Ways to Help Your Clergy Employee Save On Healthcare Costs

By Steven M. Jacobson

With healthcare costs always on the rise, many clergy employers may find themselves asking how they can help their clergy employee’s healthcare costs. We already know that the tax bill for clergy can be high, but is there a way to help the clergy get funds for care and save on their tax bill? The answer is yes, but you must use a legally compliant option. In this post, we will provide you with some of those options. Before you choose any option, we highly recommend that you reach out and get advice from a numerous amount of individuals that specialize in these types of options. Those options include attorneys that specialize in healthcare law and benefits, benefit brokers, church pension boards, and benefit administration and HR solution companies. Please note that this post does not constitute as legal advice.

Flexible Spending Arrangement (FSA)

FSA is an option for a clergy employee to allocate a portion of their compensation to pay for out of pocket medical expenses. This is done as a pre-tax payroll deduction. That means that a pastor will not be subject to federal income tax, social security tax, or Medicare tax on their contributions to the plan.

In order to qualify as an FSA, an employer must offer group plan health insurance, the FSA must meet non-discrimination rules (meaning it must be offered to all employees), it can not exceed IRS contribution limits ($3,300 for 2025), it must require substantiation of costs, and it must be used for qualified medical expenses (click here to see qualified expenses).

With the FSA, usually the employee is given a debit card to use to make qualified medical purchases. If an employee contributes to an FSA they wan to be careful as to how much they allocate toward the FSA. If funds are not used up by the end of the year, the employee may lose the remaining benefit.

Health Savings Account (HSA)

An HSA is a tax exempt trust or a custodial account which needs to be setup by a qualified HSA Trustee. Contributions to an HSA can be made by both the employee and employer tax free. Meaning the contributions are exempt from income tax and SECA Tax (Social Security and Medicare taxes for clergy) on either employer contributions or employee contributions made through payroll deductions.

In order for an employer to offer an HSA, the employee must be covered under a high deductible health plan (HDHP), the employee must have no other health coverage, the employee can not be enrolled in Medicare, distributions must be used to pay for qualified medical expenses, and the employee can not be claimed as a dependent on another persons return. Contribution limits range from $4,300 for individuals to $8,550 for families for 2025. Employees are also allowed an extra $1,000 in contributions if they are age 55 and older.

There are additional benefits for the employee too. If the employee does not spend all the money in the HSA, it can roll over year after year. Also, if the employee leaves their job, that money stays with the employee regardless of who made the contribution (employer or employee).

One important note is that an employee may distribute funds from an HSA without using it for qualified medical expenses. However, that money would be subject to taxation plus a 20% IRS penalty (on top of taxation).

Health Reimbursement Arrangements (HRA)

An HRA is exactly how it sounds. An employer is reimbursing an employee for healthcare costs and qualified medical expenses. However, these devices are extremely complicated from a legal perspective. Before an employer chooses such an arrangement, they should consult with an attorney or an HRA Administrator Company to assist them. You can not simply reimburse employees for medical expenses tax free. Failure to setup a proper HRA can lead to crippling taxes and penalties for both the employer and the employee. We will discuss these types of arrangement below. Please note that this post will only scratches the surface of these incredibly legally complicated instruments.

HRA plans are solely funded by the employer. Each type of HRA has it’s own set of rules and contribution limits. The reimbursements (if the HRA meets appropriate legal standards) are tax free to the employee. Any unused amounts of the HRA can carry forward year after year.

There are four types of HRA plans currently offered.

Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)- For employers that do not offer group coverage to their clergy employee and the employee is purchasing insurance through healthcare.gov or their state marketplace, a QSEHRA may be used to reimburse for those medical insurance premiums and qualified medical expenses. However, if a clergy employee uses an HRA to pay for medical insurance premiums purchased through healthcare.gov or a state marketplace, they can not take any advance premium tax credits (subsidies) in which HRA funds were used (no double dipping). The maximum amounts an employer can contribute to a QSEHRA is $6,350 for individual or $12,800 for families for 2025. The employer must have less than 50 full-time equivalent employees to offer this plan.
Individual Coverage Health Reimbursement Arrangement (ICHRA)- This HRA is again for employers that do not offer group health insurance to the clergy employee. ICHRA plans can also be used to purchase insurance through a state marketplace or healthcare.gov. However, if a clergy employee uses an HRA to pay for medical insurance premiums purchased through healthcare.gov or a state marketplace, they can not take any advance premium tax credits (subsidies) in which HRA funds were used (no double dipping). The ICHRA funds can also be used to pay for qualified medical expenses as well.
Excepted Benefit Health Reimbursement Arrangement (EBHRA)- This HRA can be used to cover insurance premiums only if it covers “excepted benefits”. Limited-scope dental and vision benefits, or long-term care benefits are excepted if provided under a separate policy. This HRA can not be used to pay for a group health plan or market place insurance, as the employer is required to cover their employee under a group plan to offer this plan. The maximum amount an employer can contribute to this plan $2,150 for 2025.
Group Coverage Health Reimbursement Arrangements (GCHRA)- This HRA is for employers that provide group coverage to their employees. Because of this factor it can not be used to purchase insurance on the state market place or healthcare.gov (even if the employer does not provide group coverage to family members and the clergy employee purchases insurance for family members through healthcare.gov or the state market place). However, it can be used to pay for qualified medical expenses that is not covered by the group plan.
Each type of HRA has its own set of rules however they all follow a general set of rules to make sure they are legally compliant. The rules below may not include all of the rules that each individual type of HRA may have.

All HRA require a set of legal plan documents. This is where things can get complicated for employers as all plan documents must contain information that include but are not limited to the following.

Classification of employees that qualify for the HRA- each type of HRA has it’s own set of allowed class of workers (like full time, part time, salaried, hourly, etc). Depending on which type of HRA is selected will tell you which types of worker classifications are allowed. If an employer offers the HRA to one classification of worker, they must offer it to all employees that meet that worker classification.
Equal Benefits- every employee of each worker class must be allotted the same benefit. This could be problematic for employers that wish to offer different amounts to different employees that meet the same worker class.
Eligibility requirements
Claim Proceedures- How employees are reimbursed
Benefit Descriptions- what type of expenses are allowed
Funding Details- How the employer will fund the HRA
Fiduciary Responsibility
Other items too voluminous to list- in short, unless you are an attorney that specializes in this type of law, it is likely that your plan documents will not have everything that is required for a legally compliant HRA which can result in taxable reimbursements to the employees and employer fines/penalties.

If a clergy employer administers their own HRA they must be HIPAA compliant. That means that they must have protections in place to protect the employee’s personal and medical information. These protection measures must meet HIPAA standards in both physical and virtual environments. Most clergy employers (church, synagogue, etc) do not have the infrastructure to be HIPAA compliant (see violations below).

The employer and the plan must meet both federal and state COBRA standards. Meaning you may have to continue to offer the plan to former employees (see violations below).

The employer and the plan must meet Medicare reporting standards. This is done to prevent employees on Medicare from receiving overpayments from Medicare benefits. Failure to do so may result in violations (see below)

The plan must meet ERISA Standards. Meaning only ICHRA plans and QSEHRA plan can be used to reimburse medical insurance premiums purchased by healthcare.gov or a state marketplace.

The plan must also comply with ACA standards including (but not limited to) minimum essential coverage, ACA Annual Lifetime Limit Rules, 60 day notice to employees of changes, internal claims appeals process, and many other items too voluminous to list.

Any violation of the above can result in a taxable benefit to the clergy employee and penalties to the employer. Employer penalties can include.

HIPAA Violations- If an employer or HRA plan administrator does not meet HIPAA standards (which most clergy employers alone will likely not), the penalty can range from $100 to $50,000 per individual violation. https://www.hipaajournal.com/what-are-the-penalties-for-hipaa-violations-7096/
COBRA Coverage- an employer or plan administrator that fails to offer COBRA Coverage or is not COBRA Compliant with their HRA, fines can be $110 per day plus the costs of medical coverage that wasn’t provided. This includes notification to employees of COBRA benefits with the HRA. (Buford V. General Motors)
Medicare Reporting (Medicare Secondary Payer Provisions)- For employers and administrators that are required, failure to provide coverage information to Centers for Medicare and Medicaid Services could face a fine of up to $1,000 daily. https://www.federalregister.gov/documents/2023/10/11/2023-22282/medicare-program-medicare-secondary-payer-and-certain-civil-money-penalties
Failure to provide legally compliant plan documents- could result in a taxable reimbursement to the employee, and penalties of $110 per day to the employer.
ERISA Compliance Penalties- Failure to meet ERISA standards (as mentioned above) can result in a penalty to the employer of $100 per day.
Failure to meet any HRA Legal standards would likely result in a taxable reimbursement to the clergy employee.

The long and short of it is while Health Reimbursement Arrangements seem like a great idea, they can be extremely difficult for an employer to execute on their own. Any employer should reach out to either an attorney or an HRA administrator that takes the legal complexities out of the employer’s hand and provides them cover (and allows their employees to receive tax free reimbursements).

The discussions above are idea’s to help clergy employers aid their clergy employees for their costs of health care. This post does not include all options nor does it constitute legal advice. All employers and employees should reach out to a professional that specializes in the above discussions (attorneys that specialize in healthcare law and benefits, benefit brokers, church pension boards, and benefit administration and HR solution companies, etc).