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Can church use proceeds of property sale to pay staff retirement?

Your Legal Questions Answered

Can church use proceeds of property sale to pay staff retirement?

Can a nonprofit religious organization sell all of its assets, close the church, and then use the proceeds of the sale to pay its 40-year board members/employees as a severance/retirement package?

Although a church doesn’t have to file a Form 990 tax information return, the substantive tax rules apply to a church just as they do to other charitable organizations that have to report their activities to the Internal Revenue Service.  The lack of adequate retirement for nonprofit employees arises frequently unfortunately.

I am assuming you want to pay these directors/employees because they haven’t been paid much for their services, in some cases over nearly 40 years.  I am assuming that you aren’t considering it just because you want to share a windfall.  Sharing the windfall would not be permitted under general tax rules.

In the dissolution of a charity, the remaining net assets, after paying legitimate expenses, must be devoted to other charitable purposes.  It is hard to argue that directors, who are traditionally volunteers who have been paid nothing for their services, are entitled to payment when the organization dissolves.  It is hard to argue that there is consideration for the payment when they have never expected any payment and volunteered knowingly in the truest sense of the word.

The situation is slightly different with paid employees, who are often given “severance” payments when they conclude their employment, especially when laid off for the convenience of the employer without fault of the employee.  The total payment for the year must be reasonable, however, or you could be involved in an excess benefit transaction or a private benefit situation.  You probably can’t give a severance big enough to create a reasonable retirement fund because it would result in unreasonable compensation for the year.

For others who could learn from this situation, it is important to provide a retirement plan early so that you don’t have to face this situation so starkly when the underpaid employee (often the founder) leaves or the organization itself closes its doors.  It may seem hard to provide a retirement vehicle when you don’t have enough to pay very good salaries and the employees want as much as possible for their current expenses.  But ultimately they will reach retirement age and will be grateful to have something of a nest egg to provide for their needs when they are no longer able to work. 

We see the situation often, and there isn’t much we can do in the last year of employment to replace the fund that should have been growing (tax free) for the prior decades.  Responsible boards can avoid the situation by adopting a prudent employee retirement benefit for the protection of all.

Tuesday, August 23, 2022

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