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2 Major Mistakes to Avoid When Offering Group Disability Benefits for Churches

Most ministry organizations are not aware of the statistics around losing income from missing work due to sickness, accident or pregnancy.

The following are only two of the many telling and frightening statistics:

  • More than one in four of today’s 20-year-olds can expect to be out of work for at least a year because of a disabling condition before they reach the normal retirement age.
  • 5.6% of working Americans will experience a short-term disability (six months or less) due to illness, injury or pregnancy on average every year. Almost all of these are non-occupational in origin.

The quick solution many ministries take is to slap on an employer-paid group disability plan or maybe a voluntary plan that employees can choose to purchase through a payroll deduction. Typically the few who enroll in an employee paid plan do so because of a bad situation they observed a friend or family member go through.

To the peril of both employer and employees, not much thought goes into the details when providing group disability as part of an employee benefits program. This lack of attention to the details can be especially damaging when it comes to providing this vital benefit to employees of churches–especially ministers (or clergy if you prefer).

The Internal Revenue Code has unique rules when it comes to compensation for licensed, ordained, or commissioned members of the clergy. Housing allowance, self-employment and the ability to opt-out of Social Security are just a few examples.

How does this relate to group disability insurance for ministries? I’m glad you asked.

    PROBLEM #1:

    The ability for clergy to receive some of his or her remuneration as housing allowance can create a challenge with the definition of Covered Monthly Earnings (CME) in the group disability insurance contract issued by the insurance company to the ministry. Typically, housing allowance is not included in CME and would be devastating come claim time when a minister loses income due to a covered illness or accident.

    The impact of this can be especially painful when the majority of a minister’s pay is housing allowance in those geographic areas where housing costs are high. For example, a minster’s total monthly compensation of $7,000 could be a mix of $3,000 of salary and $4,000 of housing allowance. If the benefit pays 60% of pre-disability wages and CME does not include housing allowance, the minister would receive 60% of $3,000 or $1,800 per month. This is a mere 26% of the total monthly pay!

THE SOLUTION: Make sure your consultant understands how to structure a group disability policy that includes housing allowance in the definition of CME. Without it, the ministry organization could be exposed to huge liability issues and the employee is going to be in a world of hurt.

    PROBLEM #2:

    I have found most group disability policies are issued without the Cost of Living Adjustment (COLA). This can be a MASSIVE problem if an employee is unable to work for longer than a year.
    COLA protects against the shrinking purchasing power of a dollar due to inflation by providing an increase in benefit. Usually, it’s the lesser of the Consumer Price Index (CPI) or 3-4% each year.

    For example, without COLA, if your current monthly check received from the disability benefit was $6,000 and average inflation was 3% per year, in just eight short years, today’s $6,000 purchasing power is only worth $4,700. The money simply won’t buy what it once would.

    With COLA, if your monthly check received from the disability benefit was $6,000 and average inflation was 3% per year, in just eight short years, that monthly check would be $7,600! This would be extremely meaningful to the recipient and their family.

    I have had church clients with employees who experienced a debilitating illness or injury that couldn’t go back to work for many years. A few have never returned and will never work again. Without COLA, they would be going backward year-after-year in purchasing power.

SOLUTION: Don’t even think about not having COLA included in your group disability contract. The cost to include is minimal and the benefit is immeasurable.

This post could be much longer to discuss the issues of a minister’s self-employment status, opting out of Social Security, and in some states like California opting out of State Disability Insurance (SDI) as well as other details of constructing a contract, so it works the way it needs to.

It’s imperative you have housing allowance included in the definition of Covered Monthly Earnings. It’s imperative you include COLA in the contract. And it’s imperative you work with a consultant that understands these issues and knows how to create solutions that won’t leave your ministry or its employees exposed.

Want to learn more about the importance of offering disability coverage? Check out this recent post: Protecting What Matters Most by Offering Disability Benefits.


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