Many churches want to help their pastor and staff with the cost of health insurance, especially small congregations that cannot offer a traditional group health plan. A common, well-meaning approach is simply to reimburse the pastor’s individual insurance premiums or add a “health stipend” to the paycheck. Unfortunately, doing it the wrong way can create serious tax problems. The good news is that there is a proper way to do it, and as churches finalize 2027 budgets, now is a good time to review it.
The Problem With Simply Reimbursing Premiums
Under the Affordable Care Act, an arrangement in which an employer reimburses employees for individual health insurance premiums is treated as a group health plan, and on its own it fails the law’s market reform requirements. The IRS states that such an arrangement may be subject to an excise tax of $100 per day for each affected employee, or $36,500 per employee per year. That is a heavy price for a church that was only trying to be generous.
Simply adding money to a pastor’s paycheck is not a violation, but it is not tax-free, either. It is taxable compensation like any other salary.
A Better Option: The QSEHRA
Congress created the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) for exactly this situation. A QSEHRA lets a small employer reimburse employees, tax-free, for health insurance premiums and other qualified medical expenses, up to an annual limit. For a church, the main requirements are:
- Size. The church must not be an “applicable large employer,” meaning it has fewer than 50 full-time-equivalent employees.
- No group plan. The church cannot also offer a group health plan to its employees.
- Same terms for all. The QSEHRA must be offered on the same terms to all eligible employees. Certain groups, such as part-time and seasonal employees, may be excluded under IRS rules.
- Proof of coverage. Before reimbursing expenses, the church must confirm that the employee has minimum essential coverage (qualifying health insurance), and employees attest to that coverage when they request reimbursement.
- Substantiation. Reimbursements must be for documented medical expenses. Unsubstantiated payments become taxable.
2026 Limits
The IRS adjusts QSEHRA limits each year for inflation. For 2026, the maximum annual reimbursement is $6,450 for self-only coverage and $13,100 for family coverage. The IRS will announce the 2027 limits separately, so confirm the current figures before setting your 2027 amounts.
Timing and Paperwork
A QSEHRA requires a written plan document and a written notice to eligible employees. The notice generally must be provided at least 90 days before the start of the plan year, or by the date an employee first becomes eligible. A church that did not provide notice in time for a January 1 start can still plan for a later start date in 2027.
The church also reports the employee’s permitted QSEHRA benefit on Form W-2 in Box 12 using code FF. Your payroll provider can help make sure this is done correctly.
How It Works for Your Pastor
Ministers are treated as employees for income tax purposes, so a pastor on the church’s payroll can generally participate in a church’s QSEHRA like any other employee. A few points to keep in mind:
- Premium tax credits. If your pastor buys coverage through the Health Insurance Marketplace (MNsure in Minnesota) and receives a premium tax credit, QSEHRA benefits reduce that credit. Your pastor should report the QSEHRA to the Marketplace.
- Housing allowance is separate. Health benefits are not housing expenses and should never be paid through the housing allowance.
- Talk it through. Depending on the family’s income, a QSEHRA, a higher salary, or a combination may produce the best result. Running the numbers before the budget is final helps everyone.
Another Option to Know About
Churches of any size may also consider an Individual Coverage HRA (ICHRA), which allows reimbursement of individual health insurance premiums under a different set of rules and without the QSEHRA dollar limits. ICHRAs have their own notice and eligibility requirements, so professional guidance is especially helpful.
Next Steps for Church Leaders
- Review how your church currently helps with staff health costs.
- If you reimburse individual premiums informally, stop and get advice before the next payment.
- Decide on a QSEHRA or ICHRA start date and reimbursement amount as part of the 2027 budget.
- Put a written plan document in place and deliver employee notices on time.
- Coordinate with your payroll provider on W-2 reporting.
Caring for your pastor’s health is a worthy goal. Setting it up correctly keeps that generosity from turning into an unexpected tax bill.
If you need guidance that is tailored specifically to your unique situation, we encourage you to connect directly with Pro Advisor Support. Their experienced team specializes in assisting clergy and church organizations with complex tax, payroll, bookkeeping, and HR matters. Whether you have detailed questions about compliance, deductions, or planning strategies, they can provide expert advice and walk you through the next steps with clarity and confidence.
Clergy Financial Resources
Tax | Payroll | Bookkeeping | HR | Consulting
11214 86th Avenue N.
Maple Grove, MN 55369
Tel: (888) 421.0101
This article provides general information and is not tax or legal advice. Tax law changes frequently, and every minister’s situation is different. Please consult a qualified tax professional before acting on this information.
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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.
For more information or if you need additional assistance, please use the contact information below.
Clergy Financial Resources
11214 86th Avenue N.
Maple Grove, MN 55369
Tel: (888) 421-0101
Fax: (888) 876-5101
Email: clientservices@clergyfinancial.com