The Return of Tax-Free Medical Premium Payments

New act addresses ACA penalty many employers, including churches, faced.

Church Finance Today

The Return of Tax-Free Medical Premium Payments

New act addresses ACA penalty many employers, including churches, faced.

At the close of 2016, Congress enacted the 21st Century Cures Act, with massive bipartisan support. While the Act addresses several health-related issues, perhaps of most interest to church leaders is a provision relieving many small employers of one of the most feared provisions in the Affordable Care Act: the infamous $100 per day per employee penalty. Prior to the passage of the 21st Century Cures Act, the Internal Revenue Service could impose this penalty on any employer that continued to pay or reimburse employees’ medical insurance under a private plan.

The $100 per day penalty applied to all employers, including churches and other religious employers. Employer payment plans have been popular not just among churches, but also among small for-profit employers. As awareness of this penalty built, Congress came under mounting pressure to provide permanent relief. Several employer groups and trade associations lobbied Congress for change, including the National Association for the Self-Employed. Eventually, Congress offered the much sought-after relief through the 21st Century Cures Act.

Small employers are not required to provide health insurance coverage to their employees, and, for some small employers, doing so may not be feasible. Nonetheless, many small employers wish to provide pre-tax funds that employees may use to purchase their own health insurance or pay for expenses not covered by their insurance. However, prior to the 21st Century Cures Act, providing such funds may have exposed a small employer to a substantial excise tax.

Get to know QSEHRA

Under the 21st Century Cures Act, a “qualified small employer health reimbursement arrangement” (QSEHRA) is generally not a group health plan under the tax code, Employee Retirement Income Security Act (ERISA), or Public Health Service Act (PHSA) and, thus, is not subject to the group health plan requirements. And, most importantly, this means that a QSEHRA will not be assessed the $100 per day per employee penalty for failure to comply with the ACA’s market reforms that apply to group health plans.

A QSEHRA is defined as an arrangement that:

  • is provided on the same terms to all eligible employees (defined below) of an eligible employer (defined below);
  • is funded solely by the eligible employer and no salary reduction contributions may be made under the arrangement;
  • provides, after an employee provides 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 2017, the dollar limits are $4,950 and $10,000 in the case of expenses of an employee and family members).

The maximum dollar amount of payments or reimbursements that may be made under a QSEHRA, with respect to an eligible employee for a year, is the employee’s “permitted benefit.” An arrangement does not fail to be provided on the same terms to all eligible employees merely because employees’ permitted benefits vary with the price of a health insurance policy in the individual insurance market, based on the ages of the employee and family members, or the number of family members covered by the arrangement, provided that the variation is determined by reference to the same insurance policy for all eligible employees.

Eligible employee

An “eligible employee” means any employee of an eligible employer, except that the terms of the QSEHRA may exclude:

  • employees who have not completed 90 days of service with the employer;
  • employees under age 25;
  • part-time or seasonal employees; or
  • nonresident aliens with no earned income from sources within the United States.

Eligible employer

“Eligible employer” means an employer that:

  • is not an applicable large employer, as defined for purposes of the requirement that an applicable large employer offer its employees minimum essential coverage (that is, generally, an employer with fewer than 50 full-time equivalent employees during the preceding year), and
  • does not offer a group health plan to any of its employees.

Churches could still be penalized

The relief from the $100 per day per employee excise tax will not benefit all churches. A church may still be subject to the penalty if, for example, an employer pays or reimburses premiums for health insurance for the employee and family members purchased in the individual insurance market (referred to as an employer payment plan or EPP), or an employer reimburses the employee for medical expenses generally of the employee and family members (referred to as a health reimbursement arrangement or HRA), and:

  • it is an applicable large employer with an average of 50 full-time employees, and “full-time equivalents” (FTEs) during the previous calendar year;
  • it offers a group health plan to any of its employees;
  • it contributes more than $4,950 ($10,000 for a family) to an EPP or HRA (defined above); or
  • the arrangement fails to satisfy one or more of the other requirements for a QSEHRA summarized above.

Notice and reporting requirements

Within 90 days of the beginning of a year in which an employer will fund a QSEHRA (or, if later, the date on which an employee becomes eligible for the QSEHRA), the employer must provide eligible employees with a written notice containing the amount of the employee’s permitted benefit and certain other information. An employer that fails to provide the notice may be subject to a tax penalty of $50 per employee, subject to a maximum of $2,500 for the year.

In addition, the employer must report an employee’s permitted benefit for a year on the employee’s W-2 for the year. An eligible employee who applies for advance premium assistance with respect to Exchange coverage for a year must provide the Exchange with the amount of his or her permitted benefit for the year.

Effective date

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

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

Taking the Next Steps

Action steps your church can take to implement or strengthen your child-protection program.

Loading the player...

Spokesperson David Staal wraps up the training and offers action steps your church can take to implement or strengthen your child-protection program.

Responding to an Allegation

The story of how one church handled an allegation of child sexual abuse.

Loading the player...

What would your church do if it were faced with an allegation of child sexual abuse? This video depicts the story of how one church handled this situation. Experts add insights to this first-person story.

Supervising Scenarios: What Would You Do?

Interactive segment teaches principles of good supervision.

Loading the player...

This fast-paced, interactive segment teaches principles of good supervision. It helps children and youth volunteers think through common scenarios of supervision.

Legal Requirements: The Church’s Responsibility to Protect Kids (with Richard Hammar)

Richard Hammar explains legal requirements for protecting children in your ministry.

Loading the player...

Viewers receive more training by the most trusted name in church law—Richard Hammar. In this segment, he explains legal requirements for protecting children in your ministry, plus practical tips on how your ministry can meet the “reasonable standard of care.”

Screening & Selection: The Candidate (a short film)

Teaches leaders how to interview a candidate, conduct a background check, and check references.

Loading the player...

This segment creatively teaches leaders how to interview a candidate, conduct a background check, and check references. Participants will see and hear what the screening and selection process should look like.

Screening & Selection: Your First Line of Defense

Richard Hammar’s teaching session on the importance of proper screening and selection of staff and volunteers.

Loading the player...

Richard Hammar, noted church attorney and CPA, and one of the creators of Reducing the Risk, presents a powerful teaching session on the importance of proper screening and selection of staff and volunteers. This segment provides a five-step plan for reducing liability.

Sexual Abuse in Faith Communities—an Expert Roundtable

Five experts who deal with different aspects of sexual abuse in the church.

Loading the player...

This presentation features five experts who deal with different aspects of sexual abuse in the church, ranging from a psychologist who helped create his church’s child protection program to an insurance claims manager who understands the legal impact of sexual abuse allegations. By sitting in on this group’s discussion, viewers gain insight into the issues surrounding child sexual abuse in ministries today.

A Victim’s Story

The true story of a victim of clergy abuse.

Loading the player...

This segment presents the true story of a victim of clergy abuse. It should help sensitize leaders to the human cost of sexual abuse in ministry settings.

Child Protection as the Foundation of Your Ministry

Children’s ministry director David Staal introduces churches to the problem of child sexual abuse in the church.

Loading the player...

Children’s ministry director David Staal introduces churches to the problem of child sexual abuse in the church. This segment gets people invested in solving this safety issue by engaging them, heart and mind. It should be the first presentation that you view and show.

Churches, Gender Identity, and Bathroom Access

Landmark ruling addresses potential liability under “public accommodations” law.

In a recent landmark ruling, a federal district court in Iowa addressed the potential liability of churches under the nondiscrimination provisions of a “public accommodations” law for failing to provide restroom and shower facilities according to a person’s “gender identity” as opposed to gender at birth. Fort Des Moines Church of Christ v. Jackson, 2016 WL 6089842 (S.D. Iowa 2016).

This article will review the facts of this case, explain the court’s ruling, and assess the possible significance of the case to churches and church leaders.

Background

A church in Des Moines, Iowa, claimed that state and municipal antidiscrimination laws unconstitutionally interfered with its constitutional rights. The church wanted to communicate messages that would place qualifications based on gender identity on who may use its restrooms and showers. It also wanted to explain its views supporting these qualifications through a sermon by one of its pastors. To these ends, it sought a preliminary injunction enjoining the enforcement of certain provisions of the Iowa Civil Rights Act (ICRA) and the Des Moines City Code, both of which prohibit places of public accommodation from discriminating based on gender identity. Both laws contain exemptions for religious acts of religious institutions. The members of the Iowa Civil Rights Commission (ICRC) and the state attorney general (collectively “the State Defendants”) and Defendant City of Des Moines (“the City”) asked the court to dismiss the church’s request for a preliminary injunction.

The church offers religious ministries, worship services, and other events and activities to its members and the public at large. It holds three weekly services, all open to the public. In addition, it regularly opens its facility to the public for weddings, funerals, and recreational and community activities, such as child care, a food pantry, and potluck dinners. The church asserted that even those activities that may not seem overtly religious are “religious in nature because they engender other important elements of religious meaning, expression, and purpose.” The church was emphatic that it does not wish to allow the use of its facility in any manner that is inconsistent with its religious mission and doctrine.

Image: The Editors & Designers of Church Law & Tax
How regular churchgoers view the transgender bathroom access issue by denomination.

The church has two multioccupancy restrooms, each designated for the exclusive use of either males or females. Each restroom is equipped with a shower. The showers are located within the restrooms and they share an entrance. Additionally, the facility has two single-occupancy restrooms also designated for the separate use of each sex. The church views these designations as being limited to biological males or females. According to its beliefs, “sex” is an individual’s biological sex, determined at the time of birth by the individual’s anatomy, physiology, and chromosomes. The church has maintained an unwritten policy that areas designated for sex-specific use may only be used by members of that biological sex—a policy that comports with its religious teachings.

As a result of recent public attention given to gender identity and restroom access, the church decided that its policy should be clarified for its members and the public. Its leadership team adopted a written policy regarding the use of its facilities:

The church’s multiple occupancy bathrooms and the showers in the bathrooms are designated for single-sex use only. “Sex” is biological sex as determined by the physical condition of a person’s chromosomes and anatomy as identified at birth, or by one’s original birth certificate. This policy is consistent with and required by God’s Word, which sets forth the distinctiveness, complementariness and immutability of the male sex and female sex as Jesus Christ himself taught in Matthew 19:4. God’s Word also teaches that physical privacy and personal modesty spring from the physical conditions and unique characteristics of the sexes.

This bathroom and shower policy will be made available to members and the public by placing it on the church website and as an insert to the weekly worship bulletin that is distributed to all attendees of the Sunday worship service. We will also post this notice outside of our bathrooms within the building.

Despite the above language regarding its intent to distribute the policy, the church has not publicized or distributed the policy due to its belief that such publication and distribution would subject it to enforcement proceedings before the ICRC or the Des Moines Civil and Human Rights Commission pursuant to state and municipal antidiscrimination laws.

Several Iowa statutes and Des Moines ordinances were the focus of this lawsuit. In 2007, the Iowa legislature amended Iowa Code section 216.7 to bar places of public accommodation from discriminating against individuals on the basis of sexual orientation or gender identity. Iowa Code section 216.7 provides:

1. It shall be an unfair or discriminatory practice for any owner, lessee, sublessee, proprietor, manager, or superintendent of any public accommodation or any agent or employee thereof:
To refuse or deny to any person because of race, creed, color, sex, sexual orientation, gender identity, national origin, religion, or disability the accommodations, advantages, facilities, services, or privileges thereof, or otherwise to discriminate against any person because of race, creed, color, sex, sexual orientation, gender identity, national origin, religion, or disability in the furnishing of such accommodations, advantages, facilities, services, or privileges.
To directly or indirectly advertise or in any other manner indicate or publicize that the patronage of persons of any particular race, creed, color, sex, sexual orientation, gender identity, national origin, religion, or disability is unwelcome, objectionable, not acceptable, or not solicited.

2. This section shall not apply to:
Any bona fide religious institution with respect to any qualifications the institution may impose based on religion, sexual orientation, or gender identity when such qualifications are related to a bona fide religious purpose (emphasis added).

Iowa Code section 216.2(13) defines a place of public accommodation as follows:

“Public accommodation” means each and every place, establishment, or facility of whatever kind, nature, or class that caters or offers services, facilities, or goods for a fee or charge to nonmembers of any organization or association utilizing the place, establishment, or facility, provided that any place, establishment, or facility that caters or offers services, facilities, or goods to the nonmembers gratuitously shall be deemed a public accommodation if the accommodation receives governmental support or subsidy. Public accommodation shall not mean any bona fide private club or other place, establishment, or facility which is by its nature distinctly private, except when such distinctly private place, establishment, or facility caters or offers services, facilities, or goods to the nonmembers for fee or charge or gratuitously, it shall be deemed a public accommodation during such period.

The ICRC released a brochure intended to serve as a guide to its interpretation of Iowa law with respect to civil rights issues concerning sexual orientation and gender identity. The brochure was titled Sexual Orientation & Gender Identity: A Public Accommodations Provider’s Guide to Iowa Law. In the original brochure, the ICRC posed the question “Does This Law Apply to Churches?” In response to that question, the ICRC posited the following:

Sometimes. Iowa law provides that these protections do not apply to religious institutions with respect to any religion-based qualifications when such qualifications are related to a bona fide religious purpose. Where qualifications are not related to a bona fide religious purpose, churches are still subject to the law’s provisions (e.g. a child care facility operated at a church or a church service open to the public).

Not long after the church filed its lawsuit seeking a preliminary injunction, the ICRC removed the original guide from its website and replaced it with a new one. The current version contains the subsection “Places of Worship,” which states:

Places of worship (e.g. churches, synagogues, mosques, etc.) are generally exempt from the Iowa law’s prohibition of discrimination, unless the place of worship engages in non-religious activities which are open to the public. For example, the law may apply to an independent day care or polling place located on the premises of the place of worship.

Both versions of the brochure contained a disclaimer: “This guidance document is designed for general educational purposes only and is not intended, nor should it be construed as or relied upon, as legal advice.”

The Des Moines City Code similarly forbids discrimination based on gender identity and other protected classes. Gender identity was added to the ordinance in 2011. Des Moines City Code section 62-136 provides:

It shall be an illegal discriminatory public accommodations practice for any person, owner, lessor, lessee, sublessee, proprietor, manager, superintendent, agent, or employee of any place of public accommodation to:

(1) Refuse or deny to any person because of race, religion, creed, color, sex, sexual orientation, gender identity, national origin, ancestry or disability the accommodations, advantages, facilities, goods, services or privileges thereof or otherwise discriminate, separate, segregate or make a distinction against any person because of race, religion, creed, color, sex, sexual orientation, gender identity, national origin, ancestry or disability in the furnishing of such accommodations, advantages, facilities, goods, services or privileges.

(2) Directly or indirectly print or circulate or cause to be printed or circulated any advertisement, statement, publication or use any form of application for entrance and membership which expresses, directly or indirectly, any limitation, specification or discrimination as to race, religion, creed, color, sex, sexual orientation, gender identity, national origin, ancestry or disability or indicate or publicize that the patronage of persons of any particular race, religion, creed, color, sex, sexual orientation, gender identity, national origin, ancestry or disability is unwelcome, objectionable, not acceptable or not solicited.

(3) Discriminate against any other person because such person has opposed any practice forbidden under this chapter or has filed a complaint, testified or assisted in any proceeding under this chapter.

(4) Aid, incite, compel, coerce, or participate in the doing of any act declared to be a discriminatory accommodations practice under this section, or attempt, directly or indirectly, to commit any act declared by this section to be a discriminatory practice.

Des Moines City Code section 62-1 defines a place of public accommodation to include any organization that “caters or offers goods, services, facilities, privileges, advantages, and accommodations to the public.”

Des Moines City Code section 62-137 states: “Nothing in this article shall be construed to apply to the following: (1) Any bona fide religious institution with respect to any qualifications the institutions may impose based on religion, sexual orientation, or gender identity, when such qualifications are related to a bona fide religious purpose.”

The lawsuit

Notwithstanding the religious exemption in both the state and municipal nondiscrimination laws, the church feared that it might qualify as a “public accommodation” through its gratuitous offer of services to the public at large. As a result, the church filed a lawsuit seeking a preliminary injunction barring enforcement of the public accommodations laws against the church. The church’s lawsuit alleged five causes of action.

  1. The nondiscrimination provisions in the state and local public accommodation laws are unconstitutional under the Free Speech Clause of the First Amendment.
  2. The nondiscrimination provisions in the state and local public accommodation laws are unconstitutional under the Religion Clauses of the First Amendment.
  3. The nondiscrimination provisions in the state and local public accommodation laws violate the church’s right to expressive association under the First Amendment.
  4. The nondiscrimination provisions in the state and local public accommodation laws violate the church’s right to peaceably assemble under the First Amendment.
  5. The nondiscrimination provisions in the state and local public accommodation laws are vague and violate the church’s right to Due Process under the Fourteenth Amendment.

The church attached to its lawsuit a sermon one of its pastors had written titled “A Biblical View of Human Sexuality.” The pastor provided a statement declaring that he had drafted the sermon but had declined to deliver it due to his fear of exposing the church to liability for violating Iowa law.

The court’s ruling

The court agreed with the defendants (the state of Iowa and city of Des Moines) that the church’s request for a preliminary injunction had to be dismissed on the ground that it lacked “standing” to prosecute its claims in federal court.

Standing is a requirement of any federal case, and derives from Article III of the United States Constitution that limits the jurisdiction of the federal courts to “cases and controversies.” To meet the “case or controversy” requirement, a plaintiff must establish “standing to sue” by showing that (1) he or she has been injured, and the injury is real rather than speculative or hypothetical; (2) the injury was caused by some action by the defendant; and (3) the injury would be “redressed” if the court grants the plaintiff the relief requested. If these conditions are not met, the dispute is not a “case or controversy” and the court is without constitutional authority to resolve it.

Injury in fact—sermons
The court noted that an injury must be “concrete and particularized or actual and imminent, rather than conjectural or hypothetical,” and that the purpose of this requirement “is to ensure that the alleged injury is not too speculative for Article III purposes.” Allegations of possible future injury “are not sufficient.”

The church claimed that it had been injured because:

(1) the state and city antidiscrimination laws forced it to refrain from posting its restroom policy out of a fear of prosecution or civil liability, and

(2) one of the church’s pastors claimed that he feared to deliver a sermon on sexual purity due to the possibility of exposing himself to liability.

By refraining to post these statements, or deliver the sermon, the church alleged that it had “self-censored” its speech.

The court acknowledged that “self-censorship may amount to an injury for purposes of standing if the plaintiff has been objectively reasonably chilled from exercising his First Amendment right to free expression in order to avoid enforcement consequences.” But, the court cautioned that “a plaintiff suffers from an objectively reasonable chilling of his First Amendment right to free expression by a criminal statute only if there exists a credible threat of prosecution under that statute if the plaintiff actually engages in the prohibited expression” (emphasis added). And, in order for a plaintiff to face “a credible threat of prosecution,” the allegedly threatened course of conduct must be prohibited by the challenged statute. The court concluded:

Plaintiff alleges that it fears prosecution under the state and municipal discrimination bans if it posts and distributes its facilities policy or if its pastor delivers his sermon about biological sex and the Bible. However, of these two alleged injuries, one—the delivery of the sermon—is based on a fear that is not objectively reasonable. All of the statutes, the ordinances, and the interpretations of the provisions appearing in the ICRC’s guidance documents include an exemption for religious institutions when conducting religious activities. Although the definitive scope of this exemption is yet to be determined, the court concludes the delivery of a sermon by a pastor of a church is undoubtedly an act intended to serve “a bona fide religious purpose.” Indeed, it is a quintessential religious activity. See Fowler v. State of R.I., 345 U.S. 67 (1953) … [in which the Supreme Court ruled] that it is not within “the competence of courts under our constitutional scheme to approve, disapprove, classify, regulate, or in any manner control sermons delivered at religious meetings,” and “sermons are as much a part of a religious service as prayers.” Hence, plaintiff’s allegedly chilled course of conduct is not even arguably proscribed by the statute. Rather, it is expressly permitted. Accordingly, plaintiff’s fear of enforcement consequences if it delivers the sermon is not objectively reasonable because it does not face a credible threat of prosecution on that basis … . A plaintiff cannot show a threat of prosecution under a statute if it clearly fails to cover his conduct.

In summary, the plaintiff lacked standing to challenge the constitutionality of applying the public accommodation laws’ nondiscrimination provisions to the content of sermons because sermons enjoy such broad and undisputed constitutional protection that it is inconceivable that the state or city would use these laws to punish churches based on the content of sermons. The court supported its conclusion by referring to a decision by the United States Supreme Court: “It is not within the competence of courts under our constitutional scheme to approve, disapprove, classify, regulate, or in any manner control sermons delivered at religious meetings,” and “sermons are as much a part of a religious service as prayers.” Fowler v. State of Rhode Island, 345 U.S. 67 (1953).

The court then turned its attention to the church’s restroom policy, which the church said it feared to publicize.

Injury in fact—posting the rest-room policy
The church argued that its decision not to post its restroom policy out of a fear of liability constituted additional injury satisfying the standing requirement. The court agreed:

The church pled that it provides services to the public gratuitously, which under certain circumstances could make it a place of public accommodation. It intends to make statements that may lead members of a protected class to feel that their patronage is unwelcome or not acceptable—at the very least, not accepted in the church’s restrooms or showers. Its proposed course of conduct is thus arguably proscribed by the statutes and ordinances at issue. Consequently, its fear of prosecution, which led it to self-censor its speech, is objectively reasonable. The court concludes the chilling of the church’s speech constitutes an injury in fact for the purposes of standing.

Injury caused by the defendant
To have standing to sue in federal court, a plaintiff not only must demonstrate an actual as opposed to a hypothetical injury, but also must be able to demonstrate that the injury was caused by the defendant. The court concluded that this requirement was met since “its injury is fairly traceable to challenged actions of the defendants.”

Redressability
To have standing to sue in federal court a plaintiff must also demonstrate that its injury would be redressed by a favorable ruling by the court. Once again, the court concluded that this element was met, and therefore the church had standing to pursue its claims in federal court.

The church’s motion for preliminary injunction

Having concluded that the church had standing to pursue its request for an injunction with regard to enforcement of the laws’ nondiscrimination provisions to the posting of its restroom policy, the court turned to the merits of the case. It began its analysis by observing that “a preliminary injunction is an extraordinary remedy never awarded as of right,” because it interferes with a defendant’s freedom of action. For the church to succeed in persuading a court to issue an injunction, it must establish a likelihood that it would succeed on the merits of the case in a court of law.

The church claimed that it would likely succeed in showing that the laws it was challenging are void under

  • the Due Process Clause of the Fourteenth Amendment,
  • the Free Speech Clause of the First Amendment, and
  • the Free Exercise of Religion Clause and Establishment Clause of the First Amendment.

Due Process Clause of the Fourteenth Amendment
The church claimed that the nondiscrimination provisions in the state and city public accommodations laws were void under the Due Process Clause on the basis of vagueness. The court conceded that a law is unconstitutionally vague if it “fails to provide a person of ordinary intelligence fair notice of what is prohibited, or is so standardless that it authorizes or encourages seriously discriminatory enforcement.”

The church pointed to several provisions in the state and city public accommodations laws that it regarded as vague. First, the church claimed that “bona fide religious institution” and “bona fide religious purpose” are impermissibly vague. But the court did not believe that “religious institution” or “religious purpose” is so subjective “that a reasonable person would realistically be unable to determine their meanings.” Further, the court did not believe that the term “bona fide” when placed alongside these terms rendered them overly vague, since it was reasonably clear that these words “conveyed the legislature’s intent to limit the religious institution exemption to those organizations who are genuine in their religious beliefs or those who request the protection of the religious institution exemption in good faith. Hence, the terms ‘bona fide religious institution’ and ‘bona fide religious purpose’ are not so subjective as to lead to seriously discriminatory enforcement.”

The court similarly rejected the church’s contention that other terms in the public accommodations laws were so vague as to be unconstitutional. The court conceded that some of these terms “do seem to leave room for a certain amount of subjectivity.” However, “considering them together within the context of the laws in question—laws aimed at preventing discrimination—the provisions are not so standardless as to lead to seriously discriminatory enforcement.”

The court concluded that it was not likely that the church would prevail in court on its vagueness challenge under the Due Process Clause.

Free Speech claim
The church claimed that the nondiscrimination provisions in the public accommodations laws violated its constitutional right of free speech under the First Amendment. The court disagreed, noting that “the problem with the church’s … challenge is that there is a significant amount of uncertainty surrounding whether the antidiscrimination laws would ever be applied to its conduct.” The court continued:

The burden is on the church to demonstrate a likelihood of success on the merits of its … Free Speech claim, which includes explaining how the laws apply to it. The church pled that it holds many events that are open to the public; however, it stated that all of the events and activities it hosts, even those without “overt religious inculcation,” are intended to further its religious objectives. As a result, there are messages, practices, and activities that the church would not sponsor, host, or otherwise communicate because those messages, practices, and activities would violate the church’s understanding of God’s truth. [The state and city public accommodation laws] do not apply to “any bona fide religious institution with respect to any qualifications the institution may impose based on religion, sexual orientation, or gender identity when such qualifications are related to a bona fide religious purpose.”

The [brochure] drafted and circulated by the [state civil rights commission] gives at least some insight into what it believes are “non-religious activities” that could fall within the scope of the statute and which churches occasionally host. Such examples are “an independent daycare or a polling place.” This interpretation of the exemption would place the emphasis on who exercises control over a given event and for what purpose. The church has not pled that it ever allows events of a nonreligious nature that function independent from the church to be held within its facility. In fact, in its complaint the church repeatedly stated the opposite.

The court noted that other courts that have addressed the issue have concluded that churches and programs they host are not places of public accommodation, citing the following cases:

  • Traggis v. St. Barbara’s Greek Orthodox Church, 851 F.2d 584 (2d Cir. 1988): Holding that a church had not violated Connecticut’s civil rights act because it was not a public accommodation.
  • Vargas-Santana v. Boy Scouts of America, 2007 WL 995002 (D.P.R. 2007): “As a matter of law, a church is not a place of public accommodation.”
  • Saillant v. City of Greenwood, 2003 WL 24032987 (S.D. Ind. 2003): Holding that a church could exclude persons of its choosing from its property because a “church is not a place of public accommodation.”
  • Wazeerud-Din v. Goodwill Home & Missions, Inc., 737 A.2d 683 (N.J. App. 1999): Holding that a church’s addiction program was not a public accommodation under the New Jersey “Law Against Discrimination” (LAD); the group was essentially religious in nature in that it devoted time to the study of Christian tenets and “a religious institution’s solicitation of participation in its religious activities is generally limited to persons who are adherents of the faith or at least receptive to its beliefs.” The court concluded:

Although churches, seminaries and religious programs are not expressly excluded from the definition of “place of public accommodation,” the Legislature clearly did not intend to subject such facilities and activities to the LAD. None of the enumerated examples of “public accommodations” set forth in [the LAD] are similar in any respect to a place of worship or religious training.

Furthermore, a church or other religious institution does not ordinarily solicit the general public’s participation, which is “a principal characteristic of public accommodations.” Dale v. Boy Scouts of America, 734 A.2d 1196 (1999). Instead, a religious institution’s solicitation of participation in its religious activities is generally limited to persons who are adherents of the faith or at least receptive to its beliefs. The conclusion that religious facilities and activities are not public accommodations is also supported by the Division on Civil Rights’ long-standing position, as expressed in an affidavit which its former director submitted in connection with other litigation, that the LAD does not “regulate or control religious worship, beliefs, governance, practice or liturgical norms.” Moreover, any attempt to regulate a religious institution’s policies concerning participation in its religious activities would raise serious constitutional questions … . Consequently, in the absence of a clear expression of legislative intent to extend the coverage of the LAD into this domain, [the LAD] should be construed to avoid governmental entanglement with religion in order to preserve its constitutionality.

  • Roman Catholic Archdiocese v. Commonwealth of Pennsylvania, 548 A.2d 328 (1988): Holding that parochial schools run by the Catholic church are not places of public accommodation under Pennsylvania law.

The Iowa federal district court noted at a pretrial hearing that the state and city defendants stated that the church’s restroom policy was likely permitted under the antidiscrimination laws “because the policy is plainly drafted to serve a religious purpose and that all of the activities the church enumerated within its complaint also appeared to be religious in nature.” The court noted that “such acknowledgements do not prevent the state and city defendants from seeking enforcement against the church and so assigns these statements little weight. However, in light of the previous determinations, they seem to be one more indication that the outcome of the church’s claim is far from certain.”

The court concluded:

On the current facts, the church has not shown that the challenged laws would ever apply to its conduct. Hence, its likelihood of success on the merits of its Free Speech challenge appears dim; there are too many obstacles it must overcome. The church may put forward a more compelling case for success on this claim at a later stage of this dispute—at present, it has not done so. The court concludes that the church has not shown the requisite likelihood of success on its Free Speech claim.

Free Exercise of Religion claim
Next, the court addressed whether the church was likely to succeed on its challenge to the constitutionality of the antidiscrimination laws on the basis of its right to freely exercise its religion. Under the Free Exercise Clause of the First Amendment, “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof.”

The court noted that “the Free Exercise Clause clearly protects a citizen’s right to his or her own religious beliefs. [It] means, first and foremost, the right to believe and profess whatever religious doctrine one desires.” However, “the Free Exercise Clause does not shield every act that may be infected with religiosity from government regulation.” The United States Supreme Court has noted that “we have never held that an individual’s religious beliefs excuse him from compliance with an otherwise valid law prohibiting conduct that the State is free to regulate.” And, significantly, “a law that is neutral and of general applicability need not be justified by a compelling governmental interest even if the law has the incidental effect of burdening a particular religious practice.” In other words, the Free Exercise of Religion clause, as currently construed by the Supreme Court, recognizes “neutral laws of general applicability” as consistent with the Free Exercise Clause. Church of the Lukumi Babalu Aye, Inc. v. City of Hialeah, 508 U.S. 520 (1993).

The Iowa court concluded that the state and municipal public accommodations laws in this case were neutral toward religion, and of general applicability, and therefore consistent with the Free Exercise of Religion Clause of the First Amendment.

Establishment Clause claim
The plaintiffs also claimed that the public accommodation laws under consideration violated the First Amendment’s Establishment Clause, which states that “Congress shall make no law respecting an establishment of religion … .” The court failed to see how this clause was implicated or violated by the public accommodation laws in this case. Further, “the three main evils against which the Establishment Clause was intended to afford protection are sponsorship, financial support, and active involvement of the sovereign in religious activity,” none of which were implicated in this case.

As a result, the court concluded that the plaintiffs were “not likely to succeed on the merits of their challenges to the state and municipal antidiscrimination laws under either the Free Exercise Clause or the Establishment Clause,” or under the Constitution’s Free Speech or Due Process Clauses, and so their request for an injunction had to be denied.

Key point. The state and city defendants cautioned that the result in this case might have been different if the church “allowed the use of its facility as commercially available space with no religious limitations placed on such use.”

Relevance to churches

Historically, a person’s gender was determined at birth. But in recent years, some have argued that their “gender identity” is different from their gender at birth. For example, while born a male, a person comes to identify with the female gender. Such persons are commonly referred to as “transsexuals.” Some of them have surgery or hormonal therapy to change some of their physical characteristics, but many do not.

In recent years, “gender identity” has emerged as a legally protected status, usually as a result of a nondiscrimination provision in a state or municipal public accommodations law. This has caused considerable confusion and concern for many church leaders, and has raised a number of ethical, theological, and legal issues. For example, is a church legally required to:

  • Allow persons to use restrooms according to their sexual identity even if different from their gender at birth?
  • Allow transsexuals who have received surgical or hormonal treatments to alter certain sexual characteristics to use restrooms according to their gender identity?
  • Allow persons to share hotel rooms on church-organized trips according to their gender identity rather than their gender at birth?
  • Refrain from discriminating in employment decisions on the basis of gender identity?

The answers to these questions are complicated by two factors. First, few courts have addressed these issues, and second, any answers will depend on the terms in a veritable patchwork quilt of hundreds of local, state, and federal laws forbidding discrimination by places of “public accommodation.”

Application to Churches

The following analysis should enable church leaders to assess the potential application of the nondiscrimination provisions in a public accommodation law. Important questions to address are:

  1. Is the church a “place of public accommodation” under applicable local, state, or federal laws?
  2. What forms of discrimination are prohibited by places of public accommodation (i.e., is gender identity included)?
  3. If a state or local public accommodations law defines a “place of public accommodation” to include churches, or if a regulatory agency has done so, can the church assert a constitutional defense to coverage based on the First Amendment’s free exercise or nonestablishment of religion clauses?
  4. These questions are addressed below, in light of the Iowa court’s ruling and other precedent.
  5. 1. Is the church a “place of public accommodation” under applicable local, state, or federal laws?
  6. Obviously, the first question to resolve in investigating the application of a public accommodations law to a church is whether churches satisfy the definition of a “place of public accommodation” under the law. There are three possibilities:
  7. The law excludes churches from the definition of a “place of public accommodation.”
  8. Churches are excluded from the definition of a “place of public accommodation” but only if certain conditions are met. For example, a church does not rent its property to the general public for weddings and other events.
  9. Churches are included in the definition of a place of public accommodation even if they do not rent their property to the general public or engage in any other commercial activity. To illustrate, four churches challenged a Massachusetts law that was construed by the state attorney general to include “houses of worship” within the definition of a place of public accommodation regardless of rental or other commercial activity. The state attorney general later announced that “while religious facilities may qualify as places of public accommodation if they host a public, secular function, an unqualified reference to ‘houses of worship'” was inappropriate.
  10. The most likely basis for the legal protection of transgender persons on church property will be the nondiscrimination provisions in public accommodations laws. But these laws only apply to entities that meet the definition of a place of public accommodation. Whether churches are included in this definition will depend on the language in each public accommodations law. Set forth below are summaries of most of the court cases that have ever addressed this question. These are in addition to the five cases cited by the Iowa court concluding that churches are not necessarily places of public accommodation (see above).
  11. (1) Thomas v. County of Camden, 902 A.2d 327 (N.J. App. 2006)
  12. A New Jersey court provided a helpful analysis on the meaning of “public accommodation”:
  13. Generally, in the context of private entities, from commercial to membership organizations providing services to the public, we have developed standards to help determine whether the entity qualifies as a public accommodation. In this regard, our “focus appropriately rests on whether the entity engages in broad public solicitation, whether it maintains close relationships with the government or other public accommodations, or whether it is similar to enumerated or other previously recognized public accommodations.” For non-public entities, the existence of broad public solicitation has consistently been a principal characteristic of public accommodations.

  14. (2) Sloan v. Community Christian School, 2015 WL 10437824 (M.D. Tenn. 2015)
  15. Title III of the Americans with Disabilities Act (ADA) protects individuals with disabilities from discrimination in public accommodations. Title III of the ADA provides that it shall not apply to religious organizations or entities controlled by religious organizations, including places of worship.
  16. A federal district court in Tennessee noted that “this exemption is very broad, encompassing a wide variety of situations. Even when a religious organization carries out activities that would otherwise make it a public accommodation, the religious organization is exempt from ADA coverage. Thus, if a church itself operates a day care center, a nursing home, a private school, or a diocesan school system, the operations of the center, home, school or schools would not be subject to the requirements of the ADA. The religious entity would not lose its exemption merely because the services provided were open to the general public. The test is whether the church or other religious organization operates the public accommodation, not which individuals receive the public accommodation’s services.”
  17. This case addressed the definition of “a place of public accommodation” under Title III of the ADA rather than a state or local public accommodations law. Nevertheless, its discussion of this key term provides some clarification, even if by inference. It suggests that churches that operate “a day care center, a nursing home, a private school, or a diocesan school system,” may be places of public accommodation subject to the nondiscrimination provisions of a local or state public accommodations law.
  18. (3) Doe v. Abington Friends School, 2007 WL 1489498 (E.D. Pa. 2007)
  19. In another case addressing the exemption of religious organizations from the public accommodations provisions of the ADA (see the previous case), a federal district court in Pennsylvania observed:
  20. Although a religious organization or a religious entity that is controlled by a religious organization has no obligations under the rule, a public accommodation that is not itself a religious organization, but that operates a place of public accommodation in leased space on the property of a religious entity, which is not a place of worship, is subject to the rule’s requirements if it is not under control of a religious organization. When a church rents meeting space, which is not a place of worship, to a local community group or to a private, independent day care center, the ADA applies to the activities of the local community group and day care center if a lease exists and consideration is paid. 28 C.F.R. Pt. 36, App. B (2007).

  21. Most public accommodations laws contain an exemption for churches that do not invite the public onto their premises for events and activities unrelated to worship or the exercise of a church’s core purposes, but the exemption of other religious organizations, including those affiliated with a church, is less clear and varies from state to state.
  22. (4) Barker v. Our Lady of Mount Carmel School, 2016 WL 4571388 (D.N.J. 2016)
  23. A parent sued a church-operated elementary school in a New Jersey federal district court for discriminating against her children in violation of the nondiscrimination provisions of a state public accommodations law (the New Jersey Law Against Discrimination or NJLAD). The court noted that the NJLAD prohibits discrimination on various grounds in any “place of public accommodation,” a term that includes schools.
  24. However, the NJLAD does not apply to any educational facility operated or maintained “by a bona fide religious or sectarian institution,” and this exception “applies both to elementary and high schools operated by religious institutions under the supervision of the State Board of Education and to purely religious schools which are not subject to any form of governmental regulation.”
  25. The court concluded that the religious school exception applied in this case since the school was operated by its parent church and diocese. The court added that the church and diocese were also exempt from the nondiscrimination provisions of the NJLAD. It concluded: “Although churches, seminaries and religious programs are not expressly excluded from the definition of ‘place of public accommodation,’ the legislature clearly did not intend to subject such facilities and activities to the NJLAD.” Thus, the claims against these institutional defendants fail as a matter of law.
  26. (5) Presbytery of New Jersey v. Florio, 40 F.3d 1454 (3rd Cir. 1994) aff’d 99 F.3d 101 (1996)
  27. In April 1992, a minister, church, and regional denominational agency (the “plaintiffs”) sued the state of New Jersey in federal court to enjoin enforcement of recent amendments to a state law prohibiting several forms of discrimination by places of public accommodation. The amendments added “affectional or sexual orientation” to the personal characteristics generally protected against discrimination in public accommodations.
  28. The plaintiffs challenged these and other provisions as an infringement on the First Amendment right to the free exercise of religion and association as well as the right to freedom of speech. They sought a preliminary injunction prohibiting the state from enforcing these provisions against it. The federal district court denied the motion for a preliminary injunction holding that the plaintiffs failed to establish both a likelihood of success on the merits and irreparable harm. The plaintiffs appealed, and a federal appeals court affirmed the district court’s ruling. Because of the state’s affidavit stating its intention not to enforce the nondiscrimination law against religious institutions, the appeals court concluded that the plaintiffs failed to demonstrate the possibility of immediate and irreparable harm. The court also ruled that the possibility of private enforcement of the law by activist homosexual groups was too remote to constitute an immediate threat of potential harm and, in any event, the private parties would not be bound by the injunction sought.
  29. The state asked the federal district court to dismiss the plaintiff’s claims. The court granted the state’s motion and dismissed the case. It held that the case was premature based on the state’s affidavit that it would not enforce the law against the institutional plaintiffs as churches or the pastor in his capacity as a clergyman. Once again, the plaintiffs appealed.
  30. On appeal, the plaintiffs alleged:
  31. Based upon the Holy Bible and church doctrine, the church and parent denomination teach that homosexuality, bisexuality, and heterosexual sex outside of marriage are grievous sins.
  32. Plaintiffs also allege that they have always in the past, presently do and since the 1992 amendments, have directly or indirectly discriminated against and made reasonable distinctions based upon homosexuality, bisexuality and heterosexual sex outside of marriage. For example, in New Jersey the plaintiffs express, speak and preach against homosexuality, adultery and fornication, calling it variously an abomination and sinful. They also disseminate and circulate such speech and distinctions throughout New Jersey and the world. They even print and disseminate materials condemning sexual sins. Plaintiffs, and their members, also inquire about the sexual practices of prospective employees and are continuing to do so despite the existence of the 1992 amendments.
  33. The pastoral plaintiff and members of his congregation “speak out about homosexuality, bisexuality and heterosexual sex outside of marriage, make reasonable distinctions based on such practices, lobby against them, and circulate literature condemning them. They encourage, aid and abet discrimination and reasonable distinctions against homosexuals, bisexuals and heterosexuals engaging in sex outside of marriage.”
  34. The pastoral plaintiff and his church members “have always in the past, presently do and since the amendments have refused to knowingly buy from, contract with or otherwise do business with persons on the basis of that person’s homosexual, bisexual or heterosexual practices.”
  35. The pastoral plaintiff and his church members also “have always in the past, presently do and since the amendments have refused to employ any individual who is practicing any public sexual sin, including fornication, adultery and homosexuality, and they make reasonable distinctions based on such acts.”
  36. The director of the state division of civil rights (Gregory Stewart), filed an affidavit setting forth the position of the division and state attorney general regarding enforcement of the nondiscrimination provisions in the state public accommodations law against religious institutions. The “Stewart affidavit” affirmed that the state did not consider churches places of “public accommodations.” Thus, the sections relating to public accommodations were “inapplicable to the church plaintiffs.”
  37. Stewart further stated that churches were considered exempt in their hiring of employees. Due to “First Amendment concerns,” the division “has not in the past prosecuted and has no intention to prosecute essentially exempt churches for sincerely-held religious belief or practice, or speech consistent with such belief, or for a refusal to engage in certain speech or for following their religious tenets. Hence, the division would not even attempt to enforce those provisions in the circumstances of sincerely-held religious reasons such as plaintiffs express here.”
  38. Stewart also made the following general statement:
  39. It has been the consistent construction and interpretation of the [law] that, consonant with constitutional legal barriers respecting legitimate belief and free exercise protected by the First Amendment, the state was not authorized to regulate or control religious worship, beliefs, governance, practice or liturgical norms, even where ostensibly at odds with any of the law’s prohibited categories of discrimination ….

  40. Moreover, the division has not and has no intention to engage in any determination or judgment as to what is or is not a “religious activity” of a church, or to determine what is or is not a “tenet” of religious faith. Within First Amendment limits, all of plaintiffs’ claimed religiously-based free exercises of faith are unthreatened by a reasoned construction of the LAD consistent with its meaning and long enforcement history.

  41. Based largely on the text of the Stewart affidavit, the appeals court affirmed the district court’s dismissal of the church plaintiffs’ complaint. The court concluded that the case was not “ripe” for resolution since there was no “credible threat of enforcement” against the church defendants.
  42. However, the court added that the Stewart affidavit did not “disavow enforcement” of the nondiscrimination provisions of the public accommodations laws against the pastor or church members individually, and so the pastor’s claims could be heard. It sent the case back to the district court for further proceedings.
  43. (6) Boy Scouts of America v. Dale, 734 A.2d 1196 (N.J. 1999) rev’d on other grounds 530 U.S. 640 (2000)
  44. The New Jersey Supreme Court addressed the efinition of public accommodation:
  45. Our case law identifies various factors that are helpful in determining whether Boy Scouts is a “public accommodation.” We ask, generally, whether the entity before us engages in broad public solicitation, whether it maintains close relationships with the government or other public accommodations, or whether it is similar to enumerated or other previously recognized public accommodations.

  46. Broad public solicitation has consistently been a principal characteristic of public accommodations. Our courts have repeatedly held that when an entity invites the public to join, attend, or participate in some way, that entity is a public accommodation … . An establishment which by advertising or otherwise extends an invitation to the public generally is a place of public accommodation.

  47. [The nondiscrimination provisions in the state public accommodations law] requires “an establishment which caters to the public, and by advertising or other forms of invitation induces patronage generally, [not to] refuse to deal with members of the public who have accepted the invitation.”

  48. Two conclusions to the question of whether the church is a “place of public accommodation” under applicable local, state, or federal laws.
  49. While the definition of a “place of public accommodation” varies from jurisdiction to jurisdiction under laws prohibiting various forms of discrimination by places of public accommodation, the following generalizations may be helpful.
  50. First, it is likely that a church that does not invite or solicit the general public to come onto its premises, whether to raise revenue or not, for events or activities unrelated to the core mission of the church, will not be deemed a place of public accommodation and therefore will not be subject to the nondiscrimination provisions in a state or local public accommodations law. This is a generalization that likely will be true in many, perhaps most, cases, but not all. As noted previously, the State of Massachusetts enacted a law in 2016 adding gender identity to the forbidden forms of discrimination by places of public accommodation. The Massachusetts law states:
  51. An owner, lessee, proprietor, manager, superintendent, agent or employee of any place of public accommodation, resort or amusement that lawfully segregates or separates access to such place of public accommodation, or a portion of such place of public accommodation, based on a person’s sex shall grant all persons admission to, and the full enjoyment of, such place of public accommodation or portion thereof consistent with the person’s gender identity.

  52. The law directed the Massachusetts Commission Against Discrimination (MCAD) and state attorney general to issue regulations or guidance facilitating the implementation of the new law. The MCAD issued “Gender Identity Guidance,” which states that “a church could be seen as a place of public accommodation if it holds a secular event, such as a spaghetti supper, that is open to the public.” The attorney general also issued its “Gender Identity Guidance for Public Accommodation” and stated on its website that “houses of worship” are places of public accommodation. The attorney general later clarified its position as a result of a lawsuit brought by four churches, and concluded that “while religious facilities may qualify as places of public accommodation if they host a public, secular function, an unqualified reference to ‘houses of worship'” as an example of a place of public accommodation was inappropriate.
  53. Second, it is likely that a church that invites the general public onto its premises for purposes unrelated to worship or other activities in furtherance of the church’s religious purposes will be deemed a place of public accommodation, especially if the primary purpose in doing so is raising revenue.
  54. Key point. The court in the Iowa case addressed in this article cautioned that its conclusion that the church was not a place of public accommodation might have been different had the church “allowed the use of its facility as commercially available space with no religious limitations placed on such use.” Fort Des Moines Church of Christ v. Jackson, 2016 WL 6089842 (S.D. Iowa 2016).

  55. These two conclusions cover some cases but not all. For example, what about churches that invite the public onto their premises without charging rent? Does a public invitation transform a church into a place of public accommodation, even if no rent or fees are charged? The answer to this question is unclear. There is no doubt that some courts would deem the public invitation to be sufficient to make the church a place of public accommodation, even if no rent or other fees are charged. But this likely would not be the conclusion of all courts. This makes it essential for church leaders to remain informed about the text and interpretation of the public accommodation laws in their state and city.
  56. 2. What forms of discrimination are prohibited by places of public accommodation (i.e., is gender identity included)?
  57. The forms of discrimination forbidden by public accommodations laws vary from jurisdiction to jurisdiction. And, they are often amended, so it is important for church leaders to be familiar with the current text of applicable public accommodation laws.
  58. 3. If a state or local public accommodations law defines a “place of public accommodation” to include churches, or is so construed by a court or administrative agency, can a church assert a constitutional defense to coverage based on the First Amendment’s free exercise or nonestablishment of religion clauses?
  59. As noted previously in this article, several courts and administrative agencies have said that there are constitutional limits on the authority of government agencies to enforce the nondiscrimination provisions of public accommodation laws against churches. To illustrate, in the Iowa district court ruling addressed in this article, the court ruled that a church’s fear of being sued for violating a public accommodations law as a result of sermons on biblical sexual morality was too fanciful to give the church “standing” to pursue its claim in federal court. The court concluded:
  60. Plaintiff alleges that it fears prosecution under the state and municipal discrimination bans if … its pastor delivers his sermon about biological sex and the Bible. However [this fear] is not objectively reasonable. All of the statutes, the ordinances, and the interpretations of the provisions appearing in the [state civil rights agency’s] guidance documents include an exemption for religious institutions when conducting religious activities. Although the definitive scope of this exemption is yet to be determined, the court concludes the delivery of a sermon by a pastor of a church is undoubtedly an act intended to serve “a bona fide religious purpose.” Indeed, it is a quintessential religious activity. See Fowler v. State of R.I., 345 U.S. 67 (1953) … [in which the Supreme Court ruled] that it is not within “the competence of courts under our constitutional scheme to approve, disapprove, classify, regulate, or in any manner control sermons delivered at religious meetings,” and “sermons are as much a part of a religious service as prayers.” Hence, plaintiff’s allegedly chilled course of conduct is not even arguably proscribed by the statute. Rather, it is expressly permitted. Accordingly, plaintiff’s fear of enforcement consequences if it delivers the sermon is not objectively reasonable because it does not face a credible threat of prosecution on that basis … . A plaintiff cannot show a threat of prosecution under a statute if it clearly fails to cover his conduct.

  61. Similarly, in Presbytery of New Jersey v. Florio, 40 F.3d 1454 (3rd Cir. 1994) aff’d 99 F.3d 101 (1996), a federal district court in New Jersey ruled that the New Jersey Law Against Discrimination (NJLAD), which prohibits discrimination on various grounds including gender identity and sexual orientation in any “place of public accommodation,” did not apply to a church. The court relied on an affidavit submitted by the director of the state division of civil rights (the Stewart affidavit) setting forth the position of the division and state attorney general regarding enforcement of the nondiscrimination provisions in the state public accommodations law against religious institutions. The Stewart affidavit affirmed that the state did not consider churches places of “public accommodations,” and so the sections relating to public accommodations were “inapplicable to the church plaintiffs.” The Stewart affidavit also made the following general statement:
  62. It has been the consistent construction and interpretation of the [law] that, consonant with constitutional legal barriers respecting legitimate belief and free exercise protected by the First Amendment, the state was not authorized to regulate or control religious worship, beliefs, governance, practice or liturgical norms, even where ostensibly at odds with any of the law’s prohibited categories of discrimination ….

  63. Moreover, the division has not and has no intention to engage in any determination or judgment as to what is or is not a “religious activity” of a church, or to determine what is or is not a “tenet” of religious faith. Within First Amendment limits, all of plaintiffs’ claimed religiously-based free exercises of faith are unthreatened by a reasoned construction of the NJLAD consistent with its meaning and long enforcement history.

  64. Conclusion
  65. At this time, the most viable basis of liability for churches that assign restrooms based solely on gender at birth is a state or local law forbidding discrimination by “places of public accommodation” on the basis of gender identity. A growing number of states and cities have enacted such a law. With that in mind, churches would be wise to work through the following seven questions:
  66. Is there a public accommodations law in my city or state?
  67. If so, does it prohibit discrimination based on gender identity?
  68. Does the law provide an exemption for churches?
  69. If the law provides an exemption for churches, are there any conditions that must be satisfied?
  70. If the law does not contain an explicit exemption for churches, what is the official position of the civil rights agency tasked with enforcement of the law? Does the agency take the position that churches are exempt? And if so, do any conditions apply? For example, does the exemption apply to churches that rent their property to raise revenue?
  71. If a state or local civil rights agency tasked with enforcement of a public accommodations law claims that it applies to churches that are engaged in commercial or other activities unrelated to exempt, religious purposes, does church coverage only apply during the use of church property for the unrelated purpose, or more broadly to include all uses of church property?
  72. Does a church have a constitutional right under the First Amendment guarantee of religious freedom to restrict restroom usage based on gender at birth? If so, do conditions or exceptions exist? What have the courts said about this, especially courts in the jurisdiction where the church is located?
  73. Note: This article does not address other issues associated with discrimination based on gender identity, including discrimination in employment and discrimination by secular businesses (i.e., bakers, photographers) based on the religious beliefs of the owners.
  74. The Application of Public Accommodation Laws to Churches:a review of the leading cases in chronological order
  75. case

    holding

    Traggis v. St. Barbara’s Greek Orthodox Church, 851 F.2d 584 (2d Cir. 1988)

    A church had not violated a Connecticut law banning several kinds of discrimination for places of public accommodation because churches are not a place of public accommodation.

    Roman Catholic Archdiocese v. Commonwealth of Pennsylvania, 548 A.2d 328 (Penn. 1988)

    Parochial schools run by a Catholic church are not places of public accommodation under Pennsylvania law.

    Presbytery of New Jersey v. Florio, 40 F.3d 1454 (3rd Cir. 1994) aff’d 99 F.3d 101 (1996)

    In dismissing a church’s request for an injunction barring the state from applying against churches a public accommodations law banning discrimination based on sexual orientation, the court relied, in part, on the following assurance provided by a state civil rights agency: “It has been the consistent construction and interpretation of the [law] that, consonant with constitutional legal barriers respecting legitimate belief and free exercise protected by the First Amendment, the state was not authorized to regulate or control religious worship, beliefs, governance, practice or liturgical norms, even where ostensibly at odds with any of the law’s prohibited categories of discrimination.”

    Wazeerud-Din v. Goodwill Home & Missions, Inc., 737 A.2d 683 (1999)

    A church’s addiction program was not a place of public accommodation under New Jersey law; the group was essentially religious in nature in that it devoted time to the study of Christian tenets and “a religious institution’s solicitation of participation in its religious activities is generally limited to persons who are adherents of the faith or at least receptive to its beliefs.”

    Donaldson v. Farrakhan, 762 N.E.2d 835 (Mass. 2002)

    The Massachusetts Supreme Judicial Court considered whether a public accommodation law applied to a religiously affiliated event that was not open to women. The event in question was a speaking event promoted, organized, and funded by a mosque, and presented by minister Louis Farrakhan at a city-owned theater, to address drugs, crime, and violence in the community. The court found that the event was not a “public, secular function” of the mosque. The court also found that application of the public accommodation law to require the admission of women to the event “would be in direct contravention of the religious practice of the mosque” because it would impair the “expression of religious viewpoints” of the mosque with respect to the “separation of the sexes” and the role of men in the community. The court thus further held that the “forced inclusion of women in the mosque’s religious men’s meeting by application of the public accommodation statute” would “significantly burden” the mosque’s First Amendment rights of expression and association.

    Sailant v. City of Greenwood, 2003 WL 24032987 (S.D. Ind. 2003)

    “The church is not a place of public accommodation.”

    Vargas-Santana v. Boy Scouts of America, 2007 WL 995002 (D.P.R. 2007)

    “As a matter of law, a church is not a place of public accommodation.”

    Abington Friends School, 2007 WL 1489498 (E.D. Pa. 2007)

    In a case involving the interpretation of the exemption of religious organizations from the public accommodations discrimination provisions in the Americans with Disabilities Act (ADA), the court quoted from the ADA regulations: “Although a religious organization or a religious entity that is controlled by a religious organization has no obligations under the rule, a public accommodation that is not itself a religious organization, but that operates a place of public accommodation in leased space on the property of a religious entity, which is not a place of worship, is subject to the rule’s requirements if it is not under control of a religious organization. When a church rents meeting space, which is not a place of worship, to a local community group or to a private, independent day care center, the ADA applies to the activities of the local community group and day care center if a lease exists and consideration is paid.” 28 C.F.R. Pt. 36, App. B (2007).

    Sloan v. Community Christian School, 2015 WL 10437824 (M.D. Tenn. 2015)

    This case addressed the definition of “a place of public accommodation” under Title III of the ADA rather than a state or local public accommodations law. Nevertheless, its discussion of this key term provides some clarification, even if by inference. It suggests that churches that operate “a day care center, a nursing home, a private school, or a diocesan school system,” may be places of public accommodation subject to the nondiscrimination provisions of a local or state public accommodations law.

    Barker v. Our Lady of Mount Carmel School, 2016 WL 4571388 (D.N.J. 2016)

    “Although churches, seminaries and religious programs are not expressly excluded from the definition of ‘place of public accommodation,’ the legislature clearly did not intend to subject such facilities and activities to the [public accommodations law]. Thus, the claims against these institutional defendants fail as a matter of law.”

    Fort Des Moines Church of Christ v. Jackson, 2016 WL 6089842 (S.D. Iowa 2016)

    A court refused to issue an injunction preventing state and local public accommodation laws from being enforced against Fort Des Moines Church of Christ, since there was no injury to be redressed. The court referenced an exception in the law for churches, and an affidavit from the state and city defendants that they had never applied the law to churches. But the court cautioned that a church that “engages in non-religious activities which are open to the public” would not be exempt, and it cited as examples “an independent day care or polling place located on the premises of the place of worship.”

IRS Extends Audit Protections to Church Payroll Compliance

New limits set on inquiries and examinations from the IRS.

Church Law and Tax Report

IRS Extends Audit Protections to Church Payroll Compliance

New limits set on inquiries and examinations from the IRS.

Congress has imposed special limitations, found in section 7611 of the tax code, on how and when the Internal Revenue Service (IRS) may conduct civil tax inquiries and examinations of churches. The IRS may only initiate a church tax inquiry if an appropriate high-level Treasury Department official reasonably believes, based on a written statement of the facts and circumstances, that the organization (a) may not qualify for the exemption or (b) may not be paying tax on an unrelated business or other taxable activity.

Restrictions on church inquiries and examinations apply only to churches and conventions or associations of churches. They don’t apply to related persons or organizations. Thus, for example, the rules don’t apply to schools that, although operated by a church, are organized as separate legal entities. Similarly, the rules don’t apply to integrated auxiliaries of a church.

Restrictions on church inquiries and examinations do not apply to all church inquiries by the IRS. The most common exception relates to routine requests for information. For example, IRS requests for information from churches about filing of returns, compliance with income or Social Security and Medicare tax withholding requirements, supplemental information needed to process returns or applications, and other similar inquiries are not covered by the special church audit rules.

Restrictions on church inquiries and examinations don’t apply to criminal investigations or to investigations of the tax liability of any person connected with the church, such as a contributor or minister.

The procedures of section 7611 are used in initiating and conducting any inquiry or examination into whether an excess benefit transaction (as that term is used in IRC Section 4958) has occurred between a church and an insider.

The sequence of the audit process is:

1. If the reasonable belief requirement is met, the IRS must begin an inquiry by providing a church with written notice containing an explanation of its concerns.

2. The church is allowed a reasonable period in which to respond by furnishing a written explanation to alleviate IRS concerns.

3. If the church fails to respond within the required time, or if its response is not sufficient to alleviate concerns, the IRS may, generally within 90 days, issue a second notice, informing the church of the need to examine its books and records.

4. After issuance of a second notice, but before commencement of an examination of its books and records, the church may request a conference with an IRS official to discuss IRS concerns. The second notice will contain a copy of all documents collected or prepared by the IRS for use in the examination and subject to disclosure under the Freedom of Information Act, as supplemented by IRC Section 6103 relating to disclosure and confidentiality of tax return information.

5. Generally, examination of a church’s books and records must be completed within two years from the date of the second notice from the IRS.

6. If at any time during the inquiry process the church supplies information sufficient to alleviate the concerns of the IRS, the matter will be closed without examination of the church’s books and records.

There are additional safeguards for the protection of churches under section 7611. For example, the IRS can’t begin a subsequent examination of a church for a five-year period unless the previous examination resulted in a revocation, notice of deficiency or assessment, or a request for a significant change in church operations, including a significant change in accounting practices.

In the past, the IRS did not apply the protections of section 7611 to “employment tax inquiries” in which the IRS sought to determine a church’s compliance with payroll tax reporting requirements. The current copy of the IRS Internal Revenue Manual specifies: “Section 7611 procedures do not apply to employment tax inquiries.”

However, on December 17, 2015, the IRS issued an internal memorandum “to provide clarification for and updates to [IRS examiners’] responsibilities regarding employment tax examinations of churches.” The IRS memo notes that “prior to this guidance memo [IRS agents] were instructed that section 7611 procedures do not apply to employment tax inquiries.” The IRS memo amends the Internal Revenue Manual with the insertion of the following new section 4.23.2.13(2):

Section 7611 procedures apply to employment tax inquiries. Examiners should not initiate any examinations on a church. If for some reason an employment tax examiner encounters a church employment tax issue, the examiner should immediately contact the Program Manager, Exam, Programs and Review (EPR) in TE/GE Exempt Organizations Examinations.

The amendment is effective immediately, and will be incorporated into the next revision of the Internal Revenue Manual.

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

How Long Should I Keep Income Tax Records?

Know what to hold on to after your form is sent in.

You must keep records so that you can prepare a complete and accurate income tax return. The law does not require any special form of records. However, you should keep all receipts, canceled checks, and other evidence to prove amounts you claim as deductions, exclusions, or credits. Records should be retained for as long as they are important for any income tax law.

In general, you should keep records that support an item of income or a deduction appearing on a return until the statute of limitations (the period during which the IRS can audit your return) runs out. Usually this is three years after the date a return was filed (or three years after the due date of the return, if later). However, in some cases it is wise to keep records for a longer period of time, since a six-year limitations period applies in some situations, and in others (e.g., no return was filed or a return was fraudulent) there is no time limitation on the authority of the IRS to begin an audit.

For how many years can the IRS question or audit your income tax returns? Consider the following three possibilities:

• Three years. In general, the IRS may audit your returns to assess any additional taxes within three years after the date a return is filed (or within three years after the due date of the return, if later).

EXAMPLE. Pastor W filed his 2012 tax return on April 10, 2013. The IRS ordinarily may audit Pastor W’s 2012 return only if it does so by April 15, 2016.

• Six years. The three-year period during which the IRS may audit your returns is expanded to six years if you omit from gross income an amount greater than 25 percent of the amount reported on your return.

• No limit. The IRS can audit returns without any time limitation in any of the following situations: (1) a false or fraudulent return is filed with the intent to evade tax; (2) a taxpayer engages in a willful attempt in any manner to defeat or evade tax; or (3) a taxpayer fails to file a tax return. IRC 6501(c).

KEY POINT. Whenever a taxpayer is requested by the IRS to extend the statute of limitations on an assessment of tax, the IRS must notify the taxpayer of the taxpayer’s right to refuse to extend the statute of limitations or to limit the extension to particular issues.

Section 6502(a)(1) of the tax code specifies that “where the assessment of any tax imposed by this title has been made within the period of limitation properly applicable thereto, such tax may be collected . . . within 10 years after the assessment of the tax.”

Adapted from the
Church & Clergy Tax Guide
by Richard Hammar.

Specific recordkeeping requirements with respect to the following exclusions and deductions are discussed in the
Church & Clergy Tax Guide
:

  • Housing allowances (Chapter 6)
  • Business expenses (Chapter 7)
  • Charitable contributions (Chapter 8)

Records of transactions affecting the basis (cost) of some assets should be retained until after the expiration of the limitations period for the tax year in which the asset is sold.

Churches have recordkeeping requirements too. These requirements are addressed in Chapter 11.

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

Meeting IRS Requirements When a Pastor Runs for Office

How one church navigated the tricky issue of political involvement.

With the presidential election coming up, many churches and ministry leaders may wonder what they can and cannot do when it comes to politics. Is there a line, and, if so, when do you cross it?

Churches are required to remain impartial toward candidates, yet church leaders tend to invest more in social issues, such as pro-life and same-sex marriage, than the average voter. Clearly the church’s interest in politics isn’t going away anytime soon.

Salem Baptist Church in Chicago, Illinois, understands the conflicts that can arise between politics and the church firsthand. Their senior pastor, James Meeks, was a former Illinois State Senator from 2003 to 2013 and currently serves as the chairman of the Illinois State Board of Education. Meeks ran for office in 2002, won, and was re-elected for two additional terms, acting as an advocate for the Roseland community on Chicago’s South Side, all while leading one of the largest African American churches in the city.

Church administrator Veronica Abney has worked at Salem Baptist Church for 20 years and knows how Salem’s ministry was carefully kept from becoming too intermingled with Meeks’s campaigns and political work in order to keep from violating any IRS rules for charitable organizations. She says the key to this is keeping the two—politics and the pulpit—completely separate. “We run our organization pretty much like a corporation,” says Abney. “We’re a megachurch, so therefore you don’t find things that would cause us to be in a compromising position.”

During Meeks’s state Senate campaigns, no one solicited votes through the church, asked for volunteers, or promoted Meeks’s political work on church grounds. People found out about the political initiatives of Meeks’s campaign and state Senate terms from the media. Candidates were not invited to speak at Salem Baptist Church during campaign seasons and would not have been allowed to share their views unless all running candidates were invited to speak.

Abney says the church staff were never used in any capacity associated with Meeks’s campaigns or legislative efforts as part of their work for Salem Baptist Church.

“If members volunteered they would have done it on their own,” says Abney. “It wouldn’t have been anything that I would have been aware of as an administrator at Salem [Baptist Church].”

As far as formal guidelines go for churches seeking to get involved politically, there are only a few specific—and critically important—rules issued by the IRS to 501(c)3 organizations. Providing funding to candidates, making a public statement supporting a candidate, and getting directly involved in a political campaign are forbidden and can result in a nonprofit’s loss of tax-exempt status, according to the IRS. Abney urges churches that are considering involvement in politics to talk to an attorney for guidance on what nonprofits are and are not allowed to do.

“My recommendation would always be to seek legal counsel who are familiar with political initiatives and nonprofits before entertaining or pursing anything like that,” says Abney. “They are well worth their scale of pay for the services that they render.”

Christen Gall is a freelance writer from the Midwest.

For more information on politics and church, check out the downloadable resource Politics and the Church: What to Know in an Election Year .

IRS Proposes Changes to Substantiation Rules for Charitable Contributions

Clarifying what the agency has proposed—and what it could mean for churches.

You may have seen recent accounts in the national media regarding a new IRS regulation that will require churches to obtain the Social Security numbers of donors and provide them to the IRS. I want to explain what has happened and address whether church leaders need to be concerned.

In October, the IRS issued a proposed regulation amending the substantiation rules for charitable contributions: Internal Revenue Bulletin 2015-41. Generally, proposed regulations are published for public comment, and then the IRS issues a final regulation based, in part, on the public input provided. The public comment period for this regulation ends on December 16, 2015, after which the IRS will consider all the public comments and issue a final regulation.

The proposed regulation is only a page long, and it makes a proposed change in the way charitable contributions are substantiated. There are five things for church leaders to note:

1. Under current law, any charitable contribution of $250 or more must be substantiated by a contemporaneous written acknowledgment from the charity that lists the name and address of both the charity and donor, the amount of the contribution, a statement of whether goods or services were provided by the charity in return for the contribution other than intangible religious benefits, and an estimate of the value of any goods or services the charity provided. This has been the law for many years.

The proposed regulation would provide an alternate way to substantiate contributions of $250 or more. Rather than the charity issuing the donor a contemporaneous written acknowledgment, it would file a form called a “donee information return” with the IRS by February 28 of the following year, listing the same information as a written acknowledgment, but, in addition, disclosing the Social Security numbers of donors making one or more contributions of $250 or more.

2. The donee information return disclosing donors’ Social Security numbers would be entirely voluntary. Churches and charities that prefer not to disclose donors’ Social Security numbers could simply continue to provide contemporaneous written acknowledgments to donors as they have in the past, reporting the information mentioned in section 1 above, which does not include donors’ Social Security numbers. Let me quote the text of the proposed regulation: “Donee organization reporting is not required. Donee reporting is available solely at the option of a donee organization.”

3. The proposed regulation has no effect on any contribution of less than $250.

4. The regulation in question is proposed, not final. It may be amended or even rescinded by the IRS. This is exactly what happened in 2009 when the IRS issued a similar regulation, but later rescinded it based on a General Accountability Office (GAO) study demonstrating that contributions to charities would plummet with the enactment of such a regulation due to donors’ concerns over identity theft. Most Americans are deeply concerned about the risk of identity theft. Just imagine how this risk would be elevated by churches obtaining donors’ Social Security numbers and then transmitting them to the IRS. Would churches have sufficient safeguards to protect this information from identity thieves? For many churches, especially smaller ones with poor internal controls, the answer is no. And, according to the GAO, this would cause many donors to discontinue making contributions to their church and favorite charities.

5. Congress can step in at any time and overturn an IRS regulation. It is likely that the current Congress will call a halt to the proposed regulation, even if the IRS fails to do so. This likely will be fueled by formidable opposition from all sectors of the nonprofit community, since every public charity will be adversely affected by the proposed regulation. Even though disclosing the Social Security numbers of donors on a donee information return would be voluntary, and few if any churches or charities would voluntarily comply, some donors will be sufficiently confused and distressed by this development to scale back their contributions, especially those of $250 or more. This was exactly what the GAO found in 2009.

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

The Tax Status of Employer-Paid Medical Insurance

New IRS guidance gives temporary relief—but compliance is still required.

The Internal Revenue Service has issued an official notice addressing the tax status of employer-paid medical insurance plans under the Affordable Care Act (“Obamacare”) and providing much-needed relief from the $100 per day per employee penalty that may be assessed against employers that continue to utilize these plans.

This article will explain the effects of the Affordable Care Act on these plans and fully address the most recent guidance and transitional relief provided by the IRS. This article provides vital information to any church that has paid for the cost of private health insurance for its employees.

background
Prior to the enactment of the Affordable Care Act, many employers provided health benefits for their employees by paying health insurers directly for the cost of private health insurance, or by reimbursing employees for the substantiated cost of insurance premiums. Such plans are called “employer payment plans” since the employer is paying an employee’s private health insurance. The amounts paid by employers under such arrangements was a nontaxable fringe benefit under section 106 of the tax code, which states that, with some exceptions, “gross income of an employee does not include employer-provided coverage under an accident or health plan.”

The IRS affirmed the tax-free status of these arrangements in a 1961 ruling in which it concluded that if an employer reimburses an employee’s substantiated premiums for non-employer sponsored medical insurance, the payments are excluded from the employee’s taxable income under section 106. IRS Revenue Ruling 61-146. The IRS added that this exclusion also applies if the employer pays the premiums directly to the insurance company.

Example. A church does not have a group health plan for its employees. Instead, employees purchase their own health insurance through private insurers, and the church reimburses employees who substantiate the amount of the health insurance premium they paid. Prior to the Affordable Care Act, the employer’s reimbursement of insurance premiums under such an arrangement was a nontaxable fringe benefit, subject to some conditions.

Example. The same facts as the previous example, except that the church paid the insurance companies directly for the cost of health insurance premiums on policies secured by their employees. Prior to the Affordable Care Act, the employer’s payment of insurance premiums under such an arrangement was a nontaxable fringe benefit, subject to some conditions.

IRS Notice 2013-54

In 2013, the IRS and Departments of Labor and Health and Human Services addressed the continuing availability of these plans under the Affordable Care Act. IRS Notice 2013-54. The Notice concluded that two of the Affordable Care Act’s “market reforms” apply to all “group health plans,” with a few exceptions, and it defined group health plans to include plans 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” (collectively, an “employer payment plan”).

The Affordable Care Act contains several “reforms” of the health insurance market (the “market reforms”) that apply to “group health plans” effective January 1, 2014. The market reforms include:

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

IRS Notice 2013-54 concludes that, in most cases, employer payment plans will fail to meet these market reforms and will be unlawful under the Affordable Care Act because they typically impose limits on benefits in violation of the annual dollar limit prohibition. The Notice explains:

A group health plan, such as an employer payment plan, that reimburses employees for an employee’s substantiated individual insurance policy premiums must satisfy the market reforms for group health plans. However, the employer payment plan will fail to comply with the annual dollar limit prohibition because (1) an employer payment plan is considered to impose an annual limit up to the cost of the individual market coverage purchased through the arrangement, and (2) an employer payment plan cannot be integrated with any individual health insurance policy purchased under the arrangement.

a hefty penalty
The Affordable Care Act added section 4980D to the tax code, which imposes a $100 per day per employee penalty on group plans that fail to meet the health insurance market reforms of the Act. Section 4980D(b)(3)(C) exempts “church plans” from this penalty. However, this does not mean that churches that continue to maintain employer payment plans are exempt from the $100 per day per affected employee penalty. This is so for two reasons.

First, and most importantly, the Affordable Care Act amends not only the federal tax code, but also ERISA and the Public Health Service Act (PHSA), and there are separate enforcement mechanisms under each statute. Churches are exempt from ERISA, but they are not exempt under the PHSA, which includes the identical penalties as section 4980D of the tax code for violations of the health insurance market reforms ($100 per day per affected employee). In short, while it is true that church plans are exempt from the $100 per day penalty under section 4980D, they are not exempt from the identical penalty under the PHSA.

Second, the IRS penalties under section 4980D are avoided only for entities meeting the technical definition of a “church plan.” Not all employer payment plans maintained by churches will satisfy this definition.

Employer Payment Plans

IRS Revenue Ruling 61-146 defines an employer payment plan 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.”

The bottom line is that the $100 per day excise tax penalty applies to any group plan that fails to incorporate all of the Affordable Care Act’s market reforms (a virtual impossibility), based not only on section 4980D of the tax code but on an identical provision in the PHSA.

The PHSA provides the following possible adjustments of the $100 per day penalty:

In the case of 1 or more failures with respect to an individual—(I) which are not corrected before the date on which the plan receives a notice from the Secretary of such violation; and (II) which occurred or continued during the period involved; the amount of penalty imposed … by reason of such failures with respect to such individual shall not be less than $2,500 [or $15,000 if “more than de minimis”] … .

No penalty shall be imposed … on any failure during any period for which it is established to the satisfaction of the Secretary that the person otherwise liable for such penalty did not know, and exercising reasonable diligence would not have known, that such failure existed … .

No penalty shall be imposed … on any failure if—(I) such failure was due to reasonable cause and not to willful neglect; and (II) such failure is corrected during the 30-day period beginning on the first date the person otherwise liable for such penalty knew, or exercising reasonable diligence would have known, that such failure existed.

In the case of failures which are due to reasonable cause and not to willful neglect, the penalty … for failures shall not exceed the amount equal to the lesser of—(I) 10 percent of the aggregate amount paid or incurred by the employer (or predecessor employer) during the preceding taxable year for group health plans; or (II) $500,000 … .

In the case of a failure which is due to reasonable cause and not to willful neglect, the Secretary may waive part or all of the penalty imposed by subparagraph (A) to the extent that the payment of such penalty would be excessive relative to the failure involved.

exceptions
Are there any exceptions to the $100 per day per employee penalty? Is there any way for churches to continue paying for employees’ health insurance through private insurers or state exchanges as a nontaxable fringe benefit? The Notice mentions three possibilities:

The market reforms do not apply to a group health plan that has fewer than two participants who are current employees on the first day of the plan year.

The market reforms do not apply to a group health plan with regard to “excepted benefits” which are defined to include disability income, dental and vision benefits, long-term care benefits, and certain health FSAs. As a result, these plans are not necessarily prohibited for failing to comply with the Affordable Care Act’s market reforms.

Another option that may allow some churches to continue to pay employee insurance premiums on a pre-tax basis is to participate in the “SHOP” (Small Business Health Options Program) marketplace. The SHOP marketplace makes it possible for small employers to provide qualified health plans to their employees. Some conditions apply. The SHOP marketplace is open to employers with 50 or fewer full-time-equivalent employees (FTEs). You may qualify for tax credits if you use SHOP. The small business health care tax credit is only available for 2014 and 2015 for plans purchased through the SHOP marketplace.

Key point. The notice acknowledges that “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 Department of Labor regulation at 2510.3-1(j) are met.” These standards include: “(1) No contributions are made by an employer or employee organization; (2) Participation in the program is completely voluntary for employees or members; (3) The sole functions of the employer … with respect to the program are … to collect premiums through payroll deductions or dues checkoffs and to remit them to the insurer; and (4) The employer … receives no consideration in the form of cash or otherwise in connection with the program, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions or dues checkoffs.”

treating employer payment plans as a taxable benefit
Many churches assume that they can continue to maintain their employer payment plan and avoid the $100 per day per employee penalty by treating their payments or reimbursements of employee health insurance as a taxable benefit. Until recently, many tax professionals shared this view. But, according to a Department of Labor document issued in November of 2014, this strategy does not avoid the penalty. The document (“FAQs about Affordable Care Act Implementation”) contains the following question and answer:

Q1: My employer offers employees cash to reimburse the purchase of an individual market policy. Does this arrangement comply with the market reforms?

No. If the employer uses an arrangement that provides cash reimbursement for the purchase of an individual market policy, the employer’s payment arrangement is part of a plan, fund, or other arrangement established or maintained for the purpose of providing medical care to employees, without regard to whether the employer treats the money as pre-tax or post-tax to the employee. Therefore, the arrangement is group health plan coverage within the meaning of Code section 9832(a), Employee Retirement Income Security Act (ERISA) section 733(a) and PHS Act section 2791(a), and is subject to the market reform provisions of the Affordable Care Act applicable to group health plans. Such employer health care arrangements cannot be integrated with individual market policies to satisfy the market reforms and, therefore, will violate PHS Act sections 2711 and 2713, among other provisions, which can trigger penalties such as excise taxes under section 4980D of the Code. Under the Departments’ prior published guidance, the cash arrangement fails to comply with the market reforms because the cash payment cannot be integrated with an individual market policy.

IRS Notice 2015-17

In February 2015, the IRS issued Notice 2015-17, which again addresses employer payment plans. This Notice affirms the tax status of employer payment plans, including the $100 per day per employee penalty, but provides much-needed “transitional relief” from this penalty for all of 2014 and the first six months of 2015 for employers with fewer than 50 employees. Here are the main points addressed in Notice 2015-17:

(1) status of employer payment plans

Notice 2015-17 begins by observing that it

reiterates the conclusion in previous guidance addressing employer payment plans, including Notice 2013-54, that employer payment plans are group health plans that will fail to comply with the market reforms that apply to group health plans under the Affordable Care Act (ACA). For this purpose, an employer payment plan as described in Notice 2013-54 refers to a group health plan under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy or directly pays a premium for an individual health insurance policy covering the employee ….

Notice 2015-17 also affirms that “arrangements constituting employer payment plans fail to comply with the market reforms and may subject employers to the [$100 per day per employee excise tax].”

(2) transitional relief from the penalty

In announcing “transitional relief” from the $100 per day per employee penalty tax imposed on any employer maintaining an employer payment plan that fails to comply with the Affordable Care Act’s market reforms, Notice 2015-17 provides:

[The IRS and Department of Labor] understand that some employers that had been offering health coverage through an employer payment plan may need additional time to obtain group health coverage or adopt a suitable alternative.

The SHOP Marketplace addresses many of the concerns of small employers. However, because the market is still transitioning and the transition by eligible employers to SHOP Marketplace coverage or other alternatives will take time to implement, this guidance provides that the [$100 per day per employee penalty] will not be asserted for any failure to satisfy the market reforms by employer payment plans that pay, or reimburse employees for individual health policy premiums or Medicare part B or Part D premiums (1) for 2014 for employers that are not ALEs for 2014, and (2) for January 1 through June 30, 2015, for employers that are not ALEs for 2015. After June 30, 2015, such employers may be liable for the [$100 per day per employee penalty].

An ALE generally is, with respect to a calendar year, an employer that employed an average of at least 50 full-time employees (including full-time equivalent employees) on business days during the preceding calendar year. For determining whether an entity was an ALE for 2014 and for 2015, an employer may determine its status as an applicable large employer by reference to a period of at least six consecutive calendar months, as chosen by the employer, during the 2013 calendar year for determining ALE status for 2014 and during the 2014 calendar year for determining ALE status for 2015, as applicable (rather than by reference to the entire 2013 calendar year and the entire 2014 calendar year, as applicable).

Notice 2015-17 clarifies that employers eligible for the transitional relief and that have employer payment plans “are not required to file IRS Form 8928 (regarding failures to satisfy requirements for group health plans, including the market reforms) solely as a result of having such arrangements for the period for which the employer is eligible for the relief.”

Key point. Notice 2015-17 clarifies that “this relief does not extend to stand-alone HRAs or other arrangements to reimburse employees for medical expenses other than insurance premiums.”

(3) increasing employee compensation to assist with payment of medical insurance premiums

If an employer 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), is this arrangement an employer payment plan?

Notice 2015-17 answers this question as follows:

No. As described in Notice 2013-54, an employer payment plan is a group health plan under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy or directly pays a premium for an individual health insurance policy covering the employee … . The arrangement described [above] does not meet that description. In addition, because the arrangement generally will not constitute a group health plan, it is not subject to the market reforms.

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.” These standards include: “(1) No contributions are made by an employer or employee organization; (2) Participation in the program is completely voluntary for employees or members; (3) The sole functions of the employer … with respect to the program are … to collect premiums through payroll deductions or dues checkoffs and to remit them to the insurer; and (4) The employer … receives no consideration in the form of cash or otherwise in connection with the program, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions or dues checkoffs.”

(4) treating an employer payment plan as taxable compensation

May the reimbursements or payments under an employer payment plan be provided on an after-tax basis and, if so, will this cause the arrangement not to be a group health plan (and accordingly not to be subject to the market reforms and the $100 per day per employee penalty)?

Notice 2015-17 answers this question as follows:

No. IRS Revenue Ruling 61-146 (1961) holds that under certain conditions, if an employer reimburses an employee’s substantiated premiums for non-employer sponsored hospital and medical insurance, the payments are excluded from the employee’s gross income under Code section 106. This exclusion also applies if the employer pays the premiums directly to the insurance company. The holding in Revenue Ruling 61-146 continues to apply, meaning only that payments under arrangements that meet the conditions set forth in Revenue Ruling 61-146 are excludable from the employee’s gross income under Code section 106 (regardless of whether the employer includes the payments as wage payments on the Form W-2).

However, Revenue Ruling 61-146 does not address the application of the market reforms and should not be read as containing any implication regarding the application of the market reforms. As explained in Notice 2013-54, an arrangement under which an employer provides reimbursements or payments that are dedicated to providing medical care, such as cash reimbursements for the purchase of an individual market policy, is itself a group health plan. Accordingly, the arrangement is subject to the market reform provisions of the Affordable Care Act applicable to group health plans without regard to whether the employer treats the money as pre-tax or post-tax to the employee. Such employer health care arrangements cannot be integrated with individual market policies to satisfy the market reforms.

(5) Medicare premium reimbursement arrangements

If an employer offers to reimburse Medicare premiums for its active employees, does this arrangement create an employer payment plan under Notice 2013-54? Notice 2015-17 answers this question as follows:

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.

However, an employer payment plan that pays for or reimburses Medicare Part B or Part D premiums is integrated with another group health plan offered by the employer for purposes of the [market reforms] if (1) the employer offers a group health plan (other than the employer payment plan) to the employee that does not consist solely of excepted benefits and offers coverage providing minimum value; (2) the employee participating in the employer payment plan is actually enrolled in Medicare Parts A and B; (3) the employer payment plan is available only to employees who are enrolled in Medicare Part A and Part B or Part D; and (4) the employer payment plan is limited to reimbursement of Medicare Part B or Part D premiums and excepted benefits, including Medigap premiums.

Ten Conclusions

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

1. Such plans trigger a significant penalty of $100 per day per affected employee. This penalty applies to any employer payment plan adopted since January 1, 2014.

2. Employers with fewer than 50 employees since January 1, 2014, are eligible for transitional relief announced by the IRS in Notice 2015-17. This means that they will not incur the $100 per day per employee penalty for operating an employer payment plan at any time from January 2014 through the first half of 2015. However, the penalty will be imposed thereafter, so you should discontinue any existing employer payment plan and consider other means of providing health coverage for your employees. One way that was 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).”

3. “Large employers” with 50 or more employees (as defined above) should terminate their employer payment plan immediately since they are not eligible for transition relief from the $100 per day per affected employee penalty. It is imperative that these employers consult with a tax professional to minimize or avoid the risk of triggering the penalty.

4. The Affordable Care Act imposed an additional penalty on “large employers” that did not offer a group health plan to employees by January 1, 2015. This deadline was later postponed to January 1, 2016, for employers with 50 to 99 employees. In anticipation of this requirement, many, if not most, larger employers already have implemented a group health plan compatible with the Affordable Care Act’s market reforms. This will minimize, and in some cases avoid, the $100 per day per employee penalty for these employers.

5. In the past, some employers thought that they could avoid the $100 per day per employee penalty by treating their payment or reimbursement of employee health insurance as a taxable fringe benefit reported on Forms W-2 and 941. Employees of churches that followed this practice in 2014 should discuss with a tax professional the possibility of claiming a tax refund. The reasoning is that employer payment plans technically remain a nontaxable fringe benefit. Revenue Ruling 61-146 and section 106 of the federal tax code (explained above) were not repealed or revoked by the Affordable Care Act. Few, if any, employers will continue providing this benefit to employees because it will trigger the $100 per day per employee penalty. But, employers with fewer than 50 employees are eligible for transitional relief from this penalty for 2014 and the first half of 2015. This means that employees whose W-2 reported the amount of their employer’s payment or reimbursement of personal health insurance may be entitled to a refund. Check with your tax professional for further details.

6. IRS Notice 2015-17 affirms that the $100 per day per employee penalty can be avoided if an employer simply “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 (Department of Labor’s) regulation 2510.3-1(j) are met.” These standards are summarized above.

7. Notice 2015-17 clarifies that employers eligible for the transitional relief and that have employer payment plans are not required to file IRS Form 8928 to qualify for the relief. Form 8928 is the form used by employers to report the $100 per day per employee penalty tax for failing to comply with the market reforms under the Affordable Care Act.

8. 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, 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.

9. The $100 per day per employee penalty applies to all employers, including, but not limited to, religious employers. Employer payment plans have been popular not just among churches, but also among small for-profit employers. As awareness of this penalty builds, Congress has come under mounting pressure to provide permanent relief. Several employer groups and trade associations are lobbying Congress for change, including the National Association for the Self-Employed. Some members of Congress are taking notice. Senator Charles Grassley (R-IA) recently observed:

I’ve heard from several Iowa small business owners who feared they could be subject to thousands of dollars in penalties simply because they helped their employees pay for health insurance in 2014. For these and other affected businesses, the penalty relief is welcome news, but ultimately it only delays the inevitable. Small businesses are still prohibited from reimbursing their employees to purchase health insurance. It’s just a matter of when they have to come into compliance with the law. Small businesses and their employees still will be hurt going forward. Congress has to fix this problem.

Any developments will be reported in future issues of this newsletter, and posted to our website, ChurchLawAndTax.com.

10. The principal author of Notice 2015-17 is Shad Fagerland of the Office of Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding this notice, you may contact Fagerland at (202) 317-5500 (Note: not a toll-free call). Additional questions regarding this information may be directed to the IRS at (202) 317-6846 (Note: also not a toll-free call).

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

Preventing Child Sexual Abuse

How to reduce this risk in your church

Churches need to be aware of how children are being protected at church from sexual, mental, and physical abuse. To help in this effort, we’ve interviewed a group of leading experts on preventing sexual abuse at church. This is the second in the series. Other posts cover how to respond to reports of child abuse, the state of abuse prevention in the church, and common church leader blind spots.

Roundtable participants: Brian McAuliffe, CFO at Willow Creek Community Church in Illinois; Boz Tchividjian, law professor at Liberty University and executive director of GRACE; Peter Persuitti, managing director of Religious & Nonprofit Practice at Arthur J. Gallagher; and Frank Sommerville, lawyer and a shareholder in the law firm of Weycer, Kaplan, Pulaski & Zuber, P.C.Freelance Editor Ashley Emmert conducted this interview, with assistance from Assistant Editor Samuel Ogles.

Ashley: How can churches make sure that they are doing their due diligence when it comes to child safety? Is there any sort of sexual abuse prevention plan that both protects children and helps prevent lawsuits?

Brian: At Willow Creek, we do an application process to get all the information on a person. Then we run a background check and conduct interviews. The protection team will interview the person to see if there’s anything from his or her application that they want to dig deeper into. And then the ministry itself interviews individuals who are going to be involved with kids because they’re the ones who have the greatest exposure to them.

There are a couple of other things to consider:

First, you need to get the leadership involved and have all of this in the budget. It’s about getting the right systems in place.

Another thing is telling people to trust their intuition. You need volunteer training on this. We’ve had several instances where someone says, “Yeah, I thought he was kind of weird but I didn’t do anything about it.” And I think, Oh my goodness.

There should be training that helps volunteer leaders feel free to speak up if they have any kind of feeling that something just isn’t right. They need to know that they have full permission to seek more information or to ask different questions if they’re noticing that something feels off, because they are around kids all the time. They understand the kind of person they want there or don’t want there, and too many times, they just let things go. You need really good training on that.

Boz: One area that I think we don’t emphasize enough is training and equipping our kids. It’s our kids who are on the frontlines of observing behaviors. Many times our employees or even our volunteers are not going to be in the places and positions to observe behaviors that might be disturbing or cause at least a few red flags to be raised. And if we aren’t training and equipping the very ones who are there all the time—our kids—then we’re really doing them a disservice.

And the reality is that oftentimes grooming by offenders begins not in a large group, but perhaps with two friends talking to an adult and an adult asking the one for a phone number or just little things like that. The kids who haven’t been trained in any capacity are not going to think twice about that. But if we can equip them to know what behavior might not be normal and help refine their intuition then if they see something that they just aren’t comfortable with based upon the training they received, they will be encouraged to say something. Because if we only focus on our volunteers and employees, I think we’re missing out on opportunities where offenders most oftentimes strike.

Peter: Another emerging risk that both kids and volunteers need to be aware of is the possibility of peer-on-peer abuse. And I know all of you are familiar with it. But this is where our level of sophistication about sexual matters is changing and [the] internet is changing. We talk about screening, but some potential perpetrators are actually part of the youth group. People are maturing at difference paces and what we thought was a homogenous group of kids may actually have a perpetrator in the mix.

Frank: I think we need to do a better job of identifying potential victims and potential perpetrators. I think there needs to be a lot more study on that, but I think there are some patterns. It’s colloquial and not scientific, but I think that many times there are patterns out there that I see over and over again.

I ran across a study last year on men in prison for sexual assault of children that said 70 percent of their victims were between the ages of 12 and 15. That tells me that junior high and early high school is a high-risk period. We already know, having raised three daughters, that that’s an interesting period in which to be a parent. But this age appears to be a higher risk area.

The study also reported that most of those girls, over 90 percent of them, came from a family without a father or with an emotionally distant father. And so now once you get to know the families at your church, you can see that there may be some young ladies who are like walking billboards for a predator.

Yes, abuse can happen to anybody anywhere. That’s the definition of a lot of these accidents and negligence. Background checks are not going to solve it all. Training isn’t going to solve it all or prevent it all. But we can do something about the higher risk categories that are out there, and we can start identifying those more actively, and then we can start pouring more of our resources into those high-risk areas.

Peter: We have a lot more science and research-based information. We have more tools today than we did even ten years ago in research regarding this issue.

Boz: I tell churches, “Listen. Your job is not to determine whether or not this person you’re interviewing is a child molester. Your job is to try to determine whether or not this person is a good match for dealing with the children in the church.”

People are really uncomfortable with assessing someone’s character, and quite frankly, most of the time they’re going to be speculating. But if you can get a church to say that it’s going to be just like any other job interview, where you have to determine whether or not someone is a good fit for this job, then that’s the process of continued accountability. It allows churches to remove someone from working with children without concluding that he or she is a child molester, as well. Suddenly you can remove someone from this position because you don’t think it’s a good fit anymore. Or, quite frankly, you may end up, depending on the situation, telling someone you think they’re actually a risk to the children at your church.

Ashley: What would you say to churches that are struggling to have enough volunteers in their children’s ministry? Do they shut down children’s ministry if they don’t have the right volunteers?

Boz: There are two things that pretty much every church you’ll find in the country demonstrate: (1) they tend to be very trusting, and (2) they’re always in need.

Every church is going to be in need. And we have to recognize that difficult reality, but also recognize that offenders are drawn to those types of environments. And so I think what we say in those circumstances is yes. If we don’t have the right match for people in our church to serve with the youth, then we don’t compromise. And that means we’ve got to figure that out.

There aren’t many churches that don’t have the right match. It just may be that those people who are better matched haven’t stepped forward to say they want to serve in this capacity. Maybe we actually have to go after them and say, “Hey, we think you would do wonderful in this capacity. Could you help us out?”

Brian: I think, too, a lot of times people start these ministries and want to do everything because they see bigger churches doing it. And eventually they have to look at the volunteers they have and say, “This is the level we can do now. To go any further would put everybody at risk.”

Most churches want to do everything at the same time. They’ve got to shut that mentality down until they have the right people in place.

The other thing is you have to keep going back and making sure that you’re verifying that your protocols are actually being done. Churches have all these great things set up, and then they say, “Great, it’s done and everybody’s kosher and we’re doing this thing and it’s good.” And then no one ever checks up to make sure it’s being maintained, and being maintained correctly. So there has to be this mantra of going back and checking and rechecking, because [not checking that protocols are being followed is] just as dangerous as bringing in someone who’s the wrong person.

Ashley: How often would you recommend that the protocols are checked and maintained?

Brian: Depending on the size of the church and if volunteers or a staff member can do that, you’d want to do that at least once a quarter to make sure things are in place.

For training on preventing child abuse, see Reducing the Risk.

Court Dismisses Atheist Challenge to Filing Exemptions for Churches

Judge cites federal appeals court’s rejection of housing allowance challenge.

A federal district court judge in Wisconsin ruled in December that an atheist group cannot legally challenge the Forms 1023 and 990 exemptions received by churches because the group lacks the legal standing to sue in the first place.

In its challenge to the filing exemptions, Freedom From Religion Foundation said the Internal Revenue Service showed preferential treatment to churches because churches do not have to apply for their tax-exempt status with Forms 1023, nor do they have to file lengthy and expensive annual reports with Forms 990. Other nonprofits do, including FFRF, a nonprofit atheist organization.

FFRF filed the lawsuit in the U.S. District Court’s Western District of Wisconsin—the same venue where it achieved initial success in a separate challenge in 2013 to the clergy housing allowance. But the clergy housing allowance challenge ended in November after the Seventh Circuit Court of Appeals determined FFRF didn’t suffer a direct injury and lacked the standing necessary to bring that lawsuit.

Judge Barbara Crabb for the Western District of Wisconsin said the Seventh Circuit’s logic also must apply to the filing exemptions case.

Judge Crabb presided over the clergy housing allowance case for the Western District of Wisconsin. In December’s ruling, Judge Crabb further explained her reasoning with the separate clergy housing allowance case, stating she allowed it to proceed because “the allegedly discriminatory treatment the plaintiffs received under the statute was an injury in fact that could be remedied by eliminating the exemption.”

However, Judge Crabb said the Seventh Circuit’s reversal in November concluded

the plaintiffs did not have standing because they never asked for the [clergy housing allowance] exemption … even if a party has no chance of getting the exemption, she does not have standing to challenge the exemption without a ‘personal denial’ … In addition, the [Seventh Circuit] noted that ‘[a]llowing members of discriminated-against groups who have not suffered a particularized injury to bring suit … would … create practical difficulties by opening the door to constitutional challenges to any tax exemption that a given individual suspects he may not be entitled to—without first giving the IRS and the Tax Court the opportunity to determine the proper construction and application of the law.’

Based on the Seventh Circuit’s decision, Judge Crabb said FFRF did not possess proper standing to bring the filing exemptions case, either. She wrote:

The standing problem in [clergy housing allowance case] was that the plaintiffs were not challenging the tax; they were challenging the exemption. That is the same problem in this case. Plaintiffs are not challenging the validity of the requirement under 6033(a)(I) to file a report; they are challenging the validity of the exemptions to the requirement in 6033(a)(3).

The decision is a significant victory for churches. In his November 2013 Church Finance Today article about FFRF’s challenge, Richard Hammar noted the costly burden churches would face if the form-filing exemptions were removed.

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

Filing the 6056 Return

Filing 6056 returns is a requirment for applicable large employers under the Affordable Care Act.

The Affordable Care Act added section 6056 to the Internal Revenue Code, which requires “applicable large employers” that are subject to the employer shared responsibility provisions (“play or pay”) to file annual information returns (the “6056 return”) with the IRS and provide statements to their full-time employees about the health insurance coverage the employers offer.

An applicable large employer is an employer that employed an average of at least 50 full-time employees on business days during the preceding calendar year.  A full-time employee generally includes any employee who was employed on average at least 30 hours per week and any full-time equivalents (for example, 40 full-time employees employed 30 or more hours per week on average plus 20  employees employed 15 hours per week on average are equivalent to 50 full-time employees).

Key point. There is no exemption for religious or other nonprofit employers from the reporting requirements.

An applicable large employer may be a single entity or may consist of a group of related entities (such as parent and subsidiary or other affiliated entities). In either case, these reporting requirements apply to each separate entity.

The IRS will use the information provided on the information return to administer the employer shared responsibility provisions of the Act and determine whether an employee is eligible for the premium tax credit under section 36B of the tax code.
Large employers that sponsor self-insured group health plans also are required to report information about the health coverage they provide.

The information reporting requirements under section 6056 are first effective for coverage offered in 2015. A large employer must file information returns with the IRS and furnish statements to employees beginning in 2016; these returns and statements will report information about the employer’s offers of health coverage to its full-time employees for calendar year 2015.

IRS Notice 2013-45 provides transition relief for 2014 from the section 6056 reporting requirements and the section 6055 reporting requirements for health coverage providers and, thus, the employer shared responsibility provisions as well. Accordingly, neither the reporting requirements nor the employer shared responsibility provisions apply for 2014. However, in preparation for the application of the employer shared responsibility provisions beginning in 2015, employers and other affected entities may comply voluntarily for 2014 with the information reporting provisions and are encouraged to maintain or expand coverage in 2014.

In implementing new information reporting requirements, short-term relief from reporting penalties is frequently provided. This relief generally allows additional time to develop appropriate procedures for collection of data and compliance with the new reporting requirements. Accordingly, the IRS won’t impose penalties on large employers that can show that they have made good faith efforts to comply with the information reporting requirements.

How to report

Under the “general method” of reporting, a large employer may satisfy the requirement to file a section 6056 return by filing a Form 1094-C and, for each full-time employee, a Form 1095-C (employee statement). A large employer that maintains a self-insured plan also uses a Form 1095-C to satisfy the reporting requirements under section 6055. There are two alternative methods of reporting under section 6056 that were developed to minimize the cost and administrative tasks for employers. They are explained on the IRS website (http://www.irs.gov/uac/Questions-and-Answers-on-Reporting-of-Offers-of-Health-Insurance-Coverage-by-Employers-Section-6056).

An applicable large employer is an employer that employed an average of at least 50 full-time employees on business days during the preceding calendar year.

Large employers must file Form 1095-C for each employee and a transmittal form (Form 1094-C) with the IRS on or before February 28 (March 31 if filed electronically) of the year immediately following the calendar year for which the coverage information is reported. Because transition relief applies for section 6056 reporting for 2014 (see above) the first section 6056 returns required to be filed are for the 2015 calendar year and must be filed no later than March 1, 2016 (February 28, 2016, being a Sunday), or March 31, 2016, if filed electronically. Regulations under section 6081 address extensions of time to file information returns.

Large employers must furnish the statement to each full-time employee on or before January 31 of the year immediately following the calendar year to which the information relates. This means that the first section 6056 employee statements (the statements for 2015) must be furnished to employees no later than February 1, 2016 (January 31, 2016, being a Sunday).

The regulations require electronic filing with the IRS of section 6056 information returns except for employers filing fewer than 250 section 6056 returns (employee statements) during the calendar year. The regulations permit, but don’t require, employers to furnish electronically the section 6056 employee statements to full-time employees. However, an employer must obtain consent from the employee before the section 6056 employee statement may be furnished electronically.

Key point. An employer can hire a third-party administrator or other third-party service provider to file the return with the IRS and furnish the statements to employees required under section 6056.

The penalty under section 6721 may apply to an applicable large employer that fails to file timely information returns, fails to include all the required information, or includes incorrect information on the returns. The penalty under section 6722 may apply to an applicable large employer that fails to furnish timely the statement, fails to include all the required information, or includes incorrect information on the statement. The waiver of penalty and special rules under section 6724 and the applicable regulations, including abatement of information return penalties for reasonable cause, may apply to certain failures under section 6721 or 6722.

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

Lost Your Form 4361?

The Tax Court addresses ministers who can’t prove they “opted out” of Social Security.

Church Finance Today

Lost Your Form 4361?

The Tax Court addresses ministers who can’t prove they “opted out” of Social Security.

Ministers who satisfy several conditions can exempt themselves from self-employment (Social Security) taxes by filing a timely exemption application, called Form 4361, with the IRS. The tax regulations specify that Form 4361 is not effective until it is marked “approved” by the IRS and returned to the minister.

A third of all ministers have exempted themselves from self-employment taxes by filing a timely Form 4361 with the IRS. Since in most cases this form must be filed by the due date of the federal tax return for the second year in which the minister received ministerial compensation of $400 or more, it ordinarily is filed early in a minister’s professional career. As years and even decades pass by, the likelihood increases that the form will be lost or destroyed.

So what happens if a minister’s tax return is audited by the IRS, and the minister is asked to produce an approved Form 4361 that has been lost or destroyed? Is the minister exempt? If not, will he or she have to pay accrued self-employment taxes with interest and penalties? If so, the tab could easily run into the tens of thousands of dollars.

The Tax Court addressed this important question in a recent case.

Facts of the case

A minister (the “petitioner”) had been an ordained member of the clergy since 1992. She began to receive income from the performance of ministerial services in 1993. The first two years after ordination in which she derived net self-employment earnings of $400 or more from ministerial services were 1993 and 1994.

The petitioner timely filed her 1994 federal tax return (Form 1040) on October 16, 1995. She claimed that she submitted a Form 4361 with her 1994 tax return and that the form was approved by the IRS and returned to her. The petitioner’s copies of her 1993 through 1998 tax returns were destroyed in a basement flood. As a result, she did not have a copy of the Form 4361 that she claimed she filed with her 1994 tax return. Further, the tax returns she filed for the years 1993 through 2002 have been destroyed by the IRS pursuant to normal procedures.

In reliance on the fact that her Form 4361 exemption application had been approved by the IRS in 1994, the petitioner did not pay self-employment taxes on any ministerial income since 1994. The petitioner’s tax returns for 2000 and 2002 were audited by the IRS, but in both cases the IRS accepted the petitioner’s status as exempt from self-employment taxes.

However, in 2012 the IRS informed the petitioner that she owed self-employment taxes for 2007 and 2008 (the years under investigation), based, in part, on the fact that the IRS “ministerial waivers unit’s” file for the petitioner did not contain a Form 4361 that was filed in 1994. The petitioner appealed to the United States Tax Court.

The Tax Court’s ruling

The United States Tax Court ruled that the petitioner was exempt from self-employment taxes even though she could not produce her approved copy of Form 4361.

The court began its opinion by noting “petitioner bears the burden of proving that her Form 4361 was properly filed and approved and that the IRS determination is erroneous.” The court noted that “the mere filing of a Form 4361 does not constitute an exemption. The exemption is granted only if the application is approved by an appropriate internal revenue officer.” Treas. Reg. 1.1402(e)-2A(c). The court continued:

The first two years after ordination in which petitioner derived net self-employment earnings of $400 or more from ministerial services were 1993 and 1994. As a result, in order for petitioner to be exempt from self-employment tax for the years at issue, she must have filed a Form 4361 no later than the due date of her 1994 federal income tax return. Petitioner stated that she attached a completed Form 4361 to her 1994 tax return and that such form was approved by the IRS and returned to her in 1995. The IRS argues that petitioner did not prove she had filed a Form 4361 with her 1994 tax return and that the IRS has no record of an approved Form 4361 from that period. We must determine whether petitioner attached her Form 4361 with her timely filed 1994 tax return and whether the IRS approved such form.

The parties stipulated that petitioner’s copy of her 1994 federal income tax return was destroyed in a flood along with copies of her 1993 and 1995 through 1998 tax returns. Petitioner stated that the Form 4361 approved by the IRS in 1995 was attached to the destroyed return. Petitioner argues that the examinations of her federal income tax return for the taxable years 2000 and 2002 in which the IRS determined she owed no self-employment tax is circumstantial evidence that at the time of the two examinations the IRS had evidence of petitioner’s approved Form 4361 … .

For the taxable years 2000 and 2002 the IRS examined petitioner’s tax returns and agreed with petitioner that no self-employment tax was owed. The only issue relative to the exemption was whether petitioner had timely filed a Form 4361 that had been approved by the IRS. This creates an inference that on at least two occasions the IRS determined that petitioner had filed a Form 4361 with her 1994 tax return and that such form had been approved. The IRS determinations during the two examinations are consistent with petitioner’s assertion that the Form 4361 she filed with her 1994 tax return had been approved. Petitioner has consistently reported that she was exempt because she had filed Form 4361. Petitioner’s reporting of no self-employment tax for these taxable years is consistent with her position that the Form 4361 filed with her 1994 tax return was approved by the IRS. Over the course of multiple examinations petitioner has consistently stated that she filed a Form 4361 with her 1994 tax return and that such form had been approved. On two previous occasions the IRS apparently agreed. Based upon the evidence we find that, more likely than not, petitioner filed a Form 4361 with her 1994 federal income tax return and that such form was approved by the IRS. Accordingly, we hold that petitioner is not liable for self-employment tax for the years at issue. Corso v. Commissioner, T.C. Sum. Op. 2014-3 (2014).

This case may be of assistance to those ministers who filed a timely Form 4361 exemption application that later was approved and returned by the IRS, but that was subsequently lost or destroyed. The tax regulations specify that “the filing of an application for exemption on Form 4361 by a minister … does not constitute an exemption from the tax on self-employment income … . The exemption is granted only if the application is approved by an appropriate internal revenue officer.” In practice, this means that an exemption is effective only when an applicant receives back one of the three 4361 forms (it is filed in triplicate) from the IRS marked “approved.”

What this means for ministers

If you are sure that you filed a timely Form 4361 that was approved by the IRS and returned to you, but is now lost or destroyed, note the following two points in the event you are audited and the IRS asks for proof of exemption:

Contact the tax preparer you used to prepare and file your tax returns at the time the form would have been submitted. The preparer may have records that will indicate if a Form 4361 was filed.

This case, and others, indicate that ministers who file a timely Form 4361 that is approved and returned by the IRS may be able to prove their exempt status even if they cannot produce the approved form, if there is other evidence to demonstrate that the IRS approved the exemption.

It is a good practice for ministers who file Form 4361 to make copies of their approved form and store them in different locations (paper or digital).

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
ajax-loader-largecaret-downcloseHamburger Menuicon_amazonApple PodcastsBio Iconicon_cards_grid_caretChild Abuse Reporting Laws by State IconChurchSalary Iconicon_facebookGoogle Podcastsicon_instagramLegal Library IconLegal Library Iconicon_linkedinLock IconMegaphone IconOnline Learning IconPodcast IconRecent Legal Developments IconRecommended Reading IconRSS IconSubmiticon_select-arrowSpotify IconAlaska State MapAlabama State MapArkansas State MapArizona State MapCalifornia State MapColorado State MapConnecticut State MapWashington DC State MapDelaware State MapFederal MapFlorida State MapGeorgia State MapHawaii State MapIowa State MapIdaho State MapIllinois State MapIndiana State MapKansas State MapKentucky State MapLouisiana State MapMassachusetts State MapMaryland State MapMaine State MapMichigan State MapMinnesota State MapMissouri State MapMississippi State MapMontana State MapMulti State MapNorth Carolina State MapNorth Dakota State MapNebraska State MapNew Hampshire State MapNew Jersey State MapNew Mexico IconNevada State MapNew York State MapOhio State MapOklahoma State MapOregon State MapPennsylvania State MapRhode Island State MapSouth Carolina State MapSouth Dakota State MapTennessee State MapTexas State MapUtah State MapVirginia State MapVermont State MapWashington State MapWisconsin State MapWest Virginia State MapWyoming State IconShopping Cart IconTax Calendar Iconicon_twitteryoutubepauseplay
caret-downclosefacebook-squarehamburgerinstagram-squarelinkedin-squarepauseplaytwitter-square