Fletch Answers Questions on Finance

Banking & Fraud, Budgets & Cuts, Financial Issues, Generosity and Legal & Insurance

Banking & Fraud

Stolen W-2s

Hey Fletch … A shipping firm claimed they left the W-2s for all of our employees at the church’s front door. No signature was required and they left the package at 9:00 pm. Financial data, social security numbers, addresses … all vanished.

I haven’t heard of that one before! I’m so glad that you looked into identity theft protection for all of those affected. All I can suggest is that you go electronic next time. Perhaps use a service that empowers the employees to download their W2. A Finance Office worker could print out a W2 for anyone without internet access.

Stolen W-2s and Insurance

Hey Fletch … There was a column that all of a church’s W2s vanished. Some insurance policies have coverage for this and the church may have a legal obligation to monitor the credit of those employees that had their personal information stolen. In California, if it was stolen electronically, cyber hack or a lost computer, there is a protocol for how this needs to be handled. If it is paper copies, there may be a liability as well for the church. I’d recommend that the church at least put their insurance company on notice and have a pro guide them through it. There could be coverage and an experienced adjuster could be of assistance.

As a capable leader of an insurance agency, you have made an excellent point. Thanks for giving more ideas for the church to consider. I immediately forwarded your thoughts to the church that had the problem.

Safety in Outsourcing Finances

Hey Fletch … We are considering outsourcing our financial roles. Any insight on this? Pros / Cons?

I answered a related question in “Would We Save Money by Outsourcing Cleaning?” The principles are the same for outsourcing financial services as to cleaning services—cost, security and savings. The risk is similar. In the one case you are handing over the keys to your church; in the other, you are handing over the keys to your bank accounts.

Look at the salary and benefits to have a person or team handle your finances in-house. This easily runs from $50,000 to $150,000. Add in other costs of the team, such as equipment, overhead and insurance. Get three bids from outsource firms. Ensure that the firms have the highest caliber of leaders and proven integrity. Compare the costs. Then compare the “ease of use.” Will regular activities like cutting checks and getting reports work for you with an outsourced firm? You will still need a team to count and deposit the offering, unless you use a bank to do that (for a fee). I know of one firm that handles outsourced financials, Empower Consulting. I like that this firm has partnered with the Evangelical Council for Financial Accountability (ECFA). Let me ask their president, Justin Spicer, for his comments.

Justin—When outsourcing, I would evaluate: Church Experience—What kind of direct experience does the firm leadership have in local church financial leadership (from a staff and/or elder leadership level), including a deep understanding of the “language of church.” Client Profile—Does the firm have a focus on serving churches, or is it a side segment of their client base? Are the churches they serve of a similar size and stage? Technology—Do they use the latest technology (cloud-based software, paperless accounting, mobile apps) and do they integrate with the ecosystem of software your church is already using? The True Value Add—Consider not only how much time it will save, but how much additional high-level expertise can you gain from outsourcing. I would argue you want to find not only a bookkeeper but strategic partner in your ministry. References—Contact several current client references to hear about their experience working with the firm. Make sure they are similar in size and stage to your church. Cost—Does the upfront and monthly cost make sense from a cost savings perspective (saving staff wages or reallocating current staff), and your current budget? As you grow, the price will increase, so are you willing to absorb that into your operating budget?

Receipts Late or Fraud?

Hey Fletch … I read the question about receipts being turned in to the church within sixty days of the expense. We also have a staff member who is turning in late receipts. Our Jr. High Pastor turned in receipts that are nine months old, just in time for the fiscal year to end. Should I really add $5,500 of youth ministry trip expenses to his income?

There are many problems with receipts that are nine months old. If you see an error in the charge, few businesses will want to correct a charge that is so old. Your church reporting will be incorrect for nine months. You may have thought that the person’s budget was on track for those nine months, only to discover that they overspent. The clock of the fiscal year-end was ticking, so your Jr. High Pastor finally turned in those receipts. Of course, there could be fraud as well!

The IRS in Publication 463 says, “You must adequately account to your employer for these expenses within a reasonable period of time.” Sixty days is generally considered a reasonable period of time. Nine months is way out of line. I suggest that you talk to your church’s CPA. See if you can give a one-time reprieve from the normal reimbursement rules for the Jr. High Pastor. You may have leeway or you may not. If not, then you will be required to post the $5,500 of expenses as taxable income to the pastor.

Along the way, see if your church has some fault in the issue. Have you adequately communicated your reimbursement plan? In reviewing the monthly reports, have you talked to the pastor about the lack of any expenses in their area? If you are at fault, and the expenses need to be considered as income, you can give funds to help pay for the added income tax. Of course, these funds are further taxable income to the pastor.

Reimbursements

Hey Fletch … Our church staff can purchase items from their own funds and then be reimbursed. This happens a lot with youth trips and out-of-town ministry. We have a policy that says that all receipts should be turned in within 60 days. Otherwise the reimbursement may be considered as taxable income. I have a staff member who turned in receipts that are 6 months old, then they hit the roof when I reminded them of our policy. Are we wrong or doing something illegal with this policy?

Since this is a tax issue, let’s see what the IRS has to say about the topic. In Publication 463, the issue is raised when talking about an Accountable Plan: “To be an accountable plan, your employer’s reimbursement or allowance arrangement must include all of the following rules. Your expenses must have a business connection—that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer. You must adequately account to your employer for these expenses within a reasonable period of time. You must return any excess reimbursement or allowance within a reasonable period of time.”

The three elements are a valid business expense, adequate reporting and a reasonable time. Your question hinges on how to “adequately account to your employer for these expenses within a reasonable period of time.” The IRS gives some guidelines on what is a reasonable amount of time: The definition of reasonable period of time depends on the facts and circumstances of your situation. However, regardless of the facts and circumstances of your situation, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time. You receive an advance within 30 days of the time you have an expense. You adequately account for your expenses within 60 days after they were paid or incurred.

A good practice for reimbursing expenses is that receipts must be turned in no later than 60 days after the expense was made. If the receipts are not submitted in a timely fashion, the church may need to consider it income to the employee. Your church is acting legally and in accordance with the tax laws. I would suggest that you have clear, written policy for the reimbursement process. You may want to have a summary of those procedures on every reimbursement form that your employees use. Pastors are hired primarily for their shepherding gifts, not for their financial abilities. Help them by providing them with good forms that include a summary of your church’s policy.

Administration Textbooks

Hey Fletch … I’m teaching a course on church administration and am looking for a good textbook. Any suggestions? Thank you!

Here are two books that may help: Rich Birch has written, Church Growth Flywheel: 5 Practical Systems to Drive Growth at Your Church. Rich spoke at an XP-Seminar, was greatly appreciated and has great thoughts for today’s church. Amazon has this to say: “Are you ready to see your church impact more people than you have ever before? Are you tired of church leadership books that are long on theory but short on practical help? Have you wanted to reach more people in your community but you weren’t sure where to start? Are you worried that your church isn’t reaching its full potential? “Church Growth Flywheel: 5 Practical Systems to Drive Growth at Your Church” is full of helpful insights to help your church reach more people starting today!”

Bestselling author, Rich Birch, has pulled together his own hard-fought experience leading within one of the fastest growing churches in the country as well as over 200 interviews with church leaders from prevailing churches.

While I know Rich, I don’t know the author, Thomas Tumblin. His book, AdMinistry: The Nuts and Bolts of Church Administration, may be of interest to you. Amazon says: “Shepherding the church requires up-to-date knowledge of budgets, insurance, financial management, personnel organization, audits, and legal liability. These responsibilities are complex and ever-changing. While as pastor, you are called to be a faithful steward of the church’s resources and an effective planner of its ministries, you need facts and skills to get your job done. This book will help you organize and weave your way through the often complex business of the church.”

Thomas F. Tumblin is Professor of Leadership, and Associate Provost for Global Initiatives and Academic Affairs at Asbury Theological Seminary in Kentucky. His role includes oversight of the strategic goals for church planting and global partnerships. He teaches in the seminary’s Master of Divinity, Doctor of Ministry and MA in Leadership degrees. He is a former executive pastor at Ginghamsburg UMC near Dayton and an elder and former district superintendent in the West Ohio Conference of the United Methodist Church.

Accounting Software

Hey Fletch … Thank you for putting together another successful XP-Seminar. I enjoyed it once again and look forward to it each year! I was wondering if you had any insights in the area of accounting software. We currently use Quickbooks Desktop and are in the process of evaluating Quickbooks Online for our church’s accounting software. I was wondering if you knew of any solutions that other XPs are using or ones you’ve used in the past. Any help is appreciated!

That question is beyond my pay grade. Nick Nicholaou, with Ministry Business Services says: “Solutions from church and donor management software providers keep improving in their ability to help churches and ministries fulfill their mission! Their features to track and communicate with people, their web and mobile device interfaces, and their powerful database tools make this category of software a big help and a valuable asset for today’s ministries in reaching many with The Gospel and discipling them.”

Nick—Church and ministry database and accounting needs are unique! Very few solutions solidly help fulfill the church’s mission—the most important on Earth—but those included in the post are leaders in doing so. Keep in mind that no solution is perfect, but an 80-90% meeting of your needs is possible!

Joining ECFA

Hey Fletch … I’ve heard about the Evangelical Council of Finance Accountability. Is that something that a church can join and how could I find out if my church qualifies? Would they accept my church?

I’ve served in several churches that were a part of the ECFA. They enhance trust in churches with their Seven Standards of Responsible Stewardship™. Those standards relate to Doctrinal Issues, Governance, Financial Oversight, Use of Resources and Compliance with Laws, Transparency, Compensation Setting and Related-Party Transactions, and Stewardship.

Over the past several years, I have served on one of their advisory groups. This allowed me to see them up close and work with Dan Busby (former President) and Michael Martin (current President). They are all about honest and forthright standards for church finances and governance. I would strongly encourage your church to apply and be a part of ECFA—it will be a great help to your Board, Finance Team and congregation. Let me ask Michael Martin to respond as well:

Response from Michael Martin—David, thanks for the chance to chime in here and for your kind words about ECFA. You’ve been such a blessing to the ministry over the years! Churches are not only welcome to join ECFA—today, churches are the fastest growing membership segment of ECFA, including over 40 of the largest churches in America. Our website has tons of free resources (webinars, podcasts, sample policies and procedures, and more). You can also check out testimonials from current members and learn more about the new short form membership application.

Budgets & Financial Issues

Budget Percentages

Hey Doc … You answered my question regarding the average percentage of General Fund that is allocated towards Creative Arts. Are there rough percentages of General Fund expenses for Youth, Children’s Ministry and Adult Discipleship which would include Life/Small Groups? Thanks for your time, brother.

Have a look at this. It should give you that data! These are just averages, so you numbers will vary. Rough Percentages: Worship, IT & Communications 9.3%. Kids 1.2%. Jr. High, High & College 1.0%. Minsitry to Adults 1.3%. Leadership Projects 2.4%. Contingency 6.7%. Missions 10.5%. Accounting 1.0%. Facilities & Facilities Capital 15.7%. Business 0.7%. Salaries 43.4%. Benefits 6.7%. Total 100.0%

Worship & Communications Budget

Hey Fletch … I doubt you remember me but I was part of a group in 2011. I am currently an XP of Operations. I serve under two Co-Lead Pastors … two young guys who are great! I wanted to ask if you have any metrics/information on the percentage of an overall church budget that goes towards the entire Worship, Arts, Marketing, Media department? We are a church of 1,000+ with an annual budget of $1.3 million. So, for example, should the percentage be 5%, 10%, 15% or 20%?

Of course I remember you, beginning with the time that we met for coffee. Even lately, when I was doing some XPastor work, I saw your paper. It has helped thousands! It can be challenging to answer your question because church budgets vary so much in what they include. My rule of thumb is to include the following budget areas: Communications, Welcome Team, Information Technology, Audio-Visual Technology Capital & Maintenance, and all Worship expenses. As I reviewed budgets from several churches, the number was 10% of General Fund expenses.

Deficit Budgeting

Hey Fletch … Our church is barely keeping the payroll and bills paid and we enter the budget process in June. Our elders keep casting a vision that requires 10% or more of deficit budgeting. Historical data says we will not receive from donors the needed amount. They say we should budget by “faith.” As a member of the finance team, I have a problem with continually asking the members to approve a deficit budget. We also have zero reserves. Can you share some biblical principles that I can share with the finance team and leaders to show it is not a “lack of faith” to present a balanced budget? If giving doesn’t increase, we are either going to have to cut a position or sell a parsonage.

I’m a fan of balanced budgets. A budget that has a built-in deficit is a disaster waiting to happen. Jesus says in Luke 14:28-30, “Who wants to build a tower, doesn’t first add up the cost to see if he has enough money to finish it? Otherwise, when the foundation is laid, and he is not able to finish it, all will make fun of him.” Your church budget should adequately cover your existing obligations.

You can add to your church budget a special contingency budget. This can be a faith-based approach. You inform the congregation that with current giving, the church budget is balanced. Then lay out the contingency budget, “if we receive $50,000 more in the next six months, then we will do these projects.” It is not a good idea to put salaries in the contingency budget, but do include special projects or renovations. If the extra funds don’t come in, then those projects won’t happen.

As for cash reserves, my friends Dan Busby & Michael Martin at the Evangelical Council for Financial Accountability say on this: “Cash reserves are the cushion that ensures: Operating expenses are paid on-time instead of incurring late fees; the church is in compliance with mortgage covenants; funds are available to replace worn-out HVAC; the church has the necessary funds ready to launch a new ministry.” You can download the ECFA free e-book, “Essentials of Church Cash Reserves.” Let me ask Dan Busby for his thoughts:

Response from Dan Busby, former President of ECFA:

Thanks for the opportunity to provide input in relation to this request. What you have written in response to the email is right on! Here are a few more thoughts: 10% of more in annual deficit budgeting with zero reserves is totally incompatible. If a church has excess reserves—say beyond six months of operating reserves, then perhaps a deficit budget might be appropriate to use some of the excess reserves but without proper reserves (let’s say at least three months of operating reserves, deficit budgeting indicates a lack of adequate responsibility by the governing board.

This church is on the verge of failing John Wesley’s test. He said, “Our responsibility is to give the world the right impression of God.” A church that is barely keeping payroll and bills paid, is flirting with sending a very bad message to people inside and outside the church, as well as taking Jesus Christ off center stage and placing financial mismanagement on center stage.

Restoring sanity to the financial planning for this church will require a conservative estimate of the next year’s revenue. When the governing board chooses, what I call, the “Big Number” for the next year’s budget, that number should probably be less than last year’s revenues. Otherwise, it is unlikely the church can build reserves. It goes without saying (except for this church) that reserves are only built when cash in exceeds cash out. If you need more scripture references, here are a few: “The wise store up choice food and olive oil, but fools gulp theirs down.” Proverbs 21:20.“Go to the ant, you sluggard; consider the ways and be wise? It has no commander, no overseer or rules, yet it stores its provisions in summer and gathers its food at harvest.” Proverbs 6:6-8.

Response—We had a church meeting the other evening regarding the finances and paying off a $3,900 credit card balance (which should have never happened). As a member of the finance team, I cut to the chase and informed those present that there must be a new attitude toward spending or else we were looking at cutting staff or selling the parsonage. I think people left better informed about the serious situation we are in. I’m going to propose to the finance team next week that we impose a spending freeze for items other than salaries and normal operating expenses for 3 months and see if we can get $1,500-$2,000 in the checking account. I’m working on forecasting now for finishing out the year and budgeting for next. Keep our church in your prayers and the finance team as we consider planning and honoring God with our decisions.

Overtime Problems

Hey Fletch … A pastor here at the church allows his assistant to work overtime and then they don’t put it on the assistant’s timecard. I have warned both of them but what more can I do?

How do you spell hot water? Let me get started by saying that churches can be exempt from the enterprise coverage of the Fair Labor Standards Act. However, there are some finely-tuned rules that invoke individual employee coverage where the employee engages in inter-state commerce (such as emails, phone calls, purchases, travel arrangements). A best practice is for all non-ministerial staff who are below the FLSA wage levels to be considered non-exempt from FLSA. That means that wage and hour laws need to be observed. Your state may have regulations that come into play as well. Another issue is that you have warned the pastor of the problem. The bigger question is, “Why is the pastor not responding to you and your fiduciary responsibility to uphold the church’s policy and federal regulations?” The assistant is lying on the timecard and the supervisor is knowingly signing it. A biblical word for that is deceit. Instruct the pastor on these issues and evaluate their response.

You will need to have the assistant compile and sign honest timecards for the entire period of unpaid overtime. The ethical response is to pay the assistant for all the prior overtime hours, including any time and a half or double time that is required by state or federal law. Unwittingly, your church has stolen from the employee. Get an attorney to draft a release statement that the employee will sign. Pray that the employee, a friend or family member, doesn’t ask the State to do a payroll audit. Those audits look at the timecards of all employees. Irregularities can incur fines and penalties to the church. This is a significant issue and you would do well to inform your governing board of potential church liability.

Getting Finances Back on Track

Hey Fletch … I am involved with trying to get our church’s financial situation back on track and healthy again. Would any of your reports contain information on a church that has about 100 members? Also, would there be a report that suggests how many paid employees there are typically with a church that size. We have four, which is killing us, but little desire to cut any positions. Also, we live in an expensive metro area, so which report would you suggest would be best for us?

Churches of all sizes struggle with the issue that you have raised. I wish that I could say, “Aha, that is a problem unique to churches of 100 members.” If I could boil your issue down to one phrase it would be, “We all want more than we can afford.” There is the principle, now let’s look at the specifics.

You identified the problem in your email. Your church has four staff people and you said, “which is killing us.” Let’s talk about staff and benefits as a percentage of budget. National averages indicate that most churches have between 40-60% of their budget going to staff and benefits. Churches at 40% are generally those which are paying a mortgage. After the bank loan is paid, churches often redirect those funds to staff, and the ratio rises to 60%. If you are at 60% or more, then you should raise a red flag.

National averages are just that—national and average! You live in an expensive part of the country. Your local church and staff will have unique factors, such as age of your facility, status of needed capital repairs, maintenance issues, medical insurance, state income taxes and housing costs. Living in an expensive metro area often requires higher salaries so that staff can afford housing. Medical insurance has risen considerably in the last decade, further impacting budgets. You need to weigh the national averages with the unique factors of your local church.

How do you know if your church budget is unhealthy? You should raise a yellow or red flag if you have insufficient funds for:

• Maintaining your property. Curb appeal is important to visitors, as are clean bathrooms. For example, some defer maintenance on the parking lot which is “penny wise and pound foolish.”
• Allocating sufficient funds for ministry. You have staff but they don’t have enough money to fully empower their work;.
• Supporting outreach into the community and world. A generous church, like the Macedonians in 2 Corinthians 8:1-2, has funds to give to others: “The churches of Macedonia, in a severe ordeal, in joy and poverty have overflowed in generosity.”
• Saving for a new roof, sound board or microphones. Does your budget have sufficient contingency funds or a savings plan for capital expenses?
• Investing in retirement for staff. I hear so many stories about pastors who can’t afford to retire because they and their churches didn’t plan for the future. When staff costs are too high, these items are the first things that are cut from a budget.

Your church budget, along with the income and expense report, will give you the hard data that you need to analyze these issues.

Asset Replacements

Hey Fletch … Do you know of or have an Asset Replacement Policy that sets aside money for major repairs/replacement of systems like HVAC? I have not been an XP in a place where I could actually establish such a practice, but am going to try it at my new church.

There are a couple of ways to go with this and I applaud you for doing it. This is great thinking for the future. One way is to do a complete list of all depreciable items on the campus, everything above $2,000. That includes computers, cameras, sound boards, routers, servers, vehicles, video projectors, roofs, HVAC units and even entire buildings. Let’s say that list comes to $20 million. Then, you set aside the 3, 5, 10, 20 or 30 year depreciation amount on those items—that is what depreciation is really supposed to do. Let’s assume an average of a 20-year life on all those items. You would need to set aside $400,000 a year. That’s a big bite!

The “all items” option is time consuming and you will list many small items. In a church, major building refurbishments or construction are generally handled as capital campaigns. That skews your depreciation list. My preference has been to establish two reserve funds. These are internally restricted by the Governing Board of your church. As internally restricted, the Board can use the money for other purposes if there is an emergency or if an account gets overfunded. One fund is for Information Technology expenses—video projectors, computer servers, sound boards, etc. The other fund is for Facility Repair—new roofs, HVAC units, minor renovations, vehicle replacements. Depending on the size of your budget, you can determine how much to put into these reserve accounts. If you save $100,000 a year, in four years you may have enough cash to pay for a new worship center roof.

The key to estimating how much to put into the reserves is to have a spreadsheet of the major items and the timeline of their probable life. For example: Worship Center roof, 5 years remaining; Children’s Building roof; 20 years remaining; video projectors in Worship Center, 3 years remaining; campus HVAC main unit, 10 years remaining. Then consider the replacement cost and divide by how many years until you will most likely have of usable life of the items. The great thing about this is that if you get an extra 5 years out of a roof, you keep the cash in the bank. My favorite illustration of this is the expensive video projectors in worship centers. You never know how long they will last and new technology is always just around the corner. By having the cash in the bank, you can wait until you are ready to replace them. Believe it or not, it is harder to spend cash than a loan—there is something about cash that says, “Wait, don’t spend it yet, it took us a while to save this much.”

Sabbatical Extra Pay & Taxes

Hey Fletch … Our elders developed a sabbatical policy that provides our pastors with benefits that includes normal salary and benefits. There is additional pay for activities like meeting with mentors, studying, developing relationships with peers, exploring industry best practices, and resting-rejuvenation. Because these activities almost always involve travel, can’t the church simply pay the travel expenses and record them as ordinary business expenses? Must we treat the extra pay as compensation that will subject the pastor to self-employment taxes of 15.3%?

Let me start with a quote from CPA Elaine L. Sommerville. She wrote an article for ChurchLaw&Tax entitled The Pastor’s Sabbatical and Tax Implications: How duration, expenses, and compensation need to be handled. Elaine noted: For a church to pay sabbatical expenses tax-free, the trip expenses must rise to the level of a business expense as allowed by IRS Section 162 and Section 274. The IRS requires the predominant or primary purpose for travel to be the conduct of a business activity … Where the predominant purpose for the trip is personal in nature, integrating a small amount of a business activity does not translate the entire trip into a business trip.

The bottom line is that the travel and expenses need to be acceptable business expenses. The primary purpose of the travel needs to be for business reasons. The pastor can’t work for 2 days and chill for 4 days on the trip. Taking along family members further clouds the issue. When family goes along, the trip is often a vacation with some work thrown in. Thus, the 10-day trip to Israel with your spouse is generally a taxable event. However, taking a two-month course at an educational institution in Israel might not be taxable.

Unfortunately, resting and rejuvenation are not IRS acceptable business expenses, nor is spiritual development. The IRS views those things as being possible while staying home. So, the expenses can be non-taxable if business guidelines are carefully followed. Since a sabbatical often mixes business and rejuvenation, a goodly part of it may be taxable income. Since you are essentially giving a bonus for these sabbatical items, you can gross up the amount to cover the extra taxes that the pastor must pay.

Restricted & Designated Funds

Hey Fletch … Thanks for your answer to my designated funds question. Let me submit another question. Someone brought an article today with the ideas of restricted and designated funds. The gist of the article is that restricted should be by resolution of the church and is just as the name implies: restricted for a particular reason, such as an Annie Armstrong offering. Where I am confused is if the church indicates that the designated money is under the control of the church and not the donor, then the church can redirect the money in the best interest of the church. An example was given: Donor A gives $5,000 and designates the money to the children’s ministry. The church needs to replace a portion of a roof, so the leadership can use the money for the roof because it is in the “best interest” of the church. They suggested the offering envelopes and the church policy state that the donor understands the “church as sole control of the disbursements of designated monies.” This is not what I have previously understood about designated giving. I certainly do not want to suggest to our finance team, leaders, or church anything that is not appropriate or in accordance with any federal regulations that may be out there and I don’t know about.

Your question gets the challenge of designated money. We commonly call these “designated funds,” but the technical terms are “internally restricted” and “externally restricted.” Internally restricted funds are those that the church sets aside for a specific purpose. This might be for a future capital improvement, such as a new roof. Since the church has made the restriction, it can later change the use of those funds. For example, the church board sets aside funds for a new roof in four years, but the air conditioner needs replacing. Since the church board made the restriction, it can change it.

Externally restricted funds must follow the intent of the donor. That word, “intent,” is the challenge. Let’s take your example of the $5,000 gift that is externally restricted for children’s ministry. The donor desires the funds to go for children’s ministry, stated the purpose in a letter or check, and the church is required to only spend those funds for children’s ministry. The church has freedom to spend the funds in any aspect of children’s ministry—staff salaries and benefits, materials, renovations or other children’s ministry expenses.

A church can publicly announce its policy of redirecting externally restricted funds. Let’s say that funds are being collected for disaster relief after a hurricane. If the redirection policy is publicized, the church can apply the money to another project. The issue is this: Did the donor know about possible redirection and have the opportunity to withdraw the donation? Suppose that a year after a $100,000 donation for a building renovation, a donor learned that $25,000 of that donation went towards staff salaries. The church might say, “that policy was stated on the offering envelope.” The donor might reply, “I had my bank send in the check and never used the offering envelope. Since I wasn’t reasonably informed of the policy, I demand that the $25,000 be used for the building renovation.”

If you want the possibility of redirecting externally restricted gifts, the cleanest way would be to inform each donor in a special letter after each donation. Externally restricted donations are complicated. They allow the donor to be in the driver’s seat. Once you accept a restriction, it can be hard to get the steering wheel back!

Preferred Ministry or Designated Funds

Hey Fletch … Can you educate me about “preferred ministry” rather than “designated” funds which are restricted. We are a church of 165 and struggling to make budget. As a member of the finance team, I can see that people are giving to certain ministries or projects at an average of about $500 per week. However, for most weeks our general fund is below budget by more than $500. Should we stop designated giving? Should we ask for continued giving on that level and say it would be used for preferred ministries? How can that be explained to the congregation?

Whether a church has a couple of hundred people or a few thousand, the issue that you presented is the same. Some in the congregation prefer to give to designated funds over the general fund. A designated fund is a donor restricted fund. By law you can only use the funds for the designation that the donor has placed on the funds. You cannot use designated funds for expenses in other areas. If someone gives money to missions, and your church accepts the check, then you can only use the money for missions. There are essentially no exceptions to this rule.

A problem with designated funds is that they allow people to give to preferred areas without paying the freight of the electricity bill, the staff costs or other expenses of running a church. Many churches do this with a designated missions fund or benevolence fund, but people often understand that these are over and above their regular giving to support the church.

A simple question highlights the issue, “What if everyone gave to a designated fund?” This leads to a follow-up question, “Will anyone pay for the staff to administer those areas, process checks or keep the lights on?” A way to resolve the issue is to stop receiving designated funds. Many churches have a one-fund approach to ministry. Give to the general fund and the church budget will allocate all expenses.

Compensation Percent of Church Budget

Hey Fletch … Do you have benchmark data that documents total compensation as a percent of total revenue (restricted and unrestricted), not just of the operating budget? I know over the years I have seen references to both. We chose to interpret it as total revenue, and I’d like to see more recent data supporting our interpretation.

I’m in the camp of looking at total revenue when making comparisons about compensation. Many churches just look at the operating budget. For example, if the operating budget is $1 million (typical for many churches of 500), and the salaries and benefits were $600,000, then that would mean that 60% of the church’s budget goes to salaries and benefits. That number is high, as the desired number should be at or below 50%, if possible. If the church with $1 million in its operating budget also receives $300,000 in missions giving and $200,000 in benevolence giving, then their total income is $1.5 million. With $600,000 in salaries and benefits, 40% of the church’s total income goes to salaries. That is a reasonable number!

Here are the reasons to include total income in such numbers: The business office of the church processes $1.5 million in donations a year. Their wages go to processing this entire amount. The staff oversees the budget of $1 million and the other gifts of $500,000. Staff who oversee missions and benevolence are paid from the operating budget but oversee these extra funds. An external audit looks at total income, not just operational income. For me, the most important reason is the last one. An external audit looks at total income. This is what the church has received in donations for the year. This style of analysis is newer for churches in the last decade. Like the advertising for laundry detergent, it is “new and improved.” In this case, it really is better than the former way of understanding church expenses.

We Borrowed from Our Restricted Fund

Hey Fletch … Our finances have trended downward and we borrowed $20,000 from the unused balances of restricted funds. This caused some controversy on the church board. What is your counsel?

I have received so many questions about restricted gifts to churches. I’ve consulted with my friend Dan Busby, former President of the Evangelical Council for Financial Accountability. Here are his thoughts:

Dan—This type of borrowing does occur, often referred to as intraorganizational loans. This practice should be avoided. Why? Churches are legally required to spend restricted net assets in a timely manner to further the intent and purposes expressed by the giver. State laws generally require that a church demonstrate that a loan is prudent. If the loan is simply to fund operating shortfalls or reflects the church’s financial difficulties, the church’s board will generally have trouble demonstrating that a loan from restricted net assets is prudent when viewed as an investment of restricted net assets.

Although borrowing from restricted net assets should be avoided, if a ministry makes a loan of this type, financial reports provided to the board should clearly reflect the borrowing. The board should adopt appropriate policies to ensure the funds are repaid within a reasonable period of time. To learn more about borrowing from designated (restricted) gift balances, obtain a copy of The Guide to Charitable Giving for Churches and Ministries from ECFA.

Vicious Calls to Finance Director

Hey Fletch … I’m new to dealing with church relationships. Sitting in the Director of Finance chair, I receive calls from disturbed congregants. I struggle with this. I don’t understand how followers of Christ can be so vicious. Is there any training or reading that can help me in this area?

I’m saddened to hear about the phone calls that you are getting. Church members should share their thoughts and opinions … but in a Christlike manner. You used a descriptive word in “vicious.” Webster defines it as: dangerously aggressive: savage—a vicious dog; marked by violence or ferocity: fierce—a vicious fight. Your note reminds me of the early days of email. People would sit down and write a hostile screed. To use Webster again, “screed is a ranting piece of writing.” We had a man write a four-page email about some issue that he was hot about. It was terrible. We asked for a meeting and in our time together asked for him to read his email to us. He got a few lines into it and then stopped. The writing was so mean that he couldn’t read it out loud. The man apologized for his style. Then we had a productive discussion about his heartfelt issues.

Perhaps the telephone gives the same sense of distance that email does. “I can say what I want because I can’t see you.” Ask to meet the person for coffee in a local restaurant. Spend time listening to their issues. If they begin to rant, gently call them out for their inappropriate words. A great book on this is The Peacemaker by Ken Sande. I’ve given away hundreds of copies to church members and pastors over the years. Often I will ask them to read a particular chapter on how to share their thoughts in a Christlike way. Ken takes the words of the Bible and applies them to conflict. He shows that conflict is a way to grow closer to God. This may be your divine appointment to help people grow in their relationship with God!

Sending Money Overseas

Hey Fletch … Our church provides direct support to several international missionaries. What are the issues we should look at to provide this support with the utmost integrity?

There are so many questions floating out there about restricted gifts to churches. I’ve consulted with my friend Dan Busby, former President of the Evangelical Council for Financial Accountability. Here are his thoughts:

Dan—There are two primary concepts when it comes to direct missionary support by a church:

1. Support from the missions fund or from the overall budget of the church. Some churches use a one-fund budget approach with all gifts (no designations, or very limited designations, accepted) going into one unrestricted fund. Support of particular missionaries is then paid from the single fund. Gifts to the single fund qualify for a charitable gift acknowledgement.

2. Donations to support specific missionaries. Here is where things get tricky! To avoid gifts being treated as nondeductible earmarked gifts, contributions to support particular missionaries must qualify as giver-preferenced gifts. This means the gifts must be preferenced to support the work carried out by a particular individual but not designated (restricted) for the individual. The preferencing language must be used in communication with potential givers. How does a church accomplish this?

Here is some wording to use: “Gifts in response to this communication are gifts for the use of the church. The opportunity to preference your gift to support the ministry of a particular missionary is secondary to identifying the gift for the church. This particular missionary’s ministry is being conducted under the direction of the church (or under the auspices of a missionary-sending organization, if the church is supporting the missionary-sending organization instead of directly supporting the missionary). In some instances, the missionary may only be partially supported by the church. In that case, perhaps the missionary’s ministry may be described as being partially conducted under the direction of the church.”

Here is some wording to avoid: “One hundred percent of all contributions designated for ‘Mary Missionary’ are provided to her.” Instead, an appropriate statement might be: “One hundred percent of all contributions designated for use on the mission field are sent to the mission field. Your gift will be placed into an account for Mary Missionary and everything in the account is available to her. Thank you for your gift to Mary Missionary.”

If the church is providing missionary financial or project support to a missionary-sending organization, it is the responsibility of the sending organization to determine that the funds are properly utilized on the field. However, if the church is providing missionary or project support directly to missionaries, the church assumes the responsibility for providing oversight of the ultimate use of the funds.

Online Giving

Hey Fletch … Our church is considering starting online giving. What are the kinds of things that we should be looking for?

From a user’s perspective, the number one thing for me in an online giving platform is ease of use. If I’m a new online donor, I want a system that works easily for me. Along with that is security. I want to know that the donation processing is secure and that my donation data is secure. I was talking recently about online giving with Brad Leeper of Ministry Essentials. Let me ask him to share his thoughts:

Brad—Your question highlights four important values an XP should consider and execute for their church:

1. Digital giving is an option that many people prefer. As wise leaders, we should make giving as easy as possible. Dealing with the issue of giving and the heart is demanding enough, so eliminating barriers to giving is something we have to incorporate into our generosity culture. A target we suggest for our clients and frequently see is at least 60% of giving coming from channels other than the actual worship experience. Financial leaders tend to balk at the fees built into digital giving. An XP will need to concede these fees as a market reality. There is good news: the market seems to be forcing fees to lower levels.
2. There is consolidation going on in the space. Be alert as to who stands behind a platform, such as if the owner is providing service and if the tool is constantly undergoing improvements. Even with consolidation in the space, new tools are frequently emerging into the market.
3. Integration with your church data base and accounting are important to understand, making sure is workable in your current configuration. Do consider that the primary goal here is to increase giving by making the process easier and more seamless to how people financially do life. If a better giving app increases your giving, then needing a few additional steps internally is well worth those steps. I’d rather have $5,000 a month in giving with an extra few steps than $800 a month in giving with the value being what is easiest internally.
4. An app is not a magic solution to instantly increase giving. Each platform will provide you with a process to announce and to integrate the tool into your setting. Successful installations, however, take far more time and emphasis to normalize and increase giving through the tool. The additional work is well worth it because an app will elevate giving over time with much of that giving chosen on a recurring basis by the giver.

First Time Giver Letters

Hey Fletch … Do you encourage churches to acknowledge first time givers through a thank you letter? I am considering starting this because I see this as a significant opportunity but do not want to come off pushy.

Great to hear from you. I have such warm memories of my time out there at your church. I was advising them of how to hire someone like you! I love seeing that you came, have stayed and have a rich ministry there. A first time donation is a big step. The person is saying, “Hey, I’m beginning to buy into the family and vision here. Let me help and support it.” I would strongly encourage you to send a letter to them. I have done that for years. When we printed a 10 page color end-of-year ministry stories publication, we printed enough extra to send to new donors throughout the year. People loved it.

You don’t need to thank the person for the amount of the donation. Some churches treat that information as confidential and only for the business office. People do want to know that the money was received and that it matters. Regardless of the size of the gift, say “thank you for being a part of this family. Every person matters here.” Will you come off as pushy? Not with a great note. When were you ever upset that someone said, “thank you!” I have asked Brad Leeper, Principal at Ministry Essentials to respond:

Brad Leeper—Rather than pushy, think pastoral. This new giver, through this financial gift, has indicated a new, deeper engagement with your church. The step to acknowledge and to say thank you is a powerful pastoral step that reinforces the risk and courage to enter into a new relationship with their church. And consequently, a new relationship with you as their pastor.

Taking this step and receiving a silent response sends an unintended message that they are not necessarily welcomed or embraced here. Another reason to graciously acknowledge the gift is to prompt and encourage a second gift that comes faster with a note than silence. It seems only 4 of 10 first time givers ever make a subsequent second gift. Those lost second gifts means less financial resources for your mission and a loss of spiritual connection with that person. The lack of a courteous response in a thank you might send the message that we really do not want your next gift and, as odd as this might sound, we really do not want you either. Sending a note establishes a personal relationship with the giver which is pastoral to the core.

One more reason to send a thank you acknowledgement. Most every non-profit will acknowledge that gift and show appreciation. Why would we as church leaders seem less pastoral and caring than a non-church organization?

Sample Thank You Letter: Dear Joe and Julie, Thanks for being part of our Church! The finance team let me know of your initial financial investment to our church. Your gift is generous and will return a big impact in the lives of many. Your part in our church really matters. It is an honor to be your pastor and to have you as part of our community! Pastor Eutychus

Note: What if your church policy states (or you prefer) that you should not know about a person’s giving? It is easy to honor that policy by including one phrase: While I am not aware of the amount, your gift is generous and will return a big impact in the lives of many.

Budget Cuts

Hey Fletch … I’ve been on staff at our megachurch for many years. Every year, I have to worry about the budget for my area being cut in the middle of the year, sometimes twice a year. What gives? Isn’t there a way that a church can get around this? It is killing my ministry plans. I never know what I can spend.

You have hit the nail on the head. Cutting staff budgets puts a crimp on ministry. In a tough economy, sometimes budgets do have to be trimmed. However, what you are describing is a pattern that can be avoided. The truth of the matter is that in most churches, ministry budgets only come to about 20% of the entire budget. The rest is salaries and benefits (50%) and operations (30%). If the staff cuts their ministry expenses by 10%, that only changes the church budget by 2%. Ministry is where the action is, so cutting a ministry budget really hurts the service that a church can do.

A better way is for a church to have a contingency budget. My preferred size is at least 5% of the total budget. Then, if there is a temporary giving shortfall, special project money in the contingency line item is not spent. Staff can continue fully using their ministry budgets. If the shortfall continues, then the entire budget can be trimmed in the next fiscal year. The main expense of churches is in staff and building debt. Perhaps your church is overstaffed or should get rid of existing debt.

SECA & Housing Allowance

Hey Fletch … It’s been one month after I got your answer to my question. I still don’t have my head wrapped around this issue of FICA vs. SECA and how it relates to Housing Allowance. Can a church choose to pay the 7.65% FICA to Social Security for a pastor? That is what my employer is claiming to be doing. Our church said we pay the extra 7.65% FICA for the employer’s share. We have 3 pastors who have opted out of social security and 3 of us have not. For those who have not, the church is saying they are paying their half for us.

FICA and SECA relate to the status of an employee. Ministers who are licensed, commissioned or ordained, and in a ministry role in their church, must pay SECA. All other employees pay FICA. For a pastor, if the church pays half of SECA (7.65%), then this must be considered taxable income to the pastor. It is essentially a bonus to help pay the self-employment tax.

Response—Now I understand it. The payment is what you earlier called a SECA bonus, or FICA-type bonus.

Mileage Reimbursement

Hey Fletch … Some of my fellow XPs have a variety of polices regarding mileage reimbursement for staff. I am wondering about best practices regarding this issue. Any help?

Check the current IRS mileage reimbursement rate for business purposes. This is the maximum amount that can be reimbursed tax-free. There needs to be a log for the IRS accountable plan—each trip needs the date, mileage and purpose. As a rule, pastors hate keeping these logs!

If a church pays more than the IRS amount, then anything above that is taxable income. Few churches pay more than the IRS maximum. Let’s say that a church did $1.08 per mile and the employee drove 1,000 miles. The business office would note that anything at the IRS mileage is non-taxable and the rest is taxable. If a church pays less than the IRS maximum, that is legal too. A church could give 25 cents per mile and that would be non-taxable to the employee. Again, this is for business miles only. Some churches pay the IRS rate for in-town travel and a lower rate for long trips.

A church can give an auto allowance to an employee. This is considered taxable income and the pastor does not need to keep a log. Let’s say a church gives the pastor $400 a month as an auto allowance. Since this is taxable income, it can be given to some employees and not all. At the end of the year, the pastor will have $4,800 of “auto allowance” added to their W-2 statement from the church.

A couple of caveats: I recommend for a long trip that the church rent a vehicle. If the trip is 1,000 miles, and at the IRS reimbursement level, that would cost the church $580. For that same amount, the church could rent a vehicle at weekly rates. Have an accountable plan—with a log. It’s the law. Otherwise, the IRS will view all mileage payments as taxable income. Do not “just buy the pastor a tank of gas when needed.” This does not qualify as an accountable plan, as there is no log. If a church does this, the best practice would then be to consider such payments as taxable income. Generally, a church pays for a tank of gas as a dodge to evade the IRS rules and regulations … not a good practice for those who are Christ followers.

Missionaries & Mileage

Hey Fletch! First off, thank you so much for bringing such an informative and fun workshop to Hawaii. It was such a pleasure to see you and we look forward to next time! We have missionaries that are deputized fund raisers and are providing them with mileage. Is that considered taxable income for them? Is that something we are allowed to do? And if so, is there a way for us to do this legally and ethically? We’d love to hear your suggestions. Thank you.

We had a marvelous time with the Hawaiian church and look forward to seeing you again! Now to your question. If the missionaries are on your payroll in any fashion, then they are your employees. You have two options for employees: Use an accountable plan for reimbursing actual miles driven. Each person much keep a log. IRS Publication 463 gives this example of a worksheet which can be used as an acceptable log: Date; Destination—City, Town, or Area, Business Purpose; Odometer Readings—Start Stop this trip; Miles. These logs should be turned in regularly, monthly is best, and the individual is reimbursed. If you don’t use an accountable plan with a log, then the income would be taxable to your employees.

Everything Deductible

Hey Fletch … Someone who is a supposed tax expert emailed me the following letter in response to a question: “If you buy everything you need or want in the name of the church, everything is deductible. As an employee of a corporation, you have no “income.” The church corporation receives the church donations and you are in charge of their dispersion. You own nothing but have the use of everything. You can be the caretaker and draw a salary for it, but as the caretaker the church can supply your food and other needs.” What do you think about what he is saying? Is there any truth in it?

In looking at his website, he seems to take a position outside of the mainstream. For example, it would be challenging to justify food for your family as a church expense. For a church-owned car, the IRS requires that personal mileage be counted as taxable income. I’m not a CPA, but these issues surfaced quickly. If you want to follow his advice, I’d suggest talking to a tax professional so that you will know the consequences with the IRS. Ensure that your actions are in line with your values and that, if needed, you will be willing to pay back taxes and penalties, or go to prison for tax evasion.

Spouse at Conference

Hey Fletch … Our senior pastor is going to a conference and purchased a ticket for his wife as well. I don’t have any policies regarding spouse expenses. Suggestions?

The bottom line is that there must be a valid ministry reason for the spouse to accompany the senior pastor on travel or at a conference. Many times spouses gain great ministry experiences in a conference. However, the expense becomes taxable income to the SP if the spouse is just along for the ride. Another thing to consider is expenses that the wife of the SP might incur in ministering to other wives of the staff team. This would be a separate line item in the SP budget, or an entirely different account. These things might include meals for discipleship, materials, special events or conferences for staff spouses.

SP Credit Card & Policy

Hey Fletch … Do you have any policies or procedures which outline appropriate spending? Our SP has a credit card but we haven’t ever put limits on spending. We are currently running with zero guidelines. This is dangerous for us all! I found a couple of good snippets in the Employee Handbook of Christ Community Church on XPastor regarding appropriate expenses for rental cars, hotels, flights, but wanted to see if you had anything else.

I would back up the car a bit on the spending issue. The place to start is in the budgeting process. You want a budget for a ministry area, in this case for the SP, that lays out expected expenses for a variety of things. You might include: Business meals, Resource materials, Honorariums for guest speakers, Conferences, Travel, Staff Development. These are just samples of what could be included. The budget becomes the policy for the coming fiscal year of what funds will be spent on, including total amounts. In this way you can monitor expenses, such as whether the SP or other staff member goes to one expensive conference or several less expensive ones.

Generosity

$300,000 Check

Hey Fletch … On Sunday, Mrs. Gold (that’s really her name) handed me an unmarked envelope with a letter in it. When I got back to my office and opened it, the handwritten note only said, “Use this for church expenses.” There was a $300,000 check. I’ve never seen a check for that much money before. I know that you encourage folks to not assume motives, so can you help me understand why she did this? Is she trying to get favoritism?

You are doing well to not assume motives. A wrong motive to assume is that Mrs. Gold is trying to get preferential treatment from you. As we see in James 2:1-4, this would be a problem: “Don’t show prejudice. If someone comes wearing a gold ring and fine clothing, and a poor person enters in terrible clothes, do you pay attention to the one who is well dressed and say, “Sit here in a good place,” and to the poor, “Stand over there? If so, have you made distinctions and become judges with bad motives?”

You don’t want to treat Mrs. Gold any differently than anyone else in the congregation, regardless of how big her check was. Consider your surprise at seeing such a large check. That was an eye opener. Perhaps Mrs. Gold was ill-at-ease with such a large check floating around in an offering plate or waiting to be picked up in an offering box. She may not have trusted the mail to deliver that much money. You are the person that she trusted to deliver the check to the Finance Office. Let your normal channels deposit the check and thank her as other gifts might be thanked. The next time you see Mrs. Gold, give a warm “thank you” and move on. She probably knows the James 2 passage and doesn’t want preferential treatment!

Giving Away 50% of Budget

Hey Fletch … In all of the church connections you have, do you know of other churches that are attempting to give away large percentages (50% or more) of what they receive annually? If you do, would it be possible for you to connect me with them? I’d love to talk with my counterparts in those churches.

I wish that I had a list a mile long of churches that gave away 50% to other ministries. Think of the impact that could be seen. That would be wonderful. Many churches give 10-25% to a combination of local and international ministries. The bulk of that often goes to work overseas. I’ve been thinking about your question and, unfortunately, don’t know of another church in your ballpark of giving. I hope that some people write in with examples! You are laying down the gauntlet. I know that it has taken you more than a decade to go from a low percentage to where you are now. Your church is living proof that it can be done. May your tribe increase!

Knowing What People Give

Hey Fletch … What is your position on the XP knowing the financial giving of a) the entire congregation, b) volunteers and key leaders, c) staff & elders and d) none at all.

Whew, those are tough questions! The answers are based on the culture of each church. The congregations where I have served took the position that pastors should have no knowledge of any person’s giving or giving pattern. They based that view from James 2:1-4.

The Bible Knowledge Commentary reflects on verse 4: “The illustration is followed by a penetrating inquiry: Have you not discriminated among yourselves? The question in Greek assumes an affirmative answer. James’ brethren must plead guilty not only to discriminatory divisions but also to assuming the role of judges with evil thoughts of partiality.” The fear in churches is that if pastors know a person’s financial giving, that they will receive preferential treatment. John says that “perfect love drives out fear, because fear has to do with punishment.” 1 John 4:18.

There are ways to preserve anonymity while still helping major donors. You can get a list of the 50 top leaders, without giving data. You can help these folks learn how to give generously and strategically. Churches do a great deal of training, but not with these folks. We may spend 8 hours training someone to work in the nursery or with youth, but what training do we provide for people of means?

Brad Leeper at Ministry Essentials would suggest that top leadership in a church know the giving patterns, so as to teach and mentor those folks on great giving. Alan Wildes wrote this article for XPastor, A Pastor’s Guide to Accelerating Generosity in Churches. Brad Leeper has contributed many articles on Generosity (do a search on XPastor) and check out his webinars with me in the Video Library.

One Donation Button

Hey Fletch … Our school is owned by our church. They are the umbrella. All online donations are being completed through the church. For example, if I want to donate to our school, I press the ‘donate now’ button on our website but get redirected to the church website in order to donate. How can I get around this? Folks who wish to donate to our school get confused when they get redirected to the church website and think their donation will be supporting the church and not the school. Please help.

You can put a “Donate Now” button on another website. The funds can still go through your church as designated funds for the school. I would suggest clear wording on the page saying that the donation is a restricted gift to the church and can only be used for the school. The technical issue is the software piece. This is generally pretty workable, to have a “Donate Now” button on another site but there may be some complications. One way to get around this is to have a specially-branded page on the church’s website, one that specifically helps people see that they are making a designated contribution to the school. When a donor makes a designated contribution, it can only be used for that purpose. It cannot be redirected, unless the page explicitly says “for the school and church use.”

Benevolence for a Divorcee

Hey Fletch … I am an elder in a church plant. Sadly, a couple who joined our church at the beginning is now in divorce proceedings. The wife and four children attend church faithfully. The husband is providing financial support but it’s not enough to pay the bills. So, we began providing a significant amount of financial support every month. She just told us that her husband said he’s not going to fund the car payment any longer. A member has given the wife information about various welfare programs but she still hasn’t signed up. I hate the thought of telling a hurting member to hurry up and get on welfare so we can stop supporting her so much. I’m looking for your thoughts on when a church should and shouldn’t financially support a member.

It is nice to see your genuine care and concern for this woman and her four children. She certainly is in a difficult place and your church wants to help her. Your church is modeling 1 Corinthians 13:4, “Love is patient, love is kind.” You have a significant issue and it is complicated by many factors. For starters, here is a recent article on XPastor that may give you some perspective: How Not to Take on Undelegated Responsibility. The crux of your problem seems to be the church’s desire and responsibility to help versus what the woman, husband and their families should do.

I would encourage you to discover ways to help the woman make the right decisions. She may be temporarily paralyzed by the problem but she needs to begin to make major decisions. Some of those decisions are about public assistance and moving in with family. She needs to set a budget based on current income, family assistance (such as free housing) and any court-mandated payments from the husband. The church needs to set or use existing guidelines on how much assistance can be given over a certain period of time. If you don’t use guidelines, you may be supporting her for the indefinite future. How long are you going to give assistance—a year, until her kids enter elementary school or longer? Walk with her as she makes the hard decisions, but don’t make them for her. She and her husband decided to have four kids, and now both of them need to decide how they are going to support those kids.

Giving money is a fine first step, but it is not the ultimate answer. Giving money over the long haul will make her emotionally and financially dependent on the church. You want to see her emotionally healthy. Perhaps as the husband realizes the cost of his actions, he will clean up his act and the marriage could be healed. He may need some financial pain to sober him up. If you make things too easy for him, you may be helping him evade his responsibilities and not feel the pain of his actions.

I’m just giving some thoughts here to a complex problem. I’m sure that I’m missing many of the nuances of the situation—but the principles remain the same. Get her to a place of making decisions and get him to a place of supporting his family. And here are some XPastor articles on Benevolence: Accountant Ted Batson on Important Considerations for Church Benevolence Programs. Attorney Frank Sommerville on Benevolence: The Right Help Given the Right Way. Southbridge Church’s Benevolence Policy and Form. A sample church on Benevolence and Financial Assistance Policy and Procedure. Northwest Bible Church of San Antonio on Benevolence Application. Apostles Church on Benevolence Policy. God’s best in all this. This gets at the essence of XPastor’s motto of The Business Brain plus the Pastoral Heart. Please keep me informed of how things go.

Benevolence for a Widow

Hey Fletch… We have a widow in our church that is going through serious medical challenges. She has exhausted her financial resources. Several wealthy members of the congregation want to financially support her. Here’s the rub: They want to provide the support through the church so they can be anonymous, as well as receive an IRS deduction.

I’ve consulted with my friend Dan Busby, former President of the Evangelical Council for Financial Accountability. Here are his thoughts:

Dan—This is a frequent scenario many churches face. We are certainly called to support one another in the body of Christ, but my Bible does not say we are to support widows only if we receive a tax deduction for the support.

There is no basis in the tax law for a giver to receive a charitable gift deduction for making a gift to a church earmarked for the benefit of a specific individual. The IRS considers this a prohibited conduit transaction. Churches should refuse to accept gifts of this nature. A giver can make a gift designated (restricted) for the church’s benevolence fund but is not eligible to receive a charitable gift acknowledgment if the donor specifies an individual or individuals who must receive that benevolence support. Under a properly functioning benevolence program, the church board or a board-designated committee should decide on benevolence recipients based on the church’s benevolence policy. If a member of a congregation desires to provide financial assistance to a specific person, they can make a gift directly to the person. If anonymity is desired, many crowdfunding platforms allow people to make gifts anonymously.

Benevolence for Cancer Patient

Hey Fletch … Our church wants to take up a special offering for a woman who has cancer. Can we ask people to give money through the church for her?

With the spirit of Christ’s love, we all care deeply for folks in a crisis. That crisis could be medical, a crisis event, housing related, or a natural disaster. Let’s clarify the issue. Since the money is going through the church, the supposition is that the donations would be tax-deductible. If people want to give funds that are not tax-deductible, then anyone can give in any way that they like. However, most folks in church reasonably assume that any money given to the church will be tax-deductible. This is why Richard Hammar recommends that, “Since such contributions are not tax-deductible by the donor, the church should not receive them.” Notice that he said “should” and did not say “cannot.” If you receive gifts earmarked for an individual, they are not tax-deductible to the donor.

Now to the issue of tax-deductible contributions. The IRS is quite clear on tax-deductible contributions. IRS Publication 625 states: “You can’t deduct contributions to specific individuals, including the following; Contributions to individuals who are needy or worthy. You can’t deduct these contributions even if you make them to a qualified organization for the benefit of a specific person. But you can deduct a contribution to a qualified organization that helps needy or worthy individuals if you don’t indicate that your contribution is for a specific person. Example. You can deduct contributions to a qualified organization for flood relief, hurricane relief, or other disaster relief. However, you cannot deduct contributions earmarked for relief of a particular individual or family.”

There are two principles that the IRS articulated in a private letter ruling: The organization must have full control of all donations. No donation can be earmarked for an individual. If your church is taking up an offering for “Mrs. Smith and her illness,” then this offering will not qualify for tax-deductible donations. Your church can take a special offering for benevolence ministries and these donations can be tax-deductible. Donation envelopes, e-giving, notes accompanying the donation and checks cannot contain the name of the individual. The church has full control of the donations and can give assistance to individuals as the benevolence policy allows.

Benevolence for Cancer Patient, More

Hey Fletch … I read the recent “Hey Fletch” column about the benevolence offering for the woman with cancer. I get that donations cannot be earmarked for a specific person. How should we do announcements when there is a need like the lady with cancer?

There are two principles that were applied in an IRS private letter ruling: The organization must have full control of all donations; and no donation can be earmarked for an individual. Your goal in an announcement is to stay within those principles. This is challenging because donors like to give to specific needs! If you say, “please give to the benevolence fund,” you may get a mixed response! Within the principles, you could say: “Our Benevolence Fund helps people in need. In the last few months we have helped Cindy who lost her job and Charles whose house was destroyed in a fire. Thank you for your gifts to the fund! Right now there are significant needs in our Benevolence Fund. One person has cancer and another is facing a dire situation. As you give to the fund, we use our benevolence policy to wisely give to many people. You are filling a tangible need in the lives of many when you give to the fund. Thank you for being the loving arms of Jesus!” You may cross the line if you dwell on the current need of one person. I would avoid names for those with a current need. Donors may fixate on the name and put it on their donation.

Benevolence for a Death in the Family

Hey Fletch … I have a question related to a special donation. A family in our church had a very unexpected death in their family. Another family in the church would like to pay for the funeral cost. They would like to do that by giving to the church, for two reasons. First, the gift could be anonymous. Second, the gift could be tax deductible. Is this type of gift acceptable with the IRS?

The way that you have described it, it is pass through giving. That can be done but not as a tax deductible gift. This allows for anonymity but not a tax deduction. See the above articles about that. The family can give funds to your benevolence or compassion ministry. You can use some or all of the funds for the funeral. The bottom line is that the church must be in total control of the funds and that the person cannot designate that use of the funds for an individual. Trying to stay on the right side of the law is complicated!

Benevolence for Staff

Hey Fletch … How do churches handle Benevolence Fund needs when a staff member is the candidate? The Board is trying to find out how other churches handle benevolence for a staff hardship.

I did some research and did not find any policies on benevolence gifts for staff members. This does not mean that churches don’t do such gifts (pardon the double negative). It just means that not many have written a policy on such gifts. For a good benevolent fund policy, see this example of Old North Church. There may be a new wrinkle on this issue. See the XPastor article, New Tax Court Case Says “Gifts” to Pastor Are Taxable by Mike Batts. Time will tell if this also applies to benevolence gifts. Let me reach out to Michael Martin, President of the Evangelical Council for Financial Accountability. He is both a CPA and an attorney. As I recall, many benevolence gifts are taxable income to staff members.

Michael—It is possible for employees to benefit from a church benevolence fund. However, in order not to be considered taxable income, it must be administered in accordance with a formal employee assistance program. CapinCrouse has an article on the ECFA site and here’s a relevant excerpt: “Benevolence program disbursements to employees also require special considerations. To give benevolence funds to an employee without having to show it as taxable income on their W-2, you need to have a formal hardship assistance plan in place before the assistance is given. See IRS Publication 3833 for the requirements of a hardship assistance plan.” We don’t have a sample on employee hardship assistance programs. Just my two cents … most churches probably go the route of taxing employee benevolence payments on the relatively rare situations when they come up, rather than going through the hoops of setting up a formal hardship program.

Special Offerings and Offering Drop

Hey Fletch … I have been a fan of your work and website for several years. I have a question and would love your insight. As a board member, let me say that our church has a history of taking special offerings whenever there is a disaster. Our congregation loves to give to emergency causes (wildfires, hurricanes, earthquakes, famine) and tends to give generously. However, our general fund often drops significantly during those weeks. People give to disaster relief and then our core offering diminishes. I have heard of some churches who build “disaster relief” into their budgets so that they can respond quickly when needs arise without draining regular income. Any thoughts on best practices around this?

Thank you for gracious words about XPastor. That is wonderful that your congregation gives so much to special needs. It sounds like your church has a huge heart for the hurting world … to the detriment of your general fund. It is truly a ‘steal from Peter to pay Paul’ issue! There is no reason why you can’t have a line item in your General Fund—you can internally restrict it for disaster, compassion, mercies or benevolence. When a disaster hits, you would say to the congregation, “Our General Fund has money for disaster relief. As needed for the relief, gifts above our regular weekly offering will go toward this current need.” You may even want to salt the food by saying, “and we have already given $25,000 this week to get help on the way.”

The issue that I see is one of communication. If people are accustomed to giving to a special fund, they will feel like the rules have shifted. You are changing away from a donor restricted fund, one which the money can only be used for disaster relief. You are moving to an internally restricted fund, where the Board can use the money as they see fit for the current disaster, future local needs, etc. You should communicate the new style of giving well in advance of the next disaster. Share the reason for the change, in print and in person, with the Governing Board, Finance Team, staff and key leaders. Once a month for six months, share a carefully worded statement with the congregation about the change. Ensure that any online giving reflects the wording that your church formally adopts, such as “Give at this link for disaster relief. This is a part of our General Fund and will be targeted for the current need. Unused funds will be used for other church ministry.”

I would also position this as one of great potential vision areas for the church. “We want to do so much and celebrate God’s generosity among us. By having these donations in the General Fund, we have governing board approved methods to strongly continue our ministry and disaster relief.”

Love Offerings

Hey Fletch … We occasionally receive love offerings for our senior pastor and other staff members. How should we handle these gifts?

There are so many questions floating out there about restricted gifts to churches. I’ve consulted with my friend Dan Busby, former President of the Evangelical Council for Financial Accountability. Here are his thoughts:

Dan—The phrase ‘love offerings’ does not appear in the federal income tax code or Treasury Regulations. It seldom appears in court cases. Still, love offerings have important tax implications for the church, those who contribute to the love offering, and the individuals who receive the love offering. Love offerings and gifts to senior pastors (and other staff members) commonly raise two tax issues: 1) Is the gift eligible to be claimed as a charitable contribution by the giver? and 2) Is the gift taxable income to the senior pastor (or other staff members)?

Attorneys Michael P. Mosher and Ryan K. Oberly highlight the taxable impact to the senior pastor in three common love offering/gift scenarios in their excellent position paper, ‘What’s love got to do with it?’

1. Individual spontaneously hands the senior pastor $20 or $50 in cash for a birthday. This type of gift is generally excludable from the senior pastor’s taxable income, since the gift likely was made with what the courts call, “detached and disinterested generosity,” and not in gratitude for services rendered. However, if the cash is provided in consideration for services the pastor provided, such as a funeral or a wedding service, the cash is taxable income.
2. The church facilitates a collection of funds to benefit the senior pastor. While the church facilitates the offering, the offering is not given directly to the church, but transferred directly to the senior pastor. Based on the facts and circumstances, the gifts might be considered tax-free to the senior pastor. However, the courts have demonstrated a willingness to treat such transfers as unreported taxable income if the transfers are regularly conducted (greater than three times a year) and are significant in relation to the leader’s annual salary from the church.
3. The church facilitates a collection of funds, deposits them into the church’s accounts, and then disburses them to the senior pastor. These transfers to the senior pastor are subject to income and social security tax. Referring to these gifts as love offerings in the hope that the terminology will make them tax free is simply wishful thinking. Staff members who are not ministers are subject to income tax, social security, and Medicare tax withholding. For both ministers and non-ministers, the amounts are reported on the employee’s Form W-2.

So, can givers take charitable deductions for love offerings? Generally, a love offering will not be tax-deductible to the giver. When the giver knows that a gift will go to a specific person, the tax law treats the gift as if it were being made to the specific person. It will be nondeductible, even when handled through a church. Particularly during the holidays, a general request for contributions for a “Christmas Gift” for all staff members may be made, where the church board determines who receives gifts and how much. The key element of a love offering which makes it nondeductible is the giver’s certainty that the giver’s gift goes to a named person or very limited group of individuals. The larger the number of individuals in the recipient group, with the specific allocation of the offering determined by the church board, the more likely the contributions qualify for a tax deduction.

Confusion on Designated Funds

Hey Fletch … I’ve been reading about designated funds and I’m still confused. Do you have a tax expert or attorney who can also comment on the issue?

We have done several “Hey Fletch” columns on the issue in the last few months. Let me ask attorney Steven Goodspeed to comment on this. He is an expert on church law issues:

Steven—It is possible for a donor to make a contribution designating an individual, project or program and still allow the donor to receive a charitable tax deduction (IRS Letter Ruling 200530016, 2005). What the church wants to avoid is taking contributions earmarked by a donor for a particular individual, project or program. The distinction between an expressed desire or preference and an impermissible earmark is somewhat nuanced, but is a distinction with a difference. It is necessary to ensure that on a relevant portion of the website where the donation is made or on the offering envelope, that there are words like “An individual may express their desire for how a donation is to be used; however, the church maintains exclusive control, under its policies, of both the administration, use and distribution of the funds, unless funds are accepted by the church under a separate written agreement or in response to a specific fundraising campaign where funds are received as designated for a specific purpose.” It should be noted that benevolence fund and scholarship contributions can raise specific issues that should be considered as special situations and may require legal counsel assistance; also, it is helpful if, in actuality, it can be demonstrated that at times some donor’s desire was in fact not followed so that the church avoid there being a claim that a commitment or understanding existed between the church and its donors.

Mission Trip Gifts

Hey Fletch … I’ve been tracking with Dan Busby’s comments in the Hey Fletch column. I know gifts to the church don’t qualify for “charitable gift acknowledgments” if they are earmarked for the benefit of a specific person. We recommend that our youth missions trip participants ask supporters to put their name on a sticky note and affix it to the check when making gifts. Is this a good thing to do?

There are several questions floating out there about restricted gifts to churches. I’ve consulted with my friend Dan Busby, former President of the Evangelical Council for Financial Accountability. Here are his thoughts:

Dan—While it is true that a gift cannot be earmarked for the benefit of a specific person, the rules relating to short-term mission trip participants require a little further nuancing. In the short-term missions trip context, it is important that a trip is consistent with the tax-exempt purposes of the church and that there is no significant element of personal pleasure, recreation, or vacation. Assuming a trip meets these requirements, the IRS is often concerned with two key elements in order for a gift to qualify as a charitable contribution: (1) Is the church the intended beneficiary? and (2) Does the church have discretion and control over the use of the funds? Under the intended beneficiary test, is there information that the gift is intended to benefit the church and not an individual? To determine this, there should be clear communication from the church or the gift participant(s) that the mission trip is church-sponsored and that gifts are being raised for the church to support the church’s mission program. Additionally, any payments should be made directly in the name of the church.

Under the discretion and control test, is it clear that the church has the right to control the use of these funds? In other words, the gift should not be designated (restricted) for a particular participant, but rather it should be a gift raised to support the whole trip group or it could be “preferenced for the support” of a particular person. While this preference language may seem like semantics, it is an important distinction to help clarify that these funds are not subject to the trip participant’s control but rather are solely under the control of the church.

In response to the sticky note method, ECFA strongly discourages this approach because the IRS could interpret this approach as a subterfuge—an effort to turn a non-deductible gift earmarked for a person into a tax-deductible gift by trickery. We encourage churches to use clear language templates that preserve the deductibility of such gifts. It is good to document the church’s practices in this area with a Short-Term Mission Trip and Mission Field Assessment Visit Policy.

Four Giving Groups

Hey Fletch … I was at the Smart Money for Church Salaries workshop in Dallas. It was awesome. I’m creating an executive summary of my notes for our directional team at our church and I came across a note I took over the lunch discussion on generosity. It says, “We should target each of the four giving groups at our church on a monthly basis.” I didn’t capture what these four groups are. Do you recall this conversation and what those four might be?

It was Dustin Bosscher that gave that example. He is the co-founder of Gyve. This is a great platform for online donations. Let me ask Dustin to reply. He has great thoughts on the topic:

Dustin—I would love to have an in-depth conversation with you. Read these descriptions for each of our categories:

Rookie: This type of giver is someone who decides to give for the first time. This is someone who has put their trust in the mission and is ready to take a first step in their generosity journey. As a rookie giver, their gift shows a growing trust in God and the leadership of the church.

Relative: A relative giver decides to give based on how they spend money in other areas of their life. They ask questions like, “Why am I giving more to my cell phone company than I am to God?” The relative giver will note their monthly spending (cable, new clothes, car payments, etc.) and start to reflect if their spending shows how important God is in their life.

Relational: When your relationship with God impacts your financial decisions, you are a relational giver. A relational giver is beginning to learn about biblical stewardship or managing the money God provides in a way that honors Him. Biblical stewardship involves tithing (the practice of giving 10% to the local church you attend), saving money for the future, and avoiding debt.

Radical: As a radical giver, you begin to ask questions like, “Am I giving in a way that changes me? Does my giving affect my lifestyle? Does it stretch my faith?” The emphasis is not so much on what God is asking me to give, but on what God is asking me to keep. A radical giver is someone who makes a lifetime or long-term giving commitment that governs their larger decisions like homes, cars, investments, etc.

Donor Designations

Hey Fletch … What are our obligations in handling donor designations? These come either verbally during a church service, on our website, or by text. They can also be formally given in writing by the donor to the church on the memo line of a check or in a letter.

There are several questions floating out there about restricted gifts to churches. I’ve consulted with my friend Dan Busby, former President of the Evangelical Council for Financial Accountability. Here are his thoughts:

There are both moral and legal obligations surrounding these gifts. The moral implications are the more obvious—following through on our commitments. If the church requests gifts for a certain purpose, the church is morally bound to spend the money for the identified purpose. Concerning the legal implications, courts have repeatedly enforced designated gifts (giver-restricted), even when it involves a church. This is true whether a gift was designated on the memo line of a check, in a separate note that accompanied the gift, or even based on a conversation with a church leader about a need which is closely followed up with a corresponding contribution.

Donor Designations but …

Hey Fletch … our church envelopes and website allow donors to make designations. There are words that say, “The board has complete discretion and control over the use of all donated funds.” Can our board take a missions fund donation and put it in the building fund?

There are several questions floating out there about restricted gifts to churches. I’ve consulted with my friend Dan Busby, former President of the Evangelical Council for Financial Accountability. Here are his thoughts:

Dan—The short answer is No. And the long answer is No-o-o-o. In nearly every instance, church boards lack the authority to override a giver’s designation. Many churches utilize disclaimers on giving envelopes or through their online giving platforms. A general statement like, “The church board has complete discretion and control over the use of donated funds” is generally ineffective to override a specific gift restriction. Exercising discretion and control over all donated funds is a fundamental responsibility of a church board. In the context of designated (restricted) gifts, the board carries out these responsibilities by determining which gifts the church will receive and ensuring that once designated (restricted) gifts are received, they are used in accordance with the giver’s designation (restriction). And yes, a church has the authority to decide whether to accept any gifts with designations. Once a designated gift has been accepted, then the church must deal with the consequences of properly handling the gift.

An appropriate disclaimer would generally indicate more specific language like, “In the event that a program, project, or giving purpose becomes overfunded, your gift will be applied where needed most.” When this wording is used, it does not give the board the authority to generally re-purpose designated gifts. But it does give the board the authority to re-purpose designated gifts that exceed stated needs for programs, projects, and other giving purposes. To learn more about designated (restricted) gifts, get free access to more resources at ECFA, such as: “The Guide to Charitable Giving for Churches and Ministries” or the smaller booklet, “Charitable Giving Guide for Giver-Restricted Gifts.”

Determine what works for your church culture. You will need to see how your staff respond and what fits your church polity.

Donor Designation Tax Exempt?

Hey Fletch … I heard that if a donor designates a gift made to our church, we cannot provide the donor with a receipt under the theory that designated gifts are not tax deductible. This does not seem correct. Help!

There are several questions floating out there about restricted gifts to churches. I’ve consulted with my friend Dan Busby, former President of the Evangelical Council for Financial Accountability. Here are his thoughts:

There are many types of designations (restrictions) donors may place on gifts. However, in general, donors can designate gifts given to your church, and the church can legitimately provide charitable gift acknowledgments for the gifts. Very basic designated (restricted) gifts might include the following: Missions fund, Building fund, Debt retirement fund, Staff Christmas gift fund, with the church board, or appropriate committee, deciding how to distribute the Christmas gifts to staff (these are taxable payments, reportable on Form W-2), Scholarship fund, with the church board, or appropriate committee, deciding which students qualify under church policies to receive a college scholarship, Benevolence fund, with the church board, or appropriate committee, deciding which benevolent recipients qualify under church policies to receive assistance, etc.

Legal & Insurance

Tax Exempt Status

Hey Fletch … I just began as the pastor of a rural midwestern church with 150 in worship. We do not have a tax exempt status. We pay tax on what we purchase, but we haven’t paid tax on our income. Maybe that’s not related to being 501(c)3, but I don’t know. I’ve not had to look into this before. Many thanks.

Congratulations on your new role. That is exciting! Don’t get to worried too fast. You may be fine. Here are selections from the IRS in Tax Guide for Churches & Religious Organizations: “Churches that meet the requirements of IRS Section 501(c)(3) are automatically considered tax exempt and are not required to obtain recognition of tax-exempt status. Many churches seek recognition of tax-exempt status from the IRS because this recognition assures contributors that the church is recognized as exempt.” The IRS explains the requirements: “To qualify for tax-exempt status, the organization must: be organized and operated exclusively for religious purposes; net earnings may not inure to the benefit of any private individual; no substantial part of its activity may be attempting to influence legislation; the organization may not intervene in political campaigns; and the purposes and activities may not be illegal or violate fundamental public policy.” I’m not a CPA or Attorney—perhaps you have one in your congregation. Get professional advice to confirm your church’s position.

UBIT

Hey Fletch … Do I need to pay unrelated business income tax on my parking lot? I heard a lot of noise about this last fall but what was the final ruling?

The law hasn’t changed on non-profits, including churches, paying Unrelated Business Income Tax (UBIT) on parking spaces. What has changed is that in mid-December 2018, the Treasury released rules on how to interpret the law. Frank and Elaine Sommerville wrote a concise article that explains if you are required to pay the tax. They note that: “The basic premise of the IRS analysis is to determine if most of the parking spaces are utilized for employees or for the general public. Spaces at a church that are not used during the week may be considered as for the general public unless they are designated for employee use only. If the majority of the spaces are utilized or available for the general public, then the church does not have unrelated business income.” There are four steps that a church needs to work through. Their article does a masterful job of walking through those steps. For most churches that own their own parking lots, and that don’t reserve spots for staff, there will not be any tax to pay. However, like Alcoholics Anonymous, you need to work the steps to stay clean!

UBIT & Renting Space to a Counselor

Hey Fletch … Let me get back to you on my question and your answer. I was asking about our church renting space to a counselor at below-market rates. I thought you might find this interesting; it comes from the IRS website. I believe we meet the conditions of the exclusion which are stated here, but of course the other issues are still very much in play. It says: “Charities and Non-Profits, Exclusion of Rent from Real Property from UBIT. Rental income from real property received by exempt organizations is normally excluded from unrelated business taxable income. However, rent may not fall under the exclusion in various circumstances, such as when substantial personal services are provided to lessees, if more than 50% of the rent is for the use of personal property, if the property is debt-financed income or leased to a controlled entity, or if the organization is exempt under Sections 501(c)(7), 501(c)(9) or IRC 501(c)(17).

That is a great page from the IRS. Thanks so much for this. I read it and saw lots of stipulations, issues and cases. Wow, that is complicated. One problem may not be today but in five years when the church wants to build and take out a bank loan. Will that change the debt financed income issue in the IRS rules? Who will remember that in five years? I’d suggest that you get a great CPA to examine it with you. Get all your paperwork in order. Double check it all. Put together a checklist of issues that may force you to pay UBIT in the future and examine that list every year. Let me know how it turns out. This is of great interest to me.

More on UBIT

Hey Fletch … We charge outside groups to use our facility. Some are concerned at our church that we should be paying tax on this income. They want us to not host any outside group for this reason. Thoughts?

There are certain situations where churches have to pay what is called Unrelated Business Income Tax (UBIT). As for UBIT, here is what the IRS says: “For most organizations, unrelated business income is income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption. An exempt organization that has $1,000 or more of gross income from an unrelated business must file Form 990-T. An organization must pay estimated tax if it expects its tax for the year to be $500 or more.”

The first question to answer is whether the outside group is fulfilling your churches charitable, educational or religious vision? Many times the answer to this question is “yes” and no UBIT is required. For example, if you allow another church to use your auditorium, that aligns with the purpose of your church—preaching the gospel. Consider though if you lease one hundred parking spaces to a local business. Let’s say that the business pays $1,000 a month for those spaces. That lease is unrelated to the purpose of your church. You will have to pay tax on the income, less expenses for maintenance, insurance and other items. In leasing parking spaces, you are acting like a for-profit business and need to pay tax on the net profit. Food for thought. Bon Appetit.

Leasing to a Public School

Hey Fletch … We are in an unusual place. Many times new churches rent or lease space from public school systems. Our county school system is seeking to lease classroom space from us to house a portion of their alternative school program, many of whom have disciplinary issues. We desire to be good neighbors and have an ideal small Sunday School space. Our Trustees only want to charge for “reasonable cost recovery.” Would the income received likely be UBIT or would the fact that it comes from a government agency negate UBIT? Would allowing a government entity use/lease our facility make us as a facility a “public community center” denying us the freedom to say “No” to other community organizations whom we might not be in agreement with philosophically or theologically? We recently revised our by-laws to avoid such requests.

You have raised so many issues! You will need to think about UBIT. That may not be an issue if you only recover utilities and janitorial costs. The criteria laid out by the IRS says: “For most organizations, unrelated business income is income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption. An exempt organization that has $1,000 or more of gross income from an unrelated business must file Form 990-T. An organization must pay estimated tax if it expects its tax for the year to be $500 or more.”

There may special circumstances in renting a room to a school or non-profit, as you mentioned. You should carefully consider the criteria for renting out the room. How will this decision impact future room rentals. Will you take all comers? Other school districts? Other non-profits? Another issue is liability insurance. Who will be liable if a child is hurt on your property or sexually molested by a teacher or visitor? This case is so complex, let me ask Michael Martin, President of the Evangelical Council for Financial Accountability, to comment:

Michael—David is right on the UBIT issue. There is a threshold question of whether there would be any income subject to tax if you’re simply trying to recover costs in renting the space. Keep in mind, you also have to reach a $1,000 gross income threshold before you face UBIT reporting requirements with the Form 990-T. Another important consideration is whether the property you’re renting is debt-financed. Rental income is generally excluded from UBIT, unless the property is debt-financed.

These are just a few general UBIT considerations. Within the rules, there are exceptions—and exceptions to exceptions! So it will be very important to reach out to your organization’s professional tax counsel for advice based on the specifics of your situation. In the meantime, I recommend IRS Publication 598 if you’re interested in reading up more on the UBIT rules before seeking professional advice. Finally, I commend you for taking a careful look at your bylaws and church policies with the help of groups like Alliance Defending Freedom. They would be in a better position to address your public accommodations question and how this scenario might interact with the bylaws and policies you’ve adopted.

Redirect Building Funds?

Hey Fletch … Two years ago we launched a building campaign for our church, but we fell short of our goals. Now the board has decided not to expand the building, but rather to use the gifts to cover deferred maintenance on our facilities. Are there any issues here?

There are so many questions floating out there about restricted gifts to churches. I’ve consulted with my friend Dan Busby, former President of the Evangelical Council for Financial Accountability. Here are his thoughts:

Dan—The answer to this question likely turns on donor communication prior to and at the time the gifts were made. Did the communications with donors provide for the potential of an under-funded project? If so, were the communications adequate to allow the redirection of gifts for facilities maintenance? If not, the church likely needs to seek legal counsel to consider options. To learn more about designated (restricted) gifts, get free access to more resources at: ChurchExcel.org or by getting a copy of The Guide to Charitable Giving for Churches and Ministries or the smaller booklet, Charitable Giving Guide for Giver-Restricted Gifts.

Change Treasurer with the State?

Hey Fletch … I would like to say that the XPastor website is awesome! My church has changed the treasurer for the church. Is it necessary to make an amendment with the State of Texas?

Most states require someone to be the registered agent for the church. Some states require several officers, such as the treasurer, to also be listed with their records. Texas requires a registered agent. I don’t think that you need to list your directors with the State of Texas. However, I would suggest a quick call to the Texas Secretary of State’s office on that; contact the Comptroller’s Exempt Organizations Section. I have never met more helpful and friendly people than in the Texas Secretary of State’s office. Many times after a call, I have posted a rave review or sent an email to the person who helped me. One time the Secretary of State replied to my email. They are truly outstanding, wanting to help!

Live Stream and Worship Songs

Hey Fletch … We live-stream our worship service and also have some recorded worship songs on our website. Someone asked me if that is legal. Thoughts?

That is a huge can of worms. Actually it is two cans worth. The first issue is live-streaming your worship and the second is recorded songs on your website. You will want to get this one right, otherwise the penalties can be stiff. There is an organization that you need to check out: Christian Copyright Licensing International (CCLI). Here is why you need CCLI. A 2017 ChurchLeaders article, stated that: “Yesh Music (Richard Cupolo and John Emanuele) filed a complaint on October 28, 2011, claiming that First Baptist Church Smyrna (TN) used two of Yesh’s compositions in videos streamed from their website. The complaint also details Yesh’s assertion that no license was granted for this use. Yesh is seeking $150,000 for each infringement in addition to attorneys’ fees.”

When I said the penalties could be stiff, that was an understatement. There is the fine to consider. There is also the public relations nightmare of having your church in the news and in a lawsuit. Your church’s integrity will be tarnished.

The CCLI Copyright License covers projecting lyrics in worship, song sheets and songbooks. You can record your worship services, provided it is live music (no accompaniment tracks). The CCLI Streaming License enables you to live stream or podcast live-recorded services. This does not cover secular songs. The CCLI Rehearsal License goes even further. See the CCLI website for details.

The prices for annual licenses are based on the size of your church. Their are fair prices and help support the original artists. If you don’t get a license, you are stealing from the artists. Get the license that fits your need and be legal!

Licensing Movies

Hey Fletch … This may not be in your wheelhouse but I know you have a lot of experience and knowledge! We are doing Christmas at the Movies this year. When it comes to licensing and copyrights, I’m not too concerned about the Sunday morning elements. We have licensing that would cover us and I believe most would be Fair Use. What about graphics? Although I’ve seen other large churches do this same theme, I get a little hesitant when using copyrighted items, such as the Elf or Grinch names and fonts. Do you have thoughts?

As for showing clips from movies, your existing license might cover that. There is a CCLI license that allows for showing clips: “The Church Video License® provides legal coverage for churches and organizations to publicly show motion pictures and movie scenes. ScreenVue® provides instant access to sermon illustration ideas for thousands of movies, ranging from cutting-edge independent filmmakers to the top-grossing major Hollywood studios.”

Things change if you livestream the service or record your sermons for later use. Talk to the people at CCLI about licenses for these distribution methods. I would urge caution for images, graphics and trademarks. Legalzoom notes: “Fair use of copyrighted material by a nonprofit organization, such as a church, is favored over use of the same material by a commercial organization. Seven appropriate circumstances are listed in the fair use statute: criticism, comment, news reporting, teaching, scholarship or research. Using a copyrighted photo in a sermon to demonstrate a point or to educate the congregation may fall into one of these seven purposes.”

If you are going to use an image or trademark to advertise the sermon series, you will need copyright permission. This would include an introductory graphic to the message. You are using the work of others for promotional purposes and should pay for that use. Use of images in sermons can become challenging. Movies in churches are not generally “fair use” and need a license. Use in a sermon of a trademarked image may be for “criticism or comment.” This is generally “fair use” and acceptable.

For a legal opinion, let’s hear from attorney Steven Goodspeed:

Steven—David seems to have hit most of the appropriate warnings for sure. Sunday morning is not an exemption nor automatically “fair use.” Fair use is pretty narrowly determined and is restricted to copyright and not trademark law so much. In addition to ensuring you have an appropriate license or permission from the trademark or copyright owner, you might also look into cyber-liability insurance as a rider to your normal insurance policies, especially if your church does a lot of social media posts, videos and images. Trust me when I tell you that there are firms with robots crawling the web, looking for copyrighted or trademarked images. Once they flag and document them, you’ll receive a really difficult letter from the rights’ administrator asking for money. It does pay (so to speak) to make sure it is all done correctly.

Security Software for Cell Phones

Hey Fletch … I am trying to find information about the legalities of requiring our church staff to install software on cell phones and laptops such as Covenant Eyes. We reimburse $100/month for personal cell-phone. I appreciate any help you can provide.

If the computer is wholly owned by the church, I don’t think that there is any problem installing such software. The church owns it and can dictate the terms of the use. The cell phone is another matter. From what you said, the church doesn’t now wholly own the cell phone nor the service plan. You are reimbursing the individual for the use of their personal cell phone. By the way, your reimbursement amount is a gracious amount. It not only covers reasonable monthly airtime but also gives sufficient funds for regular replacement and upgrading of the phone. Remember, reasonable cell phone reimbursements are tax-free to the employee! This is a nice perk. My guess is that you cannot force the individual to install the software on their cell phone. However, I may be wrong on this! In one sense you are not forcing anyone to install the phone. However, you are stipulating a condition for receiving the reimbursement. Let me run this by Steven Goodspeed, a noted attorney:

Steven—Thank you for the question. The area of law regarding what is known as Bring Your Own Device (BYOD) policies is somewhat in flux as courts evaluate this issue. Generally, it is entirely permissible for an organization, including a church or ministry, to require an employee to utilize a particular software application on their phone. However, if the employer does this, then it also has to pay part of the employee’s mobile phone bill reflecting that percentage of monthly service charge that approximates the work-related time as opposed to personal time. In the case of an application operating in the background, the actual costs would be relatively low and would certainly seem to be covered by a $100 a month reimbursement. It is important for the employer to have a BYOD policy addressing expectations and requirements of employees, especially if it is requiring employees to implement a particular mobile app(s), and it is best to get the employee’s consent or acknowledgement as part of the employment documents. Employees need to know where their privacy lies and where they are being monitored.

Insurance Maximum

Hey Fletch … Our church requires any employee who uses our health insurance to pay part of the premium. I heard somewhere that there is a maximum that we can charge. Is this so?

You heard correctly. The Society for Human Resource Management article puts it this way: “For plan years beginning in 2018, employer-sponsored coverage will be considered affordable if an employee’s required contribution for self-only coverage for the least-expensive plan option that meets ACA requirements does not exceed 9.56 percent of the employee’s household income for the year (down from 9.69 percent in 2017).”

That was for 2017 and 2018. In a later article by SHRM, “ACA’s Affordability Threshold Rises in 2019: IRS annually caps employees’ share of least-expensive health plan premiums,” they note: “On May 21, the IRS announced in Revenue Procedure 2018-34 the 2019 shared-responsibility affordability percentage. Based on the ACA’s affordability standard as adjusted for inflation, health coverage will satisfy the requirement to be affordable if the lowest-cost self-only coverage option available to employees does not exceed 9.86 percent of an employee’s household income, up from 9.56 percent in 2018.”

For 2019 calendar-year plans using the federal poverty level (FPL) safe harbor to determine affordability, an employee’s premium payment can’t exceed $99.75 per month, up from $96.08 per month in 2018. The challenge is determining an employee’s total household income. You can’t easily do this without seeing their tax forms, which would be an invasion of privacy. For this reason, you can use the safe harbor figures, or 9.86% of your state’s minimum wage. Using the federal minimum wage of $7.25, that would come to $123.91 per month. If you have an employee making $50,000 then it would come to $410.83 per month. If your employee has a working spouse, that minimum number would increase. I would check with your insurance agent to see the current year’s figures.

Tax on Parking Spaces

Hey Fletch … Anything on your radar regarding 2018 tax law that is calling for non-profit organizations to file a 990-T for tax on parking spaces provided for employees? Our CPA has emphatically advised our board to file this by January 15 … however smoother groups appear to be more ambivalent. What’s the buzz about this?

The ECFA gives this overview of the problem: In a November 13 letter, ECFA President Dan Busby joined a diverse coalition of faith leaders in continuing to call upon Congress to step up and repeal the controversial “nonprofit parking tax.” The parking tax, introduced last year by the Tax Cuts and Jobs Act, is expected to cost charities $1.7 billion over 10 years. Despite the law taking effect on January 1, 2018, the Treasury still has not provided clear guidance to churches and nonprofits. “Unless repealed, this provision [Section 512(a)(7)] will require tens of thousands of houses of worship to file tax returns for the first time in our nation’s history and will impose a new tax burden on houses of worship and nonprofit organizations,” according to the statement. Additionally, the new law creates significant constitutional concerns surrounding government entanglement with churches “simply because these houses of worship allow their clergy to park in their parking lots.”

Dan Busby just sent me an email and said: “In the next two weeks, we will know if the nonprofit parking tax is repealed before the end of the year. If it isn’t repealed before December 31, there is a good chance it will be repealed early in 2019. Churches are left to decide whether to jump in and pay the tax or delay and hope for repeal.”

The Gospel Coalition wrote: “But if you’re a pastor or nonprofit leader who doesn’t know how to comply—or wasn’t even aware of the law—you’re not alone. According to Politico, groups like the Boys & Girls Clubs of America, Goodwill Industries, the YMCA, and the National Council of Nonprofits are demanding the tax at least be delayed, since the Treasury Department hasn’t even provided the details of how the tax will work.”

Elaine and Frank Sommerville noted: “Many tax and legal professionals have questioned the implementation of the new law. All professionals agree that further guidance from the IRS is necessary to provide clarity. No one can predict the final IRS interpretation of the statute or when the IRS will interpret the statute. But because the law went into effect on January 1, 2018, tax-exempt organizations, including churches, must analyze the new law using traditional methods of analysis to determine a reasonable position on the application and breadth of the statute. They cannot wait for the IRS to issue guidance.”

The bottom line: The tax is the current law and you may need to file a return soon. The tax need guidelines from the Treasury Department. Wait as long as possible to pay the tax. See about any delay that you can reasonably implement for filing the return. This appears to now be a dead issue, but may resurface (pardon the parking lot pun).

Excess Benefit

Hey Fletch … When it comes to excess/unreasonable compensation, is this something to monitor on a per employee basis or an overall budget basis? I had someone tell me that the personnel percentage of our overall budget is too high and could be considered unreasonable compensation. Is that true?

When a church has more than 65% or 75% of their budget going to salaries and benefits, they may be in a poor financial posture for unexpected expenses. It may be difficult or impossible for that church to get a bank loan. The bank will ask, “How are you going to pay it back? Where is the money going to come from?” This is not what is meant by the term “unreasonable compensation.” Excess or unreasonable compensation is what is paid to an individual. GuideStar has an article about “What You Need to Know about Nonprofit Executive Compensation.” It says: “The IRS permits tax-exempt organizations to pay executives “fair and reasonable” compensation. There is no universal standard defining fair and reasonable, however; what’s fair and reasonable at one nonprofit may be a gross under- or overpayment at another.”

You can read a GuideStar article on “The Private Inurement Prohibition, Excess Compensation, Intermediate Sanctions, and the IRS’s Rebuttable Presumption.” GuideStar gives input on non-profits and charities. These non-profits file IRS Form 990 that churches are not required to file. This means that salaries for non-profit executive are in the public record with Form 990, while church salaries are not. The bottom line is that, by-and-large, the church board or compensation team sets the fairness and reasonableness of their church’s salaries.

Non-profits have standards for compensation, which churches would do well to utilize. The GuideStar recommendations include:

• Compensation paid by similar organizations, both exempt and taxable, for equivalent positions in the same community or geographic area.
• The need for the particular services of the person in question.
• The uniqueness of the person’s background, education, training, experience, and responsibilities.
• Whether the compensation was approved by an independent board of directors.
• The size and complexity of the income and assets and the number of employees.
• The person’s prior compensation arrangements.
• The person’s job performance.
• The relationship of the person’s compensation to the compensation paid to the other employees.
• The number of hours the person spends performing his or her job.

Utilizing these nine recommendations can guard against excessive compensation in church salaries. A great way to determine the reasonableness of a salary is to have a third party do an independent Compensation Study.

Attorney Needed

Hey Fletch … A few months ago we discussed our pastor’s lack of retirement planning. You mentioned you could recommend a non-profit attorney for a consultation. One of my “strategies” is to help our pastor qualify for Social Security, even though he opted out. He does have 28 credits, 12 short of the minimum. Can he be paid as a member of the band? Part of our worship team is paid and he regularly plays keyboards. Could you recommend a non-profit attorney?

You have a complicated question and need professional counsel. I applaud you for realizing how complex this issue is. It is far better to pay for professional legal advice now, than to have a myriad of legal fees later. In several “Hey Fletch” columns, David Middlebrook has given input, as well as Steven Goodspeed and Dustin Gaines. They are at two different firms and would be my go-to attorneys.

Accusations against a Pastor

Hey Fletch … I read the Hey Fletch column about a policy for handling accusations against a pastor. At the end you said, “I would add to these a policy statement on when an external investigator should be used. Several churches have attempted internal investigations of sexual misconduct, only to find that their work was flawed.” Could you expand on that?

There are many allegations that a church can handle on their own. Others are of such a nature that eternal help is required. Consider that many churches use an external CPA firm to do their financial audit. They like the independence of the CPA and the standards of auditing that are used. That same independence is needed on some types of allegations against a pastor. The BBC reported: “Church leaders were reportedly told four years ago that Mr. Hybels was having an affair with one woman and was accused of harassment by others. An internal investigation cleared him of wrongdoing.” The article went on to say: “In their statement, church elders said investigations had been ‘flawed’ and that their trust in Willow Creek’s founder had ‘clouded our judgement.’ ‘We, as a board, know Willow needs and deserves a fresh start, and the entire board will step down to create room for a new board,’ it said.” It is difficult to investigate the alleged misconduct of a beloved pastor. It is next to impossible to impartially investigate a beloved and founding senior pastor. The results of a biased investigation can be catastrophic.

Health Insurance

Hey Fletch … I am looking for some advice on health insurance for my team. We provide a high deductible plan for our employees and have contributed a percentage of the deductible into a HSA on behalf of each employee. We got quotes last week for this coming year’s insurance premiums. They went up 123% from this year and will cost the church $140,000 more than last year. Needless to say we are looking into other options. I am wondering if you know of other options. Thanks for any help you can give me.

That is one of the largest increases I have ever heard of. Check with your agent for a typo! Either you were paying way below market value this year, or it is time to get a new health insurer. As you work with an insurance agent, have them get bids from other carriers in your area. From an email exchange with you, I learned that you have several bids and that this increase is the lowest of the bids! Nationwide, the New York Times had an article suggesting that health care costs were going to stay about the same, or less, than last year. So I’m surprised at the increase, let alone the amount. I asked the question about rate increases to 70 church leaders at a recent XPastor workshop; most had increases ranging from 10-28%. Renewals have a short window, so you will need to act fast. Of course, most policies can be cancelled at any time in the contract period. Check on your cancellation process. You could go with your existing provider for a month or two, and then switch to a lower priced carrier. Please let me know what you find. This is alarming news!

Health Sharing Ministries

Hey Fletch … I have a question about rising medical costs for employers. There are several Christian-based health cost-sharing ministries, such as MediShare, Christian Healthcare Ministries, and Samaritan Ministries. On the surface they do not qualify as a group plan to meet the requirements of the ACA for employers with 50+ employees. At least one is communicating that they do in a certain environment. What are your thoughts on this? p.s. Our HR Manager says Hi!

Please convey greetings back to your HR Manager, a fantastic and great asset to your staff. That’s a fascinating question. Do I remember that you are with Blue Cross/Blue Shield or was it something through a local hospital? Many Christians are using health sharing ministries. There can be significant savings. This type or organization has been around for thirty-plus years and has found a louder voice in the marketplace in the last five to ten years.

I found that Christian Healthcare Ministries does have a group plan. It could work for a church but as they say, “probably not a for-profit business.” Their page said: “Group Health Plans: Christian Healthcare Ministries (CHM) has hundreds of participating groups—all of which are Christian organizations with an all-Christian staff. Furthermore, all group members meet other CHM membership requirements. Advantages of CHM group membership: Significant savings on healthcare costs (some groups save as much as 50 percent compared to their previous health care plan). Employee out-of-pocket expenses are often significantly less. Single-bill option for the group. CHM’s solutions will help you create a plan that affordably satisfies ACA requirements. However, your group plan must be set up properly or you can be heavily fined. Therefore, all groups should seek guidance from attorneys and CPAs knowledgeable about the law’s requirements. CHM can provide referrals to reliable, independent professionals. It’s important to understand that because of the specific requirements of the Affordable Care Act (ACA), it’s often not practical for for-profit organizations to pursue an ACA-qualified group plan with CHM.”

Here are some thoughts on the pros and cons: Christian Healthcare Ministries has a strong balance sheet. For the last several years, they have been rapidly growing. If you ask, they will send you their audited statement. It would be best if they were a part of the Evangelical Council for Financial Accountability.

The church could have sizable savings to your health care costs. You could bankroll the difference and save it for unusual health care expenses by your church staff, if not covered by CHS. There is a risk. As they say: “However, it’s important you understand that your healthcare will be handled by you, the patient. This means that health care providers should bill you directly, after which you can submit your bills to CHM.”

CHM and others are not insurance carriers. “Christian Healthcare Ministries is not a health insurance company. Rather, we are a group of thousands of Christians across the United States and around the world who share each other’s burdens in the area of health care costs. We also pray for and encourage one another.” Let me know if you interview them. I’d love to know what they are offering a church of your size.

Response—We called CHM and apparently they have group plans for ministries with under 50 employees but do not for ministries with 50 or more employees. After an online deep dive into this, we discovered that in order for us to use CHM, we would need to hire an attorney and CPA to write a formal “self-insured” health plan that meets ACA legal requirements and then contract CHM to manage it. Each time anything changes in healthcare law, we would need to hire an attorney to pour through our plan document to ensure we are compliant and make changes, if necessary. This sounds too convoluted for my conservative comfort. I don’t want to become a plan owner.

Sexual Abuse Insurance

Hey Fletch … Our church has $2 million in umbrella insurance. Does that cover sexual abuse as well?

When I get a question on insurance issues, I always turn to the professionals. Insurance can be a highly technical area—and I always need a refresher course. Today let’s hear from noted attorney, Gregory Love. Tomorrow we will hear from an insurance agent:

Gregory Love—As a sexual abuse attorney, I prefer doing prevention work—preparation to prevent an allegation and preparation to respond well if an allegation arises. Insurance is a very important piece of a sexual abuse preparation plan; it is not a substitute for safety measures, but plays a very important role in the event a situation arises. After years of crisis response work, I have created an exercise … a Sexual Abuse Fire Drill. This is a comprehensive study regarding potential sexual abuse risk—and insurance coverage is one of the most significant revealed weaknesses. In short, I have my organization assume it is facing a multi-victim sexual abuse allegation involving a trusted staff member. One of the first categories of inquiry is the available insurance coverage to handle a multi-victim allegation. Most organizations learn that they have insufficient coverages/limits or that they misunderstood which section of the policy involved sexual misconduct/sexual abuse.

This exercise arose from a number of in-the-ditch experiences. One Texas church, for example, contacted my office on the very front end of a sexual abuse matter involving a children’s ministry staff member and up to four children ages seven and eight. When I reached the insurance part of my inquiry, I was told the church had a $1,000,000/$3,000,000 policy; in essence the church had an aggregate of $3,000,000 available to cover a multi-claimant lawsuit. This seemed reasonable given the size of the church. When I asked for the policy, however, I realized that the church’s executive pastor was misreading the policy. There was $1,000,000/$3,000,000 available for general liability and injury; on Page 3 of the policy, there was a Sexual Misconduct Endorsement limiting coverage to $100,000 for each claim with a maximum possible aggregate of $300,000. Prior to the allegation, the church leadership believed “all is well.”

When the church was sued, the insurance company simply tendered its total obligation of $300,000 and bowed out of the matter. The church had to come out-of-pocket for its legal defense and settlement funds; the church had to sell most of its real estate to resolve the matter. Morals to the story: (1) read your policy closely; (2) have an insurance agent that is skilled beyond your ‘property and casualty’ needs; (3) do a Sexual Abuse Fire Drill—ask these questions before you are in crisis … while you still have the chance to address potential weaknesses in your system or your coverages.

Sexual Abuse Insurance—More

Hey Fletch … Our church has $2 million in umbrella insurance. Does that cover sexual abuse as well?

When I get a question on insurance issues, I always turn to the professionals. Insurance can be a highly technical area—and I always need a refresher course. Yesterday we heard from noted attorney, Gregory Love. Today, let’s hear from Charlie Cutler, a respected a insurance agent in southern California:

Charlie Cutler—Glad to be brought into the conversation! If this particular church hasn’t jumped through quite a few hoops to include abuse in the umbrella, then it likely doesn’t have that coverage. The term “umbrella” is a bit misleading. It sounds like there is a broad policy that covers anything that happens at a church. Policies used to be written this way, but virtually all umbrellas nowadays require that there are limits on the base policy and that wording on the umbrella policy says that particular coverage is included in the higher limits. A more appropriate term is actually “excess.” This means that you have limits in excess of the base policy.

Key items in the insurance policy should include Directors & Officers, Counseling, Sexual Misconduct, Coverage for your Security Team (especially if you have a formal team and/or if anyone is armed), Cyber Liability, Foreign Liability, and Non-owned Autos. The key to determining the limit is that it shouldn’t ever be one person’s decision. The board should annually be informed what the current limit is and be sure that they are all comfortable with it.

For an active church like the one you describe, most boards would be comfortable with $1million plus a $2 million umbrella (total protection of $3 million). A key point on the limit is that $1 million for Directors & Officers isn’t $1 million each board member … that is the total amount of protection for the entire board. If you have board members with high assets, those boards want to be sure that the umbrella/excess extends over the Directors & Officers Insurance to cover their personal exposure.

The majority of claim dollars are spent in the property area. With construction growing and unemployment low, replacement costs are growing faster than most insurance policy limits. Most churches should increase their property limit by about 10% in various years. Additionally, we see that most churches don’t think about the other costs during a claim … what it takes to rent an alternative location, lost tuition income, decreased giving, and much more. A major property claim (especially where the cities are difficult to work with) can last two years … think of what it would cost to rent a space for two years to keep your ministry going.

Lastly, I’d like to emphasize the importance of Ordinance & Law Coverage. If your church was built more than a couple of years ago, it doesn’t meet current codesfire sprinklers, “green” upgrades, energy efficient requirements, ADA access, etc. Talk about this with your agent (and hopefully a contractor in your congregation) to get a feel for what would be appropriate. Insurance is more than an …  annoying line item in your budget … it’s a tool for ministry protection and continuity. A good agent should have a ministry-focused discussion with how this applies at your church!

Paying More if No Insurance Needed

Hey Fletch … Thanks again for such a great XP-Seminar. It is truly run with excellence and is so helpful to me. Here’s a quick question for you or whoever you may refer me. The question is regarding full-time employees who are eligible, but do not need or engage in the medical benefits offered by our church. What is your opinion and how do most churches handle this situation regarding additional compensation? The three most common solutions of which I am familiar: 1) Stipend, 2) Covering the additional premium for the employee on their spouses policy, and 3) No additional compensation with a “thank you.” At the moment we opt for number 3, but are curious how other churches handle this.

I’m so glad that you were at the Seminar. We didn’t get much chance to talk this year, but what a wonderful time everyone had. It was so good. As to your questions … let me answer them in order.

Solution #1—The stipend is money given to encourage people to get their insurance through their spouse. At one church that I was at, they gave $1,000 to each staff person who took the medical insurance offered at their spouse’s place of work. I inherited that system and didn’t change it. This made good economic sense to the church. The church gave a bonus of $1,000 to the employee and saved $7,500 in medical insurance premiums. The humor of it is that the church is giving a bonus to folks who have two incomes.

Solution #2—I haven’t heard of a church paying the premium for an employee on their spouse’s policy. You would need to talk to a CPA or medical insurance specialist to see if this is tax-exempt. The amount that the church pays may be considered a bonus and taxable to the employee. I suspect that there will be lots of fine-print in the answer.

Solution #3—Many churches give no additional compensation. As you said, the church just says, “thanks for saving us $7,500 or more in insurance premiums.” If the two plans are similar, there is little financial incentive for the employee to be on their spouse’s plan. I knew of a family who chose to be on the church plan because “it saved them $500 a year in premiums.” The church should have paid them $500 in a bonus and saved multiple thousands in medical insurance premiums. Let me ask Jordan Pushos (CFP) at GuideStone Financial Resources and see if he can help:

Jordan—In regards to “a church paying the premium for an employee on their spouse’s policy,” this is a bit of a grey area in the industry due to the many circumstances that can surround a reimbursement of this type. An employer can reimburse premiums for an employee participating in a spouse’s medical plan if the medical plan is considered a group policy. However, many times an employer is not aware of whether or not the medical plan is a group policy. Additionally, an employer must remember what they do for one employee they must do for others; otherwise you could end up in different types of discrimination issues. Because of these issues, many employers steer away from these types of reimbursements.

Retirement & Employer Contributions

Hey Fletch … My question is regarding retirement and employer contributions. We’ve had a one-size-fits-all approach but now our staff has grown in numbers and levels of responsibility and we need to revisit it asap. I’m wanting to know how others categorize which staff gets what for retirement.

That question may be out of my pay grade, pun intended. Let me copy Dixie Beard at GuideStone on this as she is an expert at GuideStone Financial Resources. I might give the correct answer … or she may have to set me straight. To my knowledge, you can still separate your employees into classes—such as pastors, administrative personnel, facility workers, preschool teachers, etc. Each class can have a separate retirement structure:

Dixie Beard—You were on the right track, David. If the church is offering a 403(b) non-ERISA retirement plan, the church has flexibility. The church can provide different levels of employer contributions for various classifications of employees. For example, the church can provide a 10% employer contribution for the ministerial employees, 5% for the administrative employees and 3% for all other employees. Or, the church can state they want to provide employer contributions for only the Senior Pastor. It is up to the church as to how it wants to establish the employer contributions.