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Discriminatory HRAs for Churches

Question:

If a church establishes a Health Reimbursement Arrangement (HRA), can it define the plan to include only its ministerial staff and not its other full-time employees?

Answer:

Several resources are valuable in this determination:
  • IRS Publication 969
  • IRS Publication 15-B, Chapters 1 and 2
  • Internal Revenue Code (IRC) Section 105 (available at Cornell Law)
IRC Section 105 describes nondiscriminatory requirements for HRA and other accident and health benefit plans. Plans may be able to exclude five classes of employees. Three are generally applicable to churches (Section 105(h)(3)(B)):
  • employees who have not completed 3 years of service
  • employees who have not attained age 25
  • part-time or seasonal employees
Section 105(h)(4) states that "a self-insured medical reimbursement plan [and HRA] does not meet the [nondiscriminatory] requirements ... unless all benefits provided for participants who are highly compensated individuals are provided for all other participants" (other than those cited in the above bullet list).

So the definition of highly compensated individuals becomes all important. You should read Section 105 for yourself, but as I read it, for most churches, these individuals include the five highest paid employees or the highest paid 25 percent of all employees, if that number is more than five.

The consequence of providing HRA benefits on a discriminatory basis? Generally, full taxability of any benefits. Again, Section 105 has a small "out" for taxability of part of the benefits that will not likely help most churches.

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