Q: We’re a small rural church, and our pastor is the only employee. We’re considering getting him a $50,000 life insurance policy and paying the premium on it. He will name the beneficiary. Can the church get a $50,000 group life insurance policy with only one employee? Would the premium the church pays on this be considered a taxable fringe benefit if the minister names the beneficiary of his choosing (even if it’s $50,000 or less)?
Understanding Church-Provided Life Insurance for Pastors
Providing life insurance to a pastor, whether or not he is the only employee of the church, has tax consequences. Life insurance paid by an employer is a taxable benefit in instances where the employee can select the beneficiaries. Without a separate provision, the cost of the life insurance should be added to the employee’s wages in Box 1 of the Form W-2.
Can a Church Get a Group Life Insurance Policy for One Employee?
While employers can provide life insurance up to $50,000 of coverage through a group-term life insurance plan on a tax-free basis, one employee does not constitute a group. Therefore, a group-term life insurance benefit is not available in this instance.
Are Life Insurance Premiums a Taxable Fringe Benefit?
The church may pay the life insurance premiums for the minister, but it must treat them as a taxable fringe benefit for payroll reporting purposes. This is true regardless of the amount of life insurance provided. Since the pastor names the beneficiary, the premium payments are considered taxable income and should be reported accordingly.
FAQs About Church-Provided Life Insurance for Pastors
1. Can a church provide tax-free life insurance to a pastor?
A church can offer tax-free group-term life insurance only if it has more than one qualifying employee. If only one employee is covered, the benefit does not qualify as tax-free.
2. How should a church report life insurance premiums paid for a pastor?
The church must include the premiums as taxable income on the pastor’s W-2 form.
3. What if the church owns the policy instead of the pastor?
If the church owns the policy and is the beneficiary, it may not be considered taxable income to the pastor. However, legal and tax consultation is advised.
4. Are there alternative benefits churches can offer pastors?
Yes, churches can explore tax-free benefits such as a properly structured health reimbursement arrangement (HRA) or a 403(b) retirement plan.