What Your Church Needs to Know About Reimbursements, Part 2
In a letter to Jean-Baptiste Leroy, Benjamin Franklin wrote, “But in the world nothing can be said to be certain, except death and taxes.” These words still ring true today as paying taxes are simply an inevitable part of life.
While paying taxes can, at times, be burdensome, the government has set in place benefits to lessen our tax burden. One way this burden is lessened is through reimbursable expenses, but only when they are correctly used. Reimbursements are fantastic because they allow taxpayers to recapture expenses incurred on behalf of their employer.
On the other hand, reimbursements are one of many little areas that may keep churches from remaining compliant.
In continuation of the “Part 1” blog, we will review various types of reimbursements and how you can properly implement them.
7 types of reimbursements that you should know:
1. Mileage reimbursement
Whenever we talk about mileage reimbursement at our conferences, it always gets the attention of those in attendance. So you will want to pay close attention.
The IRS permits employers to reimburse employees and volunteers for miles driven when using their personal vehicles on behalf of the corporation.
A mileage reimbursement is actually not prepaid money for gas. It is a reimbursement allowed for using your personal vehicle for business purposes.
Business miles 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 these types of commutes are considered personal use.
However, volunteers serving at a charitable organization can track miles driven from their home to volunteer for a charitable organization for mileage reimbursement purposes.
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(Recommended reading: “IRS Updates Mileage Reimbursement for 2017”)
2. Medical expense reimbursement
Section 105(b) of the Internal Revenue Code allows an employee to receive a nontaxable benefit of reimbursement of medical expenses for the employee, his/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 also be a part of a qualified group health plan offered by his/her spouse’s employer. The point is that the employee is enrolled in a qualified group health plan.
Here are a few more important points:
- 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 to everyone.
- 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.
- 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).
(Recommended reading: “Important Tax Updates & Developments You Need to Know About in 2017” )
3. Continuing education reimbursement
Under section 127, the church may pay for an employee's undergraduate and graduate educational expenses. The reimbursement does not require job-related education. 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 employee.
A church may pay for an employee's undergraduate and graduate educational expenses up to $5,250 annually.
4. Cell phone use reimbursement
Notice 2011-72, published by the IRS, 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/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.
5. 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.
Church employees may receive adoption assistance of up to $13,360.00.
6. 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:
- Costs of traveling 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.)
- Transportation costs while at the business destination.
- Lodging, meals, and incidental expenses incurred while out-of-town for business purposes.
- 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.
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(Recommended reading: “Federal Judge Puts New Overtime Rules on Hold”)
7. 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 the following requirements are met:
- The individual is an employee;
- The employee must have incurred or paid the expenses; and
- The 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.
Understanding 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 created at a board meeting through passing a resolution and establishing a policy for implementing the reimbursement(s).
Additionally, your church 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.
(Recommended reading: “Do You Know How to Take Board Meeting Minutes?”
The next move belongs to you
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 call us at 877-494-4655. In addition, consider joining us at one of our upcoming conferences near you. We would be honored to serve you!
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