Posted by Christina K. Bell, CPA

Reporting of Services Rendered from Personnel of an AffiliateMy two young sons who live, eat, and breathe baseball often say the best baseball teams have two distinguishing characteristics — consistency and chemistry. The Financial Accounting Standards Board (FASB) believes the best financial statements have the same characteristics as well.

In April 2013, the FASB issued Accounting Standards Update (ASU) 2013-06, Not-for-Profit Entities: (Topic 958): Services Received from Personnel of an Affiliate. ASU 2013-06, effective for fiscal years beginning after June 15, 2014, clarifies how nonprofit entities recognize and measure services received from personnel of an affiliate to ensure consistency amongst financial statement presentations.

An affiliated entity is defined as a party that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with an entity. Many nonprofit entities are recipients of services performed on their behalf by personnel of an affiliated nonprofit. In some cases, the affiliated nonprofit will charge the receiving nonprofit for the services being performed. In these instances, the nonprofit receiving the services will recognize an expense based upon the amount they were charged; however, in other cases, the affiliated nonprofit will not charge the recipient for the services performed.

In these cases, the question was whether the recipient should recognize the value of the contributed services performed. Some nonprofits concluded that all services provided by an affiliate should be recognized within their financial statements, whether paid for or not, while others followed generally accepted accounting principles for recognizing contributed services. By following generally accepted accounting principles, contributed services were only recognized for those services that created or enhanced nonfinancial assets or required specialized skills, were provided by individuals possessing those skills, and would have been purchased if not provided by donation. As such, some nonprofits were not recognizing any services provided by an affiliate within their financial statements. ASU 2013-06 was enacted to resolve this diversity and ensure all services received by affiliated entities are being recorded consistently by receiving nonprofits.

ASU 2013-06 requires a recipient nonprofit to recognize all services received from personnel of an affiliate that directly benefit the recipient nonprofit. Those services should be measured at the cost recognized by the affiliate for the personnel providing those services (compensation and payroll-related fringe benefits). However, if measuring a service received from personnel of an affiliate at cost will significantly overstate or understate the value of the service received, the recipient nonprofit may elect to recognize that service received at either (1) the cost recognized by the affiliate for the personnel providing that service or (2) the fair value of that service.

ASU 2013-06 does not prescribe presentation guidance for the increase in net assets associated with services received from personnel of an affiliate other than prohibiting reporting it as a contra expense or a contra-asset. Therefore, it is reasonable to conclude that recipient nonprofits will record the increase in net assets associated with the services received as contribution revenue and report the corresponding decrease in net assets similar to how other such expenses are reported.

If you believe ASU 2013-06 applies to your nonprofit, consider coordinating with your affiliate’s management now to obtain the necessary accounting data in order to properly record the value of the services performed, because a little chemistry and consistency go a long way in preparing fair and accurate financial statements.

Contact Us

For additional information on Reporting of Services Rendered from Personnel of an Affiliate, or our nonprofit services,  please contact Belfint Lyons & Shuman at 302-225-0600, or click here to contact us.

Posted by: Maria T. Hurd, CPA | March 13, 2014

Does your ERISA 403(b) Plan need a financial statement audit?

Posted by Maria T. Hurd, CPA

403b Plan ChecklistChecklist for Counting Participants as of the Beginning of the Year

Many nonprofits who sponsor ERISA 403(b) plans are not aware that they need an audit, because counting participants involves much more than knowing how many full-time employees the organization has or how many account balances are in the plan. Especially in the case of nonprofit organizations, the universal availability rules and the ability to exclude certain contracts pursuant to DOL Field Assistance Bulletin 2010-1 add a layer of complexity that requires the employer to give careful consideration to the participant count.

To assist 403(b) plan sponsors in computing an accurate participant count as of the beginning of each year, we have created the following step- by-step checklist:

________ Enter Number of Forms W-2 issued in the Prior Year
+ ________ Enter Number of Terminated Employees With a Balance in the Plan
= ________ Total: If this total is greater than 120, please continue.
- ________ Subtract: <Excluded employees per the plan document as applicable>
- ________ 1) Number of employees who normallywork less than 20 hours per week:
a) For first year of employment, does the er reasonably expect the employee to work less than 1,000 hours
b) For subsequent years, if the employee worked less than 1,000 hour in the previous year
- ________ 2) Employees who had not met the plan’s eligibility requirements as of the end of the Prior Year
- ________ 3) Identify excludible contracts pursuant to DOL’s Field Assistance Bulletin as follows:
a) contract issued to a current or former employee before January 1, 2009
b) employer ceased   contributions and has no obligation to contribute to the contract before   January 1, 2009
c) the individual owner of the contract can exercise all rights and benefits under the contract without the employer’s involvement
d) the individual owner of the contract is fully vested in the contract or account
= ________ Subtotal: Total Number of eligible participants as of December 31st of the Prior Year
+ ________ Add: Newly Eligible participants whose entry date was January 1
= ________ Total:If this number is greater than 120, this plan definitely needs an audit for the plan year beginning January 1.
If this number is between 80 and 120 participants, please refer to our blog regarding the 80-120 rule

 

Each step on the list above results from specific legislation regarding the correct way for a 403(b) to count its participants as of the beginning of the year.  An accurate participant count is an important first step in determining whether an ERISA plan needs to attach audited financial statements to their Form 5500. Large ERISA plans must engage an independent qualified public accountant (IQPA) to audit the plan’s financial statements.  Most small plans are not required to have audited financial statements. For more detail on the rules affecting each step of this determination, please refer to our previous blog entries:

Counting Participants is not as easy as 1, 2, 3! – From The Art of the Qualified Plan Audit

403(b) Plans: Universal Availability Exclusions – From The Art of the Qualified Plan Audit

Field Assistance Bulletin No. 2010-01 – From the United States Department of Labor

A Nonprofit’s Guide to Navigating the ERISA Audit Requirements – From The Belfint Nonprofit Ledger

I don’t want to grow up, I want to be a small plan! – From The Art of the Qualified Plan Audit

BLS is available to assist any ERISA 403(b) plan sponsors who need assistance with this complicated determination. Contact me at 302.225.0600 or mhurd@belfint.com.

 

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Posted by: Maria T. Hurd, CPA | March 5, 2014

Counting participants is not as easy as 1, 2, 3!!!

Posted by Maria T. Hurd, CPA

Counting Plan ParticipantsIn a time when nonprofit organizations are facing higher demand for their services with fewer financial resources available to them, maintaining compliance with the ever-changing landscape of regulatory requirements is becoming increasingly difficult. As a result, it’s no surprise that we are seeing more and more organizations fall victim to noncompliance with DOL regulations regarding retirement plan audits.

Every year, we become aware of at least one organization that needs several years of plan audits because the participant count was not performed accurately. Inevitably, a plan official or service provider failed to count a group of participants that they did not THINK should be included. Unfortunately, the participant count is not a matter of opinion. For a defined contribution retirement plan, such as a 401(k) or a 403(b) plan, the rules are clear.  The number of participants reported on the Form 5500 must include:

1-Any employee who is ELIGIBLE to participate in the plan, regardless of actual participation

and

2-Terminated or retired employees who have left their account balance in the plan

In many cases, the preparer of the Form 5500 erroneously counts only participants whose accounts were allocated a contribution during the year, or participants who have account balances. Both methods are incorrect and result in an inaccurate participant count. In many cases, the understated participant count results in a small plan filing, when the plan is actually a large plan that would have been required to attach audited financial statements for the plan to the Form 5500.

Plan officials who annually submit census information to the plan’s third-party administrator should ensure that all employees are listed, including employees that are not yet eligible, and employees who are eligible but not participating. A good way to verify the completeness of the census information is to reconcile the number of employees listed on the census with the number of W-2s and/or K-1s. Reporting all employees is especially important for 403(b) plan sponsors such as schools, which may have a substantial number of employees who are eligible due to the universal availability rules, but who do not choose to make any elective contributions to the plan. Universal availability rules for 403(b) plans are discussed in a previous post in our Employee Benefit Plan Audit Blog, 403b Plans: Universal Availability Exclusions.

After ensuring that all employees are listed in the census, plan officials must make sure they submit a list of participants who have separated from service due to termination of employment, retirement, disability, or death, but still have an account balance in the plan. Once an accurate participant count is achieved, plan sponsors can refer to I don’t want to grow up, I want to be a small plan, also from our firm’s sister blog, to determine whether prior small plan filings need to be amended to attach a financial statement audit. If so, our blog archive includes several entries to assist with the selection of a qualified retirement plan auditor.

Contrary to popular belief, counting participants is not as easy as 1,2,3, but with practice, the process becomes much more intuitive and plan sponsors can file accurate Form 5500 information returns before learning the hard way as a result of an IRS or a DOL audit.

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Posted by: Scott G. Sipple, CPA | February 18, 2014

ACA Update: Final regulations announced regarding shared responsibility

Posted by Scott Sipple, Jr., CPA

On February 13, 2014, IRS has issued final regulations that provide guidance to employers that are subject to the shared responsibility provisions for employee health coverage under Code Sec. 4980H , which was enacted by the Affordable Care Act (ACA).

Companies with 50-99 employees that do not yet provide quality, affordable health insurance to their full-time workers will report on their workers and coverage in 2015, but have until 2016 before any employer responsibility payments could apply.  Thus, the aforementioned reporting requirements and responsibility payments, respectively, are extended for one year.

Posted by Scott G. Sipple, CPA

Employer Shared Responsbility When last we saw the Winter Olympics take place in Vancouver, Canada, Congress was putting the finishing touches on the 2,049 pages of legislation known as the Patient Protection and Affordable Care Act (PPACA) which President Barack Obama signed into law on March 23, 2010. Nearly 4 years later and 5,962 air miles away, Sochi, Russia is hosting the XXII Winter Olympic Games while the United States of America begins to enforce the provisions of PPACA on its constituents.

Even though the U.S. Supreme Court rendered a final decision to uphold the PPACA on June 28, 2012, plans were set in motion to change existing federal laws to comply with every intricate detail. Under PPACA, all nonprofit organizations (NPOs) are considered employers; to date, there are no exceptions. NPOs must evaluate whether they employ more than 50 full-time equivalent (FTE) employees; if so, they are subject to the Employer Shared Responsibility provisions and are required to offer health care coverage to full-time employees (and their eligible dependents).

Individuals with no previous health insurance coverage are mandated to enroll in the public or private exchanges by March 31, 2014. Those individuals are looking for guidance from their NPO employers as to whether health insurance coverage will be provided to the employees before going to the designated marketplaces.

Internal Revenue Bulletin 2012-41 provides guidance for employers to calculate the number of FTEs for its tax year. The basic criteria are as follows:

  • An employee who works more than 30 hours per week meets the statutory definition of full-time employee (at least 1,560 hours per year). Each full-time employee is recorded at 1.00 FTE.
  • An employee who works less than 30 hours per week is classified as either:
    • A variable hour employee (VHE): The NPO cannot determine that the employee is reasonably expected to work on average at least 30 hours per week. To determine the FTE fraction, per current guidance, take the total number of hours worked by the VHE for each month and divide by 120 separately; then, take the sum of the fractions and divide by the total months worked in the tax year (up to 12) to produce a weighted average for each VHE; finally, total all of the weighted averages for each VHE to produce total FTEs and add to the full-time employee FTEs (rounded down to nearest whole number).
    • A seasonal employee: A worker performs labor or services on a seasonal basis, as defined by the Secretary of Labor, including (but not limited to) workers covered by 29 CFR 500.20(s)(1)  and retail workers employed exclusively during holiday seasons. Normally, seasonal employees are omitted from the calculation; however, by statute, seasonal employees are not permitted to work more than 4 calendar months in a tax year; otherwise they would be considered VHEs and are subject to the calculation.

Unlike for-profit businesses, NPOs have the ability to solicit and utilize volunteers to carry out their missions. If NPOs, other than public agencies, provide benefits to their volunteers, such as stipends, pensions, housing or other tangible services, those volunteers will be deemed employees and will have to be evaluated for inclusion in the FTE calculation.

Even though the reporting provisions in PPACA for employers (Sections 6055 and 6056) take effect on January 1, 2015, and the first reports are due to the Internal Revenue Service in early 2016, NPOs should react to the changing environment by updating its internal control structure and documenting its position to mitigate the risk of noncompliance.

Contact Us

For additional information, BLS dedicates an entire section of its website, ACA Resource Center, for guidance regarding the PPACA. BLS also established an internal committee to interpret and discuss PPACA issues internally and externally. As always, please direct all questions and comments to your practitioner for clarification as it relates to your specific situation.

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Posted by: Saaib Uppal, CPA | February 4, 2014

990 Changes – Better Read Each One

Posted by Saaib Uppal, CPA

IRS Form 990 ChangesIn its latest “Exempt Organizations Update,” the Internal Revenue Service (IRS) listed significant changes to forms and instructions for the Form 990 series. Form 990, of course, is the required tax return for most tax-exempt organizations. It is an informational tax form and must be filed on an annual basis. If your organization is exempt from federal income tax under Internal Revenue Code section 501(a) and you are not exempt from filing, it is important that you remain up to date with these changes to ensure that your 2013 return is both accurate and in compliance.

The changes include those related to required documentation, terminology clarifications, information that must be reported, and more. The IRS-provided chart can be found here.

We recommend reviewing the chart and discussing any applicable topics with your CPA for clarification. Keep the consequences of not doing so in mind. The IRS has 990 changes, so be sure to read each one.

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Posted by: Saaib Uppal, CPA | January 24, 2014

Stipends to Host Families: To report or not to report?

Posted by Saaib Uppal, CPA

Host Family StipendsWith the January 31, 2014 deadline for furnishing Forms 1099-MISC to their recipients quickly approaching, independent schools have an important decision to make. The situation in question is in relation to stipend payments that are given to host families in a foreign exchange student program. Should those payments be taxable for the recipient host family? If yes, what due diligence should the school follow to make sure they have met all reporting requirements as well as communicated the tax implications to the above-mentioned families?

The first step is to decide if these stipends were paid in accordance with a qualified expense reimbursement program. In determining whether or not the expenses were paid in conjunction with an expense reimbursement program, the school must have in place a valid “accountable plan,” the requirements of which have been laid out in one of our previous posts 8 Tips for Running a Valid Accountable Plan. In general, under an expense reimbursement program, the host family submits proof of qualifying expenses to the school for reimbursement. The expenses are basically considered expenses of the school. The benefit to the host family of an accountable cost reimbursement plan is that the payments from the school to the family would not be classified as taxable income. It is important to note that being reimbursed for expenses paid for students living with you may preclude you from the charitable deduction available for such situations, which the IRS generally limits to $50 per month.

In most cases, independent schools do not have an accountable plan for reimbursing expenses paid for students living with you. There is currently no exclusion from taxable income for payments made by independent schools to host families, absent an accountable cost reimbursement plan. As a result, payments made to families under these circumstances would be taxable to the host family and the school should issue a Form 1099-MISC if total payments exceed reportable thresholds. As this can come as a surprise to the family, the school should send a letter to explain the purpose of the Form 1099 as well as recommend that the family talk to a CPA regarding proper reporting on their personal tax return.

With 2013 having come and gone, it would be difficult to qualify any stipend payments for this past year to as an expense reimbursement if a program was not already in place during the year. Therefore, schools should begin to prepare both the Forms 1099-MISC that must be sent out by January 31 and the letter that we recommend above. With the popularity of foreign exchange programs continuing to rise for independent schools, it may be time for schools to evaluate whether an accountable cost reimbursement plan covering expenses for students living with host families would be advantageous to adopt. The tax benefits extended to parents under this option may benefit the school by increasing the number of available host participants.

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Posted by: Christina Bell, CPA | December 17, 2013

Giving the Gift of Appreciated Securities

Posted by Christina K. Bell, CPA

Appreciated SecuritiesThe holidays are a great time for thinking outside of the box to find that perfect present for someone special. Many nonprofit organizations would like their donors to think outside of the box when making their end-of-year donations, specifically, contributing appreciated securities (stock, mutual funds and bonds) as an alternative to cash. Donating securities which have appreciated in value offer specific tax benefits to you and many nonprofit organizations have policies and procedures in place to easily and happily receive them.

So what are the benefits? First, when donating your securities which have appreciated in value, you are excluded from paying federal or state taxes on the capital gains. In addition, you may deduct the entire fair market value at the time of donation from your income taxes; however, this deduction is limited to 30% of your adjusted gross income and to 20% if the donation is being contributed to a private foundation. Amounts in excess of this limit may be carried forward for up to 5 years. Below is an example:

Jane Smith is in the 28 percent tax bracket and she owns securities currently valued at $30,000. She purchased these securities several years ago for $4,000. She contributes the securities to a qualifying 501(c) organization and takes a $30,000 charitable deduction. In addition to avoiding a $3,900 capital gains tax (15% of $26,000), Jane immediately saves $8,400 of federal income taxes (15% of $30,000). Thus her contribution only cost her $21,600 ($30,000 less $8,400 tax savings).

In order to receive these benefits you must be itemizing your tax deductions, have held the securities over a year, and the organization in which you are donating to must be a registered 501(c)(3) charity or qualified religious organization that can lawfully accept tax-exempt donations.

It is also important to note that individuals in higher tax brackets will experience greater benefits due to the savings experienced from higher capital gains tax rates. Capital gains tax rates are increasing from 15% to 20% for singles with taxable income over $400,000 and couples with taxable income over $450,000 in 2013. In addition, it should not be overlooked that if you are carrying a security at a loss, meaning it is worth less now than what you originally paid, it is more beneficial to you to first sell the stock and then donate the proceeds to charity since the sale would trigger a capital loss.

Before making a decision to liquidate securities it is advisable to consult with your tax accountant to fully understand all applicable IRS codes and regulations.

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Posted by: Chris Ciminera | November 14, 2013

A Nonprofit’s Guide to Navigating the ERISA Audit Requirements

By Christopher J. Ciminera

Navigating ERISA Audit RequirementYou are a nonprofit and your organization has a Code section 403(b) retirement plan, but is an independent qualified plan audit required to be attached to the 5500 filing? Let’s look further into the requirement of a retirement plan to attach an independent qualified plan audit to the 5500 filing.

First, the organization should determine whether its plan is covered by ERISA. If it is covered by ERISA, then the plan may have to file a 5500. If not, then the plan doesn’t need to file a 5500, and does not need a retirement plan audit.  Plans not covered by Title 1 of ERISA are:

  • deferral only, tax-deferred annuity 403(b) plans in which the employer has limited involvement as described in Field Assistance Bulletin (FAB) 2010-01
  • federal, state, or local government plans, including plans of international organizations
  • certain church or church association plans
  • plans maintained solely to comply with state workers’ compensation, unemployment compensation, or disability insurance laws
  • plans maintained outside the United States primarily for non-resident aliens
  • unfunded excess benefit plans maintained solely to provide benefits or contributions in excess of those allowable for tax-qualified plans.

Additional Plan Criteria

If the retirement plan is covered by ERISA, there are additional criteria to consider. Let’s discuss the terms “large plan” and “small plan,” which determine if an audit is needed with the 5500 filing. If your plan is a “large plan,” then you may need to have an audit performed on your retirement plan. Generally, a “large plan” filer is an organization that has a retirement plan that benefits 100 or more participants at the beginning of the plan year. On the other hand, a “small plan” generally benefits fewer than 100 participants at the beginning of the year. An important definition to consider is the definition of a participant, as reported on Line 5 of the Form 5500, including:

  1. active participants (employees eligible to participate in the plan, regardless of whether they are actively contributing to the plan)
  2. retired or separated participants receiving benefits (a retired or separated employee receiving distributions from the plan)
  3. other retired or separated participants entitled to future benefits (a retired or separated employee entitled to receive distributions from the plan)
  4. deceased individuals who had one or more beneficiaries who are receiving or are entitled to receive benefits under the plan.

ERISA Audit Exceptions

Now, let’s discuss the exceptions to the “large plan” and “small plan” rule above. The first exception to the 100 participant rule is the 80-120 participant rule. The 80-120 participant rule states that you may elect to file as the type of plan you filed in the previous year if your retirement plan benefits between 80 and 120 participants on the first day of the plan year. For example, an organization’s retirement plan had 99 participants in the prior year and filed as a “small plan.” As of the first day of the current year, the organization’s retirement plan benefits 120 participants. In the current year, the organization may elect to file as a “small plan.” In subsequent years, the organization may continue electing to file as a “small plan” each consecutive year that it does not exceed the 120 participant mark. Once the organization’s retirement plan benefits over 120 participants on the first day of the plan year, then the plan must file as a “large plan” and must attach an independent qualified plan audit to its 5500 filing. For further information please refer to ‘I Don’t Want to Grow Up, I Want to Be a Small Plan’ from our Employee Benefit Plan Audit Blog.

There is one other exclusion, specifically for 403(b) plans, that the Department of Labor provided relief. 403(b) plan sponsors can choose to exclude pre-2009 contracts from the participant count if they meet the following criteria:

  1. the contract or account was issued to a current or former employee before January 1, 2009
  2. the employer ceased to have any obligation to make contributions (including salary reduction contributions), and in fact ceased making contributions to the contract or account before January 1, 2009
  3. all rights and benefits under the contract or account are legally enforceable against the insurer or custodian by the individual owner of the contract or account without any involvement by the employer
  4. the individual owner of the contract is fully vested in the contract or account.

In conclusion, after determining if the plan is covered by ERISA, an organization must determine how many participants its retirement plan is benefiting by counting all active participants, including retired or separated participants and their beneficiaries who still have an account balance in the plan, but excluding any pre-2009 contracts meeting the criteria above for these participants if the plan sponsor elects to exclude them. The resulting number of participants is then used to determine if the plan is classified as a “large plan” or “small plan” filing, keeping in mind the 80-120 exception.

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Posted by: Casey Foulk | September 18, 2013

The Importance of Having a Strong Nonprofit Board

TogetherWeCan1Have you ever wondered how many nonprofit organizations there are in the United States? Over 1.5 million! Having a strong Board is crucial for the survival of these organizations. When it comes to nonprofits, there is so much at stake and the Board members have a deep responsibility to safeguard the mission and sustain their respective organizations.

One of the hardest parts of building a strong Board is selecting the right Board members. Start with your needs. Create a method to evaluate the Board composition in relation to your organizational needs and structure. When considering potential members, ask yourself, “Do their skills fill the gap?” Also be sure that they are passionate about the organization’s mission and will help fulfill it. The Board should encompass a variety of skill sets, for example: finance, marketing, personnel management, consumer of your services, or expertise in your mission field.

The Non Profit Times believes the following are 7 important qualities of Board Members:

  • § Integrity
  • § Independence
  • § Mature Confidence
  • § Corporate Manners
  • § Sense of Context
  • § Courage
  • § Commitment

Take a look at your current Board members. Do they demonstrate these characteristics?

Once you have selected your Board members, it is important to establish clear guidelines and expectations. When new members join the Board, they should know exactly what they signed on for. This includes their responsibilities, time commitment, term limits and what kind of fundraising they will be expected to do. Clear guidelines for giving should be established – you don’t want to ask the public for donations if your Board members aren’t even contributing. Because these members will essentially be ambassadors for the organization, make sure they understand the mission, vision, and values of the organization. Provide new members with a handbook that could include prior year Board minutes, budgets, strategic plans and development calendar.

Once clear guidelines and expectations have been established, it is important to keep the Board members involved. No one should be asking themselves, “What am I doing here?” As a collective group the Board should be handling big decisions, legal matters, financial matters, fundraising and planning. As individuals, members should advise, volunteer, serve as ambassadors, etc. A good way to keep them involved is to have them mentor members of the organizational staff. Match their skills to the skills of the staff and develop a mentoring program. This will add value to the organization and establish good will with the team.

Developing and keeping a strong nonprofit Board is crucial for the survival of nonprofit organizations all across our country.

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