Why should your church use an accountable reimbursement plan?

Most pastors and ministry leaders incur expenses for the churches they serve. Many churches give pastors and ministry leaders allowances to pay for their ministry-related expenses. However, these ministry leaders often must pay taxes on the entire allowance. A better approach is for the church to utilize an accountable reimbursement plan (ARP) for ministry-related expenses.

At its most basic definition, an ARP is a plan that helps explain terms, conditions and tax rules related to allowable ministry expenses. With this type of plan:

1. The church creates a reimbursement budget.
2. The minister or employee turns in an expense report.
3. The church uses that report to reimburse the minister or employee.

On the other hand, some churches use a non-accountable reimbursement plan, which similarly provides a set amount of money to pay back pastoral and staff expenses. The staff covers the cost of their ministries from this amount but is not required to provide any documentation — unlike an ARP. In addition, with these plans, all reimbursements received are considered additional taxable income and must be reported, potentially resulting in a higher tax liability for staff members.

With an ARP, your pastor and staff can receive reimbursement for ministry-related expenses without being counted as taxable income.

The requirements for an ARP are simple:

• All expenses must be related to the minister’s or employee’s duties.
• Expenses must be verified with documentation of the amount, date, place and business purpose. Documentation should be provided within 60 days of incurring the expense.
• All reimbursements must come from employer funds, not by reducing salary or allowing a minister to rearrange his salary package.
• Any excess reimbursements should be returned to the church within 120 days, and unused ARP money should not be given as a bonus or additional income.

Here are three steps to help your church get started.

1. Decide what expenses will be covered.

Eligible expenses include:

• Vehicle use for ministry purposes
• Fees for meetings, workshops and conferences
• Books and publications
• Technology, audio and video resources
• Continuing education
• Ministry-related hospitality

Then, determine how much money the church will budget to cover these expenses separate from personal income. Your church may want to re-evaluate this amount annually to help ensure it keeps up with inflation.

2. Develop a simple process for documenting and reporting expenses.

Receipts should be required for purchased items, and mileage should be reported for automobile expenses. Your church should consider using the IRS standard mileage rate for transportation and per diem rates for meals. Again, expense reports should be submitted within 60 days of incurring expenses.

3. Reimburse ministers and employees at least once a month for all approved expenses.

Remember, this reimbursement should not affect their income! Additionally, advances can be given for anticipated expenses, but unused funds must be returned to the church within 120 days.

An ARP can benefit both your church and staff. For your church, it helps ensure compliance with the IRS while fostering financial transparency. For church staff members, it reduces their financial stress by covering ministry-related expenses without increasing their taxable income. They can focus on what they do best — serving and leading your church.

Visit GuideStone.org/CompensationPlanning to download your copy of our Compensation Planning Guide and find other helpful resources. This guide also includes a Sample Accountable Reimbursement Plan and Sample Expense Report to help you get started.

Be sure to explore the Ministerial Resources Center and find answers to common financial, benefit and tax-related questions and issues for ministers.