Medical Insurance, Life Insurance & Health Savings Accounts for Pastor's

We are in the process of having the board write up a church plan to be placed in our board minutes to exclude certain benefits from taxable income for our Pastor to be effective starting the end of February.

I am the bookkeeper at our church and I want to make sure I am understanding things correctly.

Our Pastor would like a Salary Reduction so that the Church pays for his and his wife's Medical Insurance Policies. (They have separate policies that the Church will assume the payments on).

He would also like his salary reduced so that we can pay a monthly amount to his Health Savings Plan. He would also like to have the church pay his personal $500,000 Term Life Insurance Premiums and not report it as Taxable Income, (Also, reducing his Salary).

From what I read in the IRS rules and a Church & Clergy Tax Guide that I have in my office -I can pay his medical premiums without having to report them as income on his W-2 or even show it on his W-2. I can pay a certain amount to his HSA (up to the HSA's plan's financial limitation) and report that in Box 12 on his W-2 at the end of the year as a "W" item. But, I do not see that Life Insurance can be paid and excluded from taxable Income.

Am I correct in everything I am understanding? Also, can we agree to pay his high deductible on his Medical Insurance Policies without reporting it as taxable income?

Answer

I have researched your question and still do not feel comfortable giving any advice on your particular situation.

Your question regarding the tax implications of the medical and life insurance are very important. If they are not set up properly and your church or pastor was ever audited the results could be very troublesome.

My best advice is to consult a knowledgeable CPA before you set up this salary reduction. A lot of CPAs will give free advice to churches, but even if they charge, it would be worth every penny for advice on the proper way to set up everything and if all the benefits are actually nontaxable.

I am sorry I could not be of more assistance, but your question, which is very wise to ask beforehand, is out of my field of expertise.