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Friday, June 9, 2023

 

                         ACCOUNTABLE REIMBURSEMENT PLANS AND 

                                    PASTOR DISCRETIONARY FUNDS

 

            I recently was in a church finance meeting and a question came up about accountable reimbursement plans (ARPs) and pastor discretionary funds, and how they should be used. I’ve taught several workshops on church finances and include slides on both. I also recently attended a workshop given by the General Council on Finance & Administration (GCFA). ARPs are different from pastor discretionary funds and have very different uses.







            “Pastor discretionary funds are established by a local church to give its pastor complete discretion and authority to provide confidential financial support to persons in need. The details of these discretionary funds can vary. In some cases, no guidelines or instructions as to acceptable use of the funds is provided, effectively giving the clergyperson free reign as to how they are spent. In other instances, the clergyperson is given some guidance, but it may be very general or unclear and may be given orally or understood culturally. These funds can lead clergy – both local church pastors and bishops – to unknowingly run afoul of relevant Internal Revenue Service regulations and can result in unintended tax consequences to clergy and to donors.”[1]

 

            Accountable reimbursement plans are very different in that they are budgeted amounts provided to a pastor to be used to pay the pastor’s professional and business expenses, such as travel, continuing education, subscriptions, etc. When the pastor incurs a professional or business expense, he or she submits a claim with backup substantiation. The church either pays the expense directly or reimburses the pastor.

 

            By definition, the accountable reimbursement plan is for reimbursement of business expenses and is not reported as compensation on the pastor/employee’s W-2.

 

Receipts are mandatory as part of an accountable reimbursement plan. The IRS (and the Conference) requires an adequate accounting by the employee and maintenance of good records by the employer. The IRS requires actual receipts for any expense over $75.00. The church may use this figure or set a lower limit. (e.g., GCFA

requires receipts for all expenses over $25.00.)

            The documentation should show (or be listed on the receipt itself): the purchase, amount, date, place, and the business nature of the expense.

·         For example, if the pastor purchased a $10.25 notebook, the substantiation would not require a receipt, but at the very least should state, “Purchased Notebook for $10.25 on 1/5/01 for keeping accountable reimbursement records for church.”

·         A meal expense might state, “$5.90 lunch on 1/5/01, in Centerville while meeting with district superintendent.”

·         Another example is $150 expenditure for a continuing education seminar where the staff can submit the invoice for payment by the church to the vendor. Or, if the staff person paid personally, an acknowledgment of payment by way of a receipt for the seminar or the invoice with a front and back copy of a canceled check would be adequate to substantiate the reimbursement to the staff person.

            I have been aware of times when employees/clergy submit receipts several months after the funds are expended. This is inappropriate at best. The IRS requires that all substantiation of expenses occur within a reasonable time (within 60 days will be deemed reasonable) of the expense being paid or incurred. I would suggest at least monthly, to be sure receipts or information isn’t lost.

            The church can allow advances, if the church wishes to do so and has an adequate accounting system to track the substantiation for or reimbursement of advances. If an advance is given and exceeds the amount of business expense substantiated, the staff person must return the excess within a reasonable time (within 120 days will be deemed reasonable) of the date incurred or paid.

 

            Under no circumstances should the ARP be given to a pastor at the beginning of the year with the instruction to “keep track of everything.” Nor should unused funds be given to the pastor/staff person at the end of the year. This could jeopardize the entire accountable reimbursement policy.

            “Under an accountable plan, you are required to return any excess reimbursement or other expense allowance for your business expenses to your employer. Excess reimbursement means any amount for which you did not adequately account within a reasonable period of time. For an example, if you received a travel advance and you did not spend all the money on business-related expenses, or you do not have proof of all your expenses, you have an excess reimbursement. You must return an excess reimbursement to your employer within a reasonable period of time…The IRS will always accept 120 days as a reasonable period of time.” “If an employee fails to return, within a reasonable period of time, any reimbursements in excess of substantiated expenses, “only the amounts paid under the arrangement that are not in excess in the substantiated expenses are treated as paid under an accountable plan.”[2] 

            In other words, since those excess expenses are no longer part of an accountable plan, that means they are now considered part of compensation of the employee. So the amount would be added to the employee/pastor’s W-2 salary and is subject to income tax and self-employment tax (if pastor), and Social Security and Medicare (if non-clergy employee).

            In all cases, I think written policies are the best way to make sure everyone abides by the tax and church rules, and also that everyone has the same understanding. These policies should be in place, and reviewed annually, and should always be discussed with a new employee or clergy at appointment time.

 

            If you wish more information on this, or need templates for policies, please feel free to contact me at (315) 427-3668 or sranousacctg@twcny.rr.com. I’d be happy to answer questions.



[1] CLERGY DISCRETIONARY FUNDS, General Council on Finance and Administration of The United Methodist Church Legal Services Department.

[2] 2022 Church & Clergy Tax Guide 2022, Hammar, Richard R., p 329.

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