Churches often provide various fringe benefits to employees, some of which are tax-free or tax-deferred. However, churches must carefully structure these benefits to comply with IRS regulations and maximize tax advantages for employees.
Tax-Free and Tax-Deferred Fringe Benefits for Church Staff
Health Insurance
- Employer-paid group health insurance premiums are tax-free.
- Premiums can amount to $10,000 or more per employee annually.
- Learn more about ACA compliance for churches.
Medical Expense Reimbursement
- Churches can reimburse coinsurance, deductibles, and out-of-pocket expenses through an FSA.
- FSAs are capped at $2,500 per year (adjusted for inflation).
- Funds must be used within the designated period to remain tax-free.
- Read about healthcare reimbursement rules.
Retirement Plans
- Churches often provide 403(b) tax-sheltered annuity plans.
- Pension contributions for pastors are tax-deferred.
- Distributions can be designated as a tax-free housing allowance.
Life Insurance
- Up to $50,000 in group-term life insurance is tax-free.
- Coverage above $50,000 is taxable but at favorable rates.
Disability Insurance
- Employer-paid premiums are tax-free, but benefits are taxable.
- If the employee pays premiums, disability benefits are tax-free.
Long-Term Care Insurance
- Church-paid or reimbursed long-term care premiums are tax-free.
Dependent Care
- Childcare or dependent care for children under age 13 may be tax-free.
- Dependent care plans must comply with nondiscrimination rules.
Church-Owned Vehicles
- Personal use of a church vehicle is taxable.
- The fair market value of personal use must be reported unless reimbursed.
Loans to Employees
- Many states prohibit churches from making loans to employees.
- Loans under $10,000 may have exceptions; consult an attorney.
Tuition and Fee Discounts
- Church-operated schools may offer tax-free tuition discounts to employees and their dependents.
- Church employees receiving tuition benefits may need to report them as taxable income.
Special Rules for Fringe Benefits
- Many tax-free benefits must be available to all employees, not just senior staff.
- Discriminatory plans may result in tax liabilities for highly compensated employees.
Fringe Benefits That May Violate IRS Rules
Improper Use of Benefit Plans
- A church sets up a medical reimbursement plan using salary reductions but refunds unused amounts at year-end.
- A church reimburses medical expenses without a formal ACA-compliant plan.
- A church pays whole life insurance for a senior pastor, with the pastor’s spouse as the beneficiary.
- A church reimburses dependent care expenses through an accountable plan, improperly mixing benefits.
Key Takeaway: Properly structured fringe benefits offer significant financial advantages to churches and their employees. However, improperly designed plans can create IRS compliance risks.
FAQs About Fringe Benefits for Church Staff
1. What fringe benefits can a church provide tax-free?
Health insurance, retirement contributions, group-term life insurance (up to $50,000), disability insurance, and dependent care benefits are commonly provided tax-free.
2. Can a church provide tax-free tuition benefits?
Tuition discounts for employees and their dependents may be tax-free if they meet IRS guidelines.
3. Are church-provided vehicles a taxable benefit?
Yes, unless the employee reimburses personal use, the fair market value of personal use must be reported as taxable income.
4. What happens if a church offers discriminatory benefits?
Highly compensated employees may lose tax-exempt treatment for certain benefits, leading to additional tax liabilities.
