Church Benevolence Fund: Financial Controls and Governance Risks Every Growing Congregation Needs to Address

A church's benevolence fund is meant to help people in crisis: a family facing eviction, a congregation member with unexpected medical bills, someone who needs groceries to get through the week. It is one of the most tangible expressions of what a church is built to do.

It is also one of the easiest places for financial misconduct to occur, and one of the areas most likely to draw IRS scrutiny when controls are absent.

We have reviewed financial controls at growing churches across Massachusetts for years. Benevolence funds come up repeatedly in financial audits and internal investigations, not because churches have bad intentions, but because most benevolence funds were set up on good faith with almost no formal controls, and those controls never evolved as the congregation grew.

What Makes Benevolence Funds a Governance and Insurance Risk

Most church benevolence funds started informally. A pastor had discretion over a small reserve for emergency assistance. That worked when the fund held $500 and the pastor personally knew every recipient.

The problem is that churches grow and the fund grows with them, often without the governance structure keeping pace. A benevolence fund disbursing $30,000 to $50,000 per year out of a single-approver process run by the senior pastor is a meaningful governance risk. And governance risk translates directly into insurance risk.

Here is the specific insurance dimension: churches with Directors and Officers (D&O) coverage are protected when board decisions result in claims. But D&O policies typically cover board-level decisions made within documented governance processes. If a benevolence fund claim arises against the church, whether from a disgruntled employee, an IRS inquiry into private benefit, or an actual embezzlement investigation, and the fund operated entirely outside board oversight, the D&O carrier has a basis to dispute coverage.

We have seen this scenario play out. A church's D&O insurer denied coverage on a benevolence-related claim because the fund had no board resolution governing it, no written disbursement policy, and no documentation of who approved what. The insurer's position was that this was not a protected board decision at all; it was uncontrolled discretionary spending by a single staff member. Technically, they were right.

IRS Private Benefit Rules and Your Benevolence Fund

There is a specific IRS compliance dimension to benevolence funds that most church administrators are not aware of until someone raises a question.

The IRS permits tax-exempt organizations, including churches, to make charitable distributions from benevolence funds, but with conditions. The distributions must be made to people in genuine need based on objective criteria. They must not be made to specific individuals designated by donors (that creates a "donor-directed contribution" problem). And they must not provide private benefit to the church itself, its leaders, or their families.

The private benefit rule is where problems most often arise. If a senior pastor makes benevolence disbursements to family members of staff, to vendors who do church work, or to individuals in ways that look like supplemental compensation, the church's tax-exempt status can be challenged. The IRS has audited churches specifically over benevolence fund misuse, particularly in congregations that lack written disbursement policies and documentation.

This is not a theoretical risk for growing churches. It is a practical one that surfaces in audit and investigation contexts when controls were never put in place.

What Proper Benevolence Fund Controls Look Like

For any church distributing more than $5,000 per year from a benevolence fund, a basic governance structure should include a board-approved written policy defining eligibility criteria, maximum disbursement amounts per recipient per year, and authority levels for approvals.

A two-approver requirement matters. Any disbursement above a defined threshold, we typically suggest $500, should require two authorized approvers, not one. That threshold can be set wherever makes sense for your church's scale, but the principle is that no single person should have unchecked authority to move money from the benevolence fund.

Documentation requirements are essential. Every disbursement should have a written request or application describing the need, some form of verification (a utility shutoff notice, a medical bill, an eviction notice), and a record of who approved it and when. The documentation does not need to be elaborate. It needs to exist.

Churches should also prohibit disbursements to staff or immediate family members of staff, or at minimum require a separate committee approval process for any such exception. This is one of the clearest IRS private benefit risk areas, and a written policy that explicitly addresses it protects the pastor and the board from accusations.

Annual board review of all disbursements, even if the pastor has day-to-day authority, closes the accountability loop. The board does not need to approve individual disbursements, but it does need visibility into the pattern of how the fund is used.

Real Scenarios Where Missing Controls Created Problems

Three situations we have seen that illustrate how this plays out in practice.

In the first, a church administrator with check-writing authority over the benevolence fund began making disbursements to a fictitious recipient. Over 18 months, approximately $12,000 was diverted. When discovered, the church filed a claim under its employee dishonesty coverage. The insurer asked for documentation of the disbursement approval process. There was none. The administrator had sole, undocumented authority. The claim was disputed on the basis that the church had no reasonable controls in place.

In the second, a senior pastor made a series of genuine benevolence disbursements to a close friend's family during a real financial crisis. The amounts were generous, roughly $8,000 over six months. No other board members knew. When the finance committee reviewed the year-end report, questions arose. The pastor gesigned under pressure. The situation was referred to legal counsel for an IRS private benefit analysis. The church spent considerably more in legal fees than the original disbursements.

In the third, a long-term congregation member in financial distress received multiple disbursements over two years. The total reached $22,000. The church's accountant flagged it during year-end review as a potential private benefit issue. Again, legal counsel was engaged. The root problem in all three cases was the same: no written policy, no second approver, no documentation.

How to Assess Your Current Benevolence Fund Governance

Pull whatever written documentation exists for your benevolence fund and answer these questions honestly. Is there a board-adopted written policy governing how the fund works? Is there a second-approver requirement above any threshold? Does the policy explicitly address disbursements to staff or their family members? Are all disbursements documented with a description of need and an approval record? Does the board see a summary of benevolence fund activity at least annually?

If the answer to most of those is no, or if the documentation exists but was written years ago and has not been reviewed since, a governance cleanup is worth doing. It protects the pastor from accusations, protects the board from liability, and protects the church from IRS scrutiny. None of that requires making the process bureaucratic. It requires making it documented and accountable.

Frequently Asked Questions

Does church D&O insurance cover benevolence fund misuse?

It depends on how the fund was governed. D&O policies cover board-level decisions made within documented governance processes. If the benevolence fund operated entirely outside board oversight with no written policy and no second approver, a carrier may reasonably argue that the resulting claim falls outside the scope of covered board decisions. Formal board governance of the fund significantly strengthens your D&O coverage position.

Can a church benevolence fund disbursement affect tax-exempt status?

Yes. Disbursements that provide private benefit to staff, their families, or specific individuals directed by donors can trigger IRS scrutiny. Churches should have a written policy with objective eligibility criteria and maintain documentation of every disbursement demonstrating that distributions serve a charitable purpose, not a private one.

How much documentation does a church need for benevolence fund disbursements?

Every disbursement should have a written request describing the need, some verification of that need (a bill, a notice, a statement), and a record of who approved it. The documentation can scale with the size of the disbursement, but nothing should be approved with zero documentation. Amounts above $500 should have dual approval on file.

Should a pastor have sole authority over a church benevolence fund?

For a very small fund with minimal activity, pastor discretion with basic reporting may be workable. But any fund disbursing more than $5,000 per year should require a second approver for amounts above a defined threshold. Sole authority without oversight creates risk for the pastor, not just the church. Written controls actually protect the pastor from false accusations by establishing that every disbursement was authorized and documented.

Does church crime insurance cover benevolence fund theft?

Church crime and employee dishonesty policies cover theft by employees and volunteers, including misappropriation of restricted funds. However, carriers examine whether the church had reasonable financial controls in place. Complete absence of controls can be a factor in claim disputes, and some carriers include a "controls requirement" provision that conditions coverage on basic financial oversight practices being in effect.

What is the difference between a benevolence fund and a general discretionary fund?

A benevolence fund is specifically designated for assistance to individuals in need, typically with some eligibility criteria. A discretionary fund is broader and usually covers any unbudgeted expense at the pastor's or board's discretion. Both carry governance risk if they lack written policies and dual-approval controls. The IRS private benefit rules apply specifically to benevolence distributions, making documentation of charitable intent especially important for those funds.

If you want to talk through how your church's financial controls connect to your D&O and crime insurance coverage, we are glad to take a look. Benevolence fund governance gaps are among the most common things we find when doing a full risk review, and they are usually straightforward to address with a written policy and a second approver. Contact Hale Street Insurance at 978.712.0111 or support@halestreetinsurance.com for a free church insurance review. You can also visit our church insurance page or request a quote to get started.


Jake Lubinski is the founder of Hale Street Insurance and a licensed insurance broker with years of church board and stewardship experience. That time inside church operations gave him a clear view of how congregations end up carrying coverage that does not actually reflect how they operate. Based in Boxford, MA he works primarily with medium and large churches throughout Massachusetts and the US to build insurance and risk programs designed around how ministry actually operates. Reach Jake at jake@halestreetinsurance.com or 978.712.0111.


Related reading: Church Directors and Officers Insurance | Church Embezzlement Prevention and Financial Controls | Church Governance Gaps That Create Insurance Claims | Church Financial Oversight and Fiduciary Duty

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