Healthcare and Your Church; A Simple Guide

By Raul Rivera

“It’s been over 5 years and we’re still trying to get it right,” Greg said with a sigh. He was burning the midnight oil with the finance committee, working to finalize the compensation agreements the church needed for the new staff members they were about to hire.

The church had grown by leaps and bounds. They were adding 5 new staff members to keep up with the growing needs of the ministry and knew it was wise to hire them in early summer before the school year began and church attendance spiked.

Greg and the finance team got to the healthcare portion of the contracts and realized that since the church would soon have more staff members, there may be some changes they needed to enact to keep up with the current healthcare requirements.

It made him nervous. The finance team had successfully navigated payroll for over 20 years, but the healthcare act was still somewhat new and unfamiliar territory for them all. He wished he could find an easy-to-understand resource that made it simple to know what the church was responsible for regarding insurance.

Back to the basics

The Affordable Care Act (ACA) was passed on March 23, 2010 and changed the landscape of healthcare practices in America. Navigating the scope of healthcare can now seem daunting and intimidating...but it does not have to be.

Each week we receive questions from pastors and church administrators regarding employer healthcare responsibilities.

Well, you have asked, and we have listened.

Below are the top 3 questions pertaining to healthcare and the church that we receive from pastors and church administrators, just like you.

3 common healthcare questions

Before proceeding, please take note that this post is not intended, in any way, to be legal advice. Rather, this post is intended to provide you (pastors and church leaders) with information to help guide you and your church. If you have further questions regarding healthcare that are specific to your church or ministry, I highly recommend that you seek the counsel of a qualified attorney and/or tax professional.

Question 1: “Who is required to have/maintain healthcare coverage? And what happens if one does not maintain healthcare coverage?”

In short, all individuals are required to maintain minimum essential healthcare coverage. Individuals who do not have and maintain minimum essential coverage will be required to pay a penalty. There are, fundamentally, 3 main types of minimum essential coverage:

1. Employer-sponsored coverage - This is a health plan provided by your employer that meets the requirements of the ACA.
2. Individual health coverage - This is a health plan that you obtain on your own. This must also meet the requirements of the ACA.
3. Coverage under government-sponsored programs - This includes coverages such as Medicare and Medicaid.

The fee assessed to those who do not maintain minimum essential healthcare coverage is calculated in 2 different ways - as a percentage-based penalty or per-person penalty. You will end up paying whichever is higher.

1. Percentage-based penalty - 2.5% of your household income, not to exceed the total annual premium of the national average of the Bronze plan sold through Marketplace, or
2. Per-person penalty - $695 per adult, $347.50 per child under 18, not to exceed $2,085.

Using the percentage method, only part of your household income that is above the yearly tax filing threshold is counted. So, say for instance your annual household income is $80,000. The current tax filing threshold for a couple filing jointly and under the age of 65 is $20,600. If you do not have coverage and are subject to the percentage-based penalty, that penalty will be 2.5% of $59,400. The penalty assessed will be $1,485.

Using the per-person method, you pay only for people in your household who do not have insurance coverage. If you and your spouse do not have healthcare coverage, but your three children do, then the penalty in this case will only be assessed upon you and your spouse for a total of $1,390. Keep in mind, however, that the penalty assessed will be the higher of the two methods.

Now, if you have coverage for part of the year, the fee is 1/12 of the annual amount for each month you (or your tax dependents) do not have coverage. But if you are uncovered only 1 or 2 months, then you do not have to pay the fee at all. Finally, if you are subject to a penalty, you will pay the fee when you file your federal tax return for the year that you do not have healthcare coverage.

Question 2: “What are my church’s responsibilities, as an employer to its employees, regarding healthcare coverage?”

In short, there are two provisions in the ACA that affect churches; the employer mandate and employer payment plans. Let us take a look at each of those:

1. The employer mandate:

This mandate requires that all employers (churches and ministries included) with 50 or more full-time equivalent (FTE) employees provide health insurance to at least 95% of their full-time employees and dependents up to age 26, or pay a fee. The penalty for not providing health insurance is, generally, a flat $2,000 per full-time employee (excluding the first 30 employees).
Now since most churches and ministries have less than 50 full-time employees, the employer mandate will not apply. Although the employer mandate may not affect your church at this time, this next provision most likely will.

2. Employer payment plans:

Over the years, many churches have relied on the convenience of section 106 as a way to offer pastors and other church employees tax-free healthcare payments. Yet, in 2013 the IRS addressed the continuation of section 106 employer payment plans, in accordance with the ACA, via IRS Notice 2013-54. The latest determination is that employer payment plans do not meet the requirements of the ACA.

This is not to be confused with section 105(b) medical expense reimbursements. In essence, 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.

I realize this is a lot of information to digest, and there is more to consider regarding section 105(b) medical expense reimbursements. So, for more information, you can click here.

Question 3: “Although not required, our church wants to provide healthcare coverage to our employees. What are our best options?”

In all likelihood your church will not be required to provide a group healthcare plan since most churches usually have less than 50 full-time equivalent employees. However, chances are that your church will want to provide some sort of healthcare coverage to your employees. So, what are your options?

Option 1: Small Business Health Options Program (SHOP)

The first, rather obvious, option is that your church can purchase a qualified group healthcare plan from an insurance provider. But for churches that have only a handful of full-time staff members, this is not always the most feasible or affordable option. Some smaller organizations that wish to provide health insurance may qualify for the Small Business Health Care Tax Credit.

This credit is available to small churches and other employers that provide group healthcare for their staff. Furthermore, this credit is only available to employers who enroll in a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace. While each situation is different, there are a few conditions that must be met in order to qualify for the tax credit. Those conditions are as follows:

• Number of employees: Your church must have fewer than 25 full-time equivalent employees.
• Average wages of employees: The compensation your church pays its employees must be an average wage of less than $50,000 a year.
• Employer-paid insurance premiums: As employer, your church must pay at least half of employee health insurance premiums.

If your church meets these requirements then you will need to use Form 8941 to calculate the credit. However, as a tax-exempt organization, you will need to include the amount on line 44f of Form 990-T. In order to claim the credit, you must file the Form 990-T even if you do not normally file that form.

Option 2: An increase in wages

Up until July 1st of 2015, a common practice amongst many smaller churches was to help their employees offset the cost of healthcare by either reimbursing them for the cost of insurance premiums, or by paying the health insurers directly for the cost of private health insurance that employees obtain.

But as previously mentioned, these section 106 employer payment plans are no longer viable options for churches. However, according to IRS Notice 2013-54, if your church has only 1 full-time equivalent employee then the employer payment plans are still a viable option. Once your ministry has 2 or more employees, this will no longer be an option for your church.

The IRS actually gives a solution to small organizations with 2 or more employees that wish to provide some sort of healthcare assistance, but cannot afford to provide a qualified group health care plan. In Notice 2015-17, the IRS states that as long as the employer (church) “does not condition the payment of additional compensation on the purchase of health coverage”, it will not be considered a group health plan as described in Notice 2013-54.

In other words, your church may give a raise to its employees to help offset the coverage of health insurance, but it may not designate the additional compensation for health coverage purposes. (In a previous post, I provide an example of what this looks like. Click here to read more.)

The ever-changing reality of church compliance

The Affordable Care Act is an ever-evolving piece of legislation that requires careful consideration in order to fully understand and comprehend it all. My sincere hope is that this article has helped you gain a better understanding and grasp, at least at a basic level, of healthcare and how it applies to your church.

Similar to the ACA, church compliance requires our attention. Unfortunately, most churches, pastors, and church leaders are simply unaware of the various “legal pitfalls” that exist in today’s world. That is one of the reasons why we exist. It is our desire to empower pastors and church leaders, like you, with the knowledge and know-how of leading their churches and ministries in today’s legislative environment.

Our Ultimate Church Structure Conference is just one of the ways we empower pastors and church leaders. If you have yet to attend or if you have attended but are in need of a refresher, I want to invite you to register. It is a time of empowerment and impartation that every pastor and church leader needs.

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