s responsibility to report any excess housing allowance as taxable income on his or her tax return.


IRS Publication 517 states:

You must include in gross income the amount of any [housing, rental, or parsonage] allowance that is more than the smallest of

  • Your reasonable salary,
  • The fair rental value of the home plus utilities, or
  • The amount actually used to provide a home.

Include this amount in the total on Form 1040, line 1. On the dotted line next to line 1, enter “Excess allowance” and the amount.

Example. At the end of 2023, a church board determined that Pastor T’s compensation for 2024 would be $50,000. It designated $20,000 of this amount as a housing allowance. At the end of the year the church treasurer issues Pastor T a W-2 that reports taxable income of $30,000 (salary less housing allowance). However, Pastor T only has $17,000 of housing expenses in 2024. As a result, taxable income is understated on his W-2 by $3,000. It is Pastor T’s responsibility to report this $3,000 as additional income on line 7a of Form 1040.

Church treasurers should be sure that their pastor is aware of this reporting responsibility. Many pastors erroneously assume that they can reduce their taxable income by the full amount of the church-designated housing allowance. This will be true only if the allowance is less than the pastor’s actual housing expenses and the annual rental value of the home (including utilities).

Amending the housing allowance

What if the housing allowance designated for your pastor turns out to be too low? For example, the pastor has to pay for unanticipated home repairs, or begins to prepay part of the home mortgage loan. Can the church amend the pastor’s housing allowance? Yes it can, but note that the amendment only operates prospectively—from the date of the amendment forward.

For detailed information on the parsonages and housing allowances, see chapter 6 in the annual Church & Clergy Tax Guide.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Will Sexual Orientation and Gender Identity Discrimination Become Illegal?

High court’s decision could have implications for the hiring and firing practices of churches.

Three cases argued last month before the United States Supreme Court raise a key employment question that may significantly affect the way churches approach future hiring, firing, compensation, and benefits decisions involving nonministerial employees.

Though a ruling is not expected until the Supreme Court’s current term ends in the spring of 2020, legal experts say congregations with theologically conservative views of human sexuality should note the situation and contemplate taking several steps now to protect those positions.

At issue before the Supreme Court: How the term sex should be interpreted under Title VII of the Civil Rights Act of 1964. The federal law prohibits employers with 15 or more workers from discriminating against people based on their race, color, religion, national origin, or sex, the latter term long-assumed to mean biological gender (male or female).

The plaintiffs in the three cases, however, argue the definition means more than biological gender and should both encompass sexual orientation and gender identity, thus providing legal protections for people who are gay or transgendered. The defendant employers—two for-profit businesses and one county government—contend the respective dismissals in their cases were not solely based on sexual orientation or gender identity, if at all. And even if they were, the defendants add, Title VII does not prohibit decisions based on such criteria because Congress never contemplated such a broad meaning of sex when the law was passed 55 years ago.

The three cases—Bostock v. Clayton County; Georgia, Altitude Express v. Zarda; and Harris Funeral Homes v. the Equal Employment Opportunity Commission—were consolidated into one by the Supreme Court since they address similar matters. Although no church or religious organization is involved with this particular litigation, religious-related concerns still arose during oral arguments, leaving observers to wonder what potential impact could come to churches if a Court majority sides with the plaintiffs.

“If the Supreme Court rules that sexual orientation/gender identity discrimination is illegal, then churches would face the prospect of lawsuits by gay or transgender individuals who are denied employment in nonministerial roles,” said Thomas Berg, a professor with the University of St. Thomas School of Law in Minnesota, through an email interview with Church Law & Tax. “But it’s highly uncertain whether the Court will declare sexual orientation/gender identity discrimination illegal.”

Go deeper

Does Title VII Apply to Sexual Orientation and Gender Identity?” (accessible to Church Law & Tax Advantage members) features an in-depth look at these three cases before the Supreme Court, how Title VII works, how the “ministerial exception” does and does not apply, the complications posed by state employment laws, and five steps churches should contemplate implementing now, regardless of the Supreme Court’s upcoming decision. Become a Church Law & Tax Advantage Member.

Q&A: Should Policies and Procedures Be Separate Documents?

A church business manager shares best practices learned through the process.

I’m working on a policies and procedures manual for my church. It has grown to 28 pages, and I expect it will get longer. Would it be better to have separate documents—one for policies and one for procedures—or should everything be kept in a single document? Also, what else should we consider when developing policies and procedures for our church?

We went through this process a number of years ago and settled on the following best practices that may prove helpful to you.

Policies and procedures are separate documents

We decided to create two separate documents, but one references the other.
There were three reasons for doing this:
  1. Church boards should be focused on policies and not on writing and monitoring procedures for policies. This helps board members stay focused on the broader area of church governance without burdening them with step-by-step procedural matters.
  2. Procedures typically change much more often than policies, and they should. System, organizational, and other changes may trigger the need to rework procedures within a church. Procedures are best kept up to date by staff using some formal review and approval methodology to ensure they stay true to policy and operational standards.
  3. Staff and volunteers will be able to reference specific procedures related to their job easier. Sometimes a policy requires multiple procedures. Yet employees or volunteers with specific jobs often only need to refer to a procedure or procedures related to their areas of responsibility. Having policies and procedures all lumped into one document can make it hard for your staff and volunteers to parse out what they need to do.
  4. Procedures are based on what works best operationally

    Some thought needs to go into the proper content or steps for each procedure. Sometimes it can get confusing for someone doing role A to be handed a procedure that covers roles A, B, C, D, and E. On the other hand, it can be helpful to see how one role works together with others. Similarly, sometimes a procedure will apply to more than one policy. Again, procedures need to be carefully thought through and also clearly communicated or an employee may become confused and frustrated.
    At our church, we have a group made up of operational management staff that helps employees set up and implement procedures. This group also acts as a review/approver body to make sure the procedures put in place perform to all the policy requirements and don’t leave anything out.
    At the end of the day, you want procedures that are clear, unambiguous, and easy to digest by those who use them.

    Employee handbook—the big exception

    An employee handbook typically contains the policies and practices that pertain to all church staff. While this handbook is mostly a policy document, it also tends to include a fair amount of procedure—at least at a high level.
    For example: After explaining the workers’ compensation benefit, the handbook will typically instruct employees on the first steps of what to do if they are injured on the job. Undoubtedly, there are other procedures needed for a workers’ compensation policy, but those would be directed to, for instance, the claims administrator. The handbook would only include procedural steps that the employee needs to take.
    Timecard reporting and vacation requests are two other areas, among others, that typically include some high-level procedures.

    How to decide when a policy should be in an employee handbook and when it should be a separate church policy

    If a policy only applies to church staff, we put it in the employee handbook.
    If a policy applies to church staff and others (e.g., volunteers or congregants), we create a church policy and then reference it and repeat some or all of the policy in the employee handbook.
    If a policy primarily deals with church governance, the congregation, or organization as a whole, it is a church policy.
    Note: Calling something a “church policy” does not necessarily mean that staff members are not affected. For example, most or all staff are typically congregants. Another example is a policy on the church budget might have elements that the finance manager must abide by.

    Department procedures are generally determined within a department

    There is a need for procedures to accomplish specific tasks within a given department or area of ministry. When tasks apply only to employees within a department or ministry area (and aren’t tied to church policy), we generally let the department or ministry area establish and maintain those procedures.
    Mark Simmons is the business manager Christ Community Church Milpitas, California.

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Does Title VII Apply to Sexual Orientation and Gender Identity?

Supreme Court ruling in 2020 could have implications for a church’s hiring and firing decisions.


Editor’s Note: Since this article published, the US Supreme Court handed down its ruling concluding the definition of “sex” under Title VII of the Civil Rights Act of 1964 should also include sexual orientation and gender identity (Bostock v. Clayton County, 140 S. Ct. 1731 (2020)). However, the Court also said the decision should not apply to religious organizations. Be sure to read attorney Frank Sommerville’s in-depth analysis of Title VII and what the
Bostock decision means for churches and religious organizations.

This article is part of the Advantage Membership. Learn more on how to become an Advantage Member or upgrade your membership.

Three cases argued last month before the United States Supreme Court raise a key employment question that may significantly affect the way churches approach future hiring, firing, compensation, and benefits decisions involving nonministerial employees.

Though a ruling is not expected until the Supreme Court’s current term ends in the spring of 2020, legal experts say congregations with theologically conservative views of human sexuality should note the situation and contemplate taking several steps now to protect those positions.

At issue before the Supreme Court: How the term sex should be interpreted under Title VII of the Civil Rights Act of 1964. The federal law prohibits employers with 15 or more workers from discriminating against people based on their race, color, religion, national origin, or sex, the latter term long-assumed to mean biological gender (male or female).

The plaintiffs in the three cases, however, argue the definition means more than biological gender and should encompass sexual orientation and gender identity, thus providing legal protections for people who are gay or transgendered. The defendant employers—two for-profit businesses and one county government—contend the respective dismissals in their cases were not solely based on sexual orientation or gender identity, if at all. And even if they were, the defendants add, Title VII does not prohibit decisions based on such criteria because Congress never contemplated such a broad meaning of sex when the law was passed 55 years ago.

The three cases—Bostock v. Clayton County, Georgia; Altitude Express v. Zarda; and Harris Funeral Homes v. the Equal Employment Opportunity Commission—were consolidated into one case (Bostock) by the Supreme Court since they address similar matters. Although no church or religious organization is involved with this particular litigation, religious-related concerns still arose during oral arguments, leaving observers to wonder what potential impact could come to churches if a Court majority sides with the plaintiffs.

“If the Supreme Court rules that sexual orientation/gender identity discrimination is illegal, then churches would face the prospect of lawsuits by gay or transgender individuals who are denied employment in nonministerial roles,” said Thomas Berg, a professor with the University of St. Thomas School of Law in Minnesota, through an email interview. “But it’s highly uncertain whether the Court will declare sexual orientation/gender identity discrimination illegal.”

A “ministerial exception”—but what else?

Churches already receive broad First Amendment protection to select their ministers without interference by civil courts—a right known as the “ministerial exception” that was unanimously recognized and affirmed by the Supreme Court after its 2012 decision in Hosanna-Tabor Evangelical Lutheran Church & School v. E.E.O.C. However, Hosanna-Tabor left open the question of just how much latitude churches receive with employment decisions involving nonministerial positions, such as those of secretaries, bookkeepers, or janitors.

“Every Court of Appeals to have considered the question has concluded that the ministerial exception is not limited to the head of a religious congregation, and we agree,” Chief Justice Roberts wrote in the Hosanna-Tabor opinion. “We are reluctant, however, to adopt a rigid formula for deciding when an employee qualifies as a minister.”

Title VII, as well as other case decisions, offer three additional clues about potential exemptions for churches and their nonministerial employment decisions, but ambiguity remains:

  • Clue No. 1: Title VII applies to employers that engage in commerce and employ 15 or more people for at least 20 weeks in either the current or previous calendar year. This means churches with fewer than 15 employees are not subject to the federal law. (However, small churches still must note whether state employment laws apply to them—more on that below.)
  • Clue No. 2: Title VII contains an exemption allowing a religious organization to hire individuals “of a particular religion.” For instance, Christian churches do not have to hire Muslims, nor do Muslim mosques have to hire Christians. In a key 1987 decision, Corp. of the Presiding Bishop of the Church of Jesus Christ of Latter-day Saints v. Amos, the Supreme Court affirmed this exemption and even went one step further, indicating courts should refrain from inquiring into how much nonministerial roles are religious or secular in nature.
  • Furthermore, lower federal courts have varied in their interpretations of the religion-based exemption, some narrowly, others broadly, noted Luke Goodrich, an attorney with the Washington, DC-based Becket Fund for Religious Liberty, in an email interview.

Attorney Sally Wagenmaker, whose Chicago-based firm serves churches and nonprofits, said she believes both the Title VII religious exemption and the Amos decision provide churches with strong cover, and still will do so regardless of the current slate of cases before the Supreme Court. “Taken together, a church employer should be able to impose a code of conduct or similar religious standards, such as no sexual activity outside of one man/one woman marriage, consistent with its biblical standards,” she said in an email interview.

  • Clue No. 3: Title VII includes a job-based exemption called a “bona fide occupational qualification” (BFOQ). Under this exemption, when a position requires a specific qualification in order for the employer to operate, such as religious beliefs and behaviors for a specific role at a church, then the employer may lawfully discriminate based on that qualification. “The limit is that the Supreme Court has said this exemption is ‘extremely narrow,’ applying only when sex or another characteristic ‘actually interferes with the employee’s ability to perform the job’ in matters involving the entity’s ‘central mission,’” Berg said. It is therefore hard to say how a court would view a religion-based BFOQ used specifically with a nonministerial job in a church.

Though these three clues offer possible reassurances about the protections churches receive, notable uncertainty still lingers. With the Bostock, Zarda, and Harris Funeral Homes cases looming, that leaves the question open as to how an expanded definition of sex would or would not affect churches in their nonministerial employment decisions.

What about Religious Freedom Restoration Acts?

In 1993, Congress passed—nearly unanimously—the Religious Freedom Restoration Act (RFRA). After a subsequent Supreme Court ruling deemed the law applied only to the federal government and not state governments, at least 21 states have passed similar laws.

In general, these laws say the government may not “substantially burden” the free exercise of religion protected by the First Amendment unless the government can show both a “compelling state interest” exists and that the action it took to further that interest was administered in the narrowest way possible. Some theorize RFRAs could offer protection from Title VII complaints against churches should the Supreme Court decide to interpret sex to include sexual orientation and gender identity.

However, RFRAs are not necessarily a viable defense since discrimination lawsuits are initially brought by private parties, not government actors, and RFRAs specifically address government-initiated actions, Berg said. “A small number of courts have held that RFRA applies only to suits involving government parties, such as criminal or civil prosecutions, not to suits brought by private parties,” he added. “The Supreme Court has not yet resolved that uncertainty either.”

Also unclear: Whether any action triggered by a private party complaint and pursued through the EEOC or a comparable state agency would sufficiently constitute the “state action” required for a RFRA-tied defense.

State employment laws

Also lurking in the background are state employment discrimination statutes. Many states set lower employee-count thresholds than Title VII, and they may not include religious and BFOQ exemptions similar to Title VII. As the language of Title VII notes, a state law will supersede it whenever the state law is stricter in its language or requirements.

“Since state laws can vary widely, churches should investigate them—particularly to determine whether any express exceptions apply and, if so, their scope,” Wagenmaker said.

While local laws may institute stricter standards, they still are limited by the US Constitution, too, added attorney Frank Sommerville, an editorial advisor for Church Law & Tax. A 2018 decision by a federal district court in Missouri, for instance, found a city ordinance prohibiting discrimination based on sexual orientation violated the First Amendment rights of churches because it lacked a religious exemption, he said. The case, Our Lady’s Inn v. City of St. Louis, does not set national precedent and did not deal with employment law. But it shows municipalities, in general, “have to accommodate the First Amendment. [They] have to accommodate religion and religious organizations, period,” Sommerville said.

Five steps to take now

Until the Supreme Court issues a definitive word about its interpretation of sex under Title VII, legal experts suggest congregations holding traditionally orthodox views of human sexuality take several steps now. These are designed to help reinforce their views as well as defend any future actions they take in relation to those views.

Step No. 1: Churches should document their sincerely held religious beliefs about human sexuality and marriage, and how those clearly align with the church’s purpose and mission, in both their bylaws and employee handbooks, all four legal experts said. While church leaders often ask whether such changes also should be made to a church’s constitution or articles of incorporation, those are not necessary. The constitution does not naturally lend itself to such matters, while articles of incorporation are also less related and, because of their public nature, can draw unnecessary outside scrutiny, Sommerville said.

The policy changes to the employee handbook should be acknowledged and signed by existing ministers and staff, as well as all future hires, and reaffirmed annually, Sommerville added. Additionally, “[t]o be safest,” Berg said, “churches should consider requiring that employees agree not only to behave according to conduct standards but also affirm belief in the standards.”

Berg said that “belief affirmations bolster a church’s claim to the ‘organization-wide’ exemption [under Title VII]: they show that the church consistently makes distinctions based on employees’ beliefs (‘religious discrimination,’ which the exemption protects), not based on their or their partner’s sex or sexual orientation (‘sexual orientation/gender identity discrimination,’ where the exemption’s application is more uncertain).”

 

These steps also provide stronger protections for churches with respect to state laws, even when those laws are more employee-friendly, Berg added. “[T]he steps … will often strengthen a church’s claim to an exemption—either because the employee is a ‘minister’ (and thus the First Amendment protects the church), or because adherence to traditional sexual norms in that position is necessary to the church’s mission (and thus is a ‘BFOQ’), or because the church consistently requires adherence to traditional beliefs, not just opposite-sex-only conduct (thus it discriminates based on religion, not sex or sexual orientation/gender identity),” he said.

 

Step No. 2: Job descriptions also should be updated. Berg said they “can explicitly state and show that certain employees perform crucial religious functions (making them more likely to be “ministers”), or that sexual-conduct standards in certain jobs are “necessary” to the church’s operation and theological witness (making adherence to the standards a ‘BFOQ’).”

Step No. 3: Goodrich said employment practices from “front-end hiring” to “back-end communication and enforcement” all need to align with the church’s mission. Sommerville said that alignment should incorporate this recommendation he makes to all church clients: “Job applicants should be required to believe and follow the church’s statement of their sincerely held religious beliefs before the church will accept their application. This process establishes that any discrimination occurs only within the context of the church’s sincerely held religious beliefs.”

Step No. 4: The legal experts said churches should regularly consult with qualified legal help. Goodrich encouraged churches to regularly assess their potential employment litigation risks with an attorney. Berg referenced online resources available from Christian Legal Society (CLS) and Alliance Defending Freedom (ADF)—two legal networks consisting of Christian attorneys—that offer further guidance (for CLS, those are found here and here; for ADF, it is found here).

Step No. 5: Churches should make changes now, Sommerville said, rather than await the outcome of Bostock, Zorda, and Harris Funeral Homes. Should a Court decision perceived to be negative occur, changes made after that may give the appearance they came only in response to that adverse outcome. And if a perceived favorable outcome occurs, there is nothing to say a negative one still won’t arise down the road. “Churches need to be prepared for this eventuality,” Sommerville added.

Kindness still counts

Lastly, the experts encouraged church leaders to maintain kindness and civility as they navigate employment-related matters with ministers and staff, especially when controversial theological topics—such as sexual orientation and gender identity—arise.

Work should always be done to minimize potential conflicts, Goodrich said, and to extend “kindness, grace, and generosity to all employees.”

Matthew Branaugh is editor of content and business development for Christianity Today’s Church Law & Tax.

Advantage Member Exclusive

Key Year-End Financial and Tax Tasks for Church Leaders

On-Demand Webinar: CPA and attorney Richard Hammar lists critical tasks to focus on as the year draws to a close.

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Renowned attorney and CPA Richard R. Hammar joined Church Law & Tax for an exclusive Advantage member webinar. In this one-hour webinar, Richard provides key end-of-year tasks that churches and church leaders should consider for a successful end to 2019.

Key topics include:

  • Business Expenses
  • Housing Allowances
  • Charitable Contributions

Churches Can Once Again Reimburse Employee Health Care Costs

New rules maintain the same tax-favored status for employer contributions toward a traditional group health plan.

New rules issued in 2019 by the US Department of Labor, US Department of Health and Human Services, and US Department of the Treasury (collectively, the Departments) fundamentally transformed the way many employers assist employees with their health care costs.

This significant development will again allow employers to:

  • reimburse employees for some or all of the premium expenses they pay for an individual health insurance policy, and
  • use their funds to directly pay the premiums for individual health insurance policy covering an employee.

Employers commonly used these methods to provide health insurance for employees for over half a century, but they had been made unlawful by the Affordable Care Act (ACA or Obamacare).

Background

The Affordable Care Act contains several reforms of the insurance market (market reforms) that apply to group health plans, including the following:

  • Annual dollar limit prohibition. A group health plan may not establish any annual limit on the dollar amount of benefits for any individual.
  • Preventive services requirement. Employer-sponsored group health plans must provide certain preventive services without imposing any cost-sharing requirements for these services on employees.

Prior to the enactment of the ACA, the tax code contained a number of popular tax-favored options for covering employees’ health care costs, including employer payment plans (EPPs). But since EPPs typically did not incorporate the two market reforms listed above, they were illegal under the Affordable Care Act. This meant that employers that continued to use EPPs, which had been used for over half a century to pay some or all the costs of employees’ health care, faced a staggering penalty of $100 per day ($36,500 per year) per employee.

Defining an EPP. The Internal Revenue Service (IRS) defines an EPP as any plan under which “an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy . . . or arrangements under which the employer uses its funds to directly pay the premium for an individual health insurance policy covering the employee.” Notice 2013-54.

For additional background information on the Obamacare reforms discussed above, see my article, “ Are Church-Paid Medical Insurance Benefits Taxable?

Two significant developments

The use of EPPs was partially restored by two significant developments:

  • Qualified small-employer health reimbursement arrangements (QSEHRAs) and
  • “Individual Coverage HRAs” (ICHRAs). These options will again allow many employers to (1) reimburse employees for some or all of the premium expenses incurred for an individual health insurance policy, and (2) use their funds to directly pay the premiums for individual health insurance policy covering an employee.

Both developments are addressed below.

Qualified small-employer health reimbursement arrangement

Under the 21st Century Cures Act (2016), a QSEHRA is generally not a group health plan under the tax code and thus is not subject to the group health plan requirements. Most importantly, this means that a QSEHRA will not be assessed the $100 per day per employee penalty for failure to comply with the market reforms that apply to group health plans.

In brief, a QSEHRA is defined as an arrangement that:

  • is provided on the same terms to all eligible employees of an eligible employer;
  • is funded solely by the eligible employer, and no salary reduction contributions may be made under the arrangement;
  • provides, after an employee gives proof of minimum essential coverage, for the payment or reimbursement of medical expenses of the employee and family members; and
  • the amount of payments and reimbursements under the arrangement for a year cannot exceed specified dollar limits (for 2019, the dollar limit for an employee is $5,150 or $10,450 for an employee and family members).

Eligible employers and employees. For definitions and qualifications, see my article “New Act Restores Tax-Free Premium Reimbursements for Many.

The relief from the $100 per day excise tax will not benefit all churches. A church may be subject to the penalty if, for example, it offers an employer payment plan or health reimbursement arrangement (in which an employer reimburses the employee for medical expenses generally of the employee and family members) and

  • it is an applicable large employer with an average of 50 full-time and full-time equivalent (FTE) employees during the previous calendar year;
  • it offers a group health plan to any of its employees;
  • it contributes more than $5,150 ($10,450 for a family) to an employer payment plan or health reimbursement arrangement; or
  • the arrangement fails to satisfy one or more of the other requirements for a QSEHRA summarized above. (The $5,150 and $10,450 amounts are adjusted annually for inflation and represent the 2019 amounts.)

Section 6652(o) of the tax code provides a penalty of $50 per employee (up to a maximum of $2,500 per calendar year per eligible employer) for failure to provide a written notice (see IRS Notice 2017-20).

The law’s provision of relief from the $100 per day per employee penalty for noncompliant group plans is effective retroactively.

Churches that have used an employer payment plan in the past, or that are using one now, should bear in mind the following points:

  • Such plans may trigger an excise tax penalty of $100 per day per affected employee unless an exemption applies.
  • Employers with fewer than 50 employees may avoid the $100 per day per employee penalty by adopting a QSEHRA.
  • Larger employers (with 50 or more full-time employees during the prior year) are subject to the $100 per day per employee excise tax for maintaining an employer payment plan unless an exception applies.
  • One exception approved by the IRS in Notice 2015-17 is to implement a plan that “increases an employee’s compensation, but does not condition the payment of the additional compensation on the purchase of health coverage (or otherwise endorse a particular policy, form, or issuer of health insurance).” Similarly, Notice 2013-54 provides that an employer payment plan “does not include an employer-sponsored arrangement under which an employee may choose either cash or an after-tax amount to be applied toward health coverage. Individual employers may establish payroll practices of forwarding post-tax employee wages to a health insurance issuer at the direction of an employee without establishing a group health plan, if the standards of the DOL’s regulation 2510.3-1(j) are met.”
  • Large employers with 50 or more employees during the previous year should consult with a tax professional to address compliance issues.
  • An arrangement under which an employer reimburses (or pays directly) some or all of Medicare Part B or Part D premiums for employees constitutes an employer payment plan, as described in Notice 2013-54, and if such an arrangement covers two or more active employees, it is a group health plan subject to the market reforms. An employer payment plan may not be integrated with Medicare coverage to satisfy the market reforms because Medicare coverage is not a group health plan.

For additional background information and other pertinent details, see IRS Notice 2017-20 and my article “New Act Restores Tax-Free Premium Reimbursements for Many.”

New rules for health reimbursement arrangements (HRAs)

The new rules released by the Departments permit employers to offer a new individual coverage health reimbursement arrangement (ICHRA) as an alternative to traditional group health plan coverage, subject to certain conditions. Among other medical care expenses, ICHRAs can be used to reimburse premiums for individual health insurance chosen by the employee, promoting employee and employer flexibility, while also maintaining the same tax-favored status for employer contributions toward a traditional group health plan.

Specifically, this significant development will again allow employers to

  • reimburse employees for some or all of the premium expenses incurred for an individual health insurance policy, and
  • use their funds to directly pay the premiums for an individual health insurance policy covering an employee.

As mentioned earlier, this benefit was commonly used by employers in the past to provide health insurance for employees, but was made illegal by the Affordable Care Act.

The new rules also increase flexibility in employer-sponsored insurance by creating another, limited kind of health reimbursement arrangement (HRA) that can be offered in addition to a traditional group health plan. These “excepted benefit” HRAs” (EBHRAs) permit employers to reimburse dental, vision, long-term care, COBRA, and the cost of copays, deductibles, or other expenses not covered by the primary plan even if the employee declines enrollment in the traditional group health plan. However, individual insurance premiums are not eligible for reimbursement under EBHRAs.

Most importantly, the new rules will provide hundreds of thousands of employers a better way to offer health insurance coverage and millions of workers and their families a better way to obtain coverage. The ICHRA rules will especially help small employers, who face larger administrative costs from offering a traditional group health plan, compete for talent. Many small employers struggle to offer coverage to their employees, and a significant number of small employers have stopped offering coverage since 2010.

Supporting Statistic. Between 2010 and 2018, the percentage of firms offering coverage declined from 59 percent to 47 percent at firms with 3 to 9 workers, from 76 percent to 64 percent at firms with 10 to 24 workers, from 92 percent to 71 percent at firms with 25 to 49 workers, and from 95 percent to 91 percent at firms with 50 to 199 workers (2018 Employer Health Benefits Survey from the Kaiser Family Foundation).

The Departments estimate that once employers fully adjust to the new rules, roughly 800,000 employers will offer ICHRAs to pay for insurance for more than 11 million employees and family members, providing these Americans with more options for selecting health insurance coverage that better meets their needs.

ICHRAs provide tax advantages because the reimbursements provided to employees do not count toward the employees’ taxable wages. In effect, ICHRAs extend the tax advantage for traditional group health plans (exclusion of premiums, and benefits received, from federal income and payroll taxes) to reimbursements of individual health insurance premiums.

Employers may also allow employees to pay for health insurance purchased outside the ACA-created health insurance exchange (off-exchange) on a tax-favored basis, using a salary reduction arrangement under a cafeteria plan, to make up any portion of the individual health insurance premium not covered by the employee’s ICHRA.

Note. Employers are not required to assist employees in finding health insurance in the private market. This is the employees’ responsibility.

In most cases, the ICHRA rules will increase worker options for health insurance coverage, allowing workers to shop for plans in the individual market and select coverage that best meets their needs. These rules will also result in coverage being more portable for many workers.

Supporting statistic. Of employers offering health benefits in 2018, 81 percent of small to midsized employers (fewer than 200 employees) and 42 percent of larger employers (at least 200 employees) provided only one type of health plan to their employees (2018 Employer Health Benefits Survey from Kaiser Family Foundation).

Facts to consider about ICHRAs

Church leaders should note the following additional information about ICHRAs.

An ICHRA reimburses employees for their medical care expenses (and sometimes their family members’ medical care expenses), up to a maximum dollar amount that the employer makes available each year. Qualifying medical expenses are listed in IRS Publication 502. The employer can allow unused amounts in any year to roll over from year to year.

Employees must enroll in individual health insurance (or Medicare) for each month the employee (or the employee’s family member) is covered by the ICHRA. This can be individual health insurance offered on or off an Exchange. However, it cannot be short-term, limited-duration insurance (STLDI) or coverage consisting solely of dental, vision, or similar “excepted benefits.”

Employers that offer an ICHRA must offer it on the same terms to all individuals within a class of employees, except that the amounts offered may be increased for older workers and for workers with more dependents.

You cannot offer an ICHRA to any employee to whom you offer a traditional group health plan. However, you can decide to offer an ICHRA to certain classes of employees and a traditional group health plan (or no coverage) to other classes of employees. Employers may make distinctions, using classes based on the following status:

  • Full-time employees
  • Part-time employees
  • Employees working in the same geographic location (generally, the same insurance rating area, state, or multistate region)
  • Seasonal employees
  • Employees who have not satisfied a waiting period
  • Nonresident aliens with no US-based income
  • Salaried workers
  • Non-salaried workers (such as hourly workers)
  • Temporary employees of staffing firms, or
  • Any group of employees formed by combining two or more of these classes.

To prevent adverse selection in the individual market, a minimum class size rule applies if you offer a traditional group health plan to some employees and an ICHRA to other employees. The minimum class size is 10 employees for an employer with fewer than 100 employees.

Employers can contribute as little or as much as they want to an ICHRA. However, an employer must offer the ICHRA on the same terms to all employees in a class of employees, except that employers can increase the amount available under an ICHRA based on the employee’s age or number of dependents.

Employers must provide a written notice to eligible participants regarding the ICHRA and its interaction with the premium tax credit. Employers must also have reasonable procedures to substantiate that participating employees and their families are enrolled in individual health insurance or Medicare, while covered by the ICHRA. Employees must also be permitted to opt out of an ICHRA at least annually so they may claim the premium tax credit if they are otherwise eligible and if the ICHRA is considered unaffordable.

If an employee opts out of the ICHRA, the employer generally will not have any responsibility with respect to the individual health insurance itself that is purchased by the employee, because it will not be considered part of an employer-sponsored plan, provided:

  • An employee’s purchase of any individual health insurance is completely voluntary
  • You do not select or endorse any particular insurance carrier or insurance coverage
  • You don’t receive any cash, gifts, or other consideration in connection with an employee’s selection or renewal of any individual health insurance
  • Each employee is notified annually that the individual health insurance is not subject to the Employee Retirement Income Security Act (ERISA), which is the federal law governing employer-provided health coverage.

Q&A about ICHRAs and EBHRAs

Here are the answers to some key questions about ICHRAs and EBHRAs:

Can an employer offer an ICHRA to satisfy the employer mandate?

First, only certain employers—in general, those with at least 50 full-time employees, including full-time equivalent employees, in the prior year—are applicable large employers subject to the employer mandate. An offer of an ICHRA counts as an offer of coverage under the employer mandate.

In general, whether an applicable large employer that offers an ICHRA to its full-time employees (and their dependents) owes a payment under the employer mandate will depend on whether the ICHRA is affordable. This is based, in part, on the amount the employer makes available under the ICHRA. Therefore, if you are an applicable large employer and want to avoid an employer mandate payment by offering an ICHRA, in general, you will need to contribute a sufficient amount for the offer of the ICHRA to be considered affordable.

Additional Information from the IRS. The IRS has announced that it will provide more information on how the employer mandate applies to ICHRAs. When this announcement is made, it will appear on irs.gov.

May an employer allow employees to pay any portion of the premium for their individual health insurance that is not covered by the ICHRA on a tax-preferred basis by using a salary reduction arrangement under a cafeteria plan?

The Internal Revenue Code provides that an employer may not permit employees to make salary reduction contributions to a cafeteria plan to purchase coverage offered through an Exchange. However, that restriction does not apply to coverage that is purchased off an Exchange. Therefore, if an employee buys individual health insurance outside an Exchange and the ICHRA doesn’t cover the full premium, the employer could permit the employee to pay the balance of the premium for the coverage on a pretax basis through its cafeteria plan, subject to other applicable regulations.

Can large employers offer ICHRAs too?

Yes. Although the Departments expect that the rule will especially benefit small and mid-sized employers, employers of all sizes may offer an ICHRA, subject to the conditions in the ICHRA rules.

What are the benefits of offering an EBHRA?

There may be scenarios in which you wish to offer a reimbursement plan in addition to a traditional group health plan—for example, to help cover the cost of copays, deductibles, or non-covered expenses. EBHRAs generally allow for higher levels of employer contributions than health flexible spending arrangements (FSAs) and can permit rollover of unused amounts from year to year. Beginning in 2020, reimbursement arrangements can be offered as “excepted benefits” which are exempt from many federal health care requirements that don’t work well for account-based plans. Employees may use these EBHRAs even if they do not enroll in the traditional group health plan (or in any other coverage), which distinguishes the EBHRA from other HRAs.

To qualify as excepted benefits:

  • The annual HRA contribution must be limited to $1,800 per year (indexed for inflation beginning in 2021).
  • The HRA must be offered in conjunction with a traditional group health plan, although the employee is not required to enroll in the traditional plan.
  • The HRA cannot be used to reimburse individual health insurance premiums, group health plan premiums (other than COBRA), or Medicare premiums, although it can reimburse premiums for excepted benefits, such as dental and vision coverage, as well as for STLDI.
  • The HRA must be uniformly available to all similarly situated individuals (as defined under the Health Insurance Portability and Accountability Act, which generally permits bona fide employment-based distinctions unrelated to health status).

The EBHRA will help some of the growing number of employees who have been opting out of their employer’s traditional group health plan because the employee’s share of premiums is too expensive.

Supporting Statistic. In 1999, 17 percent of workers eligible for employer coverage at small and midsized firms (those with 3 to 199 workers) turned down the offer of employer coverage. By 2011, this share had climbed to 22 percent, and in 2018 it was 27 percent (2018 Employer Health Benefits Survey from the Kaiser Family Foundation).

Need help setting up an ICHRA or EBHRA?

Contact:

  • your church pension provider
  • an attorney
  • CPA
  • employee benefits professional
  • the Department of Labor at 1-866-444-3272 or askebsa.dol.gov. More information regarding ICHRAs and Excepted Benefits HRAs is also accessible at dol.gov/agencies/ebsa.
  • the IRS Office of Chief Counsel, Health and Welfare Branch, at 202-317-5500 (not a toll free number) regarding the federal tax-treatment of employer-provided health coverage.

QSEHRA or ICHRA?

The Departments’ supplementary information to the final rule note that “an employer may not both offer an ICHRA and provide a QSEHRA.”However, “the final rules do not change the ability of eligible employers to provide QSEHRAs. Rather, the final rules provide an opportunity for all employers, including those who may or may not qualify to sponsor a QSEHRA, to sponsor an individual coverage HRA.”

Many employee benefits professionals are suggesting that employers use QSEHRAs instead of ICHRAs unless

  • they have 50 or more employees,
  • the caps on contributions to an ICHRA are too low, or
  • you want more freedom to provide an ICHRA to only certain classes or groups of employees.

Mastering Seventeen End-of-Year Financial Tasks

Mastering seventeen end-of-year financial tasks before January 1, 2025, will help churches and ministers thrive with the upcoming tax season.

Last Reviewed: October 24, 2024

Here’s to finishing 2024 strong and getting off to a great start in 2025!

1. Designate a housing allowance

A key end-of-year financial task for a church board or congregation should be designating a housing allowance for 2024 for ministers who own or rent their home (and for ministers who live in a parsonage and who pay some of their housing expenses from their own funds). 

Find sample housing allowance and parsonage allowance resolutions in chapter 6 of Richard Hammar’s annual Church & Clergy Tax Guide.

“Because housing allowances can only be provided prospectively (that is, after they have been approved by the board or the board’s designee), obtain approval from the board prior to January 1,” advises Rob Faulk, a CPA and partner with CapinCrouse.

2. Review W-4 forms

All employees should review their W-4 form and submit a new form if circumstances have changed. This will ensure accurate tax withholding.

“Many employees are surprised when they complete their tax return and find they owe money,” says Elaine Sommerville, a CPA and senior editorial advisor for Church Law & Tax. “Employees may be caught short on taxes paid if both spouses are working.”

She explained that the tax withholding tables “don’t appropriately take a dual-earner household into consideration. It is advisable for employees who owed money with their 2023 Form 1040 to complete a new Form W-4 at this time.”

And don’t leave out ministers, says Frank Sommerville, a CPA, tax attorney, and senior editorial advisor for Church Law & Tax. Unfortunately, “many ministers just go to the treasurer and say, ‘Withhold such-and-such from a paycheck,’” he said. “But the pastor should also fill out a W-4 or provide other written documentation for withholding income tax.” (For more information on this aspect of the topic, see #9 below.)

Tip. Visit the IRS’ publications site to download the 2025 edition of IRS Publication 15 for the new withholding tables. (This publication is regularly updated each December for the upcoming year.)

3. Provide a notice to donors

Advise donors in the church bulletin or newsletter, on the church website, or in a letter or email from the church, not to file their federal income tax return before they receive their contribution summary from the church.

Donors may not be able to deduct individual contributions of $250 or more if they file a tax return before receiving a qualified contribution receipt from their church.

Double-check the software the church uses to prepare charitable contributions receipts to confirm that the vital “no goods or services other than intangible religious benefits were provided” statement is included when the receipts are prepared.

“Making sure donors have those contribution acknowledgements prior to filing is definitely important,” added Kaylyn Varnum, a partner and assistant national director for tax services for the accounting firm Batts Morrison Wales & Lee, and an advisor-at-large for Church Law & Tax.

While deductions may be available to fewer donors, it’s still important to notify all donors, Frank Sommerville stressed, because churches simply don’t know who might qualify for a deduction.

Tip. Answer many of your members’ questions about charitable giving and tax law with the Charitable Contributions Tax Reminder (for their 2023 returns).

4. Determine if contributions are effective for 2024 or 2025

The general rule is that a contribution is effective when delivered. A check deposited in the church offering in January of 2025 cannot be deducted in 2024, even if it is backdated to 2024. One exception—checks mailed and postmarked in 2024 are deductible in 2024, even if they are not received until 2025.

IRS Publication 526 offers these guidelines for three other types of giving (adapted):

  • Text message. Texted contributions are deductible in the year the donor sends the text message if the contribution is charged to the telephone or wireless account.
  • Credit card. Contributions charged on the donor’s bank credit card are deductible in the year the donor makes the charge.
  • Pay-by-phone account. Contributions made through a pay-by-phone account are considered delivered on the date the financial institution pays the amount. This date should be shown on the statement the financial institution sends the donor.

5. Correctly handle gifts and noncash/cash benefits to staff and volunteers

Consider these two categories of gifts:

  • Cash Christmas gifts to employees. Be sure to correctly handle any Christmas gifts made by the church or congregation to a minister or lay staff member. In most cases, these transfers represent taxable income and not a tax-free gift and must be reported as income on the recipient’s W-2.

    “If the gifts are paid through accounts payable, the value of the gifts will need to be submitted to the payroll system prior to the end of the year to allow for correct reporting on the recipient’s W-2 and on the church’s fourth-quarter Form 941,” Elaine Sommerville explains.
  • Noncash gifts to employees and volunteers. Noncash gifts may also create income requiring payroll reporting. A gift of property having a value so small “as to make accounting for it unreasonable or administratively impracticable” is a nontaxable “de minimis fringe benefit” (see Section 132(e)(1) of the tax code). This exception does not apply to cash or “cash equivalents” (such as gift certificates).

    “Information on noncash gifts that may not be considered as ‘de minimis’ will need to be provided to the payroll system prior to the end of the year to allow for correct reporting on the recipient’s Form W-2 and the church’s Form 941,” Elaine Sommerville says.

Avoid monetary gifts (including gifts cards) to volunteers of any amount, says Frank Sommerville.

“Once you give people money, they are no longer volunteers,” he says. “They are employees. Once you compensate them, then you’re getting into all kinds of issues. Does employment law apply? Does workers’ comp apply? Once you give them anything of value, they no longer qualify as a volunteer under many, many statutes.”

6. Be careful about accepting certain types of end-of-the-year noncash donations

Near the end of the year, churches should be wary of a noncash donation of significant value, such as an antique car or a gift of real estate. Some gifts might be hard to sell. With land, there could be unresolvable zoning issues or issues with toxic soil. With a building, there could be structural issues or a problem with lead or asbestos.

“You don’t want to be rushed into making a decision,” says Frank Sommerville. “If a gift comes in near the end of the year, you don’t have the time to do your due diligence.” He stressed that the gift could end up costing you a lot more than it is worth.

An exception: publicly traded stock. “Stock is pretty easy to address appropriately as a year-end gift,” he says.

Additional resources:Gifts of Property: Help Donors Get It Right” offers tips on handling noncash gifts of real property (buildings and land) while “Tax Rules for Gifts of Personal Property” offers tips on handling noncash gifts of personal property (such as cars, household items, and stock).

7. Review classification of employees for US Department of Labor (DOL) purposes

“Now is the time to decide if employees are properly classified for wage and hour purposes,” Elaine Sommerville says. “Review job descriptions to determine if employees qualify for the ministerial exception. Then review job descriptions for non-qualifying employees and decide if they’re exempt or non-exempt.”

This step cannot be overlooked for 2025 because the minimum weekly salary requirement for exempt employees under the federal Fair Labor Standards Act (FLSA) has changed.

On July 1, 2024, the requirement increased from $684 per week (or $35,568 per year) to $844 per week (or $43,888 per year). 

On January 1, 2025, the requirement jumps again, this time to $1,128 per week (or $58,656 per year).

The salary thresholds for the highly compensated employee classification also increased from $107,432 to $132,964 for 2024, and increases again in 2025 to $151,164.

The result of these changes: it is possible that employees properly classified as exempt employees are now nonexempt due to the higher minimum weekly salary requirement. Exempt employees falling below the threshold must be reclassified. It is still possible to compensate nonexempt employees on a salary arrangement. A church needs to take special steps with these arrangements, such as considering a strict no-overtime policy and requiring weekly timesheets from the new nonexempt employees.

For further guidance, see Elaine Sommerville’s article “The Right Way to Handle Wage Classifications,” and Frank Sommerville’s article “Fed Raises Minimum Salary Requirements for Exempt Status.

8. Make sure ministers are properly classified for paying into the Social Security system

Separate from applying the DOL’s ministerial exception discussed above, a church must also determine who is a minister for IRS and Social Security purposes.

Many churches incorrectly report ministers as employees for paying into the Social Security system by withholding Social Security and Medicare taxes from their wages. This is incorrect, since the tax code classifies ministers as self-employed for purposes of paying into the Social Security/Medicare system with respect to services they perform in the exercise of ministry. As a result, they pay the self-employment tax with their individual income tax returns and not through withholding and employer matching of Social Security and Medicare taxes.

Now is also a good time to provide information to ministers regarding their unique tax classifications to make them aware of the unusual filing requirements.

Caution. Ministers who are incorrectly classified for Social Security and Medicare jeopardize their ability to receive the tax-free housing allowance. The ideal time to reclassify these ministers as self-employed for Social Security is January 1 and the prior year’s reporting should be corrected to preserve the other benefits afforded to ministers.

9. Voluntary withholding

Since ministers’ wages are exempt from Social Security, Medicare, and federal income tax withholding (with respect to services performed in the exercise of their ministry), they use the quarterly estimated tax procedure to prepay their federal taxes.

However, ministers who report their income taxes as employees can enter into a voluntary withholding arrangement with their employing church by submitting written authorization—such as a letter, email, or a W-4 form—to the appropriate church representative. Under such an arrangement, the employing church withholds income taxes as it would for any other employee and also can withhold an additional amount of income taxes to cover the minister’s self-employment tax liability.

Tip. The ideal time to start voluntary withholding is January 1. However, Ted Batson, a CPA and tax attorney with CapinCrouse, and an advisor-at-large for Church Law & Tax, says adjustments in voluntary withholding can be made at any time during the year.

In addition, some churches have filed a Form 8274 with the IRS exempting themselves from the employer’s share of Social Security and Medicare taxes. As a result, lay employees of these churches are responsible for making quarterly estimated self-employment taxes to the IRS.

If the employee requests additional voluntary withholding, the church withholds an additional amount of federal income taxes to cover their estimated self-employment tax liability.

“For ministers who prefer to make estimated tax payments rather than allowing the church to withhold federal income tax, it is beneficial to enroll in the IRS Electronic Funds Transfer Payment System (EFTPS),” Elaine Sommerville suggests. “Making tax payments through the EFTPS system provides the minister with the ability to preschedule estimated tax payments and to receive immediate confirmations of the payments.”

10. Review plans for compensation in 2025

Review compensation and benefits for employees for the upcoming year. Doing so will “provide for the proper documentation of compensation packages and proper taxation of benefits provided to employees,” says Elaine Sommerville.

Additional resource: Find help for your various compensation issues in Elaine Sommerville’s book, Church Compensation, Second Edition: From Strategic Plan to Compliance.

11. Have applicable employees fill out various required elections

Certain plans require benefit elections by the beginning of the plan year. These include benefit elections for a church’s cafeteria plan or Section 125 plan, enrollment in insurance plans that begin on January 1, and the required health insurance opt-out election certificates required by large employers.

For any church that’s an applicable large employer—and currently in its annual benefit enrollment period—Rob Faulk from CapinCrouse offers this guidance: Ensure that any employee who chooses to opt out of the health benefit plan completes an opt-out election certificate [or waiver] and furnishes proof of enrollment in another qualified group health benefit plan from a source other than your church’s plan before coverage is terminated.

12. Review payments to any independent contractors

Preparations for filing the annual Forms 1099-NEC should include a review of payments to unincorporated independent contractors, including LLCs, and their related W-9 forms. (Credit card or PayPal payments are not reported on the Form 1099-NEC.)

With this task, it’s important to remember the electronic filing requirements for churches filing 10 or more reporting forms of any type and make plans to identify a provider who can accomplish this task (see Task #14 below for more information).

“If a Form W-9 hasn’t been obtained for a contractor, determine if the church has the correct address and Social Security/employer identification number for the contractor,” Elaine Sommerville stressed. “And don’t forget to include payments to attorneys even if paid to a law firm that is incorporated.”

Tip. The Form 1099-MISC is still used for other reportable payments, so make sure the church orders the right forms to report all necessary payments. For example, payments made to unincorporated lessors are still reported in Box 1 of Form 1099-MISC. Forms 1099-NEC are due to the IRS and the recipients by January 31, 2025, and Forms 1099-MISC are due to recipients by January 31, 2025, and to the IRS by February 28, 2025.

13. Report all taxable fringe benefits on W-2 forms

Did your church give a low-interest or interest-free loan to your pastor this year?

How about forgiving interest or principal on a loan to your pastor during the year?

Could employees’ children attend your summer camp without charge? Did you provide employees with free memberships to the local gym?

The value of such benefits needs to be reported on your employees’ W-2s “and included on your Form 941 with tax withholdings and payroll taxes paid as applicable,” Batson says.

“Whenever possible, taxes for fringe benefits should be withheld throughout the year and at the time the fringe benefit was received,” Batson says. “But in cases where that has not happened, the value of the fringe benefit should still be included on the W-2s at the end of the year.” 

Elaine Sommerville adds that “taxes associated with the fringe benefits may still be calculated and paid through additional withholding from employees’ final paychecks this year, if not calculated at the time the benefit was provided.”

“Fringe benefit plans should be reviewed to determine the plan documents are still in compliance with applicable law and the church is operating within the boundaries of the applicable benefit plan,” Elaine Sommerville says.

A church that provides its minister a car should download IRS Publication 15-B and review the Fringe Benefit Valuation Rules to ensure the proper amount for personal use is included in the pastor’s W-2,” Batson says.

14. Prepare for proper filing of Forms W-2 and 1099

The IRS requires electronic filing for 10 or more 1099, W-2, and many other forms. 

There are many easy systems allowing for electronic filing of payroll reports. The Social Security Administration maintains a portal for filing Forms W-2 electronically for smaller employers.

The IRS has created the Information Returns Intake System (IRIS) as a free system for meeting electronic filing requirements. Filers must register to utilize the IRIS system.

Local office supply stores sell hard copy forms for the few employers who may use them. While irs.gov/forms, offers many forms for download, Form 1096, Form 1099-MISC, and Form 1099-NEC still require original, red-colored forms when filing paper forms.

15. Finalize 2025 budgets and take care of any budgeting issues

If your current budget year ends on December 31, finalize your 2025 budget before then, Faulk advises. Further, he says to perform a variance review of income statement (actual vs. budget). “This process may affect decisions about next year’s budget and may be particularly challenging due to the changes caused by the pandemic,” Faulk explains. “To help, CapinCrouse offers a free e-book, How to Budget Effectively in Changing Times.”

Additional resource:Some Churches Keep Their Budgets Rolling,” by CPA Michael Batts provides insights on how to closely monitor income and expenses during unpredictable economic circumstances.

16. List and take care of any additional year-end items

Sit down and list any additional items that could easily slip through the cracks, which are particular to your church, then take care of them before the end of the year. Faulk mentions the following items:

  • Reconcile your church’s donor system to your general ledger, and then investigate any significant differences. This is an important internal control to help detect any errors and to prevent fraud.
  • If your church has a loan, talk to your lender about instances of noncompliance before the end of the year.
  • Learn more about how many of these year-end steps are effective tools for preventing financial fraud in your church.
  • Review and sign annual conflict-of-interest forms.
  • Reconcile detailed property and equipment depreciation listings to the general ledger.
  • Record destroyed items in accordance with document retention and destruction policies.
  • Review insurance policies and update as appropriate.
  • Document a list of authorized check signers and update bank records.
  • Document a list of those authorized to approve expenditures.
  • Document a list of approved bank accounts. Close the ones the church no longer needs.
  • If your church will have an audit or review, your finance or audit committee should be in the process of selecting the independent auditors.
  • Make sure the church has adopted an accountable expense reimbursement plan and makes it available to all employees, especially those with church-issued credit cards.
  • Confirm the church is still in good standing with the state where it formed and make sure the name and address for the registered agent is current.

17. Update your church’s resource guides

Now is a good time to order Church Compensation, Second Edition: From Strategic Plan to Compliance by Elaine Sommerville. It’s also a good time to preorder the 2024 edition of Richard Hammar’s Church & Clergy Tax Guide. Both can help answer the various tax, payroll, and compensation questions that will invariably arise next year.

Protect the Children in Your Church’s Small Groups

How churches can help prevent child abuse in the context of a small-group gathering.

Many churches encourage small-group participation, and pastors or other staff provide resources for these groups, but there often is very little oversight by church leadership.

How can the church and the small group best protect the children in their care? What happens if an incident of child abuse occurs in the home of a church member during a small-group function? Who is liable?

Handling childcare for small groups

One important consideration is how to provide childcare in a small-group setting. Of course, you can make it an “adults only” meeting, which would require parents to find their own childcare for the evening. However, some small groups would find this option untenable, especially if the host and most attendees have children.

Another often used option is to have a volunteer, perhaps a teen, supervise the children in another room of the host home. If the church sponsors the small group as part of its ministry (providing leadership, curriculum, and structure), this presents a serious liability to the church and the host, as well as a significant risk to the children attending.

Church members tend to trust fellow churchgoers’ integrity without question in choosing a volunteer caregiver. But, in the era of #ChurchToo, it is increasingly evident that this kind of trust has been misplaced and has led to much abuse and heartache.

Even when a risk is exposed, the church far too often opts for a misunderstood concept of grace and forgiveness that sacrifices the safety and well-being of the “least” among them.

Implement a child protection policy

In order to be “wise as serpents, and harmless as doves” (Matt. 10:16, KJV), the church must implement safeguards to protect the congregation under its care. Implementing and adhering to a child protection policy is one of the first (and most important) steps a church can take.

A church should consider enforcing the child protection policy within every small group that it endorses as a part of its ministry. Small-group leaders/hosts should sign the policy and agree to adhere to it in order to be sponsored by the church.

  • Some basic elements of a child protection policy include:
  • Providing background checks, training, and references for volunteer childcare workers;
  • Implementing the two-adult rule, which requires two unrelated adults to be in the room with the children at all times;
  • Requiring childcare workers to go get the parents/guardians if the child needs to use the restroom;
  • Requiring children be kept in as public of a location as possible—avoiding bedrooms, and preferably meeting in an area with windows.

A child protection policy is one of the most basic, yet important, ways to create a safe environment for children and to minimize liability for churches.

Creating the safest environment possible

In addition to implementing and adhering to a child protection policy, here are a few other considerations for church leaders, in order to provide the safest environment for children in their congregations:

Mandatory training session for small-group leaders

When an individual or family expresses interest in starting a small group, the church should require that the small-group leaders attend a church-sponsored sexual abuse and child protection course. This training also should be a requirement in order for the church to sponsor and affiliate with the small group.

This training should include helping small-group leaders with the elements of the child protection policy as well as how to recognize the signs of abuse and “grooming behaviors.”

In many churches, there is online training for child protection programs where a certificate must be obtained to pass the course.

Awareness of known sex offenders in the church

Some churches may allow convicted sex offenders to attend their worship services. In these instances, the congregation should know who these individuals are, and every precaution should be taken to protect children by ensuring sex offenders only attend small groups that do not have any children present when the groups meet. Of course, many sex offenders will be prohibited by their parole or probation from even being near children, but regardless, they should have no contact with children in any circumstance.

Additional reading. Successful Church Assimilation of Sex Offenders” provides guidance for churches on how to safely minister to sex offenders, while also protecting the vulnerable within the congregation.

Post a sponsored small-group list

In small-group bulletins and websites, include a statement that any small group not listed is operating independent of church leadership and is not affiliated with the church, even if church members are involved or leading the group. This way, the church separates itself from liability if something were to happen within a small group that did not follow the church’s child protection policy and training.

Check with your insurance provider

Churches should contact their insurance agent to see if small groups are covered, or can be covered, under the church’s insurance. Some insurance companies offer this option, which would protect homeowners who host small groups from having to rely on their homeowner’s insurance should something happen in their home.

Crucial steps

In summary, there are several crucial steps that churches can take in considering the “least of these” in their congregation and providing the most protection within their power. These steps include:

  1. Providing a child protection policy;
  2. Requiring background and reference checks for all childcare workers;
  3. Providing due diligence in obtaining insurance coverage;
  4. Training small-group leaders in knowing the signs of abuse and “grooming”; and
  5. Making sure parents and guardians are duly notified of all known sex offenders in the congregation.

Additional reading.Minimize Child Abuse: How to Do Excellent Background Checks for Child and Financial Protection” explains how to best protect children through better background and reference checks; and “Reporting Child Abuse: What Is Your Duty?” discusses your duties to report child abuse and how to do it best.

This article is adapted from “ Protecting Children in Church Small Group Settings ” by H. Robert Showers—an attorney with Simms Showers, LLP . Used with permission.

For additional help, see Richard R. Hammar’s “Minimizing the Risks of Child Molestation in Churches,” along with these downloadable resources:

New Lease Reporting Standard Deferred

Important update for churches that follow generally accepted accounting principles.

Churches and other nonprofits that follow generally accepted accounting principles (GAAP) for external financial reporting should be aware that the new lease accounting reporting standard has been deferred.

The accounting firm Batts Morrison Wales & Lee (BMWL) offered these details:

As widely expected, the Financial Accounting Standards Board (FASB) unanimously voted on October 16, 2019, to defer the effective date of its major new Accounting Standards Update (ASU 2016-02) related to accounting for leases. (This is the ASU that generally requires organizations to capitalize leases, including operating leases, with terms of more than one year.) The FASB deferred the ASU by one year for most nonprofit organizations. For organizations to which the deferral applies, the new effective date of the lease standard is for fiscal years beginning after December 15, 2020 (calendar years ending December 31, 2021 and non-calendar years beginning in 2021).

The deferral does not apply to a nonprofit organization that is a borrower of tax-exempt bonds and is considered a conduit bond obligor for securities that are traded, listed, or quoted on an exchange or over-the-counter market. The deferral does apply to conduit bond obligors of securities sold pursuant to a private placement offering.

This new lease reporting standard will apply to “many nonprofit organizations, including churches, that follow” GAAP, said CPA Mike Lee, a partner and the national director of audit and assurance services for BMWL.

“Simply put, the new standard will require organizations to recognize a lease liability (using present value techniques) with an offsetting asset on its statement of financial position (balance sheet),” Lee told Church Law & Tax. “The asset and liability will be written down over time. There are also implications to the statement of activities (income statement) and footnotes.”

Lee added that BMWL will publish detailed guidance in the coming months.

Editor’s note: Major changes in GAAP under Accounting Standards Update 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, are now in effect for churches and other nonprofits following GAAP for external financial reporting. Mike Lee covered the most significant of these changes in this article for Church Law & Tax.

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Three Reasons Christians Should Defend Religious Liberty for All

Preserving rights for other faiths enhances our own witness—and is the right thing to do.

In my work as a religious freedom attorney, I defend people of all faiths—including those with whom I deeply disagree. For example, I once defended a Muslim mosque in Tennessee that was stopped by local zoning authorities from gathering in their new building for worship. Although zoning authorities had approved 20 Christian churches in a row, they said the mosque had to satisfy a higher legal standard because of the vocal opposition of its neighbors. In other words, the mosque faced stricter rules because it was unpopular.

My Christian friends often ask me why I defend religious freedom for non-Christians. But I think this case illustrates three reasons why all Christians should care about religious freedom for non-Christians.

The first reason is rooted in self-interest—namely, protecting religious freedom for non-Christians helps protect religious freedom for Christians. This is easy to see in the zoning context, where local governments restrict how land can be used. The mosque in my case happened to be unpopular with its neighbors in Tennessee. But I’ve represented multiple Christian churches that were unpopular in their local communities. For example, I represented a small church in Texas that was blocked from using a vacant building because local authorities wanted more tax revenue. I also represented a church in Colorado that was stopped from expanding because local officials vowed “there will never be another mega-church in . . . Boulder County.”

The same legal principles apply to all of these cases. So if the government blocks a mosque based on the hostility of neighbors in Tennessee, it creates a precedent for blocking a church based on the hostility of tax-hungry officials in Texas. Conversely, if a court protects the mosque, it sets a precedent that protects churches. In fact, when I won the zoning case against the Texas town, the court relied primarily on a precedent involving a Jewish synagogue in Florida. A victory for a Jewish synagogue led to a victory for Christian church.

The same principle also works in reverse: a loss for non-Christians often leads directly to losses for Christians. The most famous example is the landmark Employment Division v. Smith case, in which the Supreme Court ruled that the government could punish Native Americans for using peyote in their religious ceremonies. The precedent set in Smith has led directly to losses in numerous religious freedom cases, including for Christians—demonstrating that religious freedom for Native Americans is vitally important for Christians.

In a very real sense, then, if we ignore religious freedom for Muslims, Native Americans, Jews, and others, we’re undermining it for ourselves. And if we defend religious freedom for non-Christians, we’re defending it for ourselves.

The second reason we should care about religious freedom for non-Christians is rooted in evangelism—namely, protecting religious freedom for non-Christians helps more non-Christians come to Christ. This is a simple theological argument. Scripture doesn’t instruct us to use government power to make disciples. Neither Jesus nor the early church did so. Instead, we’re called to “preach Christ” in word and deed (1 Corinthians 1:23), trusting the Holy Spirit—not the government—to “convict the world concerning sin and righteousness and judgment” (John 16:8).

Using government power to suppress false religion is also counterproductive. Preventing a mosque from being built or preventing a Muslim from wearing a headscarf doesn’t bring any Muslims closer to Christ. At best, it may pressure them to feign Christianity—which is not a saving faith. At worst, it can harden them against Christ and entrench them even more deeply in non-Christian religion.

By contrast, defending religious freedom for non-Christians can lead directly to opportunities for sharing the gospel. I’m now good friends with the imam from the Tennessee mosque. We’ve had multiple conversations about the differences between Christianity and Islam. He tries to convince me the doctrine of the Trinity makes no sense; I try to convince him we can’t earn God’s favor and must turn to Jesus as our savior instead. I never would have had that opportunity if I hadn’t defended his religious freedom.

The third reason to care about religious freedom for non-Christians is an argument based on justice—namely, protecting religious freedom for non-Christians is the right thing to do. A violation of religious freedom is an act of injustice because God created each one of us for a loving relationship with him. This relationship can’t be coerced by the government; it can only be entered into voluntarily. So when the government needlessly interferes in our relationship with God, it is exceeding its God-given authority and depriving human beings of the God-given opportunity to respond freely to him.

A violation of religious freedom is also a violation of basic human rights. All human beings are born with a religious impulse—a desire to seek and embrace transcendent truth. But by our very nature, we can seek and embrace the truth authentically only if we do so freely. So when the government coerces us to go against our understanding of transcendent truth, it is forcing us to go against our very nature as human beings and is violating a human right.

This analysis doesn’t depend on the understanding of transcendent truth we embrace. It applies to everyone—even those who are mistaken about transcendent truth. This is not because we’re relativists but because we believe a particular absolute truth: God created us for a relationship with him that cannot be entered via coercion.

In short, ask not why I defend religious freedom for non-Christians. Ask how you can too.

Adapted from Free to Believe: The Battle Over Religious Liberty in America . Copyright © 2019 by Luke Goodrich. Used by permission of Multnomah, an imprint of Penguin Random House LLC.

Read Christianity Today’s review of the book.

Luke Goodrich is author of Free to Believe: The Battle Over Religious Liberty in America and vice president and senior counsel at the Becket Fund for Religious Liberty where he has won numerous precedent-setting cases in courts across the country, including multiple Supreme Court victories for clients like the Little Sisters of the Poor and Hobby Lobby. Goodrich appears frequently in the media to discuss religious freedom, including on Fox News, CNN, PBS, NPR, and The New York Times. He also teaches an advanced course in constitutional law at the University of Utah law school. For more information, visit lukegoodrich.com.

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Advantage Member Exclusive

The Building Blocks of Compensation

On-Demand Webinar.

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In this one-hour webinar, available exclusively to ChurchLawAndTax.com Advantage Members, CPA and author Elaine Sommerville walks leaders through the building blocks essential to compensation planning in their churches.

Key topics include:

  • Identifying the decision-makers
  • Defining job positions
  • Researching data
  • Establishing well-defined parameters for salaries and benefits.
Elaine L. Sommerville is licensed as a certified public accountant by the State of Texas. She has worked in public accounting since 1985.

Reliable Financial Data for Churches

Replace assumptions with research and insights you can trust.

Church leaders know that money is an essential resource that helps make the work of the church possible: the engine that powers yearly mission trips to South America, the technology broadcasting worship services online, the repair of a leaky roof on an aging building, and of course, the staff that ministers to the entire community.

To lead well on issues of congregational finances, leaders need reliable information to understand the modern landscape of congregations’ economic practices and the unique challenges of congregational finances.

Yet, information about congregational finances can be hard to find. Oftentimes, executive pastors and other church finance staff are left to make assumptions as to best practices or trade insights from coffee conversations or zoom calls with their peers around the country.

There are a number of reliable resources available for church leaders—along with some significant ongoing research. Consider the following:

What the research tells us

NSCEP is the largest, most comprehensive study of congregation finances in the past 25 years surveying a nationally representative sample of 1,231 religious congregations and achieving a 40-percent response rate. It included congregations from all major religious traditions, every state of the country, and represents congregations from storefront gatherings to megachurches. Lake Institute focused its study on the trends in how congregations receive, manage, and spend resources along with mapping the changes in revenue and size.

During 2020, the NSCEP will also expand to include in-depth interviews with leaders and observations at select congregations.

The NSCEP and CBP reveal strikingly similar results and introduce complexity into the narrative about congregational finances.

The NSCEP asked congregations to compare changes to their sizes and revenues from 2014 to 2017, while CBP asked about changes over the past year. Both studies revealed some decline among congregations, but the percentage of congregations growing in revenue and size were higher than those in decline.

A strength of NSCEP was its nationally representative design. It revealed that a greater proportion of congregations were small (under 100 adults), and that 20 percent of congregations have a bi-vocational pastor.

CBP’s sample skewed a bit more to larger congregations, but still demonstrated the relatively small size of most faith communities. Though a smaller part of NSCEP’s samples, congregations that were established since 2000 and large churches with multiple revenue streams each reported growth in higher percentages.

NSCEP also captured the perspectives from multiple religious traditions and found that Catholic and Jewish congregations are experiencing the most decline while black Protestant, evangelical Protestant, and congregations from other world religions are the most likely to be growing.

Answering core questions

Underneath these larger trends, however, were three core questions raised by both projects:

Where does the money come from?

Both studies report that over 80 percent of congregational revenue comes from individual donations. The NSCEP provides a bit deeper analysis on the forms of individual income, finding that an additional 6 percent on average comes from special fundraisers outside of regular tithes and offerings.

Of particular note: NSCEP found half of congregations were conducting a capital campaign or had held one in the previous five years. Congregations often focus their attention on promoting regular giving whether digitally or through an offering plate, and that clearly remains the bulk of congregations’ revenue, but it is worth noting that individuals are supporting the work of the church in a variety of ways.

Other forms of revenue came from rent, endowments/reserves, the selling of products and services, and grants.

As simple as it sounds, NSCEP found that the primary driver for increasing revenue was the frequency of teaching about giving—90 percent of congregations who discussed or taught explicitly about giving weekly experienced growth. Yet, it was clear that the vast majority of congregations (79%) only talked explicitly about giving in worship services quarterly or less.

How do congregations spend their money?

Both the NSCEP and CBP found that overhead is high in congregations. Almost half of congregational resources are invested in personnel and another quarter in maintaining facilities.

CBP provides a more fine-tuned breakdown of facility costs by separating expenses on utilities, repairs, and mortgage costs. Yet, staff and facilities are an essential part of the mission and ministries of any congregation. Religious leaders would do well to emphasize the ways in which these assets are not seen as “overhead” or “administrative costs,” but rather, as vital aspects of congregational life.

Congregations also budget resources to provide for their congregants through ministries and programs as well as to outreach beyond their members through mission and service.

According to NSCEP, congregations prioritize spending on missions (11%). The majority of this funding is local (61%), but another 20 percent is invested nationally, and 19 percent on international causes. Congregations are not doing their mission and service work alone. Among those congregations engaged in social service ministries, such as providing food, clothing, or disaster relief, 98 percent are collaborating with another agency, enabling them to scale their overall impact.

How do churches manage congregational resources?

In addition to how congregations receive and spend money, the NSCEP also helps us understand how congregations manage congregational resources. A quarter of congregations leverage digital technologies to collect money and half use software to track their weekly expenses. While these technologies allow for more direct contact with members, congregations still acknowledge their members contributions quarterly or less.

The often-taboo topic of money is evident when examining clergy’s access to financial and donor records. Only 55 percent of congregations claimed that their clergy had access to giving records, and among that group, only 58 percent of clergy actually looked at that information. However, these congregations were much more likely to be growing in their revenue. (Editor’s note: Attorney and senior editor Richard Hammar offers several cautions about clergy access to giving records.)

“Knowledge is power”

Given what we have found from both the NSCEP and CBP, the story about congregational economic practices is complicated. But as the saying goes, “Knowledge is power.” Having better information about what is happening in faith communities across the country, as well as an interest in attending to the economic practices of your own congregation, are essential for healthy leadership. As we continue to learn more about how money flows in and out of congregations, we can better prepare for the present and vibrant future of our institutions.

Rev. Dr. David P. King is the Karen Lake Buttrey Director of the Lake Institute on Faith and Giving as well as assistant professor of philanthropic studies within the Indiana University Lilly Family School of Philanthropy.

Dr. Chris Munn is a sociologist and postdoctoral research fellow at the Lake Institute on Faith and Giving.

Q&A: Are Churches Legally Required to Issue Statements for Every Contribution?

What about a one-time donation of only $10? Are churches required to issue contribution statements for such small gifts?

Last Reviewed: February 1, 2024

Is there a minimum gift amount for which a contribution statement must be issued? For instance, if someone visited the church one Sunday and dropped a $10 check in the offering plate, is the church obligated to send a statement?

Churches typically face this question in January, but also may encounter it throughout the year if they issue regular quarterly giving statements.

No law requires the church to issue the donor a receipt. The receipt is issued as a courtesy to the donor to allow them to deduct their contributions. Churches should also be aware that due to changes in tax law there is no longer an incentive for the vast majority of donors to itemize deductions.

Donor responsibilities

If the church issues a receipt, it should meet all the tax requirements to allow the donor to deduct the contribution. We did some research on this administrator’s question. Attorney Frank Sommerville, an editorial advisor for Church Law & Tax, provides this response:

[Based on this question] since the donation is less than $250, no receipt is required from the church for the donor to deduct the contribution. The cancelled check is adequate.

Richard Hammar further explains what donors need in order to deduct contributions of any size on their taxes in Chapter 8 (pages 365-366) in the updated 2024 Church & Clergy Tax Guide:

Donors cannot deduct a cash contribution to a church or charity, regardless of the amount, unless they keep one of the following:

  • a bank record (a statement from a financial institution, an electronic fund transfer receipt, a canceled check, a scanned image of both sides of a canceled check obtained from a bank website, or a credit card statement) showing the charity’s name, date of the contribution, and the amount of the contribution,
  • a receipt or other written communication (including “electronic mail correspondence”) from the charity showing the charity’s name, date of the contribution, and the amount of the contribution, or
  • if you make a contribution by payroll deduction, a pay stub, Form W-2, or other document furnished by your employer that shows the date and amount of the contribution.

The substantiation requirements may not be satisfied by maintaining other reliable records.

Like Sommerville, Hammar cautions churches to provide charitable contributions statements that meet substantiation requirements for all contributions of $250 or more.

Very specific information must be included on charitable contributions statements in order to make them valid for donors to use for tax-deduction purposes.

Learn more about the specific information to include in the 2024 Church & Clergy Tax Guide.

Matthew Branaugh is an attorney, and the business owner for Church Law & Tax.
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