Let me share a number of factors for your consideration:
Status is ambigious
Pastor emeritus status is an ambiguous status in many cases due to a lack of any definition in a church’s governing document (i.e., bylaws). If a church’s governing document does not address this status, then it is a purely honorific status conveying no legal authority.
Carefully review compensation agreements
Some churches have adopted compensation agreements for a retiring pastor that may or may not be linked to pastor emeritus status. These agreements are perfectly legitimate so long as the following requirements are satisfied:
The agreement is duly authorized pursuant to the church’s governing document. To illustrate, an agreement adopted by the church board will be legally unenforceable if the board lacked the authority under the church’s governing document to enter into the agreement.
If the church’s governing document authorizes the board to approve a compensation agreement with a retiring pastor, then there are two fiduciary duties that must be recognized and discharged by the members of the board. The first is the fiduciary duty of “reasonable care” that any board member owes to the organization. This duty requires board members to exercise prudence, care, and independence in fulfilling their duties, and this requires the full and objective consideration of any compensation arrangement with a retiring pastor.
Duty of loyalty
A second fiduciary duty that is implicated in such arrangements is the duty of loyalty. This duty, which is recognized by the nonprofit corporation laws of most states, requires board members to place the corporation’s interests above their own. This means, among other things, that board members (such as the senior pastor) who will personally benefit from a particular board decision should recuse themselves from the discussion and take no part in the vote. Further, the duty of loyalty requires full disclosure of all the terms and conditions of a particular action, and that a board-approved action that personally benefits a particular member must be “fair” to the organization. These constraints transcend any ethical imperative. They are a matter of law.
Include language to keep options open
Some compensation agreements with former pastors may become burdensome to the church in future years. For this reason, I recommend that such agreements contain language that gives the church the ability to unilaterally modify or terminate its obligations under the agreement.
Review tax reporting requirements
It is essential that a church comply with the tax reporting requirements associated with such transactions. Any compensation that a church provides to a retired pastor, including pastors who are given the status of pastor emeritus, is taxable and must be reported to the IRS. The notion that such remuneration is a nontaxable “love gift” is widespread but mistaken.
The failure to report taxable compensation to the IRS will convert the compensation into an “excess benefit transaction” under section 4958 of the tax code. This could result in substantial excise taxes (called “intermediate sanctions) of up to 225 percent of the amount that the IRS determines to be excessive compensation.
If a compensation agreement provides for the payment of compensation in future years, it may constitute a non-qualified deferred compensation plan subject to strict new requirements under section 409A of the federal tax code. A failure to comply with these requirements can result in substantial penalties.
If a pastor emeritus remains employed by the church in some capacity, then several additional issues are implicated, including workers compensation and fringe benefits.
Benefits to surviving spouse
Any agreement approved by the church board or congregation that recognizes a pastor emeritus should address the issue of continuation of benefits to a surviving spouse.
Consult an attorney
Legal counsel should review any agreement pertaining to a retiring pastor before it is executed.