Accountable Reimbursement Plans

Written by Julie Bloss

Businesses have been reimbursing their employees for business expenses for years, but that's still a novel idea to many churches. If you've never heard of accountable reimbursement plans, it's time you learned about them. That's especially true if your church ever reimburses you for expenses you incur on behalf of your church.

Background
Some people associate "expense accounts" with lavish spending. That's unfortunate for ministers and others church employees who may spend money out of their own pockets to support the ministry of the church. Corporate employees don't look at their expense accounts as part of their compensation. When they think of their annual pay, corporate employees don't add together their salary and the money they are reimbursed for expenses on business trips for things like hotel bills and airline tickets.

Unlike other employees, churches often use a "package approach" to pay their ministers. The church decides the total amount it can pay the pastor and then tells the pastor to divide that amount for different things. Sometimes ministers want part of this money used to reimburse them for business expenses.

Churches should realize that some of a pastor's business expenses are as important to the ministry as the electric bill. Although few churches would tell a minister to pay the light bill out of his annual pay, many churches expect their pastors to pay other legitimate ministry expenses from their annual compensation (e.g., all the gasoline and wear and tear on their cars when they visit church members). Some church members assume that ministers can just write off such expenses, but ministers can't always do that.

Some churches give "car allowances" or "travel allowances" to their ministers to help them pay for ministry expenses. Often the church doesn't expect the minister to show how the allowance was spent. Unfortunately, these allowances are taxable and should be reported on the minister's Form W-2.

Some churches use a salary-reduction arrangement to reimburse ministers for business expenses. At some churches, ministers periodically turn in receipts for their business expenses. At the end of the year, the church adds up all of the business expenses and subtracts them from what the church paid the minister. The church then reports that amount on the minister's W-2. The IRS says this arrangement is a nonaccountable reimbursement plan and that the full amont should be treated as income.

With an accountable reimbursement plan, ministers don't have to pay taxes on money the church uses to reimburse them for business expenses. And churches don't have to report reimbursements on the minister's W-2. Accountable reimbursement plans allow churches to reimburse their employees for legitimate church business expenses without adverse tax consequences to the employees.

Requirements for Accountable Reimbursement Plans
The IRS says that an accountable reimbursement plan must meet two requirements:

1. The plan can reimburse only business expenses that employees account for or substantiate. -- Employees must therefore, give the church adequate documentation about the date, amount, and business purpose of the expense.
   
   
2. The church must require any excess reimbursements or cash advances to be returned to the church. -- The IRS says that employees must substantiate business expenses within 60 days and return excess reimbursements within 120 days.

Churches can set up accountable reimbursement plans by passing a resolution. They also need written policies that explain which expenses will be reimbursed and the documentation the church will require before reimbursing an employee.

Churches sometimes say they "can't afford" an accountable reimbursement plan. But an accountable reimbursement plan doesn't mean a minister can go on an uncontrolled spending spree. Churches should budget for reasonable ministry expenses.

Churches need accountable reimbursement plans, and they need to administer them according to IRS guidelines. If ministry-related expenses aren't part of your church budget, they should be.

Julie L. Bloss is a freelance writer and an attorney.

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