Q: My church has an employee who is covered by his spouse’s medical insurance plan. Is it okay to give a stipend to an employee who declines our plan so long as it is reported as taxable income?
The answer is maybe. Employers, including churches, cannot offer a cash or benefit option to employees who opt out of group health insurance as a general choice. Doing so—providing an increased paycheck in lieu of participation—may jeopardize the tax benefits of your medical plan for all employees.
How Can a Church Structure an Opt-Out Payment?
- The opt-out payment should be structured in compliance with the Affordable Care Act (ACA) and should not disrupt the benefits of those who remain in the plan.
- It must be coordinated properly to avoid making the benefit taxable for all employees.
- The church should consider placing the opt-out payment within a Section 125 cafeteria plan to preserve tax benefits.
When Is the Opt-Out Payment Taxable?
Unless structured within a Section 125 plan, the opt-out payment is taxable. Churches should work with a tax professional to ensure compliance with federal regulations.
FAQs About Church Employee Medical Stipends
Can churches offer cash payments to employees who decline medical coverage?
Yes, but only if structured correctly within a compliant benefits plan to avoid negative tax implications.
Does an opt-out stipend impact other employees’ benefits?
Potentially, yes. If not handled correctly, it may make the employer’s entire group health plan taxable for all employees.
What is a Section 125 cafeteria plan?
A Section 125 plan allows employees to receive certain benefits pre-tax, preserving tax advantages for both the employer and employees.
Should churches consult a tax professional before offering an opt-out stipend?
Yes, it is essential to consult a tax or benefits expert to ensure compliance with ACA regulations and IRS guidelines.
By structuring an opt-out payment correctly, churches can ensure they remain compliant while supporting employees with alternative medical coverage options.
