In order for the payroll reductions for health insurance to be tax-free for employees, the church has to establish a POP (premium only plan) or FSA (flexible spending account) or a cafeteria plan. These benefit plans offer the employee the option to forgo part of his or her compensation on a tax-free basis in order to provide certain fringe benefits. Benefit plans come in various sizes and shapes and differ from church to church. A basic plan is called a premium-only plan. This plan only provides for the exclusion from income and payroll taxes the amount of health insurance premium deducted from the employee’s wages. The plan is simple to administer, as it only requires the church to deduct the premiums from the employee’s paycheck, which is something that they would do whether or not tax-favored. The plan is tax-free because part of your pay covers the cost of the insurance. Suppose you make $50,000 annually. If your church gave you the full $50,000, all of it would be subject to payroll taxes, including income taxes. Now, if the church establishes a premium-only plan, and offers you health insurance for $300 a month, your taxable salary becomes $46,400 plus $3,600 in pre-tax benefits. Because health benefits are favored under the law, you avoid paying payroll taxes on that part of your salary reduction. If, instead of health insurance, your church offered you a car allowance for $300 a month, the $300 continues to be taxable, as a car allowance is not an excludable fringe benefit. Your church must establish a qualified plan in order to provide the employees with tax-free health benefits. If the church pays 100% of the health insurance, the above mentioned plans are not required. Clergy Financial Resources https://www.clergyfinancial.com Clergy Financial Resources is a national accounting and finance organization serving churches and clergy since 1980. They have an unparalleled tax expertise on the complex issues associated with clergy tax law, clergy taxes, clergy compensation and church payroll. Clergy Financial Resources is a valuable resource for clergy, churches and denominations.< Back
Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
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