Fill Your Car With Gas, Break The Law - Part 2

By Raul Rivera

In America, we pay taxes. These can be burdensome, but the government has also set in place benefits to lessen our tax burden. We are often unaware of the reimbursable expenses that can pay off dividends when correctly applied. Reimbursements are fantastic because they allow taxpayers to recapture expenses incurred on behalf of their employer.

On the other hand, reimbursements are just one of many little areas that may keep churches from remaining compliant. Reimbursements are oftentimes undocumented, leaving no paper trail to show that they were done correctly or why they were given. More often than not, this can be attributed to the leadership simply not knowing how to handle reimbursements. In fact, many pastors will read this and think to themselves, "I wish I would have known this earlier!" or "Why didn't someone tell me about this before?"

Today, in continuation of Part 1, we will review various types of reimbursements and how to implement them. By the end of this post you will be empowered with the knowledge and understanding of how to manage these reimbursements.

Mileage reimbursement

Mileage reimbursements are common in churches but frequently misunderstood. The IRS permits employers to reimburse employees and volunteers for miles driven when using their personal vehicles on behalf of the corporation.

A mileage reimbursements is actually not pre-paid money for gas. It is a reimbursement allowed for using your personal vehicle for business purposes. Below are the 2016 mileage reimbursement rates:

• 54 cents per mile for business miles driven (for employees)
• 14 cents per mile driven in service of charitable organizations (for volunteers)

Business miles driven are counted when driving from the business office to complete tasks on behalf of the employer. Mileage reimbursements for commuting miles from the home to the office, and vice versa, are considered taxable income because commuting is considered personal use.

However, volunteers serving at a charitable organization can track miles driven from their home to volunteer for a charitable organization.

Medical expense reimbursement

Section 105(b) of the Internal Revenue Code allows an employee to receive a non-taxable benefit of reimbursement of medical expenses for the employee, his or her spouse, or dependents under the age of 27, when the reimbursement is paid directly or indirectly to the employee. These are commonly referred to as Health Reimbursement Arrangements (HRA).

It is important to note that HRAs are still subject to the new requirements for group health plans according to the market reforms of the Affordable Care Act (ACA). In other words, an employer may still offer a section 105 HRA as long as it is in conjunction with a qualified group health plan. The qualified group health plan may be one that the employee’s employer offers, or it may be a part of a qualified group health plan offered by his/her spouse’s employer. The bottom line is that they are enrolled in a qualified group health plan.

Here are a few more important points:

1. If you offer this reimbursement to one full-time employee, it must be offered to all full-time employees. Additionally, you cannot offer a larger reimbursement amount because of one’s title or position. The same amount must be offered across the board.
2.  A medical reimbursement plan only applies to amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease as well as transportation costs for essential medical care.
3. An employee must be given the option to “permanently opt out of and waive future reimbursements from the HRA  at least annually” if you choose to offer such a benefit.

Remember, we are just referring to qualified medical reimbursements according to section 105(b). Section 106 employer payment plans are different and discussed in our article about the 7/1 deadline.

Continuing education reimbursement

Under section 127, the church may pay for an employee's undergraduate and graduate educational expenses. The education is not required to be job related either. Payments under this program may be made directly to the educational institution or may be reimbursed directly to the employee. Up to $5,250 may be reimbursed annually. The payments that the church makes are tax-free to the employer.

Reimbursement for use of cell phone

Back in the days when VCR's and cassette tapes were popular, cell phones were rare and expensive. But now times have changed, and cell phones are a part of virtually everyone’s daily life. In light of the common use of cell phones, Congress passed the Small Business Jobs Act of 2010, which reversed an originally burdensome requirement to substantiate every bit of cell phone use for reimbursement.

As a result of that law, the IRS published Notice 2011-72, which states that if the church provides the pastor or employee a cell phone "primarily for non-compensatory business reasons," then the value of that cell phone is considered an "excludible fringe benefit”. Meaning that, if from time to time the pastor uses his or her church provided phone for personal use, it is not considered a taxable benefit to him/her. Additionally, when a church now pays for the pastor's cell phone, it is no longer considered taxable income to the pastor.

Adoption assistance reimbursement

In Tax Topic 607, the IRS gives guidance on adoption assistance programs. Under this program the church can directly pay for the expenses related to the adoption of a child. Church employees may receive adoption assistance of up to $13,360.00. Benefits received by the employee under this program are tax-free.

Travel expense reimbursement

Reimbursements received by an employee that travels on business outside of the area of his/her home are tax-free so long as they are properly documented.

Travel expenses that can be reimbursed include the following:

1. Costs to travel to and from the church office to the destination when using a method other than your personal vehicle. Using your personal vehicle would be reimbursed via mileage reimbursement.
2. Transportation costs while at the business destination.
3. Lodging, meals, and incidental expenses incurred while out-of-town for business purposes.
4. Cleaning, laundry, and other miscellaneous expenses incurred while out-of-town for business purposes.

In order for travel expenses to be reimbursable, section 162(a)(2) states that the travel must be "temporary and be substantially longer than an ordinary day's work, requiring an overnight stay or substantial sleep or rest." Let us look at a couple of examples.

Example 1:  Pastor X travels from Dallas, TX to New Orleans, LA to attend a conference.  He spends two nights there attending workshops and evening sessions. All of his meals, lodging, cleaning, and laundry (if any) are fully reimbursable.

Example 2:  Pastor X travels from Dallas, TX to Fort Worth, TX to visit a member of the church who had surgery. He left the church office at 9:00 a.m. and traveled 35 miles each way. While there, he bought lunch at the hospital cafeteria. He arrived at home at 4:30 p.m. Under this scenario, his miles are fully reimbursable, but his meal IS NOT.  In order for his meal to be reimbursable, he had to be out substantially longer than an ordinary day's work, requiring an overnight stay or substantial sleep or rest. It may not seem fair, but that is the rule.

Moving expense reimbursement

It is not uncommon for pastors to move from one state to another after accepting a position as senior pastor of a church. Section 82 and Section 217 provide that an employer may reimburse the moving expenses of an employee if he/she meets the following requirements.

• The individual must be an employee;
• The employee must actually incur or pay the expenses; and
• Expenses are closely related to starting work at the new job location (generally, moving expenses qualify that are incurred within one year from the date the employee first reported to work at the new location).

In addition, the moving expenses must meet the time and distance tests, as follows:

Time test: The employee must work at least 39 weeks full-time in the first year after arriving in the new location.
Distance test: The new job is at least 50 miles farther from the former home than the old job location was from the former home.

What next?

We have reviewed some great reimbursements that can enrich the employee experience at your church. Understanding these reimbursements can help keep your ministry from making costly mistakes in how it manages financial transactions with its staff members. Simply knowing about the reimbursements is not enough. They must also be properly established.

Each reimbursement should be established at a properly called board meeting through passing a resolution and establishing a policy for implementing the reimbursement(s). Additionally, the board should approve the medical reimbursements and education reimbursements as part of each eligible employee’s compensation agreement. When you create a plan of action to track and manage reimbursements, you do yourself and your employees a favor.

We are here to help

Our vision and mission is to help church planters, pastors, and ministry leaders have up-to-date information to help them protect what God has given them to lead. You do not have to be in the dark any longer. StartCHURCH can partner with you and give you confidence that you are moving forward in a strong, compliant manner.

If you have any questions concerning reimbursements or if we can be of service to you in any way, please feel free to call us at 770-638-3444. We would be honored to serve you.