Minimizing Church Risk

1
Minimizing Church Risk

• Presented by
• Peggy Z. Miller
• 713-521-9383
• pzmiller_at_methodists.net

2
Introduction

• Minimizing church risk is much more than just
  having insurance. A church should have several
  policies/procedures in place to try to minimize
  risks.
• The Objective is to remind you of your fiscal
  responsibility to your church and employees
• Presentation will allow you to look at how you
  can continue to practice good stewardship and
  accountability.
• Remember You are demonstrating by word and
  action that someone is in control, that there is
  a plan, and that faithful stewards are managing
  the congregations finances.

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Financial Outline

• Lesson 1 What your church needs to have in place
  to minimize risk
• Lesson 2 Insurance
• Lesson 3 Latest Tax Law Changes
• Maintaining your Tax-exempt status, Tax changes
  that affect your church Gifts, Mileage, Church
  School
• Lesson 4 Audit Guidelines
• Internal and external audits internal controls

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Lesson 1 Minimizing Risk

• When a church first opens its doors, a church has
  to have policies and procedures in place. In
  order to conduct business a church will need to
  receive an EIN (Employer Identification Number).
  A church will need to open a bank account. A
  church will need to hire employees to handle
  finances and administration.
• It is Important to identify risks that attach to
  all elements of church activity property,
  liability, people (e.g. staff, members,
  volunteers, visitors and program participants),
  fleet, etc.
• Managing risk includes creating administrative
  policies and procedures, eliminating hazards in
  the facility and programs, and buying insurance.
• Insurance is NOT a substitute for good internal
  control.
• Understand that the risks, and attendant costs,
  that are not managed through an insurance
  program, are retained by the church.

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Church Staff

• In January, update all W-4 Forms. The W-4 is
  used by employees to report withholding
  allowances.
• Issue Form W-2. The form must be completed and
  issued to each employee by January 31, By
  February 28 (March 31 if you file electronically)
  you must submit Copy A of each W-2 form to the
  Social Security Administration along with a W-3
  transmittal form.
• New Hires Keep a file with Form I-9, with for
  example a copy of Social Security Card and
  Drivers License or a copy of a passport. Other
  documents are accepted and are shown in the
  instructions for Form I-9. The instructions on
  the Form I-9 mentions the need to be aware of The
  Anti-discrimination Act and The Immigration
  Reform and Control Act of 1986.

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Complying with Laws

• The information that follows is a basic
  explanation of some key laws that may impact your
  organization. There may be a financial risk if
  they are ignored.
• To minimize risk in your church, you need to be
  aware of these laws.
• Some of these laws are not mandatory to a
  religious organization but following the laws may
  be of tremendous benefit.

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Age Discrimination American with Disabilities
Act

• Age DiscriminationThe Age discrimination in
  Employment Act of 1967 (ADEA) applies to
  employers in any industry affecting commerce with
  20 or more employees. Churches may be exempt
  from the ADEA because of a lack of involvement in
  commercial activities.
• ADEA prohibits employment discrimination on the
  basis of age against applicants for employment
  and employees who are age 40 and older. The top
  age limit for mandatory retirement has generally
  been eliminated. Compulsory retirement is still
  permissible for certain executives or tenured
  college faculty members who have reached age 65.
  Ministers are subject to compulsory retirement.
  The age for retirement in the Methodist Church is
  70.
• Americans with Disabilities Act
• Covers employers with 15 or more workers in 20 or
  more weeks a year.
• Employment hiring must be without regard to
  disabilities and also make reasonable
  accommodations for disabled individuals.
• There are limited exceptions to the employment
  provisions of the ADA for churches and religious
  employers. Preferential treatment may be given
  in hiring individuals of a particular religion.
  Additionally churches and religious organizations
  may require employees to conform to their
  religious tenets.
• Public accommodations. Facilities open to the
  public must be accessible to the disabled. The
  primary focus is on facilities like restaurants,
  museums, hotels, retail stores, and banks.
  Religious organizations or entities controlled by
  religious organizations (including places of
  worship) are exempt from the public accommodation
  requirements of the ADA. Caution although a
  church is exempt under the public accommodations
  provision, it may still be covered under similar
  provisions of local building codes.

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Charitable Solicitation, COBRA, and The Equal Pay
Act

• Charitable Solicitation
• Federal, state, and local governments have
  enacted laws regulating the solicitation of
  contributions by nonprofit organizations. These
  laws are known as charitable solicitation acts.
• COBRA
• The Consolidated Omnibus Budget Reconciliation
  Act of 1985 requires covered employers to offer
  18 months of group health coverage beyond the
  time the coverage would have ended because of
  certain qualifying events.
• Equal Pay Act
• Equal Pay Act prohibits employers from paying
  employees of one sex at a lower rate than
  employees of the opposite sex for equal work for
  positions that require the same skill, effort,
  and responsibility and that are performed under
  similar working conditions.

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Fair Labor Standards Act, Family and Medical
Leave Act, The Immigration Control

• Fair Labor Standards Act
• Fair Labor Act sets basic minimum wage and
  overtime pay standards and regulates the
  employment of minors.
• Family and Medical Leave Act
• Provide up to 12 weeks of unpaid leave to
  eligible employees. It does not override more
  generous state entitlements.
• Law applies only to organizations with 50 or
  more employees
• No exemption for religious organizations
• Immigration Control
• The immigration reform and control act (IRCA)
  prohibits all employers from hiring unauthorized
  aliens, imposes documentation verification
  requirements on all employers, and provides an
  amnesty program for certain illegal aliens. Law
  also prohibits employers with 3 or more employees
  from discriminating because of national origin.
• An I-9 form must be completed and retained on
  file by all employers fro each employee. The
  form must be available for inspection at any
  time.

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National Child Care Act, Occupational Safety and
Health Act, Pregnancy Discrimination Act and
Racial Discrimination

• National Child Care Act
• States may designate organizations that will be
  permitted to obtain a nationwide criminal record
  check on child care workers. If your state
  designates churches, this will enable you to
  quickly check on prospective child care workers
  by asking a state agency to conduct a criminal
  record check.
• If not, you must rely on other methods of
  screening child care workers in your church.
• Occupational Safety and Health Act
• Occupational Safety and Health Act to protect
  workers from unsafe conditions in the workplace.
• Churches and other nonprofits are not
  specifically exempt from OSHA. A church must
  employ at least one person in secular
  activities to be covered.
• Pregnancy Discrimination Act
• Under this act, women affected by pregnancy,
  childbirth or related medical conditions must be
  treated the same for all employment-related
  purposes as other workers who have a similar
  ability or inability to work.
• Racial Discrimination
• Racial Discrimination Form 5578 Annual
  Certification of Racial Nondiscrimination for a
  Private School Exempt from Federal Tax must be
  filed by church that operate, supervise, or
  control a private school. For organizations that
  must file Form 990 there is no requirement as the
  information is included in part V of Schedule A.

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Title VII of the Civil Rights Act of 1964
Religious Discrimination and Sexual Harassment

• Religious Discrimination
• Title VII of the Civil Rights Act of 1964
  prohibits discrimination in employment with
  respect to compensation, terms, conditions, or
  privileges of employment because of an
  individuals race, color, religion, sex, or
  national origin. The law applies to
  organizations with 15 or more employees. Title
  VII does permit religious organizations to
  discriminate on the basis of religion for all
  positions. However, religious employers may not
  discriminate on the basis of race, sex, or
  national origin.
• Sexual Harassment
• Under Title VII of the Civil Rights Act of 1964
  two types of conduct that can constitute unlawful
  sexual harassment are harassment in which
  concrete employment benefits are conditioned upon
  acquiescence to sexual advances and harassment
  that does not affect economic benefits but
  creates a hostile working environment.
• Precautionary Steps - While standards are not
  clear, certain basic precautionary steps still
  serve to reduce the potential for employer
  liability
• Establish a comprehensive policy against sexual
  harassment
• Conduct supervisory training on a regular basis
• Implement a meaningful complaint procedure taking
  into account both the perspective of the
  aggrieved employee and the rights of the alleged
  harasser
• Investigate complaints promptly, thoroughly, and
  tactfully, and document the investigation
• Take appropriate remedial action in cases of
  proven harassment.

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Tax Exempt Status

• Churches and religious organizations like many
  other charitable organizations, qualify for
  exemption from federal income tax under IRC
  section 501(c)(3) and are generally eligible to
  receive tax deductible contributions. To qualify
  for tax-exempt status, such an organization must
  meet the following requirements
• the organization must be organized and operated
  exclusively for religious, educational,
  scientific, or other charitable purposes,
• their net earnings may not inure to any private
  shareholder or individual
• they must not provide a substantial benefit to
  private interests
• they must not devote a substantial part of their
  activities to attempting to influence legislation
• they must not participate in, or intervene in,
  any political campaign on behalf of (or in
  opposition to) any candidate for public office,
  and
• the organizations purposes and activities may
  not be illegal or violate fundamental public
  policy.

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Jeopardizing Tax Exempt Status

• To avoid violating the political campaign
  provisions of the law
• Do not use a rating program to evaluate
  candidates.
• Do not endorse a candidate, or a slate of
  candidates, directly or indirectly through a
  sermon, speech, newsletter, or sample ballot.
• Do not publish or distribute
• a candidates statement, printed or oral
  statements about the candidates, names of
  candidates who agree to adhere to certain
  practices, candidates responses to a
  questionnaire that is biased to certain issues
  or unbiased with regard to narrow range of
  issues.
• Do not raise funds for a candidate or provide
  support to a political party.
• Do not pay campaign expenses for a candidate.
• Do not provide volunteers, mailing lists,
  publicity or free use of facilities unless all
  parties and candidates in the community receive
  the same services.
• Do not display campaign literature on the
  organizations premises.

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Tax Exemption

• Tax exemption is a privilege that is not to be
  taken lightly
• Churches are generally exempt from federal income
  taxes without applying for this status
• Most non-church organizations must apply for
  federal tax-exempt status
• Churches and other non-profits may be subject to
  the unrelated business income tax
• Tax-exempt funds must not be diverted for
  personal use. This is called private inurement
  or benefit.
• Exemption from federal tax does not automatically
  provide exemption from state taxes such as
  property, sales, and use tax.

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Lesson 2 Insurance

• Property Insurance
• Crime Insurance Employee dishonesty coverage
  usually relates to employees but may be extended
  to volunteers such as a church treasurer or
  volunteers who handle the donations.
• Director and Officers Liability Insurance
• Disability insurance
• General Liability Insuranceumbrella liability
  policy may require general liability limit be 1M
• Liability Insurance for special events such as
  camps, sports, etc. should be provided with a
  specific endorsement under a general liability
  policy.
• Health Insurance
• Professional Liability Insurance-pastoral
  counseling covers both pastor and church
• Automobile Insurance
• Sexual act liability
• Travel and accident insurance
• Umbrella Liability Insurance
• Workers Compensation-not mandatory in Texas
• Insuring for risks

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Handling Your Insurance

• Engage the services of competent commercial
  insurance agents to help with risk and insurance
  management.
• Obtain two or three quotes for insurance coverage
  from different agents. Advantages include
• independent evaluation of total risk management,
  and
• securing the lowest cost for insurance.
• Review risk and insurance programs at least
  annually. If there is any significant change in
  the churchs building, staffing or program,
  increase the frequency of review.

17
Property Insurance

• Property Considerations
• Are property appraisals and related insurance
  coverage limits up to date?
• Are policies and procedures for facilities
  supervision and use up to date?
• Is handicap access and safety given special
  consideration?
• Is program use of the facility monitored by
  responsible members?
• Are entrances not needed for outside access
  locked?
• Are all exits void of obstruction and capable of
  use?
• Are fire warning and sprinkler systems in place
  and operative?
• Are mechanical systems regularly serviced and
  given restricted access?
• Are entrances monitored by video and authorized
  access security systems?
• Are criminal record checks done on church staff
  and volunteers before hiring?

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People and Programs

• People and Program Considerations
• Are policies and procedures for program
  supervision up to date?
• Are policies and procedure actually implemented
  and used for staff and volunteers?
• Are criminal record checks done on church staff
  and volunteers before hiring?
• Are staff and volunteers adequately trained, or
  have the necessary experience, for the services
  that they are providing?
• Do the parents of minor aged church program
  participants sign acknowledgement and release
  forms when their children travel to off-premises
  activities?
• Are more than one adult present with children at
  all times?
• Is workers compensation insurance in force?
• Is liability insurance in force with adequate
  limits?

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Fleet/Vehicle Considerations

• Fleet Considerations
• Are policies and procedures for fleet maintenance
  and use up to date?
• Are policies and procedure actually implemented
  and used for staff and volunteers?
• Are motor vehicle record checks done on church
  staff and volunteers before hiring?
• Do staff and volunteers have a chauffeur's
  license?
• Do the parents of minor aged church program
  participants sign acknowledgement and release
  forms when their children travel to off-premises
  activities?
• Are more than one adult present with children at
  all times?
• Is appropriate liability and collision insurance
  in force?

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Emergencies

• Emergency Considerations
• Are policies and procedures up to date
• Extreme weather conditions?
• Medical emergencies?
• Accidents?
• Communication protocols?
• Are policies and procedure actually implemented
  and used for staff and volunteers?
• Is appropriate liability, property, workers
  compensation and medical insurance in force?
• REMEMBER Insurance is NOT a substitute for good
  internal control.

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Latest Tax Law Changes Lesson 3

• Rules the IRS has set in place with regards to
  gifts of vehicles
• Mileage Rates for 2007
• Latest change with regard to Form 990

22
Contribution of Motor Vehicles, Boats, Planes

• The deduction for motor vehicles, boats, and
  airplanes contributed to charity for which the
  claimed value exceeds 500 will depend on how the
  donated asset is used by the charity. If the
  charity sells the asset without any significant
  use or improvement to it, the taxpayer's
  deduction is limited to the gross sales price
  obtained by the charity.
• The FMV of the asset based on comparable sales or
  appraisal does not apply.

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Key Note provide acknowledgement within 30
days of the sale of the asset

• If the charitable organization makes significant
  intervening use of or materially improves the
  asset, or if the organization sells the asset at
  a low price to a needy individual, the taxpayer
  generally may deduct the FMV of the asset.
• Additionally, a timely acknowledgement is now
  required. If the claimed value of the asset is
  more than 500, the taxpayer must have a written
  acknowledgement of the donation from the
  organization and must attach the acknowledgement
  to the tax return.
• The charitable organization should provide both
  the taxpayer and the IRS with the acknowledgement
  information.
• In announcement 2005-66, the IRS announced the
  availability of new Form 1098-C, Contributions of
  Motor Vehicles, Boats, and Airplanes, for use by
  donee organizations to report the contribution of
  qualified vehicles under the new provisions.
  Instructions for the new form are also available.
  Form 8283, Non-cash Charitable Contributions,
  and its instructions have also been updated.
• In IR-2005-149, the IRS reminded taxpayers about
  the requirement for a written acknowledgement of
  their vehicle donations. This news release also
  clarified that a charity need not sell the
  vehicle in 2005 in order for the donor who
  donated the vehicle in 2005 to receive a
  deduction for 2005.

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Mileage Rates

• Beginning Jan. 1, 2007, the standard mileage
  rates for the use of a car (including vans,
  pickups or panel trucks) will be
• 48.5 cents per mile for business miles driven
• 20 cents per mile driven for medical or moving
  purposes and
• 14 cents per mile driven in service of charitable
  organizations, other than activities related to
  Hurricane Katrina relief.

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Church School Free of Form 990Dont forget to
File Form 5578

• The IRS ruled that a separately-incorporated,
  church controlled private elementary and
  secondary school was exempt from federal income
  taxation as a result of its relationship with the
  church and was not required to file an annual
  information return (Form 990) with the IRS. The
  IRS noted that all tax exempt organizations must
  file a Form 990 each year, except for those
  organizations exempted by law. The tax code
  exempts an educational organization (below
  college level) that has a program of a general
  academic nature, and that is affiliated with a
  church or operated by a religious order. The
  tax regulations clarify that a school is
  affiliated with a church or a convention or
  association of churches. IRS Private Letter
  Ruling 100615027. A church does need to file
  Form 5578 a certificate of racial
  non-discrimination each year. The form is due by
  the 15th day of the fifth month following the end
  of the organizations fiscal year.

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Two General Rules for Charitable Gifts

• Two general rules that a church or religious
  organization needs to be aware of to meet
  substantiation and disclosure requirements for
  federal income tax return reporting purposes.
• A donor is responsible for obtaining a written
  acknowledgement from a charity for any single
  contribution of 250 or more before the donor can
  claim a charitable contribution on his or her
  federal income tax return.
• A charitable organization is required to provide
  a written disclosure to a donor who receives
  goods or services in exchange for a single
  payment in excess of 75.

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Written Acknowledgement

• The written acknowledgement should contain the
  following information
• name of the church or religious organization
• date of the contribution
• amount of any cash contribution, and
• description (but not value) of non-cash
  contributions
• In addition, the timely, written statement must
  contain one of the following
• statement that no goods or services were provided
  by the church or religious organizations in
  return for the contribution,
• statement that goods or services that a church or
  religious organization provided in return for the
  contribution consisted entirely of intangible
  religious benefits, or
• description and good faith estimate of the value
  of goods or services other than intangible
  religious benefits that the church or religious
  organization provided in return for the
  contribution.
• The church or religious organization may either
  provide separate acknowledgements for each single
  contribution of 250 or one acknowledgement that
  lists all the contributions.

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Gifts

• Cash and checks
• Stock
• Real Estate and interests in Real Estate
• Tangible personal property
• Other forms of property (ex. Auto)
• Accepting/declining gifts
• If a gift is given whereby the person is
  designated, the church should let the donor know
  that the gift cannot be considered tax
  deductible.
• If the church has control over the gift, then the
  contribution can be tax deductible. There is an
  extremely fine line between a personal
  nondeductible gift to a missionary (or other
  religious worker) and a tax deductible gift to a
  charity to provide funding for the ministry of a
  particular employee of the charity. The key is
  the intention of the donor to benefit the charity
  and the charitys discretion and control over the
  gift.

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Benevolence Fund Policy

• Contributions made directly by a donor to needy
  individuals are not tax deductible. If funds are
  raised on a case-by-case basis, it is likely that
  any donations made will not be tax deductible.
  To quality for a charitable deduction,
  contributions must be made to a qualified
  organization. The church needs to adopt a Good
  Samaritan/Benevolence fund policy. A Good
  Samaritan/Benevolence committee should be set up
  or the function of selecting needy donees can be
  assigned to another existing committee of the
  church. It is important that all of the
  decisions be made totally independent of donors
  suggestions and on the basis of need and other
  objective criteria. (IRS publication
  526-Charitable Contributions).

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Lesson 4 Audit Guidelines

• How important are internal controls? Extremely
  important.
• How big is the theft problem? Huge problem that
  has affected insurance policies.
• Who commits the crime? Anyone can.
• What are the components that may cause a crime?
  Components can be need and opportunity. The
  person may begin to rationalize the action.

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Lesson 3 An Annual Audit

• What is an audit?
• A local church audit is an independent evaluation
  of the financial reports and records and the
  internal controls of the local church by a
  qualified person or persons for the purpose of
  reasonably verifying the reliability of financial
  reporting, determining whether assets are being
  safeguarded, and whether the law, the Discipline
  and policies and procedures are being complied
  with.
• Why Audit?
• For the Discipline tells me so.

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An Annual Audit and Disclosure

• Who can Audit?
• The Book of Discipline does not define what a
  local church audit is. It does not, for example,
  say that an audit must be performed by a
  professional, or that it must conform to
  generally accepted auditing standards, or that is
  must be prefaced by the usual representations and
  caveats that auditing firms incorporate into
  their audits.
• Recommendations are to have a person who has some
  experience with accounting principles, who has
  the time to devote, and the initiative to follow
  through.
• Churches with annual receipts of about 300,000
  to 400,000 should seriously consider engaging an
  outside auditing firm to perform the audit.
• When to have an audit?
• An annual financial review should be done when
  the financial statement is prepared for year end.
  The Book of Discipline requires that this be
  done yearly.
• What does an audit do?
• An audit should independently verify the reports
  of the treasurer follow the money and test how
  it is treated at different steps document that
  donated and earned funds of the congregation have
  been used as stipulated by the donors.

33
Internal Controls

• Areas of concern that should be evaluated
• Cash controls
• Accounting controls (systems that reduce the
  possibility of loss or errors)
• Segregations of duties (assurances that more than
  one person is involved in critical steps in
  handling money so that there can be checks and
  balances)
• Reasonableness of systems and procedures in the
  light of all factors including the size of the
  church and its budget
• Adequacy of insurance coverage
• Systems for retaining and accessing meeting
  minutes that have financial implications (i.e.
  Finance Committee, Trustees, Charge Conference)
• Records that show donors stipulations for the
  use of gifts made to the local church.
• And in addition to the church, other groups with
  separate treasuries or bank accounts using the
  same tax id number as the church including for
  example, United Methodist Men, United Methodist
  Youth Fund, Church school, and others. The only
  exception is the United Methodist Women which
  should be audited but may be audited separately.

34
Internal Controls

• Other areas to check
• Is the correct employer identification number
  (EIN) on all accounts
• Are investments made only by authorized person
• Are authorized signatures with banks up to date
  and complete?
• Are payroll taxes being paid on time?
• Are computer software and data files backed up on
  a regular basis and are back-ups kept off
  premises?
• Are loan documents being read and complied with?
  
• Are reports from the treasurer, financial
  secretary and business manager, if any, to the
  finance committee accurate, timely and complete
  enough to provide necessary information for the
  committee to make prudent decisions?
• Is there a current inventory of fixed assets?
• Is there a policy on records retention?

35
Good Stewardship

• Conducting an audit is not a symbol of distrust.
  It is a mark of responsibility.
• It is good stewardship demonstrated for all to
  see.
• It is a message to the local church donors that
  you care about their gifts.

36
Resources

• Resources for this presentation have come from
  the General Council on Finance and
  Administration, the Internal Revenue Service, and
  financial books including Dan Busbys Church and
  Non Profit Tax and Financial Guide.
• Websites www.gcfa.org and www.irs.gov