Health Insurance Taxes - Episcopal Diocese of San Diego Health Insurance Taxes - Episcopal Diocese of San Diego

Health Insurance Taxes

Attention All Clergy in Charge of Congregations, Parish Administrators & Treasurers

AKA Section 106 and Section 125 plans demystified and clarified

Section 125
With the advent of the Denominational Health Plan, we anticipate that a larger number of employees will have deductions from their pay for employee contribution to health insurance. Fortunately, the IRS allows this deduction to be non-taxable income. However, the IRS requires that each church set up a Section 125 plan. The two types of section 125 plans are the premium only plan (POP) and the cafeteria plan. The POP only allows an employee’s health and dental insurance premiums to be non-taxable. The cafeteria plan allows other expenses, such as childcare, to be non-taxable. Cafeteria plans can be expensive and difficult to administer; therefore, this article will only address the POP since that is an immediate need for many churches and their employees.

Episcopal Payroll Services through ADP has a POP plan for churches. The explanation and application is included in the link below:

ADP Premium Only Plan Explanation and Application

Although there is a cost associated with setting this up, there is a savings in taxes for the employee and a savings in payroll taxes for the church.

Section 106 
Section 106 allows for insurance benefits paid for by the church on behalf of the employee to be treated as non-taxable. This is much simpler; it requires the vestry to pass a resolution to allow health insurance deductions to be non-taxable income under the Section 106 plan. Passage of a motion to approve this action should be recorded in the vestry minutes and filed with the minutes.

Questions?
For general questions, please email the Rev. Kirby Smith, treasurer and chief financial officer. 

For questions specific to the ADP plan, email Patricia Tucker at  ptucker@cpg.org.