Thursday, December 15, 2016

Limited Relief Offered for Employer Reimbursement of Individual Health Insurance Premiums

Finding a way onto the very end of the 21st Century Cures Act, signed by President Obama on December 13, 2016, are provisions allowing eligible employers to operate Health Reimbursement Accounts (HRA) on a limited basis without requiring full compliance with the provision of the Affordable Care Act (ACA).  

Under the ACA, an HRA must provide for certain preventative services to be provided free of charge, and it may not establish any annual limits on the dollar amount of benefits available for any individual.  HRA plans integrated with group health insurance plans meeting these two requirements are deemed to fulfill the requirements of the ACA.  However, HRA plans integrated with individual health insurance policies are not deemed to fulfill the requirements of the ACA, even if the individual policies meet the two ACA requirements.  HRA plans integrated with individual health insurance are subject to a penalty of $100 per day per participant since the health plans do not comply with the ACA.  (Notice 2015-17 provided penalty relief through June 30, 2015.)

The above provisions greatly affected and continue to affect nonprofit organizations of all sizes, but they dealt a substantial blow to smaller nonprofit organizations who are unable to justify the cost of the group health plans available to them.  Faced with substantial ACA penalties, many organizations are unable to offer any type of assistance to employees for health insurance.  

The 21st Century Cures Act addresses this issue in two different ways. 

ACA Penalties for Non-Compliant Health Plans
 In regards to the penalties, limited relief from the penalties arising from these rules was previously offered via Notice 2015-17 allowing for penalty relief for employers reimbursing employees for the cost of individual health insurance policies through June 30, 2015.  The "Cures" Act extends this relief for all years beginning on or before December 31, 2016.  For calendar year organizations, this covers all years through 2016.  For fiscal year organizations, it covers all years beginning on or before December 31, 2016.  

Exception to ACA Requirements for Small Employer HRA Plans
In regard to allowing for HRA plans (including those reimbursing for individual health insurance policies), the "Cures" Act creates a Small Employer HRA.  While the Small Employer HRA provides some relief, the relief is limited.   Qualifications of a Small Employer HRA are: 

  • The employer has fewer than 50 employees;
  • The employer may not offer a  group health plan to any of its employees;
  • The plan must be provided to all eligible employees, i.e., employees who are not part time or seasonal, have completed 90 days of services and are 25 or older (this prohibits a plan providing for just one or two employees and not for all eligible employees);
  • The plan must be funded solely by the eligible employer and not through a salary reduction plan; 
  • The plan only covers eligible medical expenses defined by IRC 213(d); 
  • The employer receives confirmation from participating employees that the employee maintains a policy providing minimum essential health coverage; and 
  • The total amount of the payments available during the plan year do not exceed $4,950 ($10,000 in the case of the arrangement providing for expenses of family members.)
Small Employer HRA plans are allowable for years beginning after December 31, 2016.  

Taxation of Payments:  Payments to the employee under the plan will be tax free as long as the employee maintains minimum essential health coverage.  If an employee does not maintain such coverage, the benefits paid under the plan are included in taxable compensation of the employee. 

Notification Requirements:  Employers offering the plans must provide written notice to employees including the (i) amount of the employee's permitted benefit under the plan; (ii) instructions to the employee to provide the plan benefits to any health insurance exchange in cases where the employee is applying for an advance payment of the premium assistance tax credit; and (iii) information regarding the taxable nature of the benefit where an employee does not maintain minimum health coverage.  

The written notice must be provided to employees at least 90 prior to the beginning of a plan year.  Since this is not possible for the 2017 plan year, the notice is required to be provided within 90 days of the enactment of the "Cures" Act or March 13, 2017.  

The new law offers some relief to small employers, but it does not return these employers to a pre-ACA position.  The new law's provision allowing for a monthly benefit of $412.50 to $833.33 may allow for the offset of a significant portion of an individual health plan premium, but it likely will not offset 100% of the premium especially for family plans.  Additionally, the requirement to provide the plan to all eligible employees prohibits an employer from providing the plan solely to one or more key employees, i.e. to an executive director or to a senior pastor.  Since penalty relief has only been granted through 2016, small nonprofit organizations should carefully review the application of the new law and swiftly act to create the plan, if it can be effectively used within the organization. 

Monday, February 1, 2016

501(c)(4) Organizations Face New Reporting Requirements

Organizations claiming exemption under IRC Section 501(c)(4) have received greater attention over the past two years amidst allegations of IRS targeting based on an organization's political and/or philosophical views.  Due to what is perceived by many as widespread unacceptable activity by (c)(4) organizations, there are various attempts to increase the regulation and oversight of these organizations.  One of these attempts was recently codified into law as a part of the recently enacted Protecting Americans from Tax Hikes (PATH) legislation.  Organizations formed under 501(c)(4) are now required to file an additional notification with the IRS.


Unlike organizations organized under IRC Section 501(c)(3), organizations exempt under 501(c)(4) have the ability to operate as exempt organizations without receiving official notification of exempt status from the IRS.  These organizations are categorized as "self declarers".  The organizations have to follow the rules and file the required annual Form 990, but they do not have to file an application with the IRS to have their exempt status recognized.  An organization may file a Form 1024, Application for Recognition of Exemption under Section 501(a), if it wishes to receive IRS approval and receive a determination letter from the IRS.  

New Law

PATH has enacted IRC Section 506 requiring organizations formed under 501(c)(4) to notify the IRS of the intent to operate as a 501(c)(4) organization.  Notification must be made to the IRS within 60 days of the formation of an organization created after December 18, 2015.  Additionally, notification is required by any organization in existence at December 18, 2015 that has never filed either an exemption application, Form 1024, or an annual information return, Form 990, 990-EZ or 990-N.   The due date for notification by existing organizations is June 15, 2016.   Failure to comply with the notification requirements carries of penalty of $20 per day up to a maximum of $5,000.  

The notification includes 1) the name, address and employer identification number of the organization; 2) the state laws under which the organization was formed; 3) the date of the organization's formation; and 4) a statement of the purposes of the organization. (This notification is not a request for recognition of an organization's exempt status.  A request for determination of the organization's exempt status is required to be made in addition to the notification required under IRC Section 506.)

Extended Due Date

Due to the need for the IRS to issue regulations regarding the operation of the notification requirement, the due date for the notifications has been extended to 60 days after the issuance of the temporary regulations.  (Notice 2016-9)  Therefore, organizations are not required to provide notification at this time.  

Once this notification is fully operational, there will be very little time between an organization's date of formation and when failure to comply penalties begin to accrue.  Therefore, it is critical that professional working with and organizers of these organizations understand the substantial change  required by IRC Section 506.  The new requirement transforms an organization being able to operate as a self declared organization with no specific notification to the IRS of its existence, other than filing its annual return, to being required to immediately inform the IRS of its existence and purposes. 

Wednesday, January 20, 2016

Fringe Benefits - A Fresh Look to Start the New Year

It's a new year, so it's time to reevaluate everything your organization provides to its employees.  Each year my firm assists churches and other organizations in making payroll corrections to properly report the value of various benefits offered throughout the year.  To avoid making costly mistakes, it's time for a quick Fringe Benefit 101 update.

Fringe benefits are generally those items provided to employees outside of the normal paycheck.  Fringe benefits take on different shapes and different forms and can result in different tax treatments.  Many of them are paid directly by an organization, so they never come close to the organization's payroll system.  However, some are paid by employees through payroll tax deduction.  The IRS has expressed frustration with the omission of items of additional compensation involving benefits provided outside of the traditional paycheck system from being included in employees' income.

In reviewing fringe benefits, it is important to understand the basic premise of our tax system.  Under our taxing system:
  1. All items improving an employee are taxable to the employee until a tax provision can be identified to make it nontaxable;
  2. Most tax provisions affording tax free treatment of a benefit have rules that have to be followed; and 
  3. Not all benefits are treated the same for all applicable taxes.  For example, an employee's elective deferral into a retirement plan is excluded from federal income tax, but it is taxable for purposes of Social Security and Medicare taxes.
Mistakes in the proper treatment of fringe benefits can be costly in terms of payroll taxes and related penalties, but also in terms of an organization's tax exempt status.  Fringe benefits provided without the correct framework create private benefit or inurement of benefit and may threaten an organization's tax exempt status for both federal and state purposes.  Additionally, benefits provided incorrectly to organizational leaders or decision makers may constitute excess benefit transactions and subject individuals to intermediate sanctions requiring repayment of the benefit and penalties up to 225% payable to the IRS.

Since 2016 has just begun, it is a good time for a benefit review.  The review should include the following:

Step 1:  Take an inventory of any and all benefits provided to anyone in the organization even if the benefit is only provided to one staff member.   Look for those expenses that are paid directly for a staff member or allow a staff member to take advantage of one of the organization's services without charge or at a reduced charge.

Step 2:  Review the organizational minutes, budget, employment contracts, etc to confirm that any and all benefits have been properly authorized as additional compensation to the applicable staff member.   This step is crucial to avoid the creation of automatic excess benefit transactions under IRC Section 4958.  It is also necessary to confirm that a staff member's compensation is still within the realm of reasonable compensation.

Step 3:  Review the rules regarding the benefit to determine if the rules are being met.  Virtually every benefit that can be provided by an organization has a required framework to achieve tax favored treatment.  For example, the majority of benefits are required to be offered on a nondiscriminatory basis and cannot be offered just to those in upper management.  For churches, this requires a good review of any benefit exclusively offered to the ministerial staff members.

Step 4:  Determine the steps that need to be taken to bring the benefit into alignment with the rules.  If there is a plan already in place that appears to comply with the rules, have this plan reviewed every few years to determine if it is still in alignment with the rules.   This may require the assistance of either a CPA and/or an attorney.  When selecting these professionals always select those who are experienced in working with nonprofit organizations.  Churches should select professionals with specific experience working with churches, since some benefits afford special considerations for churches.

Step 5:  Review the reporting requirements for the benefit and determine the applicable taxes that may or may not be due. As previously mentioned, some benefits require special reporting and some are exempt from federal income tax but still subject to Social Security & Medicare taxes.

Step 6:  Document the results and make corrections in the payroll system to achieve the appropriate tax treatment.  It's only January, so make any payroll corrections now to avoid having to amend quarterly Forms 941 in the future.  Additionally, if a benefit is going to create taxable income to an employee, it is better to make that determination at the beginning of the year, rather than the end of the year.

The IRS provides Publication 15-B, An Employer's Tax Guide to Fringe Benefits, as a useful guide in evaluating benefits and related tax requirements and can be obtained at  Don't let your organization's benefit plans become an unexpected tax burden to either the organization or its employees,  Be proactive in protecting and benefiting both the organization and the employees with your 2016 benefit review.

Monday, January 11, 2016

Noncash Charitable Contributions - Not Just An Easy Deduction

(Note:  While the following post is focused on individuals more than charities, charities can learn from the woes of donors and make changes in practices and procedures to assist their donors in claiming noncash charitable contributions.)

We have all done it in the past - gathered up the old clothes and unused household items and delivered them to the charity of our choice.  If we are lucky, the charity's attendant hands us a "receipt" (I use this term loosely) for our donation.  We fill in the receipt as best we can and then add them to our tax information.  At tax time, we take them out and use them to determine our deduction for our noncash contributions (or worse hand them over to our tax preparer uncompleted, believing they have some intrinsic gift to know what was given and how much it was worth.)

Meet Mr. & Mrs. Kunkel (T.C. Memo 2015-71).  The Kunkels followed the above scenario to the amount of more than $37,000 of items donated to various charities.  The IRS audited the Kunkels and found that the substantiation for the noncash donations failed to meet the requirement of Internal Revenue Code Section 170 and disallowed the deductions.  The Kunkels took this position to court in hopes of achieving a more lenient decision from a judge.  The court was just as stringent as the IRS and also disallowed the deductions based on the following:

  • The Kunkels did not have any "contemporaneous written acknowledgements" from any of the charities;
  • In instances where a charity had picked up the donation from the Kunkels home and left the obligatory "thank you" receipt, the receipt was insufficient to justify a donation since it failed to contain any of the required information;
  • The Kunkels did not maintain a written record detailing each item that was donated, how it was acquired and it original price;
  • The Kunkels did not maintain any information on how the fair market value of the items was determined; and 
  • The Kunkels did not present any credible evidence that the items donated were "in good used condition or better."
There are several interesting lessons to be learned from this case:

  • The IRS may aggregate all the items donated into categories to determine if the requirement for an appraisal (value at more than $5,000) is met.  For example, out of all the donations, the Kunkels estimated that the clothing given away was valued at $8,000.  This was spread out among various charities, but the IRS aggregated the values and stated that an appraisal was required to claim the donation.  Other groups of items, i.e., household items or toys, were aggregated to determine if the additional substantiation requirements for donations of $500 or more were met.  This level of documentation requires the donor to keep records to describe and list each of the items donated, its original price when it was acquired and what condition it is in in addition to the date donated and the value at the time of donation.
  • Receipts, such as door hangers and blank receipts, often used by charities, do not meet the substantiation tests, since they are not donor specific, do not contain a description of the items donated and generally may not even be dated. 
  • Failure to claim deductions without the required substantiation may be considered as negligence and subject a donor to a 20% accuracy related penalty in addition to any additional taxes that are due.
Donors who desire a tax deduction for noncash contributions, including clothing and household items, should take great care to have records that contain all the required substantiation for the donation.  Charities, including churches, should become aware of the substantiation requirements, so they can assist donors by issuing receipts including all the required information.

A charities receipt should include:
  • The date the donation was received by the charity; 
  • The name and address of the donor;
  • A complete description of the items donated;
  • A general statement as to the condition of the items donated; and 
  • The "no goods or services" statement, as generally required for cash contributions. 
In addition to obtaining a qualifying receipt, donors must also be able to:
  • Maintain records establishing when or how the donated items were acquired and what the donor's cost basis is in the items;
  • Maintain records on how the fair market value of the items were determined by the donor;
  • Confirm that a receipt is always obtained and confirm that it is sufficient to meet the "contemporaneous written acknowledgment" when the aggregate of items donated is more than $250;
  • Understand when and how the appraisal requirements are applied with donations, either for an individual item or the aggregate of similar items, exceeding $5,000. 
There have been other cases of similar nature decided in the last few years.  The IRS is taking a strong stance on the substantiation of both cash and noncash charitable contributions and the courts are consistently siding with the IRS.  Both donors and charities need to be familiar with all of the requirements for substantiating charitable contributions.  Additional information on substantiation requirements can be found in IRS Publications 526, Charitable Contributions and 561, Determining the Value of Donated Property at

Friday, January 8, 2016

IRS Backs Off on Proposed Charitable Substantiation Procedures

The IRS continues to struggle with donors substantiating charitable contributions in the midst of advanced computer skills and capabilities or simply failures of donors to know, understand and adhere to the substantiation rules.  Contributions of $250 or more are required to be substantiated with a contemporaneous written acknowledgment that includes:

  • The amount of the cash donated or a description of the property donated (no value is required);
  • whether the donee provided any goods or services in consideration for the contribution, and if it did, a description and good faith estimate of the value of the goods or services provided; and 
  • if the goods or services consisted entirely of religious benefits, a statement to that effect.

Charities have struggled to implement the substantiation rules and include all the pertinent information.  Donors have struggled in understanding what is required substantiation and when they have to have substantiation, i.e., prior to the filing of a timely filed return.  The IRS has struggled with the ability of taxpayers to provide fraudulent receipts due to the wonders of electronic capabilities.  In an effort to provide for an avenue to resolve all of the failures, errors and frustrations, the IRS issued proposed regulations in September 2015 providing for the creation of a new IRS filing.  The filing would allow charities to report donors and related donations to the IRS in a manner similar to the current Form 1098-C used for reporting the donation of transportation equipment.  The filing would require the charity to report the donor's name, address and social security number as well as the amount of the donations.  The proposed filing was strictly optional, not mandatory.

  The IRS requested comments on the proposed regulations and received an overwhelming response.  Despite proposing an optional filing, many charities believed that the regulations were suggesting a mandatory filing requirement with the IRS.  Charities often strive to protect the identities of their donors and were concerned the proposed filing would unnecessarily provide their entire donor list to the IRS.  Additionally, there were concerns that charities choosing to utilize the filing option would not be able to provide adequate security over the social security numbers of the donors giving rise to concerns of potential identity theft.

Amidst the hue and outcry against the proposed regulations, the IRS attempted to placate the charity world by emphasizing the "optional" in the new regulations in a rare email communication issued early in December 20125.  However, concern over the proposed filing continued and in an action published January 8, 2016, the IRS has withdrawn the proposed regulations that would institute the new filing mechanism.

In the midst of all the discussion created by the IRS proposal, it is a great time to review the substantiation requirements and double check contribution receipts before they are issued this month.  Charities continue to struggle with the substantiation requirements resulting in donors forfeiting the right to deduct charitable contributions.  While the real burden to obtain adequate substantiation for one's charitable contributions lies with the donors, donors rely on charities to issue receipts that comply with the rules.

To assist donors, in the event of an IRS examination, contribution receipts reporting donations of $250 or more should include the following:

  • The name and address of the charity (including a logo or other unique identifier is not required but beneficial);
  • The date the receipt is issued (this is not required but is a prudent practice to assist donors in proving the receipt was timely provided to them);
  • The name and address of the donor;
  • A listing of the dates and the donation amounts (receipts for noncash donations would only list the date and a description of the item(s) donated);
  • In the event the donor is provided a product or service in exchange for the donation, the value of the product or service should be indicated; and 
  • Statement that there were no goods or service given in exchange for the contributions other than intangible religious benefits (if the charity is a religious organization).  (If goods or services have been given in exchange, this statement may be modified to indicate that the value has already been noted in the receipt.)
Donors should also be aware there is no mandatory deadline for when a charity has to issue contribution receipts.  Many charities and donors mistakenly believe contribution receipts have to be issued by January 31st each year.  While this may be a prudent business practice, it is not a legal requirement.  The donor is legally required to have the receipt in his/her possession either by April 15th or, if later, the filing date of his/her timely filed tax return.  

In summary, charities do not have to worry about a new filing requirement with the IRS, but they do have to worry about keeping their donors happy.  Reviewing contribution receipts for the above factors will make sure charities assists their donors in meeting all of their legal requirements in claiming charitable contributions.