Budget season. Two words that you’ll be hearing a lot in the upcoming months. Have you considered budgeting for an accountable plan as an alternative for expense reimbursements for your pastoral staff?
Why reimburse under an accountable plan
Under regular employee reimbursement, expenses reimbursed to an employee are considered income and must be accounted for in the employee’s gross income. This causes the reimbursements to be subject to employment taxes. Instead, it may be beneficial to reimburse employees under an accountable plan. An accountable plan allows employees to be reimbursed without having to report the expense as income for federal income tax purposes.
Accountable plan requirements
To benefit from using an accountable plan, three requirements must be met. There must be legitimate business purpose, substantiation, and return of excess amounts for all expenses being reimbursed under an accountable plan. If a reimbursement plan does not meet these requirements, the reimbursement would be considered a regular reimbursement and must be treated for as such.
For churches to reimburse their ministers, the expense must be a church-related business purpose. Expenses that qualify for expense reimbursement for ministers may include mileage other than commuting miles to and from church; lodging, meals, and other reasonable costs associated with overnight trips; training and conventions; subscriptions, books, portion of internet and other educational equipment used for sermon preparation; and hospitality such as hosting a meal for church members. All reimbursable expenses must have evidence of a church-related business purpose.
To substantiate the expenses reimbursement, a receipt must be provided within a reasonable time established by the plan. The receipt must include the date, amount, proof of a church-related business purpose, location, and if it was for hospitality, the individuals present.
Finally, the accountable plan must be budgeted for by the church. The budget must be approved by the church, either by the church members as a whole or the finance committee or executive staff, whomever has the power to approve budgets. It can be included in one line item of the budget. To be considered eligible under the accountable plan, the expenses cannot be considered part of the minister’s salary. Since they are not included in the minister’s salary, the amount budgeted for is on a use it or lose it basis. If the full amount of the budget is not used, the excess funds must be returned. Funds reimbursed for expenses that are not for church-related business purposes must also be returned otherwise they have to be accounted for under regular employee reimbursement.
Remember the three requirements
When setting up an accountable plan for employee reimbursement, it is important to follow these three requirements. If these requirements are not followed, the church may end up having to pay penalties if these reimbursements are seen as income to the minister since the income would have been claimed tax-free. It is best to adopt the appropriate policies beforehand to ensure that the tax-exempt funds are properly expended.
Questions? Please contact Dale Kunin or Hannah Lanser