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Alert: Individual Health Insurance Loses Tax Benefit

Authored by: FCMM Benefits & Retirement
Date: December 10, 2013
The local church should recognize the tax impact upon staff if the church cannot provide group health insurance.

FCMM Benefits & Retirement, the church benefits organization of the EFCA, monitors developments affecting how local churches provide for staff. There are significant changes that we want to bring to the attention of church leaders.

Diminished ability to provide health insurance as a nontaxable benefit

Providing health insurance as a “pre-tax” benefit has been restricted by the Affordable Care Act. Effective for health insurance plan years starting on or after January 1, 2014, individuals who obtain insurance through the public—or private—marketplace exchanges may not deduct their premiums as medical expense and may not be reimbursed tax-free by their employer.

The longstanding practice of many churches to use “Health Reimbursement Arrangements” (HRA), whether formal or informal, may no longer be used to reimburse premiums outside of reporting the amount as W2 (taxable) compensation. IRS Notice 2013-54 and DOL Technical Release 2013-03 specifically state that reimbursement of individually-owned health insurance policies is no longer allowed.

The only remaining method for providing health insurance as a tax-free benefit is by means of group health insurance, either: (1) through group health insurance paid by the employer, or (2) through the Small Business Health Options Program (SHOP), which are public exchanges for small employers with no more than 50 employees (or up to 100 employees in some states). If the employer does not elect to pay all of the premium and requires employees to share in the cost, the employer must use a cafeteria plan, as described in Section 125 of the IRS Code, to allow employees to pay their portion of with pre-tax dollars. Typically, an employer will need the assistance of a CPA, or an attorney, or an insurance provider or broker to properly set up a compliant cafeteria plan.

Effect on staff compensation

The local church should recognize the tax impact upon staff if the church cannot provide group health insurance. The best practice would be to increase the salary to cover the additional tax in order to keep the staff member at an equivalent level of compensation.

Future of clergy housing allowance

As most have probably read, a recent court case in Wisconsin declared the housing allowance exclusion to be unconstitutional. There will be no immediate effect as the case works its way through the appeals process – probably lasting two years. Should the decision be upheld by higher courts, local churches should also consider the tax impact on their eligible staff members.