07 May Are health care allowances taxable?
When a church provides a health care allowance to its pastor, the tax implications can vary based on how the allowance is structured. Here’s a detailed explanation:
Direct Payments to the Pastor:
If the church pays a health care allowance directly to the pastor to cover individual health insurance premiums or medical expenses, these amount is generally considered taxable income.
The allowance is included in the pastor’s gross income and subject to federal income tax, SECA taxes.
Reporting:
The church must report the health care allowance on the employee’s Form W-2. It will be included in Box 1 (Wages, tips, other compensation).
Health Reimbursement Arrangements (HRAs):
Churches can set up Health Reimbursement Arrangements (HRAs) to reimburse employees for medical expenses, including health insurance premiums. HRAs can be tax-free if they comply with IRS requirements.
Individual Coverage Health Reimbursement Arrangements (ICHRAs):
ICHRAs allow churches to reimburse employees for individual health insurance premiums on a tax-free basis, provided certain conditions are met.
These arrangements offer flexibility and maintain tax-favored status for employer contributions.
Example Scenario
Imagine a church decides to provide a monthly health care allowance of $500 to its pastor to cover individual health insurance premiums. If this allowance is paid directly to the pastor without an HRA or ICHRA, it will be considered taxable income. The church will report this amount on the employees’ W-2 forms, and the pastor will need to include it in their gross income when filing their tax returns.
However, if the church sets up an HRA and reimburses employees for their individual health insurance premiums, the reimbursement can be tax-free, provided the arrangement meets IRS requirements.
Original content by clergyfinancial.com. This information is provided with the understanding that Payroll Partners is not rendering legal, human resources, or other professional advice or service. Professional advice on specific issues should be sought from a lawyer, HR consultant or other professional.