Monday, February 11, 2019

Compensation Planning

Building the Basic Foundation - Part 2

Building off the first four blocks of compensation planning discussed in my post of February 4, 2019, we continue our discussion with a look at the last four basic blocks in compensation planning.  

Building Block #5 – Identify What Is or Can Be Provided

Many nonprofit organizations do not take the time to inventory benefits provided to employees or benefits that may easily be provided.  Compensation is more than just an employee's paycheck.  An organization must think broader than just the amounts in the paycheck. Often there are noncash benefits provided or that can be provided.  For example, dependent care provided through a nonprofit's daycare operation is a noncash benefit.  Other benefit opportunities are available through the establishment of benefits plans, such as an educational assistance plans to provide for employees’ extended education and training, or through benefit plans available offered by national organizations, such as church denominational programs. The benefits provided or considered should assist an organization in meeting its goals defined in building block #4.

Building Block #6 – Valuation of What is Provided to Employees

Since compensation is often related to the paycheck, it is easy for nonprofit organizations to forget to value other aspects of the compensation package.  This oversight may cause organizations to run afoul of the reasonable compensation amounts determined in building block # 3.  Organizations may determine an amount of reasonable compensation, but then only compare it to the regular cash salary paid.  Reasonable compensation encompasses all of what is provided to employees and not just cash salary.  Therefore, value the benefits provided, both the cash and noncash benefit programs.  After the valuation has been accomplished, then it's total can be compared to the amount determined as reasonable compensation in building block #3.

Building Block #7 – Write It Down

Failing to document processes, procedures and decisions, is one of the greatest weaknesses in the compensation process performed by nonprofit organizations.  One of the first documents requested in an IRS examination are the board minutes for the organization to verify the documentation to the executives’ compensation packages.  For religious organizations, a minister’s housing allowance must be documented in writing prior to its being paid to the minister.  Documentation of compensation decisions provides authorization for the compensation, including benefits, to be provided to employees. Without documentation, it may be asserted that the compensation was not authorized.  Unauthorized compensation may create inurement of benefit, potentially threatening an organization’s exempt status, or creating excess benefit transactions, potentially resulting in excise taxes.

Building Block #8 – Set Up the Payroll Correctly

A few years ago, the IRS instituted a payroll tax compliance initiative and audited 6000 for-profit and nonprofit organizations.  The initiative resulted from the IRS’ frustrations that  Forms W-2 only reflect the amounts paid through the regular paycheck functions of organizations omitting other taxable benefits provided to employees.  When nonprofit organizations are examined by the IRS, significant time and attention is spent reviewing operations for unreported taxable benefits provided to employees.  Once building blocks #5 and #6 are a part of the compensation planning process, evaluate the taxation of each element of the compensation package and then appropriately adjust the payroll system to properly report taxable compensation.  Taxation of benefits depends on many factors.  Great care should be taken to address all the factors regarding the taxation of any specific benefit including any requirements for written plan documents or nondiscrimination requirements.

Summary

Compensation planning can be complicated.  Organizations should, at a minimum, address the eight factors discussed in these two blog discussions creating policies and procedures to embody the concepts and objectives. There are many excellent resources for compensation planning, and nonprofit organizations have access to more resources than ever before.  However, even with available resources, organizations may still struggle getting a compensation structure in place properly.  Two resources associated with this author are PPC's Nonprofit Tax and Governance Guide:  Helping Organizations Comply available at https://store.tax.thomsonreuters.com/accounting/Audit-and-Accounting/PPCs-Nonprofit-Tax-and-Governance-Guide-Helping-Organizations-Comply/p/100201592 and Christianity Today's Church Compensation: From Strategic Plan to Compliance available at https://store.churchlawandtax.com/church-compensation-from-strategic-plan-to-compliance/.  

Monday, February 4, 2019

Compensation Planning

Building the Basic Foundation - Part 1


Virtually all organizations face a lot of moving parts and pieces in establishing compensation plans for employees, but nonprofit organizations face even more considerations in the planning process.  In 2012, this blog presented a series of posts related to compensation planning and covered many of the planning considerations.  This presentation summarizes some of the most important aspects of creating a strong foundation for handling compensation processes in organizations of all sizes. 


There are eight basic blocks to building a nonprofit organization's foundation for compensation planing.  Four of the blocks are presented in this post with the other four presented in a future blog:

Building Block #1 – Define the Decision Makers

Approval of compensation plans is critical for many positions in nonprofit organizations.  Therefore, all organizations should know who makes decisions on compensation plans and who approves any changes or unusual transactions during the year.

It isn’t enough to define the decision makers.  Consider any potential conflicts of interest that may exist in the decision-making process.  For individuals defined as “disqualified persons” under IRC Section 4958, it is critical that the decision makers are independent of the person being compensated.

Building Block #2 – Define the Position

No one enjoys the tasks of creating job descriptions, but a strong job description is a valuable building block in the foundation for compensation planning.  Job descriptions should describe the duties to be performed and the criteria and qualifications required of the person holding the position.  It is also a good place to define the position for wage and hour rules.  For religious organizations, clarify if the position qualifies under the DOL’s ministerial exception or as a minister under the IRS rules and regulations.  The job description is the first document requested by either of these regulatory agencies to support these positions.  If the position should qualify as ministerial for the IRS, the job description should require ministerial credentials as a part of the position's qualifications.

Building Block #3 – Know the Compensation Limits for a Position

While all organizations should not pay more than “reasonable” compensation, this requirement is even more important in compensation planning for nonprofit organizations.  The payment of unreasonable compensation can be cause for the revocation of an organization’s tax-exempt status and/or the assessment of excise taxes against individuals.   Reasonable compensation can be determined through salary surveys, comparison with other similar organizations and/or using an outside compensation expert.

Building Block #4 – Determine the Goals of the Compensation Package

Funds in nonprofit organizations are often stretched thin.  The result is compensation packages may be below market value for the position and fringe benefit plans may be limited.  However, it is important that nonprofit organizations see compensation planning as more than just the paycheck.  A nonprofit organization should acknowledge the varied needs of its employees and determine what is important for the organization to provide.  Organizations should consider if they desire or intend to provide for benefits such as health benefits, retirement needs, educational programs or dependent care programs. 

Summary

There are many excellent resources for compensation planning.  Nonprofit organizations of all types have access to more resources than ever before.  However, even with all of the resources, organizations still struggle getting a compensation structure in place properly.  Two publications associated with this author are PPC's Nonprofit Tax and Governance Guide:  Helping Organizations Comply available at https://store.tax.thomsonreuters.com/accounting/Audit-and-Accounting/PPCs-Nonprofit-Tax-and-Governance-Guide-Helping-Organizations-Comply/p/100201592 and Christianity Today's Church Compensation: From Strategic Plan to Compliance available at https://store.churchlawandtax.com/church-compensation-from-strategic-plan-to-compliance/.  

For the final four building blocks in building a solid foundation for an organization's compensation process see next week's blog. 


Monday, January 21, 2019

Does Your Organization Need to Pay the “Parking Lot" Tax?

Insights on new guidance from the IRS.

Concerns and questions arose last year regarding an obscure provision in the Tax Cuts and Jobs Act of 2017—a provision requiring nonprofit employers pay an unrelated business income tax for expenses associated with qualified transportation fringe benefit plans provided to employees.

Controversy arose surrounding the legislation in regard to its application to parking lots naturally associated with the nonprofit's facilities.  Legal and accounting experts differed on how the so-called “parking lot tax” would work, and how the Internal Revenue Service would interpret and implement the new provisions.  The uncertainty was eased—albeit temporarily—when interim guidance was issued in late December.

The IRS has provided its initial interpretation of the new law, which may foreshadow its ultimate position when it eventually provides permanent guidance. The good news: many nonprofits, including most churches, will not face this tax. The bad news: some nonprofits and churches will. The guidance provides a four-step process for determining whether your organization’s or church’s parking situation will still trigger this tax. 

The Four Steps

In IRS Notice 2018-99, the IRS provided the recommended analysis.  The recommended analysis encompasses 4 steps, but many organizations may stop the analysis after the second step. 

Step 1:


Determine the number of spaces specifically reserved for the organization's employees. The expenses related to these spaces create unrelated business income.

Example: An organization has 500 parking spaces and designates 50 parking spaces exclusively for employees, then 10 percent of the expenses associated with the parking lot will count as unrelated business income. (For organizations desiring to avoid this automatic potential for taxable income, the IRS is allowing employers to remove the reserved space designation as late as March 31, 2019, and the IRS will consider it retroactive to January 1, 2018.) 

Step 2: 

Determine the spaces not specifically reserved for any staff members. If at least 51 percent of the remaining spaces in the parking lot are available to the general public, then all the remaining spaces are considered as utilized for the general public.  Expenses related to those spaces do not create unrelated business income.  For churches, the spaces available to their attendees are classified as general public use, even if they are unoccupied most of the time.

Example:  A museum has 400 parking spaces available in its parking lot.  None of the spaces are specifically reserved for any employees, but employees may utilize any of the 400 spaces.  An analysis indicates the museum has 100 employees regularly using the parking spaces.  The remaining 300 spaces are available for the general public, including the organization’s visitors or members.  Since the 300 spaces for general use are at least 51 percent of the total spaces, none of the expenses associated the parking lot are included in unrelated business income.

Example:  A church’s denominational offices have a parking lot with 100 parking spaces.  Regularly, 75 of the spaces are utilized for the denomination’s employees.  The remaining 25 of the spaces are available for the few visitors that may come to the denomination’s offices.  Since more than 50% of the parking spaces are used by employees, a portion of the expenses associated with the parking lot are included in unrelated business income and the organization must proceed to Step 3 of the process. 

Step 3:

If it is determined in Step 2 that the parking spaces are not primarily used for the general public, then determine the number of spaces specifically reserved for non-employee use. For example, reserved non-employee spaces include spaces reserved for visitors and customers. The expenses related to these spaces do not create unrelated business income.

Example:  The denominational offices have a parking lot with 100 parking spaces, and it has 10 spaces that are specifically reserved for visitors and are not available to employees.  When the expenses are analyzed, 10 percent (10/100) may be excluded from unrelated business income.  

Step 4:

If it is determined in Step 2 that the parking spaces are not primarily used for the general public, then it must be determined what expenses will be allocated to the employee spaces. The organization may use an actual number of spaces and number of days the employees use the parking spaces, or it may adopt any reasonable method to determine this usage on a typical day. The employee usage is multiplied by the actual parking expenses to arrive at the unrelated business income amount.

Example: An organization has 500 parking spaces and regularly has 300 employees utilizing parking spaces. Since this is the typical use of the parking lot, then the organization may treat 60 percent of its total parking expenses as unrelated business income. 

Comprehensive Example:

A church’s denominational offices are in an office building owned by the organization.  The organization’s parking lot has 150 parking spaces.  Ten of the spaces are reserved for key staff members.  Ten of the spaces are specifically marked for visitors and the remaining spaces are available for employees or other general public use.  The denominational office employees 85 people that utilize the parking lot regularly during the normal work week.  In 2018, the organization spent $5,000 on general maintenance and upkeep of the parking area.

Step 1:  The 10 spaces specifically reserved for the key staff members represent 6.67% of the parking spaces, so $333.50 (6.67% of the $5,000) must be included in unrelated business income. 

Step 2:  The remaining 140 spaces are analyzed to see if more than 50% are utilized for the general public.  10 spaces are reserved for visitors, so these 10 are used by the “general public”.  Of the remaining 130 spaces, 85 spaces (65%) of the spaces are used by employees.  Since the employee-use is more than 50% of the spaces, a portion of the remaining parking lot expenses must be included in unrelated business income.

Step 3:  Before determining the remaining expenses included in unrelated business income, expenses may be allocated to the parking spots specifically reserved for visitors.  There were 10 visitor spaces, so 6.67% or $333.50 of the expenses are allocated to these spaces and are not included in unrelated business income.    

Step 4:  After allocating expenses to the internally reserved spaces (Step 1) and to the visitor spaces (Step 3), it is determined what expenses are allocated to the employee used spaces.  While there may be more difficult or extensive calculations, the easiest is to determine the percentage of the employee used spaces (85) to the total spaces available in the parking lot (150) and allocate 56.67% (85/150) of the expenses to the employee spaces or $2,833.50. 

The organization must report as unrelated business income the $2,833.50 (Step 4) plus the $333.50 (Step 1) for a total of $3,166.50 reported on Form 990-T as unrelated business income.

Reporting the Unrelated Business Income

Form 990-T is required if unrelated business income amount is $1,000 or more during the year. The return is due 4 ½ months after the end of the organization/church’s fiscal year.  For organizations with a calendar year end, a return is due May 15, 2019 to report taxable expenses incurred in 2018.  If a church has another source of unrelated business income, a loss from the other source may be netted against the income created through this provision and reduce the tax due.

Summary

Many organizations may discover they have an expected filing obligation.  The IRS’ interpretation took unexpected turns and created an analysis not anticipated by most tax professionals.  Even as this information is presented, there are actions underway to repeal the provision.  However, despite broad bi-partisan support, the repeal has not occurred.  Organizations should plan to perform the above analysis and timely file Form 990-T until a repeal of the law is finalized.

My thanks to Frank Sommerville, JD/CPA for his contribution to this blog post, as it represents our combined efforts to sort through and analyze the requirements of this new provision.  The above information is adapted from an article that first appeared on Christianity Today’s ChurchLawAndTax.com. Used with permission.  Frank and Elaine Sommerville both serve as editorial advisors for ChurchLawAndTax.com. Elaine is also the author of Church Compensation: From Strategic Plan to Compliance (2018, Christianity Today).


Monday, April 9, 2018

Unrelated Business Income - More Than Income These Days

The tax-exempt community has long been immune from many of the tax provisions meant to raise tax revenue from the business community by determining certain expenses are not tax deductible.  For example, businesses may deduct only 50% of the amount spent on business meals and certain expenses for business autos may be limited.  Since tax-exempt entities do not calculate tax on their regular operations, these rules have never affected them.  

The Tax Cuts and Jobs Act of 2017 (the Act) provides lower tax rates on business activities, but it also reduces several deductions for various business expenses.  One of the deduction eliminated by the Act is the elimination of deductions for expenses paid by an employer for qualified transportation fringe benefits provided to employees. 

Qualified transportation fringe benefits, defined by Internal Revenue Code (IRC) Section 132(f), include: 
  • Commuter transportation in a commuter vehicle; 
  • Transit passes; 
  • Qualified parking at regular work facilities; and 
  • Qualified bicycle commuting reimbursement.
Prior law allowed these benefits to be provided to employees, within certain limitations, tax-free and allowed the employer to deduct the costs of the benefit.  Therefore, the benefits were a win-win for the employer and the employee. The Act still allows for an employer to provide the benefits to employees tax-free, but the employer may no longer deduct the cost of the benefit for federal income tax purposes.  (Since most state tax laws follow federal tax law, the expenses are also not deductible for state income tax purposes.)  

How does this affect the tax-exempt community?  The Act also enacts a new provision for unrelated business taxable income creating a taxable event when a tax-exempt employer pays these same expenses for its employees.  Since other employers will pay tax on the costs of the benefits through the disallowance of the deduction for the benefit, the tax-exempt employers will join them in paying tax on the costs. IRC Section 512(a)(7) now states that any expenses incurred for qualified transportation fringe benefits and are disallowed by IRC Section 274, will be included in unrelated business taxable income (UBTI).  [The provision in IRC Section 512(a)(7) also includes costs associated with on premises athletic facilities, but the Act did not create a corresponding disallowance under IRC Section 274 for these expenses.  Therefore, at this time, the costs for on premises athletic facilities are escaping the effect of IRC Section 512(a)(7).]

Example

A church, in a large metropolitan downtown area, has limited parking facilities.  Because of limited parking facilities, employees must pay to park in nearby facilities.  The church reimburses its 10 ministers for these parking expenses.  The parking expenses are $260 per minister, per month, so the full parking reimbursement is a qualified transportation fringe benefit and is excluded from the ministers’ taxable income. (The parking benefit is limited to $260 per month.)  Because of the new provisions, the church must file Form 990-T reporting the cost of the benefit, $2,600, as UBTI.  After the standard deduction of $1,000 allowed in computing UBTI, the net taxable income is $1,600. The church's tax owed is $336 (calculated at the corporate rate of 21%). 

While the provision does not affect most churches, it may affect churches in metropolitan areas providing parking or transit passes to employees.  Churches providing these benefits must understand the benefit has limitations on the tax-free amount available to employees and the potential of the benefit to create an income tax and a requirement to file Form 990-T.  The new provisions are effective for amounts paid or incurred after December 31, 2017.

The essence of the law requires someone to pay tax on the transportation costs.  Therefore, the tax burden may be shifted to employees by opting to include the value of the benefits in employees’ taxable income.  Employers, both taxable and tax-exempt, must decide who will bear the new tax burden, the employer or the employee. 









Monday, October 30, 2017

Charitable Contributions - A Primer in Preparation for Year End

Often when I present tax updates to nonprofit organizations and churches, a section on charitable contributions is included.  These sections discuss unfortunate taxpayers who lost their way in accomplishing a successful tax deduction for their charitable contributions.    These cases illustrate the importance for the recipient of charitable contributions to be knowledgeable in the contribution receipting rules.  Many disallowed contributions result from a donor's failure to obtain the proper "contemporaneous written acknowledgement", better known as the contribution receipt, from the charity.  

There are only two months left in 2017 and the end of the year is a time of increased giving.  Since churches and other charities desire happy donors, it is a fitting time to review the basics of contribution receipting rules to prepare for the increased giving and issuing of annual donation receipts at the end of the year. 

Virtually every core contribution rule can be reviewed through a review of Embroidery Express, LLC v. Commissioner, TC Memo 2016-136.  The taxpayers were audited for 2004, 2005, 2006 and 2007 and ran afoul of the receipting rules in every way possible.  The following is a discussion of the lessons learned from Embroidery Express and owners, Mr. & Mrs. Brent McMinn.

Lesson 1:  To be tax deductible, the donation must involve a valid exempt organization. 

The McMinns demonstrate this lesson in two separate scenarios.

  • Foreign Organizations - In 2004, the McMinns donated $2,600 to Kayit's Children's Home.  The Home is based in Mexico and is not organized as a charity in the United States.  Donations to foreign organizations are not deductible by U.S. taxpayers (certain exceptions exist for Canadian charities). This rule may also apply when donations made to U.S. charities are  specifically earmarked for a foreign organization.  The contribution may not be deductible unless the U.S. charity takes and maintains control over the funds.  
  • Unregistered U.S. Charities - Throughout the audit years, the McMinns donated more than $11,000 to R.L. Montgomery Ministries.  While Montgomery Ministries is based in the United States, it never registered as a tax-exempt entity or received recognition as a 501(c)(3) organization by IRS.  Churches do not have to have status as 501(c)(3) organizations confirmed by the IRS, but all other charities, with gross receipts or more than $5,000, must receive IRS recognition.  Donors may look for confirmation of an organization's status online through the IRS Select Check program ( https://apps.irs.gov/app/eos/ ).

Lesson 2:  No contemporaneous written acknowledgement - no deduction for donations of $250 or more.

For all donations of $250 or more, the law requires the contribution to be substantiated with a contemporaneous written acknowledgement, otherwise referred to a qualifying donation receipt.  The receipt must include a) the amount of cash and a description (but not value) of any property other than cash contributed; b) whether the donee organization provided any goods or services in consideration, in whole or in part, for any property described in the receipt and c) a description and good faith estimate of the value of any goods or services provided in exchange for the donation.  A receipt is "contemporaneous" if obtained by the earlier of the final due date of the taxpayer's return or the date the taxpayer's return is filed.

The McMinns failed to obtain contemporaneous written acknowledgments for various cash donations and the court disallowed each contribution of $250.

Lesson 3: Noncash donations need a qualifying receipt adequately describing the donated property to be deductible.

The McMinns encountered a road block encountered by many donors.  The McMinns contributed office furniture and equipment to their church and claimed a donation for $6,950.  They obtained contemporaneous written acknowledgment from the church with a generic description of the property on the receipt.  Treasury Reg. 1.170A-13(b)(1)(iii) states that the receipt must contain a "description of the property in detail reasonably sufficient under the circumstances."  Without adequate description, it is not possible to determine if the value attributable to the item by the taxpayers is reasonable.  The McMinns lost the contribution deduction due to the vague description of the property in an otherwise qualifying receipt.  

The McMinns are not alone in this trap.  Over the past few years, the courts have consistently held the receipt must contain an adequate description of the property given to secure the tax deduction.  In Ohde v. Commissioner, T.C. Memo 2017-137, the taxpayers lost contributions of $145,250 to Goodwill for similar reasons.  The Ohde's maintained an extensive list of donated items, but the court was not persuaded, since there was no evidence Goodwill had ever seen the listing.  In Thad D. Smith v. Commissioner, T.C. Memo 2014-203, the taxpayer lost more than $27,000 in contributions because the receipts issued by AMVETS were pre-signed and contained no descriptions of the donated items.  

Lesson 4:  Noncash contributions of $5,000 or more of a single item or similar items require an appraisal issued by a qualified appraiser and an acknowledgement by the charity.

The McMinns entered into a bargain sale of a 2002 Chevy Suburban to their church and claimed a contribution of more than $15,000 for the donation portion of the transaction.  Noncash donations of $5,000 or more require an appraisal to support the value of the donation and the McMinns failed to obtain the appraisal.  Information from Kelly Blue Book was deemed insufficient to meet the appraisal qualification.  

The appraisal requirement is applicable when one or more items, similar in nature, are donated for a total value of more than $5,000.  For example, a collection of books valued at $10,000 requires an appraisal even if each book donated is valued at less than $5,000.  The qualifications for the appraiser and the appraisal are stringent.  

Special Note:  The McMinns case predates Form 1098-C requirements.  Today, the recipient organization must issue Form 1098-C to the donor besides other potential documentation requirements.  The donor is must attach the Form 1098-C to his tax return to claim the donation.  A lesson learned by Mr. Izen, Jr., when his contribution of an airplane, valued at $338,000, to a museum was disallowed.  The recipient organization failed to issue Form 1098-C and the related documents did not contain sufficient information to meet all the requirements of a contemporaneous written acknowledgment.  [Izen, R. v. Commissioner, 148 T.C. No 5 (2017].  (It also should be noted that the recipient organization can be assessed a penalty for failing to issue Form 1098-C.)

Lesson 5:  Out of pocket volunteer expenses may require a contemporaneous written acknowledgment that describes the volunteer services provided by the donor. 

During 2006, the McMinns traveled to Jamaica as a part of their church's mission trip spending $3,013 for unreimbursed travel expenses.  Out of pocket volunteer expenses incurred on behalf of a charity may be deductible contributions. [Treas.Reg. Sec. 1.170A-1(g)] However, as with other contributions, where the expenses exceed $250, a contemporaneous written acknowledgement is required.  The acknowledgment need not include the actual amount of the unreimbursed volunteer expenses, but it should describe the volunteer services provided to the charity.  The McMinns did not receive the required acknowledgment from their church, so the deduction was disallowed. 

Take Aways from the McMinns

Only in certain instances must churches and other charities issue a contribution receipt or face a penalty.  These instances include complying with Form 1098-C requirements and for contributions of more than $75 where goods or services are provided in exchange for the contribution.  

Generally, it is the donor's responsibility to obtain contemporaneous written acknowledgements sufficient to support contribution deductions.  However, donors rely on recipient organizations to be knowledgeable of the rules and assist them in obtaining sufficient documentation for contribution deductions.  Churches and other charities should:
  • be aware of and understand the rules applicable to donors;
  • review receipting practices and determine if they include the following:
    • receipts containing name, address and details of donations are issued for both cash and noncash donations of $250 or more;
    • receipts contain either a description of the goods or services provided in exchange for a donation or the statement "there were no goods or services provided in exchange for the donations" (religious organizations should include "other than intangible religious benefits" with this statement.);
    • receipts for volunteer services, especially those including travel, are issued to participants detailing the services provided to the organization; 
    • donations of any mode of transportation; i.e., auto, plane, boat, motorcycle, etc. are reported on Form 1098-C; and 
    • receipts for noncash contributions contain an adequate description of the property donated including the condition of the property (value of property not required or suggested.)
Due to the strict nature of the timing for "contemporaneous" receipts, a donor may not be provided a new receipt or a corrected receipt in the event of an IRS exam.  If a donor doesn't have required substantiation at the time the tax return is filed, there is no provision for correction in the future.  Time taken now to review organizational receipting practices may be the difference between a donor's success or failure in claiming a tax deduction for charitable contributions.



Monday, September 25, 2017

Reimbursements for Individual Health Premiums & the Myths of the 21st Century Cures Act

Background

Among my church clients, one of the most difficult changes from the Affordable Care Act (ACA) was the end of an employer's ability to reimburse employees for individual health insurance premiums.  Due to the financial and administrative costs of  group health insurance, many small churches and nonprofits reimburse employees for individual health insurance plans.  Pre-ACA law allowed this reimbursement and the reimbursement was nontaxable to the employee. 

Under the ACA, such a reimbursement plan became an ineligible health plan subject to fines of $100 per day per participant.  The reimbursement  still isn't taxable, but the plan creates fines to the employer.  In response to the ACA rules, many small employers stopped providing for insurance for employees, a result contradictory to the purposes of the ACA. Other employers weren't aware of the rule changes and continued with plans violating the ACA.  (In 2015, the IRS provided relief to employers violating these particular ACA rules by relieving them of any penalties through June 2015.  The 21st Century Cures Act provides this relief through December of 2016.)

The Myth

In December of 2016, The 21st Century Cures Act (the Act) was signed containing a provision allowing for small employers to reimburse for individual health plan premiums.  Unfortunately, the "Cures Act" did not cure the problem for many small employers, but instead created a myth that the problem was cured.  Once the Act was signed, word spread that individual health insurance premiums could once again be reimbursed and all the prior ACA created issues were rolled back.  Throughout the church and nonprofit community, it was assumed the old ways could be resumed (or continued for those who failed to understand the ACA.)  

The Truth

It is true that the Act provides for a method of providing health insurance through the reimbursement of individual health insurance premiums.  It is not true that the Act allows employers to return to the good ole days of pre-ACA practices.   

The Act created the Qualified Small Employer Health Reimbursement Account (QSEHRA) to provide for an employer's reimbursement of individual health insurance plan premiums and other medical expenses.  The QSEHRA is removed from the ACA's definition of a "group health plan".   The QSEHRA does not return to the days of old, and churches/nonprofits desiring to utilize the it must understand its rules and limitations.

A QSEHRA is for:
  • employers with fewer than 50 full time equivalent employees (FTEs); and 
  • employers not offering a group health plan.
The QSEHRA must:
  • be a written plan;
  • include notification of the plan to employees 90 days before the beginning of the year or for new employees, their eligibility for the plan.  IRS Notice 2017-20 granted relief from this provision for plans starting in 2017.  (There has not been any guidance issued to date, so the penalty relief may be suspended until such guidance is issued.) Penalties for failure to provide the notice are $50 per participant not receiving the notice;
  • be employer funded - no elective employee salary deferrals may be used;
  • reimburse for substantiated medical expenses and premiums;
  • limit reimbursements to annual amounts of $4,950 for an individual or $10,000 for a family plan.   If greater amounts are provided, the additional cash must be for unrestricted purposes or a non-qualifying group health plan not complying with the ACA is created;
  • provide for reimbursements on the same basis for all employees.  There may not be variations for position, length of service, etc; 
Employees should be aware that an insurance policy obtained from an exchange may be reimbursed, but the employee must notify the exchange of the employer reimbursement and cannot claim the reimbursed portion of the premiums for the premium credit.  This educational information is required to be part of any notice given to the employees regarding the plan. 
For churches/nonprofits desiring to institute a QSEHRA, steps should be taken to establish the plan in writing and to provide notice to the employees of the plan for 2018.  While notice requirements may be temporarily suspended, it is best to distribute a notice in accordance with the initial instructions to provide relevant information to employees.  Plans reimbursing individual health insurance premiums, outside of a qualifying QSEHRA, should be terminated immediately as such plans are currently subject to ACA penalties. 

Monday, September 18, 2017

New Guidance Provided for Determinations of Acceptable Foreign Grant Recipients

Background

Private foundations have very specific rules applicable to foreign grants that have long been ignored by churches and other public charities.  However, with the events of 9-11, governmental scrutiny of any charity's foreign expenditures greatly increased.  For charities filing Form 990, information on foreign expenditures is requested each year through Schedule F.  Schedule F requires reporting areas of foreign operations as well as a description of foreign activities and foreign recipients.  Churches don't file Form 990, so they escape this particular scrutiny by the IRS.  However, churches are subject to other filing requirement on foreign activities.  For example, when churches have funds in foreign accounts, they are subject to the financial bank account reporting (FBAR) on FinCen 114.  (For more information on reporting of foreign assets, including the FinCen 114 go to https://www.fincen.gov/resources/filing-information.)

As the IRS increases scrutiny of all charities' foreign activities, it is necessary to be familiar with the documentation, expected by the IRS, required to support the exempt purposes of the activities.  Without any specific guidance for churches and public charities, it is necessary to look to the long standing requirements placed on private foundations' foreign activities.  Therefore, when the IRS issues new guidance to private foundations regarding foreign activities, it is wisdom for all charities with foreign activities to become familiar with this guidance and the related criteria.

Expenditure Responsibility or Equivalency Determinations

Private foundations are required to operate foreign grants under one of two scenarios.

  1. Expenditure responsibility  - These requirements state that the grant funds will be segregated from other funds of the foreign charity and that all expenditures will be reported back to the grantor through the use of pictures, written reports, receipts, financial statements or other methods of reporting and documenting how the funds were specifically utilized.  Think of this requirement as similar to operating an accountable expense reimbursement plan with the grantee.
  2. Equivalency determination  - This is a process in which a qualified professional determines that the foreign recipient organization meets the qualifications of IRC Section 501(c)(3) and grants to it may be treated in the same manner as grants to U.S. 501(c)(3) charities. 

New Guidelines for Equivalency Determinations

IRS Rev. Proc. 2017-53 details out the new standards for equivalency determinations, now to be referred to as "preferred written advice" or PWA.  While binding on private foundations, the new standards provide an excellent guide for how churches and other public charities may establish foreign grant programs. The Rev. Proc. states that the equivalency determination is:

  • Based on current written advice - "Current" is defined as advice based on the grantee's current or previous year.  The advice may be relied on for a period of up to two years after the advice is provided depending on how recent the factual information is on which the advice is based. (As long as there is not a relevant law change affecting the advice during this two year period.) 
  • Prepared by a qualified tax practitioner - A qualified tax practitioner is an attorney, a certified public accountant or an enrolled agent who is subject to the IRS Circular 230 standards of practice. 
  • Indicates that the recipient is a qualifying public charity - The foreign grantee must meet the tests be the equivalent of a public charity as defined in IRC Section 509(a)(1), 509(a)(2) or certain 509(a)(3) organizations.  This includes churches, schools and hospitals as well as other organizations generally supported by donations or governmental support.  For some foreign grantees, this determination is made through specific testing as performed on U.S. public charities by using Form 990 Schedule A. 
  • Includes the statement that the grantor is reasonably relying on the written advice in accordance with IR Reg. Sec. 1.6664-4(c)(1). 
The preferred written advice should be in English and all attachments should be translated into English.  The advice should contain the following components.  
  • Copies of the grantee's organizational documents;
  • Descriptions of the grantee's exempt purposes and how these purposes align with 501(c)(3) exempt purposes;
  • Confirmation that upon dissolution the grantee's assets will be distributed to another charitable organization for charitable purposes or to a governmental entity;
  • Confirmation that the grantee does not have shareholders or members with an ownership interest in the grantee and that the grantee's assets will not be used for non-charitable purposes or for the private benefit of an individual except for the payment of reasonable compensation;
  • Confirmation that the grantee does not directly or indirectly intervene in any political campaign to any extent or work to influence legislation more than as an insubstantial part of its activities;
  • Disclosures of related or affiliated organizations that control the grantee or work in connection with the grantee;
  • Details of the grantee's activities, past, present and anticipated over the life or term of the grant.  These details should be specific as to sources of revenues and types of expenditures;
  • References to any relevant federal tax law applying to the grantee's operations;
  • Confirmation that the grantee has not been identified as or designated as a terrorist organization by the United States government.  (While not required, it is recommended that all key individuals associated with the grantee also be screened for terrorist designations.);
  • If the grantee, is a school, its organizational documents must include the required nondiscrimination policy as applicable to U.S. schools; and
  • Financial support testing for grantees meeting the  "public charity" test under 170(b)(1)(A)(vi) or 509(a)(2).  (Form 990 Schedule A schedules may be used for this requirement.) 

Application to Churches and Public Charities

It cannot be disputed that the required documentation of foreign activities is overwhelming and burdensome to a U.S. church or charity.  The days of blindly sending money to foreign grantees is over and operating in this manner is dangerous for a U.S. organization.  While appearing to be onerous in many aspects, the equivalency determination  can alleviate  many of the complications for churches and other public charities working in foreign countries. 

For example, a church may have a sister church it supports in Kenya.  Generally, the support provided to the Kenyan church must be specifically accounted for with documentation of the expenditures back to the U.S. church.  If preferred written advice or an equivalency determination is gained for the Kenyan church, then the U.S. church can provide support with less ongoing paperwork. 

In seeking an equivalency determination, churches and public charities should seek a qualified tax professional with experience with nonprofit organizations with extensive foreign activities.  Since, the above requirements are similar to the information provided to the IRS when exemption applications are filed, a professional experienced in filing exemption applications is also preferential.