Are you Ready for the 7/1 Deadline?
By Raul Rivera
By now many churches have figured out that they can no longer continue to pay the pastor’s or other employees’ health insurance premiums the same way that they used to. A common practice amongst many smaller churches and ministries is to help their employees offset the cost of healthcare by either reimbursing them for the cost of insurance premiums, or paying health insurers directly for the cost of private health insurance that employees obtain. Churches can no longer do that because the Affordable Care Act (ACA) amended the law to no longer allow (with one exception) churches and ministries to reimburse the pastor or other employees their health insurance premiums as a tax-free benefit.
Let us start from the beginning
In 2010, the ACA was passed by Congress and signed into law by President Obama. The ACA required all “applicable individuals” to maintain “minimum essential” healthcare coverage by 2014 or pay a penalty. In addition, it mandated all employers with 50 or more full-time employees to provide health insurance to their employees or pay a fine. This mandate was initially set to begin in 2014, but was delayed until 2015 and 2016.
There are two provisions in the ACA that affect churches. They are as follows:
- The employer mandate: This mandate requires all churches and ministries with 50 full-time employees to provide healthcare coverage. Since most churches and ministries across America have less than 50 full-time employees, they are not affected by the “employer mandate” of the ACA.
- Employer payment plans: Many churches have relied on the convenience of section 106 as a way to offer pastors and other church employees tax-free healthcare payments. However, 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 ruling is that employer payment plans do not meet the requirements of the ACA.
Costly penalty for failing to comply
If your church has been reimbursing the pastor or other church employees for their healthcare insurance premiums, it is subject to a penalty of $100.00 per day. However, that penalty does not begin until June 30, 2015. This temporary transitional relief only applies to employers with fewer that 50 full-time employees. Therefore, if your church currently provides a section 106 employer payment plan to your employees, then you must stop or have an alternative option that complies with the ACA by July 1st, 2015.
An exception to the rule
You may be wondering if there are any exceptions to the costly penalty of $100 per day, per affected employee. Well, there is some good news to some employers that provide employer payment plans.
According to IRS Notice 2013-54, “The market reforms do not apply to a group health plan that has fewer than two participants who are current employees on the first day of the plan year.” Therefore, since many smaller churches and ministries are generally only able to pay the pastor, the $100-per-day penalty would not be applicable for providing a section 106 employer payment plan to the pastor. Remember, this is only true if the church has one employee, such as the pastor or church secretary.
Additionally, you want to keep in mind once your church or ministry has 2 or more employees that you will no longer be able to provide such employer payment plan benefits to the pastor or any other employee.
Solution for churches with 2 or more employees
Many pastors and leaders have wondered if there are any answers or strategies for small churches and ministries to consider.
The IRS actually gives a solution for such organizations 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 IRS Notice 2013-54. In other words, the 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. Let me give you an example:
Church XYZ Pays Pastor B a salary of $60,000.00 per year. They also provide Pastor B an employer payment plan that reimburses his healthcare insurance premiums in the amount of $12,000.00 per year. Church XYZ realizes that it can no longer provide Pastor B the $12,000.00 employer payment plan because of the new requirements of the ACA. What can they do to help the pastor with his insurance premiums? The only viable option is for the church to give Pastor B a raise of $12,000.00 and then let him use $12,000.00 to pay for his insurance.
This does, therefore, raise another question. Will Pastor B have to pay taxes on the $12,000.00? The answer is YES! However, under the new provisions of the law, it appears that his health insurance premiums after rebates will leaver Pastor B with enough money to pay the new taxes. The bottom line is that under the new requirements of the ACA, it is entirely possible that many pastors will still break even and many that have applied for the self-employment tax exemption will come out ahead.
Conclusion
The $100-per-day-per-employee penalty is a steep penalty that I know churches and ministries do not want to have to pay. That is why it is important for you to be aware of the July 1st deadline, which is now only about 3 weeks away, and to make sure that any necessary changes are made.
Our goal here at StartCHURCH is to empower and educate pastors and ministers on the subject of church compliance in today’s legal world. For this very reason, I invite you to attend one of our conferences. I know that you will not only walk away with more knowledge about church compliance than you already have, but you will also walk away empowered with the confidence that you can navigate your church through the world of church compliance today.