Posted by: Christina Bell, CPA | February 8, 2016

Delaware Grant-in-Aid Update

Posted by Christina Bell, CPA

Grant-in-Aid Bill - Delaware CPA FirmWith recent and upcoming changes in Delaware grant-in-aid, it may be helpful for nonprofits to re-familiarize themselves with House Bill No. 230, commonly referred to as the Fiscal Year Ending June 30, 2016 Grant-in-Aid Bill,  and begin learning about anticipated changes to subsequent grant-in-aid bills.

Nonprofit organizations are eligible to apply for grant-in-aid appropriation once they have been incorporated and operating for a two-year period prior to June 30 of the fiscal year in which they are applying. For example, agencies who applied for fiscal year 2016 grant-in-aid must have been incorporated and in operation for at least two years prior to July 1, 2015. For fiscal year 2016, as in prior fiscal years, funding is paid in 4 equal installments beginning on July 1. Installment payments may be delayed or withheld for several reasons including, but not limited to, utilizing the funds for purposes not intended by the General Assembly and seizing operations. Additionally, as in prior fiscal years, it is the intent of the General Assembly that no grant-in-aid funds appropriated in fiscal years 2016 and 2017 be utilized by agencies to purchase capital equipment, relocate, rehabilitate, renovate, or purchase buildings.

Two significant sections of House Bill No. 230 are as follows and meant to increase agency accountability.

  • Section 7 – This section states that during fiscal year 2016, the Joint Finance Chairs and the Office of the Controller General will conduct random in-depth assessments of certain agencies awarded grant-in-aid. Assessments will include, but are not limited to, a review of the agency’s performance measures, program evaluation metrics, site visits, and meetings with Executive Directors and Board of Directors.
  • Section 31 – This section states that all grant-in-aid funding shall be maintained in a separate bank account and not co-mingled with any other funding. Upon request of the Controller General, agencies must provide bank statements showing all transactions using grant-in-aid funds.

John Baker of Delaware Alliance for Nonprofit Advancement (DANA) received clarification from the Controller’s office regarding these two items. The first clarification received was that if an agency receives grant-in-aid funds directly deposited electronically by ACH, the agency should transfer the funds to a separate account in a reasonable timeframe. In cases where the funds are combined with other sources to cover payroll or other program expenses, the agency simply needs to be able to show the transfers from the grant-in-aid account.  So an accounting journal entry may be: “Payroll transfer out of GIA Account to General Account for portion of payroll expense as described/approved in GIA Budget Application and Award.” Additionally, agencies must follow Generally Accepted Auditing Standards of the American Institute of CPAs (GAAS) for restricted grant accounting. The Controller General’s office also clarified with  John Baker that the random assessment will be focused on the performance measures and program evaluation proposed in the recipient agency’s application, not agency-wide performance measures and program evaluations; however, the random assessment will have the authority to look at all aspects of the agency’s operations. The full article written by John Baker describing grant-in-aid clarification can be found here

Fiscal year 2017 grant-in-aid applications were due November 2, 2015. It is the intent of the Joint Finance Committee (Committee) to review these applications and give consideration to the diversity of the agency’s revenues, including the percentage of revenues that are from the State via pass through, agency grants, or contracts. The Committee will also consider the percentage of an agency’s budget allocated to salaries and benefits.

It is further the intent of the Committee that all fiscal year 2018 applications require an audit prepared by a certified public accountant and issued within the past three years of the date the application is due. Currently, if an agency is unable to submit an audit they may provide a copy of their most recent financial statements and the reason(s) why they have chosen not to have them audited.

Understanding and familiarizing yourself with grant-in-aid changes can assist in ensuring all application criteria is met and reduce the risk for installment payments being delayed or withheld. Therefore, it is our recommendation that agencies take the time to thoroughly read House Bill No. 230 and all subsequent bills as they are signed into law.

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Posted by: Casey Hagy, CPA | December 22, 2015

Health Coverage Information Reporting Deadlines

Posted by Casey Hagy, CPA

Health Coverage - Delaware CPA FirmWith the end of the year approaching, it is important to be aware of reporting requirements your organization may be subject to under the IRS. Governmental and tax-exempt entities that are considered applicable large employers are subject to information reporting requirements under the Affordable Care Act. An applicable large employer for 2015 is an entity that had at least 50 full-time employees, including full-time equivalent employees, during 2014. You will need to determine the number of full-time and full-time equivalent employees for each month during the calendar year and then divide by 12 to see if you meet the criteria for an applicable large employer.

  • Full-time employee – For a calendar month, an individual employed on average at least 30 hours of service per week, or 130 hours of service per month.
  • Full-time equivalent employee – Calculated in the following two steps:
    • Combine the number of service hours of all non-full-time employees for the month up to 120 hours of service per employee.
    • Divide the total by 120. The result is the number of full-time equivalent employees for the month.

If you meet the criteria for an applicable large employer in 2015, you are required to provide statements (Form 1095-C) to employees who were considered full-time for at least one month of the year regarding the health coverage you offered or to show that you did not offer health coverage. These forms must be provided to employees by February 1, 2016.

Applicable large employers must also file the following information returns to the IRS:

  • Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns. This form is used to report summary information for the employer and to transmit Forms 1095-C to the IRS.
  • Form 1095-C, Employer-Provided Health Insurance Offer and Coverage. This form is used to report required information to employees and to report information about employees to the IRS.

These forms are due to the IRS by February 29, 2016, if paper filed, or March 31, 2016, if electronically filed.

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Posted by Casey Hagy, CPA

gift substantiation rulesIn September 2015 the IRS proposed regulations that would change the gift substantiation rules. Under the current law, donors that claim a charitable contribution deduction of $250 or more must obtain contemporaneous written acknowledgment (CWA) from the charitable organization. This CWA usually takes the form of a letter and must include the amount of the donation, a statement saying whether any goods and services were provided in exchange for the donation and, if applicable, a good faith estimate of the value of any goods and services provided by the donee. The current law also states that donors are exempt from their requirements to obtain a CWA if the nonprofit organization reports the donation to the IRS.

The proposed regulations attempt to implement a process through which nonprofit organizations can report contribution information to the IRS. The new regulations would permit, but not require, charitable organizations to file a separate information return with the IRS to substantiate contributions greater than $250. The new information return would require nonprofit organizations to obtain the donor’s name, address, and social security number. This form would be due to the IRS by February 28 and the organization would also be required to provide a copy to each donor by that date (but only the information that pertains to that donor).

The IRS is currently accepting written comments regarding their proposed regulations before they are adopted as final. The National Council of Nonprofits is encouraging nonprofit organizations to take action and submit comments to the IRS about the negative consequences this new rule could have on nonprofits. The following are a few concerns from the National Council of Nonprofits:

  • Donors may be hesitant to provide social security numbers, which could result in reduced charitable contributions.
  • The new process could impose significant costs and burdens on nonprofit organizations.
  • Increased identify theft issues.

The IRS is accepting comments from the public through December 16. Click here to gather more talking points from the Nation Council of Nonprofits and to submit your own comment.

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Posted by: Lou Volpe, CPA | September 16, 2015

Cash Rules Everything Around Me

Posted by Lou Volpe, CPA

Fundraising Activities - Nonprofit CPA FIrmThis is a common thought running through the minds of many controllers of not-for-profit entities, especially during times when fundraising events are being held.  These fundraising events are used to raise funds that support the organization and their programs and may make up a majority of the organization’s revenue stream.  Revenue from these events may include donations, tickets sales, auctions, concessions, and registration for walks.  Although more and more people are using debit and credit cards, cash still remains a popular form of payment, especially at walks.

In order to ensure that the cash at these events is handled properly, the organization should develop a specific set of cash receipt procedures for fundraising events.  These procedures should be disbursed to not only employees of the organization who are involved in the cash collection process at these events, but also to any volunteers that may be assisting.  Also, a copy of these procedures should be kept in the cash collection box or bag to serve as a reminder.

Procedures that will help to mitigate the risk of improper handling of cash for the majority of fundraising events include the following:

  • Utilize a log to document which employees and/or volunteers were in charge of a cash box or cash bag.
  • Keep a standard amount of start-up currency in each cash box or bag.
  • Require the employee and/or volunteer to sign the log indicating his/her agreement with the start-up amount when checking out the cash.
  • Do not allow commingling of personal money with donations.
  • Never utilize cash collections for last-minute purchases the day of the event.
  • Refrain from making change unless a patron has made a purchase/donation.
  • Each event’s collections should be documented via standardized forms. The forms should be remitted to the organization’s Finance Office, along with the physical cash collections, immediately following the event.
  • Accept checks made out to the organization only. Immediately endorse the checks with a restrictive endorsement payable to the organization.
  • There should never be fewer than two people in the same room or vehicle when the cash is either being counted or transported.
  • Two employees or volunteers should independently count the cash immediately after the event. The two cash counts should be compared to make sure the collections are counted properly.
  • Utilize lockable bank bags to secure cash bag and collections.
  • Consider tracking the average cash receipts per individual per event and investigate anything not meeting your expectation based on the average receipts per event.

Procedures for concession-type events:

  • Consider reconciling inventory to cash receipts.

Procedures for events with ticket income:

  • Use pre-numbered tickets.
  • Document all volunteers who were issued tickets and which numbers.
  • Reconcile tickets sold to cash received.

Procedures for events taking place over several days:

  • Collect funds daily and deposit to Finance Office.

Additional procedures would also include having the Executive Director, Controller, or Director of Events present at all events and having them transport the cash to and from these fundraising events.  As noted above, during the transportation of the cash, there should be no fewer than two individuals in the vehicle and the cash should never be left unattended. When not in use, the cash should be safeguarded and maintained in a safe located at the organization.  Limiting the number of volunteers who have access to the cash box or bag during the events will also to mitigate the risk of mishandling the cash.  During the events, the majority of cash handling should be done by the employees of the organization.

By implementing these cash receipt controls, the organization will help to establish a safe and appropriate method for the handling of cash at fundraising events.

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Posted by: Madison Gerdts | September 1, 2015

Treasuring the Mission – The Role of Board Treasurer

Posted by Madison Gerdts 

Board Treasurer Role - Nonprofit CPA FirmAs accounting professionals who specialize in nonprofit organizations, we’re often presented with opportunities to strengthen financial positions and, in turn, serve our communities both directly and indirectly. Few opportunities are more humbling than serving as a board treasurer. What may seem like a time-consuming task is truly one of the most rewarding ways to make a fiscal difference for an organization in which you’re often emotionally invested. What, though, is at the crux of this position?

A treasurer should possess a thorough understanding of financial reporting and procedures as the position often encompasses the task of serving as chair of the board finance committee. Some responsibilities of a finance committee include reviewing periodic financial statements, drafting and presenting an annual budget to the board, overseeing expenditures, monitoring compliance with covenants related to debt or grant funding, ensuring the completeness of the annual tax form (990), and assisting external accountants when undergoing review or audit procedures.

While a treasurer’s ability to contribute financial expertise is crucial, one should also be able to translate fiscal information and concepts to fellow board members who likely have little or no such knowledge. The ability to serve as a liaison between the board, finance committee, and accounting personnel will ensure fluid communication of inter-organizational goals, concerns, and ideas. Maintaining this channel allows the board’s treasurer and finance committee to adjust budgets and review their fiscal strategy for economic uncertainties with greater ease.

The success of a nonprofit organization can be largely determined by the passion of its board members and management personnel for the mission they so tirelessly work to achieve. This yearning to enhance the world around them, in conjunction with financial expertise, strong communication and leadership skills, and the ability to reconcile short-term strategy with long-term goals are all necessary attributes of a great treasurer. Likewise, it’s important to note that these qualities are often rooted in professional experience and strengthen over time.  At the commencement of your term, communications with the former treasurer(s) and the current engagement partner on the audit or review team, attendance at not-for-profit and governance seminars, and meetings with management and accounting personnel are sure to provide adequate insight as you settle into your new role.

Board service is a serious and demanding business, a reality that’s often obscured by the fact that the majority of nonprofit board members are volunteers. At times, you may find yourself going beyond your comfort zone and making tough decisions necessary to promote fiscal stability, but keep in mind that without spirited board members and the selfless giving of one’s talents and time, even the largest nonprofit organizations responsible for sparking the most significant movements and demands for change would crumble.  Above all, embrace your new leadership position and take pride in the impact you have on securing the future of a meaningful cause.

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Posted by: Christina Bell, CPA | August 18, 2015

Quid Pro Quo Contribution – What Your Nonprofit Should Know

Posted by Christina Bell, CPA

Quid Pro Quo Contribution - Nonprofit CPA FirmThe IRS refers to transactions in which the donor makes a payment partly in return for some type of goods or services (a benefit received) and partly as a contribution as quid pro quo contributions. Examples of quid pro quo contributions include fundraising dinners, benefit concerts, and sports events, where the price charged is substantially greater than the cost of the items. For all quid pro quo contributions over $75, the IRS requires that organizations provide donors with the estimated fair market value of the goods or services received by the donor in return for the contribution. This estimated value is important because charitable contributions are only deductible by the donor to the extent the donation value exceeds the value of goods or services received.

From an accounting perspective, nonprofit organizations should recognize the revenue earned from quid pro quo contributions in accordance with FASB ASC 958-225, as such organizations should report net amounts for its special events only if they result from peripheral or incidental transactions. Costs netted against receipts from peripheral or incidental special events are limited to direct costs. However, special events often are ongoing and major activities and therefore, revenues and expenses should be recorded gross on the statement of activities. Events are considered ongoing and major if they are normally part of an organization’s strategy and are normally carried on, or if gross revenues or expenses are significant in relation to the organization’s annual budget. FASB ASC 958-225 provides 3 separate options in displaying special event revenue from ongoing and major activities on the statement of activities. These 3 options are described below for the following scenario:

Scenario –

Nonprofit A sells 300 tickets at $100 per ticket for their annual fundraising dinner that is ongoing and a major activity. The fair value of each ticket is $75. In addition, Nonprofit A incurs $5,000 of other direct costs in connection with promoting and conducting the event.

Option 1:

Revenue:
  Special Event Revenue (Ticket Sales) $      30,000
Expenses:
  Fundraising Expense $        7,500

 

Option 2:

Revenue:
  Special Event Revenue (Ticket Sales) $       30,000
  Less: Costs of Direct Benefits to Donors          (2,500)
  Net Revenues from Special Events $       27,500
Expenses:
  Fundraising Expense $        5,000

 

Option 3:

Revenue:
  Contributions $      22,500
  Annual Dinner Sales           7,500
  Less: Costs of Direct Benefits to Donors          (2,500)
  Contributions and Net Revenue from Special Events $       27,500
Expenses:
  Fundraising Expense $        5,000

 

By being aware of both IRS and accounting reporting requirements nonprofit organizations can help ensure their compliance with each.

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Posted by: Casey Hagy, CPA | August 4, 2015

The AICPA Introduces the Not-for-Profit Certificate Program

Posted by Casey Hagy, CPA

Nonprofit Certificate - Nonprofit CPA FirmAs described in our earlier blog “The AICPA Introduces the Nonprofit Membership Section,” the AICPA has broadened their membership requirements for non-CPA associates and added a not-for-profit (NFP) section which allows non-CPAs to join the AIPCA and have access to numerous NFP resources. In an effort to strengthen this new NFP section, the AICPA recently launched the NFP Certificate Program. The Certificate Program is an on-demand learning experience that covers the essentials of NFP financial responsibility. There are four main sections to the program as listed below:

  • Introduction to Not-for-Profit Entities
  • Accounting and Financial Reporting
  • Tax Compliance
  • Governance and Assurance

The Certificate Program will benefit CPAs who perform NFP engagements, as well staff and board members at NFPs who wish to improve their NFP financial expertise. There are no prerequisites to complete this program, and the course totals 40 hours of eligible CPE credit.

For more information about the program, please visit NFP Certificate Program.

I will post an update after personally completing the Certificate Program. Stay tuned!

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Posted by Christina Bell, CPA

Delaware Alliance Nonprofits - Nonprofit CPA FirmThe Delaware Alliance for Nonprofit Advancement (DANA) 2015 Annual Conference was held on June 15th at the Chase Center on the Riverfront in Wilmington, Delaware. Over 900 nonprofit leaders and others within the industry attended to hear keynote speaker Mr. Jim Collins.  Mr. Collins has authored or co-authored six books that have sold in total more than ten million copies worldwide. They include: GOOD TO GREAT, a #1 bestseller, which examines why some companies and leaders make the leap to superior results, along with GOOD TO GREAT AND THE SOCIAL SECTORS. Jim’s presentation revolved around twelve questions which were designed to help efficiently access the full body of his work. Each question was listed in what Jim described as a highly effective sequence and included the corresponding reading from one or more of his books.

The three most valuable insights I personally took away from the discussion of these twelve questions were:

  • Commit to a 20-Mile March – Mr. Collins gave the example of imagining a man determined to walk across the United States, and how he could accomplish his goal faster by committing to walking 20 miles every single day, rain or shine, rather than walking for 40-50 miles in good weather and then very few miles or not at all during poor conditions. Mr. Collins’ research showed that great companies develop a plan, and then carefully and methodically follow that plan, focusing on long-term goals rather than changing course when circumstances change, whether for the better or the worse. For example, Southwest Airlines made it a goal to turn a profit every single year. While the airline industry as a whole lost money during the recession, Southwest achieved their goal, keeping themselves in the black for 30 consecutive years. As Mr. Collins explained in the book, GREAT BY CHOICE, Southwest did it through careful, consistent growth: “Southwest had the discipline to hold back in good times so as not to extend beyond its ability to preserve profitability and the Southwest culture. It didn’t expand outside Texas until nearly eight years after starting service, making a small jump to New Orleans. Southwest moved outward from Texas in deliberate steps — Oklahoma City, Tulsa, Albuquerque, Phoenix, Los Angeles — and didn’t reach the eastern seaboard until almost a quarter of a century after its founding. In 1996, more than a hundred cities clamored for Southwest service. And how many cities did Southwest open that year? Four.”
  • Practice the Stockdale Paradox – Admiral James Stockdale was held in captivity and tortured during the Vietnam War for eight years and had no reason to believe he would survive the prison camp. And yet, as Stockdale told Collins, he never lost faith during his ordeal: “I never doubted not only that I would get out, but also that I would prevail in the end and turn the experience into the defining event of my life, which, in retrospect, I would not trade.” Then comes the paradox: While Stockdale had remarkable faith in the unknown he noted that it was always the most optimistic of his prison mates who failed to make it out of there alive. “They were the ones who said, ‘We’re going to be out by Christmas.’ And Christmas would come, and Christmas would go. Then they’d say, ‘We’re going to be out by Easter.’ And Easter would come, and Easter would go. And then Thanksgiving, and then it would be Christmas again. And they died of a broken heart.” What the optimists failed to do was confront the reality of their situation. They preferred the ostrich approach, sticking their heads in the sand and hoping for the difficulties to go away. Mr. Collins and his team observed a similar mindset in the good-to-great companies. They labeled it the Stockdale Paradox and described it like so: “You must retain faith that you will prevail in the end, regardless of the difficulties AND at the same time you must confront the most brutal facts of your current reality, whatever they might be.” And, “What separates people is not the presence or absence of difficulty, but how they deal with the inevitable difficulties of life.”
  • What is Greatness? “Greatness is not a function of circumstance. Greatness, it turns out, is largely a matter of conscious choice, and discipline.”

Jim Collins’ presentation at the DANA’s 2015 annual conference was a great learning experience and I would encourage those within your organization to read over each of the twelve questions. Having the opportunity to participate in this once-in-a-lifetime speech is just one of the many benefits of being a member of DANA.

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Posted by: Christina Bell, CPA | July 6, 2015

The AICPA Introduces the Nonprofit Membership Section

Posted by Christina Bell, CPA

4579243797_183432f005_mIn an effort to better serve the nonprofit community, the AICPA’s governing Council voted to broaden Section membership requirements for non-CPA Associates. Those who have management or governance responsibilities with respect to a nonprofit, including those who serve as board members or as volunteers, are eligible to join the AICPA as a non-CPA Associate. Once you have joined the AICPA, you can join the Nonprofit (NFP) Section. Current Regular Voting, Associate, and International AICPA members are also eligible to the join the NFP Section.

The AICPA’s NFP Section is a centralized resource supporting NFPs and the professionals that serve NFPs, including managers, board members, and volunteers.  Its mission is to deliver information, tools, and resources that facilitate timely compliance with standards and regulations and promote the excellence of members as leaders in the NFP sector. Benefits of joining the NFP section include the following:

  • Timely communications covering breaking news. Section members receive e-alerts and access to interactive webcasts covering NFP trends, new guidance, and changes made by standard setters and regulatory agencies.
  • resource library which includes information such as sample financial statements and note disclosures, board governance resources and policy examples, and articles that relate to a variety of issues affecting NFPs.
  • Exclusive discounts on high-quality live and on-demand CPE-eligible courses on topics such as NFP accounting, auditing, tax compliance, and board governance The NFP Section also provides 4 free webcasts per year as a benefit. These webcasts are announced in the e-alerts and offered throughout the year.
  • Opportunities for peer-to-peer learning and information sharing, both online and in person
  • Special discounts on AICPA NFP products and resources including the new Nonprofit Certificate Program. The Certificate Program is designed for CPAs who perform NFP financial reporting and tax engagements as well as staff and board members at small and medium-sized NFPs. More information on the course such as its learning objectives and number of hours can be found on the AICPA website.

Membership costs to join the NFP Section is $199 annually in addition to the normal AICPA membership costs. We encourage you to visit AICPA.org to learn the NFP section and its potential benefits to your organization.

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Posted by: Lou Volpe, CPA | June 22, 2015

Top Hat Plans Viewed Through the Looking Glass

Posted by Lou Volpe, CPA

Top Hat Plans - Nonprofit CPA FirmAt one point the top hat was commonly found throughout American history and pop culture.  During the 19th century, it served as a symbol of freedom sitting atop President Abraham Lincoln’s head as he navigated our country’s Civil War.

During the 20th century, it was a staple of Uncle Sam’s attire as he recruited soldiers for both World Wars.  It even received fame among Disney fans as “The Mad Hatter” attending a tea party in the Adventures of Alice in Wonderland.  However, as we moved into the 21st century, the top hat began to take on a new form.  Instead of serving as a recognizable piece of history fashion or pop culture, it is now being used to describe nonqualified retirement plans that are limited to a select group of key employees and that are exempt from ERISA regulations, otherwise known as Top-Hat plans.

A specific type of Top-Hat plan which is beneficial to not-for-profit organizations is a non-governmental 457(b) deferred compensation plan.  Internal Revenue Code Section 457 provides tax advantaged treatment for certain nonqualified deferred compensation plans and requires that the plan sponsor either be a state or local government or a tax-exempt organization under IRC 501(c). These Top-Hat plans must limit participation to groups of highly compensated employees or groups of executives, managers, directors, or officers and may not cover rank-and-file employees.  Top-Hat plans may be formal or informal, and they need not be in writing.  While many plans are set forth in extensive detail, some are referenced by nothing more than a few provisions contained in an employment contract.  In either event, the form of a non-qualified deferred compensation arrangement is just as important as the way the plan is operated.

Non-governmental 457 plans must remain unfunded.  That means the plan assets remain the property of the employer and are not set aside for the payment of benefits under the Top-Hat plan.  Therefore, the plan assets are available to the employer’s general creditors in the event of litigation or bankruptcy.  A common form of practice for these plans is to use “rabbi trusts” to hold employee deferrals.  In this instance, the trust is funded, but the trust assets still remain available to creditors since employees are lower in priority than general creditors in the event of legal claims against the employer.

Contributions to 457(b) plans may include employee salary deferrals and employer contributions up to $18,000 in 2015.  The employee deferral contributions are reported on Form W-2 and are tax deferred.  Any earnings on the retirement money are tax-deferred to the participants as well, thus creating certain advantages for participating in these Top-Hat plans. Catch-up contributions for participants who are within 3 years of normal retirement age are available for both governmental and non-governmental 457(b) plans. These catch-up contributions allow eligible employees to contribute up to another full employee deferral limit with the amount limited to “unused” deferrals from previous years. However, an employee who already deferred the maximum in the 457(b) plan for all years of employment would not be able to use this type of catch up. In addition, the three year period must be continuous and must not include the year of retirement.  This double-limit catchup is available to both, governmental and non-governmental 457(b) plans.  However, the basic $6,000 catch-up contribution available to participants in 401(k), 403(b), and governmental 457(b) plans who are 50 years of age or older is not available in non-governmental 457(b) plans.

A special feature of the 457(b) plan is that they may be amended to allow designated Roth contributions and in-plan rollovers to designated Roth accounts.

Tax-exempt organizations have the ability to establish nongovernmental 457 plans as either eligible under IRC Section 457(b) or ineligible under IRC Section 457(f).  If the plan is established as ineligible under 457(f), the plan will be tax deferred and will allow contributions exceeding the annual deferral limit.  These plans and the associated deferrals are possible only if there is a “substantial risk of forfeiture.”  Once the risk is removed, the participant’s deferral amounts then become taxable.

In regard to filing and reporting, there are specific requirements that these plans need to follow.  IRC Section 457 plans are not required to file Form 5500 as they are not subject to Title I of ERISA.  In addition, nongovernmental 457(b) Top-Hat plans must file a notification of the plan’s existence with the Department of Labor.  There are also certain compliance issues that 457(b) plans may face.  Therefore, before you jump down the Top-Hat plan rabbit hole, please be aware of the following: failure to limit participation in a nongovernmental 457(b) plan subjects the plan to ERISA Title I funding requirements; nongovernmental 457(b) plans that must comply with the ERISA funding requirements will fail to satisfy IRC 457(b)(6), which provides that the plan must be unfunded; and contributions to a funded nongovernmental 457(b) plan are immediately taxable.

Ultimately, the advantages of establishing a nongovernmental 457(b) deferred compensation plan outweigh any limitations.  With these Top-Hat plans in place, state or local governments and tax-exempt organizations will be able to offer their highly compensated key executives the benefit of deferring their income until retirement, when in most instances, these participants will be in a lower tax bracket.  And just as the portrait of a top-hat-wearing Uncle Sam once recruited soldiers to war, these Top-Hat plans will assist organizations in recruiting qualified employees and will help them retain highly compensated key executives.

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