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Read this if you are a not-for-profit organization. 

Due to the impacts of COVID-19, on June 3, 2020, FASB issued an Accounting Standards Update (ASU) that granted a one-year effective date delay for NFPs to adopt the new revenue recognition standards (Topic 606). The ASU permitted NFPs that had not yet applied the revenue recognition standard to do so for annual reporting periods beginning after December 15, 2019. Many NFP’s choose to take advantage of this delay. 

However, the clock is ticking on FASB’s revenue recognition changes, as most NFP’s will have to adopt the revenue recognition changes shortly. With that in mind – let’s revisit Topic 606 and what it could mean for your organization. 

The overarching goal of the changes to revenue recognition is to converge disparate standards across industries, all while making the information more useful to users. The core principle of the standard is that “the organization should recognize revenue to depict the transfer of goods or service in an amount that reflects the payment for which the organization expects to be entitled for those goods and services.” 

A five-step process and a simplified approach 

To achieve that core principle, your organization will need to apply a five-step model to some of your revenues streams:

  1. Identify the contract(s) with a customer
  2. Identify the separate performance obligations
  3. Determine the transaction price
  4. Allocate the transaction price to the separate performance obligations
  5. Recognize revenue when or as a performance obligation is satisfied

While the process can be broken down into five simple steps, the task of reviewing revenue streams and specific contracts can be quite daunting in implementation.

Additional disclosures needed

Whether your organization is currently implementing, or soon will, you will want to make sure you understand the extensive disclosures required under the standards. Annual disclosures include the following:

  • Qualitative information about how economic factors affect the nature, amount, timing, and uncertainty of revenue and cash flow
  • Opening and closing balances of contract assets, contract liabilities, and receivables from contracts with customers
  • Descriptions of performance obligations

We are here to help

We recognize the difficult task ahead for our clients in analyzing their multiple contract vehicles and revenue streams in implementing the new standards. To help our clients through the process, we are offering revenue standard workshops. This workshop can be tailored to your needs, with an in-depth meeting to review the standard, consider your significant revenue streams, and a walkthrough the five-step process. We will leave you with an easy to use template for analyzing future revenue streams along with recommendations for your current revenue recognition system and process. 

Don’t wait until the financial year has come to a close to review your processes and systems in place, we are available now to work with you to prepare for the new standard. Contact Chris Mouradian or Sarah Belliveau to find out how you can join the list of organizations getting ahead of the new standard.

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Financial Accounting Standards Board (FASB) revenue recognition changes: What it means for NFPs

Read this if your company uses QuickBooks Online.

QuickBooks Online offers numerous ways to help you track your sales, expenses, and profitability. If you’re using QuickBooks Online Plus or Advanced, you can create and assign Classes to transactions to differentiate between, for example, store departments or product lines. Some of the site’s reports are designed specifically for these tools, like sales by class and profit and loss by class. 
 
You can assign categories to products and services to gain insight into your sales and inventory. There’s a different set of categories that you’ll use when you record bills and expenses. These are important for reporting and tax purposes. You can also add a location field to sales transactions so you can track sales by stores, sales regions, or counties, for example.

What are tags and how do you use them?

Tags are fairly new to QuickBooks Online. They are customizable labels you can assign to transactions (invoices, expenses, and bills). They’re more flexible than the tools we’ve already mentioned—they allow you to track your money any way you want. They don’t affect your books, and they’re not included in the customization criteria for reports. But there are two reports specifically designed for them: profit and loss by tag group and transaction list by tag group.

Creating your own tags

Before you create a tag, you need to create a group. Groups consist of related tags that share a common theme. For example, say you do some event planning. You might have a group titled events. Individual events might read, for example, Grayson Wedding, Spring Art Show, and Hillman Conference.

To get started, click the gear icon in the upper right. Under lists, click tags to get to the tool’s home page. (You can also click on the transactions link in the toolbar, then click the tags tab.) Click new, then tag group. A vertical panel slides out from the right. Enter a name in the group name field. Click the down arrow to select a color, then click save. 

Enter your tags one by one in the fields labeled tag name. Click add after each one until your list is complete. Click the edit button to make any changes. When you’re finished, click done. The main tags page will open again, and you’ll see your new group under tags and tag groups. Repeat to add as many as you’d like, up to 300 tags.

Making the most of the tags in QuickBooks Online

 

You can add tags to any transaction that contains a field for them

Let’s look at how you’d use tags in an expense. Click the expenses link in the toolbar, then new transaction | expense in the upper right. Click the down arrow in the payee field in the upper left and select + add new. Enter Billy’s Bridal in the name field. Leave the type as vendor and click save. Back on the expense screen, select the payment account, payment date, and payment method for the expense (reference number is optional).

Directly below those fields, you’ll see the tags field. Click manage tags if you need to add or edit one; the right vertical pane you saw before will slide out. Otherwise, click in the field below tags. Your list of tags will drop down. Select Grayson Wedding to move it into the field. You can assign as many tags as you’d like to transactions, but you can only select one tag from each group. Finish the expense and save it. 

Go back to the tags home page, and you’ll see that there’s a link to one transaction in the events row. At the end of each row is the action column, where you can run a report, add a tag, and enter or delete a group. Your expense total appears in the money out (by tag) box above it. 

Tags are a great addition to the tools QuickBooks Online provides to help you track incoming and outgoing funds. If you’re not familiar with the others mentioned at the beginning of this column and want to learn how to explore them, let us know. We're here to help.

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Tag, you're it: Making the most out of QuickBooks Online tags

Read this if you are an employer with a defined contribution plan.

This article is the fourth in a series to help employee benefit plan fiduciaries better understand their responsibilities and manage the risks of non-compliance with Employee Retirement Income Security Act (ERISA) requirements. You can read the previous articles here.

One of the most common errors we identify during an audit of defined contribution plans is the definition of compensation outlined in the adoption agreement or plan document is not consistently or accurately applied by the plan sponsor. This can be a serious problem, as operational failures will require correction and those errors can become costly for plan sponsors. 

Calculation challenges and other common errors

It is important plan sponsors understand the options selected for the calculation of employee elective deferrals and employer non-elective and matching contributions into the plan. While calculating compensation sounds straightforward, it is often complicated by the fact that your adoption agreement or plan document may use different definitions of compensation for different purposes.

For example, the definition of compensation used to calculate deferrals could differ from the definition used for nondiscrimination testing and allocation purposes. Therefore, determining the correct amount of compensation requires a strong understanding of both your entity’s payroll structure and adoption agreement or plan document. Plan sponsors should work with both in-house personnel and plan administrators to ensure definitions of compensation are appropriately applied, and that any changes are quickly communicated to all involved.  

During an audit, we commonly identify pay types excluded from the definition of compensation in the adoption agreement or plan document that are incorrectly included in the compensation used in the calculation of employee deferrals and employer contributions. Taxable group term life insurance is a common example of compensation that is improperly included in the definition of compensation. Alternatively, we also identify codes for certain types of pay excluded from the calculation of employee deferrals and employer contributions that should be included based on the applicable definition of compensation. For example, retro pay, bonus payments, and manual checks are often incorrectly excluded in the definition of compensation.

Corrective actions

If errors are identified, we recommend that corrective actions including contributions, reallocation, or distributions are made in accordance with the Department of Labor regulations in a timely fashion.

If appropriate, the plan sponsor should consider amending the plan to align with the definition of plan compensation currently used in practice. We also recommend plan sponsors perform annual reviews of plan operations to ensure compliance and avoid the costs that can accompany non-compliance.

If you have questions about your specific situation, please contact our Employee Benefits consulting team. We’re here to help.

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Plan compensation and contributions: Common errors and solutions to fix them

Read this if you are a renewable energy developer, installer, or investor.

Renewable energy has what amounts to an 18-month opportunity to make major strides before the mid-term elections. During the mid-terms, all 435 seats in the United States House of Representatives and 34 of the 100 seats in the United States Senate will be contested. Thirty-nine state and territorial gubernatorial and numerous other state and local elections will also be contested. Until then, a slim majority in both the House of Representatives and the Senate looks to be favorable for the renewable energy sector. 

The Biden administration’s proposed American Jobs Plan would eliminate tax benefits for fossil fuel companies, increase the corporate income tax, and promote renewable energy investment and jobs. How does an increase in the corporate tax rate create opportunities for renewable energy? If corporations have more tax liability they’ll be more likely to invest in projects that provide investment tax credits.  

Of particular interest to the team at Berry Dunn is the proposed ten-year extension and phase down of an expanded direct-pay investment tax credit (ITC) and production tax credit (PTC) for clean energy generation and storage. While details are sparse, direct-pay sure sounds a lot like the very successful 1603 grant program that was part of the 2009 stimulus package. Direct-pay eliminates a lot of the inefficiencies and tax hoops of the flip structure now often deployed to monetize the ITC. This allows developers to benefit directly instead of having to bring in tax equity investors. The inclusion of storage is welcome as it is now a part of most renewable energy projects and is critical in overcoming the non-intermittent power arguments that the fossil fuel industry uses to differentiate themselves from renewable energy companies. 

While there is a lot of negotiation and arm wrestling ahead to turn some or all of this into law, we encourage our renewable energy clients to line up projects and employees to be ready to pounce as this opportunity could be around for a short period. Hopefully the focus on American jobs and manufacturing will give it staying power, but don’t underestimate the political power of the fossil fuel industry. Now is the time.

The American Jobs Plan Fact Sheet

Below are some of the highlights from the fact sheet that pertain to renewable energy and clean electricity. You can read the full fact sheet posted on The White House's website here

  • Reenergize America’s power infrastructure. As the recent Texas power outages demonstrated, our aging electric grid needs urgent modernization. A DOE study found that power outages cost the U.S. economy up to $70 billion annually. The President’s plan will create a more resilient grid, lower energy bills for middle class Americans, improve air quality and public health outcomes, and create good jobs, with a choice to join a union, on the path to achieving 100 percent carbon-free electricity by 2035. President Biden is calling on Congress to invest $100 billion to:
  • Build a more resilient electric transmission system. Through investments in the grid, we can move cheaper, cleaner electricity to where it is needed most. This starts with the creation of a targeted investment tax credit that incentivizes the buildout of at least 20 gigawatts of high-voltage capacity power lines and mobilizes tens of billions in private capital off the sidelines right away. In addition, President Biden’s plan will establish a new Grid Deployment Authority at the Department of Energy that allows for better leverage of existing rights-of-way—along roads and railways—and supports creative financing tools to spur additional high priority, high-voltage transmission lines. These efforts will create good-paying jobs for union laborers, line workers, and electricians, in addition to creating demand for American-made building materials and parts.
  • Spur jobs modernizing power generation and delivering clean electricity. President Biden is proposing a ten-year extension and phase down of an expanded direct-pay investment tax credit and production tax credit for clean energy generation and storage. These credits will be paired with strong labor standards to ensure the jobs created are good-quality jobs with a free and fair choice to join a union and bargain collectively. President Biden’s plan will mobilize private investment to modernize our power sector. It also will support state, local, and tribal governments choosing to accelerate this modernization through complementary policies—like clean energy block grants that can be used to support clean energy, worker empowerment, and environmental justice. 

    President Biden will establish an Energy Efficiency and Clean Electricity Standard (EECES) aimed at cutting electricity bills and electricity pollution, increasing competition in the market, incentivizing more efficient use of existing infrastructure, and continuing to leverage the carbon pollution-free energy provided by existing sources like nuclear and hydropower. All of this will be done while moving toward 100 percent carbon-pollution free power by 2035.
  • Build next generation industries in distressed communities. President Biden believes that the market-based shift toward clean energy presents enormous opportunities for the development of new markets and new industries. Jumpstart clean energy manufacturing through federal procurement. The federal government spends more than a half-a-trillion dollars buying goods and services each year. This incredible purchasing power can be used to drive innovation and clean energy production. The President is calling on Congress to enable the manufacture of electric vehicles, charging ports, electric heat pumps, and clean materials, as well as critical technologies like advanced nuclear reactors and fuel, here at home through a $46 billion investment in federal buying power, creating good-paying jobs and reinvigorating local economies, especially in rural areas.
  • Create good jobs electrifying vehicles. The President is proposing a $174 billion investment to win the EV market. His plan will enable automakers to spur domestic supply chains from raw materials to parts, retool factories to compete globally, and support American workers to make batteries and EVs. 
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Now is the time: Renewable energy opportunities before mid-term elections

Read this if you are at a state Medicaid agency.

In early March 2021, the Biden administration passed the American Rescue Plan of 2021 (H.R.1319) with the primary goal of providing emergency supplemental funding for the ongoing response to the COVID-19 pandemic. Importantly, in addition to vaccines, unemployment, and other critical developments, the plan provided a number of Medicaid opportunities for states that expand eligibility and coverage, including the following:

  • Funding increases—a new incentive to expand Medicaid eligibility through a two-year, 5% increase in the state’s base Federal Medical Assistance Percentage (FMAP).
  • Coverage—the option to extend Medicaid coverage for women up to 12 months postpartum and with full Medicaid benefits.
  • System transformation—a one-year, time-limited FMAP increase of 7.35% for states to make improvements and rate increases to Medicaid home-and-community-based services (HCBS).
  • Waiver opportunities—a new incentive (enhanced FMAP for five years through bundled payments) for state Medicaid programs’ mobile crisis intervention services for individuals experiencing a mental health or substance use disorder crisis via a state plan amendment (SPA) or 1115 waiver demonstration.

What’s next?

It seems likely that the American Rescue Plan’s Medicaid provisions signal upcoming changes and opportunities for healthcare transformation for state Medicaid programs. The administration has consistently articulated a desire to “strengthen Medicaid” and while additional legislative actions are likely coming, there are also legislative limitations that may limit or curtail the type of broad reform we’ve seen in the past. As a result, it’s likely that the vehicle the administration will use to disseminate healthcare transformation in Medicaid are administrative actions such as executive orders, regulations, and administrative rule-making through the Centers for Medicaid and Medicare Services (CMS). This is likely to result in opportunities in two areas: waivers and the funding incentives to adopt new policies.

Waivers

The best tool the administration has is also one of its oldest: demonstration waivers. As noted above, the American Rescue Plan of 2021 includes the option for states to take advantage of waivers (as well as SPAs) to exercise new flexibilities. Unlike the Affordable Care Act (ACA) which was rolled out nationally, it’s likely the administration will seek out volunteer states that are innovative and willing to collaborate. The result will be more experimentation, more tailoring of policy, and a more gradual—even organic—approach to transformation.

In the short term for state Medicaid agencies this will mean a rebalancing of pending waivers and guidance. Prior policy priorities like work requirements and aggregate enrollment caps may be revised through the regulatory process in coming months or years. It is anticipated that CMS will execute a vision with a renewed focus on expanding services or coverage, much like those seen with the opportunities already presented under the American Rescue Plan.

Funding

Budget is a consistent challenge states have faced over the past year resulting largely from the COVID-19 pandemic. Even with recent aid to states and local governments there is likely to be uncertainty for the immediate future. The American Rescue Plan, like the ACA before it, finds mechanisms and incentives to raise the FMAP for states and potentially ease the state’s portion of Medicaid funding, particularly in the short term. Fitting with the theme of states as active partners, going forward there will likely be opportunities to maintain some type of increase to the FMAP. Beyond direct funding, opportunities like the recent CMS guidance on social determinants of heath, value-based payments, and models like the Community Health Access and Rural Transformation (CHART) hint at a continued focus on payment reform. States looking to lower costs and/or increase the quality of care will have ample opportunities to undertake projects in these areas.

State considerations

Regardless of next steps, states should expect both compliance needs and opportunities. States should begin to consider strategy, resources, and their priorities now. This process begins with knowing your agency’s strengths and potential limitations. Once states set their policy priorities and are ready to get underway with the business of transformation, time and resource constraints will likely be common barriers. Having a mature, flexible, and capable project management office, the right subject matter knowledge, and prequalified vendor lists to assist with Medicaid transformation can go a long way towards addressing time and resource constraints—making state Medicaid agencies agile in their response to the unique opportunities in the coming years.

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What's past is prologue: How the American Rescue Plan shows us what's next for Medicaid 

Read this if you are an employer with employees on COBRA. There are tax credits available to you. 

The American Rescue Plan Act of 2021 (ARP) creates a requirement that employers treat the total payment for Consolidated Omnibus Budget Reconciliation Act (COBRA) continuation coverage due from certain eligible individuals as being “paid in full” for April 1 through September 30, 2021 (Subsidy Period). The eligible individuals with COBRA coverage will not receive the subsidy directly from the government; rather, they will have a premium holiday during which time the employer pays 100% of the applicable COBRA premium. The employer will be reimbursed in full through refundable payroll tax credits.

The ARP provisions do not apply to all COBRA-eligible individuals; eligibility is limited to employees who lost health care benefits due to an involuntary termination or reduction in hours. While the loss of coverage event can be linked to COVID-19, it is not required to be. A loss of coverage event could have occurred as far back as November 1, 2019, since the law requires an employer to offer a continuation of COBRA coverage for 18 months after an involuntary termination (18 months from November 1, 2019 is April 30, 2021). Eligible individuals who opted not to pay for COBRA coverage will be given another opportunity to elect the free coverage.

Employers and COBRA administrators should prepare to distribute new COBRA election and subsidy notices and to make operational changes soon after further guidance is released. Eligible individuals not already on COBRA will need to act quickly after receiving the notice to elect subsidized COBRA coverage. Failing to timely elect COBRA coverage could result in forfeiting this valuable benefit.

It is expected many people will rush to take advantage of this opportunity, which can provide up to six months of health insurance at no cost. However, employers should keep in mind that the subsidy is available only for certain limited situations.

Which employers are eligible for the new subsidy?

Employers subject to federal COBRA provisions or to a state program that provides comparable group health care continuation coverage are not allowed to charge eligible individuals for COBRA coverage during the Subsidy Period. The subsidy applies to workers in every industry, most tax-exempt employers (except churches who are exempt from COBRA) and union, governmental, and Indian tribal government workers. The federal COBRA provisions generally apply to all private-sector group health plans maintained by employers that had at least 20 employees on more than 50% of its typical business days in the previous calendar year. Both full- and part-time employees are counted to determine whether a plan is subject to federal COBRA coverage. Many states have “mini-COBRA” laws that apply to employers who have fewer than 20 employees. The subsidy is mandatory for all employer-sponsored group health plans (i.e., all employers must offer the subsidy, regardless of whether the plan is fully or partially insured, or self-insured).

During the Subsidy Period, generally, the federal government will reimburse COBRA costs to employers by allowing credits against employers' Medicare (not Social Security or income) taxes (but for union plans, the plan would receive the subsidy and for insured, state “mini-COBRA” plans, the insurer would receive the subsidy). Guidance is needed to clarify how the flow of funds for the subsidy would work. The full cost of COBRA continuation coverage (including up to a 2% administrative fee) at any coverage level (e.g., single, “single-plus-one”, or family coverage) for employees and former employees and their spouses and dependents is eligible for the subsidy via the payroll tax credit. The subsidy applies to health, prescription drug, dental and vision plans, but does not apply to health flexible spending accounts (FSAs), health savings accounts (HSAs), or long-term care plans (further guidance is needed to clarify the scope of the subsidy).  

Due to the fact that most individuals who elect COBRA group health care continuation coverage usually pay 100% of those premiums (and in many cases they must also pay up to a 2% administrative fee), the new subsidy via the employment tax credit keeps the free COBRA coverage at zero cost to the employer. While the employment tax credit is taxable income, it will be offset by the employer’s deductible payment of the healthcare premiums.

Impact on eligible individuals

An eligible individual with an existing or new COBRA election will be provided tax-free health care coverage (both the premium and any administrative charge) at no charge for their remaining COBRA period that overlaps with the Subsidy Period.   

The free COBRA provided during the Subsidy Period would be “affordable” coverage under the Affordable Care Act (ACA). But it is not clear how this “affordable” coverage affects an individual who has purchased coverage on the exchange before they had an offer of affordable coverage.

A recipient of the free health care coverage must notify the employer or plan administrator when they become eligible for Medicare or another group health plan—other than coverage under an excepted benefit, an FSA or a qualified small employer health reimbursement arrangement (QSEHRA). Individuals who fail to promptly give this notice could be subject to a $250 fine and other penalties.

Who is eligible?

Generally, individuals are eligible for free COBRA coverage if (1) they are involuntarily terminated or have a reduction in hours that qualifies them for federal or state COBRA coverage and (2) the Subsidy Period overlaps with their COBRA coverage period.

The new COBRA premium assistance is not available to the following individuals:

  • Employees who are terminated for gross misconduct.
  • Employees who voluntarily terminated their employment or who retired.
  • Individuals who are eligible for COBRA due to other reasons, like divorce, death, or loss of dependency status.
  • Individuals who are eligible for other group health care coverage (such as from a new employer) or Medicare.
  • Individuals who are beyond their normal COBRA coverage period connected to the original qualifying event (i.e., the employee’s involuntary termination or reduction in hours that caused a loss of group health plan coverage).
  • Domestic partners who are not federal income tax dependents of the employee.

What’s the coverage?

Generally, the COBRA coverage will be the same as the coverage elected just prior to the involuntary termination or reduction in hours. However, employers can (but are not required to) allow individuals who are eligible for premium assistance to change their coverage provided it does not result in an increased premium cost. Further guidance is needed regarding the scope of who can change to a lower cost health plan as a result of the new law.

Eligible individuals who lost health care coverage after October 31, 2019 but do not have COBRA coverage on April 1, 2021 due to nonelection or lapse of payment will have a new, 60-day opportunity to elect COBRA coverage. If timely elected, the COBRA covered period will begin on the date of the individual’s qualifying event, but it appears that no payment is due for months prior to April 2021 and no claims can be filed prior to April 1, 2021. For the months remaining in the COBRA period that coincide with April 1 through September 30, 2021, the employee makes no payment but will have claims paid in accordance with the plan’s provisions. To have continued coverage after September 30, 2021, the employee must make the payments required under the plan. If the individual finds this unaffordable, they can simply drop the coverage.

What notices are needed?

The federal government is expected to issue model required notices addressing the existence of the subsidy, the availability of the 60-day election period and advance notice of when the Subsidy Period will be ending. In the meantime, employers should prepare for the following new notice requirements.

  • Group health plans must modify their COBRA election notices for individuals who become eligible for federal or state COBRA during the Subsidy Period to notify them of the premium assistance (and, if applicable, the option to enroll in a lower priced plan).
  • By May 31, 2021, individuals who previously rejected (or terminated) COBRA coverage and to whom a new election period must be offered, must be notified of their new election period and the availability of the premium assistance. This essentially creates a special COBRA enrollment period for such individuals.
  • Between August 17 and September 15, 2021, group health plans must provide a notice to individuals receiving the premium assistance stating that the subsidy will expire on September 30, 2021, and that they may be eligible for COBRA coverage without the subsidy. But if the subsidy would end earlier for any individual, the plan must provide a notice that the subsidy is expiring no earlier than 45 days and no later than 15 days before the subsidy expiration date.

It is not clear how these required notices must be delivered (sending paper mail to former employees may be needed).

How does the subsidy work?

Individuals who are eligible for COBRA premium assistance do not receive a payment from the federal government, group health plan, employer, or insurer. Rather, their COBRA costs are waived during the Subsidy Period.

Employers that sponsor a fully insured plan would continue paying the full premium to the insurer for the assistance eligible participants. Employers that sponsor a self-insured plan would pay the claims incurred by the assistance eligible participants. In both cases, the employer would receive no payment from the eligible individual during the Subsidy Period but would instead recover its COBRA costs (102% of the COBRA premium) for the assistance-eligible individuals by claiming a refundable federal tax credit against the employer’s Medicare taxes.

The COBRA subsidy is prospective only and cannot begin before April 1, 2021.

Although the law does not require employers to pay for any COBRA coverage, some employers pay for some or all of COBRA coverage (for example, as part of a severance package). Such employers can cease those contributions during the Subsidy Period and the federal government will provide the subsidy for 6 months. And although the subsidy is tax-free to employees, employers who take the COBRA premium tax credit must increase their gross income by the amount of such credit for the taxable year which includes the last day of any calendar quarter with respect to which such credit is allowed.
 
Also, under a “no double dipping” rule, employers cannot take the COBRA premium tax credit for any amount which is taken into account as qualified wages for the employee retention credit (ERC) under the Coronavirus Aid, Relief, and Economic Security Act (CARES) and Consolidated Appropriations Act, 2021 (CAA), or as qualified health plan expenses for the Families First Coronavirus Response Act (FFCRA), as amended by CAA and ARP. Likewise, amounts attributable to the COBRA premium tax credit would not be eligible payroll costs under the Paycheck Protection Program (PPP).

Guidance from the Internal Revenue Service (IRS) is needed to clarify how exactly employers would claim the tax credit, but it appears that employers would claim the credit on their quarterly IRS Form 941 or in advance on IRS Form 7200 if the actual or estimated amount of the credit exceeds the employer's Medicare taxes for any calendar quarter. Further guidance is also needed regarding the mechanics of the subsidy for employers that have insured state COBRA coverage, since under Section 9501(b) of the ARP the tax credits reimbursements would go to the insurer, not the employer.

Other considerations

For past COVID-19 relief tax credits, such as the ERC and FFCRA, IRS guidance allowed employers to dip into withheld income and Social Security taxes as a source of claiming those refundable tax credits. But the IRS has not yet authorized such actions for the ARP COBRA subsidy tax credit. Social Security taxes may not be available as a source for the new COBRA tax credits, since the ARP was enacted under budget reconciliation rules which prohibit any changes to Social Security.

Employers are not allowed to voluntarily expand the group of people who are eligible for the special COBRA premium subsidy, because the federal government is paying the full COBRA premium for the designated class of assistance-eligible individuals.

We expect the IRS to issue FAQs on the new COBRA Medicare tax credits, similar to the FAQs that the IRS issued on the ERC and FFCRA payroll tax credits.

This new COBRA subsidy may be economically more valuable than using qualified health care expenses for the ERC, because ERC nets 70% on the dollar whereas the COBRA subsidy is 102% (premium plus administrative charge).

What should employers do now?

Employers should immediately identify all employees who lost group health plan coverage after October 31, 2019 due to an involuntary termination or reduction in hours, without regard to their COBRA elections, because such event would have entitled the individual to 18 months of COBRA coverage (i.e., through April 30, 2021). Guidance is needed on whether notices must be given to individuals in this group that declined COBRA due to eligibility in another employer’s plan or Medicare. Employers will need to notify individuals who have an unexpired COBRA period that premium assistance is available, and they have a right to reconsider their original COBRA election.  

Employers will also need to review and perhaps modify any existing, automatic processes that might otherwise terminate COBRA coverage when premiums are not received during the Subsidy Period.

Year-end reporting on health benefits should also be reviewed to ensure these increased COBRA participants receive the appropriate Form 1095-B or C for 2021.

Employers should develop a procedure to identify COBRA recipients who are eligible for the premium assistance and those who do not qualify (for example, employers will need to distinguish a voluntary quit from an involuntary termination of employment and whether the employee was fired for gross misconduct). For premium-assistance eligible individuals, employers must refund within 60 days any premiums paid during the Subsidy Period. Not all COBRA participants will qualify for the subsidy, so the plan administrator will still need to handle some premium payments from non-eligible individuals.

Vendor outreach

Many employers use outside service providers for their COBRA administration, so employers should reach out to their vendors as soon as possible to coordinate their response to the ARP changes to current COBRA rules, especially the special election period for certain assistance-eligible individuals.

Keep in mind that, separate from the ARP COBRA subsidy, many employees (and their family members) may currently have extended COBRA election rights due to COVID-19 deadline extensions. For example, ERISA Disaster Relief Notice 2021-1 issued on February 26, 2021, announced an individualized one-year deadline extension for COBRA elections, which begins on the date the clock for the particular deadline would have started running (i.e., the one-year extension is applied on a rolling basis to each deadline for each affected individual). But individuals electing retroactive COBRA coverage under those extended deadlines will generally have to pay the full COBRA premiums for such periods. Guidance is needed on how the deadline extension coordinates with the new COBRA subsidy.

Employers may recall that in February 2009, under the American Recovery and Reinvestment Act of 2009 (ARRA), the federal government subsidized 65% of COBRA premiums for certain individuals who were terminated or laid off between September 1, 2008 and March 31, 2010 due to the financial crisis linked to the bursting of the home mortgage lending bubble. The ARRA subsidy was extended through May 31, 2010, so perhaps with Democrats currently controlling both Congress and the White House, the ARP COBRA subsidy may be extended beyond September 30, 2021. Also, the ARRA may be a model for how the flow of funds will work for the ARP premium tax credits for insured state COBRA coverage.

If you have specific questions about your situation, please contact our Employee Benefits consulting team. We’re here to help. 

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"Free" COBRA for some employees: Employers may benefit, too

Read this if you are an employer with basic knowledge of benefit plans and want to learn more. 

This article is the third in a series to help employee benefit plan fiduciaries better understand their responsibilities and manage the risks of non-compliance with Employee Retirement Income Security Act (ERISA) requirements. Our first article covers the background of ERISA, while our second article covers the definitions and rules of parties-in-interest and prohibited transactions.

Form 5500 is an informational return filed annually with the US Department of Labor (DOL). The purpose of Form 5500 is to report information concerning the operation, funding, assets, and investments of pension and other employee benefit plans to the Internal Revenue Service (IRS) and DOL. All pension benefit plans covered by the Employee Retirement Income Security Act (ERISA), and, generally, health and welfare plans covering 100 or more participants are subject to filing Form 5500. Any retirement plan covering less than 100 participants at the beginning of the plan year may be able to file Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan. Read on for important filing requirements, as noncompliance can result in substantial penalties assessed by both the DOL and IRS. 

Who has to file, and which Form 5500 is required?

Pension plans

The most common types of pension benefit plan filers include:

  • Retirement plans qualified under Internal Revenue Code (IRC) § 401(a)
  • Tax sheltered annuity plans under IRC § 403(b)(1) and 403(b)(7)
  • SIMPLE 401(k) Plan under IRC § 401(k)(11)
  • Direct Filing Entity (DFE)

Which Form 5500 you should file depends on the type of plan. Small plans covering less than 100 participants as of the beginning of the plan year will normally file a Form 5500-SF. Conversely, large plans, mainly those plans covering 100 or more participants as of the beginning of the plan year, will file Form 5500 as a general rule. 

Participants include all current employees eligible for the plan, former employees still covered, and deceased employees who have one or more beneficiaries eligible for or receiving benefits under the plan.

Welfare plans

Generally, all welfare benefit plans covered by ERISA are required to file a Form 5500. Common types of welfare benefit plans include but are not limited to medical, dental, life insurance, severance pay, disability, and scholarship funds.

Similar to pension plans, the required Form 5500 to be filed typically depends on whether the plan is a small plan with less than 100 participants at the beginning of the year, or a large plan with 100 or more participants at the beginning of the plan year. However, certain welfare benefit plans are not required to file an annual Form 5500, including, but not limited to:

  • Plans with fewer than 100 participants at the beginning of the plan year and that are unfunded, fully insured, or a combination of the two
  • Governmental plans 
  • Employee benefit plans maintained only to comply with workers’ compensation, unemployment compensation, or disability insurance laws

Participants for welfare benefit plans include current employees covered by the plan, former employees still covered, and deceased employees who have one or more beneficiaries receiving or entitled to receive benefits under the plan (e.g., COBRA). 

Required financial schedules for Form 5500

Small plans that do not file Form 5500-SF require the following schedules to be filed along with the Form 5500:

  • Schedule A—Insurance information
  • Schedule D—DFE/Participating plan information
  • Schedule I—Financial information for a small plan

Large plans require the following schedules in addition to small plan schedules:

  • Plan Audit (Accountant’s Opinion)
  • Schedule C—Service provider information
  • Schedule G—Financial transaction schedules
  • Schedule H—Financial information (instead of Schedule I)

Welfare plans with 100 or more participants that are unfunded, fully insured or a combination of the two are not required to attach Schedule H or an Accountant’s Opinion. Also, pension plans will attach Schedule SB or MB reporting actuarial information, if required, along with Schedule R reporting retirement plan information.

When to File

Form 5500 must be filed electronically by the last day of the seventh calendar month after the end of the plan year. However, a two and one-half months’ extension of time to file can be requested. Penalties may be assessed by both the IRS and the DOL for failure to file an annual Form 5500-series return. For 2020, the IRS penalty for late filing is $250 per day, up to a maximum of $150,000 (applies only to retirement plans), and the DOL penalty can run up to $2,233 per day, with no maximum. Therefore, it is very important to track participant counts and ensure compliance with filing deadlines.

If you have questions about your specific situation, please contact our employee benefit consulting team. We’re here to help.

Article
Form 5500: An overview

Read this if you are an employer that provides educational assistance to employees.

Under Section 127 of the Internal Revenue Code (IRC), employers are allowed to provide tax-free payments of up to $5,250 per year to eligible employees for qualified educational expenses. To be considered qualified, payments must be made in accordance with an employer’s written educational assistance plan. 

The Coronavirus Aid, Relief and Economic Security (CARES) Act amended Section 127 to include student loan repayment assistance as a qualified educational expense. The expansion of Section 127 allows employers to make payments for student loans without the employee incurring taxable income and the payment is a deductible expense for the employer, resulting in tax advantages to both parties.  

Originally, the CARES Act was a temporary measure allowing tax-free principal or interest payments made between March 27, 2020 and December 31, 2020.  Due to the difficulties in adopting a formal education assistance plan, many employers were unable to take advantage of the temporary incentive. As a result, the Consolidated Appropriations Act, signed into law on December 27th, 2020 extended the provision for five years through December 31, 2025.  

Employer requirements

For payments to qualify as tax-free under Section 127, you (the employer) must meet the following requirements: 

  • The employer must have a written educational assistance plan
  • The plan must not offer other taxable benefits or remuneration that can be chosen instead of educational assistance (cash or noncash)
  • The plan must not discriminate in favor of highly compensated employees
  • An employee may not receive more than $5,250 from all employers combined
  • Assistance to shareholders or owners must not exceed 5% of total amounts paid
  • Eligible employees must be reasonably notified of the plan

Eligible employees include current and laid-off employees, retired employees, disabled employees, and certain self-employed individuals. Spouses or dependents of employees are not eligible. Payments of principal or interest can be made directly to employees as reimbursement for amounts already paid (support for student loan payments should be provided by the employee) or payments can be made directly to the lender. Other educational expenses that qualify under Section 127 include:

  • Tuition for graduate or undergraduate level programs, which do not have to be job-related
  • Books, supplies, and necessary equipment, not including meals, lodging, transportation, or supplies that employees may keep after the course is completed

The five-year extension of this student loan repayment assistance can provide tax savings to both employers (employer portion of FICA) and employees (federal and state withholding, and FICA). Additionally, offering a qualified educational assistance program may help strengthen an employers’ recruitment and retention efforts. 

If you have more questions, or have a specific question about your situation, please call us. We’re here to help.

Article
CARES Act expansion of Section 127 of the IRC: Tax savings for employers

Read this if your organization has received assistance from the Provider Relief Fund.

On January 15, 2021 the US Department of Health & Human Services released updated guidance on the Provider Relief Fund (PRF) reporting requirements. Below, we outline what has changed and supersedes their last communication on November 2, 2020.

This amended guidance is in response to the Coronavirus Response and Relief Supplemental Appropriations Act (Act). The act was passed in December 2020 and added an additional $3 billion to the PRF along with new language regarding reporting requirements. 

Highlights

Please note this is a summary of information and additional detail and guidance that can be found on the Reporting Requirements and Auditing page at HHS.gov. See our helpful infographic for a summary of key deadlines and reporting requirements. 

  • On January 15, 2021 The Department of Health and Human Services (HHS) announced a delay in reporting of the PRF. Further details on the deadline for this reporting have not yet been communicated by HHS. Recipients of PRF payments greater than $10,000 may register to report on use of funds as of December 31, 2020 starting January 15, 2021. Providers should go into the portal and register and establish an account now so when the portal is open for reporting they are prepared to fulfil their reporting requirements.
  • Recipients who have not used all of the funds after December 31, 2020, have six more months from January 1 – June 30, 2021 to use remaining funds. Provider organizations will have to submit a second report before July 31, 2021 on how funds were utilized for that six-month period. 
  • The new guidelines further define the reporting entity and how to report if there is a parent company with subsidiaries for both general and targeted distributions:
     
    • Parent organizations with multiple TINs that either received general distributions or received them from parent organizations can report the usage of these funds even if the parent was not the entity that completed the attestation.
    • While a targeted distribution may now be transferred from the receiving subsidiary to another subsidiary by the parent organization, the original subsidiary must report any of the targeted distribution it received that was transferred.
       
  • The calculation of lost revenue has been modified by HHS through this new guidance. Lost revenue is calculated for the full year and can be calculated as follows:
     
    1. Difference between 2019 and 2020 actual client/resident/patient care revenue. The revenue must be submitted by client/resident/patient care mix and by quarter for the 2019 year.
    2. Difference between 2020 budgeted and 2020 actual. The budget must have been established and approved prior to March 27, 2020 and this budget, as well as an attestation from the CEO or CFO that this budget was submitted and approved prior to March 27, 2020, will have to be submitted.
    3. Reasonable method of estimating revenue. An explanation of the methodology, why it is reasonable and how the lost revenue was caused by coronavirus and not another source will need to be submitted. This method will likely fall under increased scrutiny through an audit by the Health Resources & Services Administration.
       
  • Recipients with unexpended PRF funds in full after the end of calendar year 2020, have an additional six months to utilize remaining funds for expenses or lost revenue attributable to coronavirus in an amount not to exceed the difference between:
     
    • 2019 Quarter 1 to Quarter 2 and 2021 Quarter 1 to Quarter 2 actual revenue,
    • 2020 Quarter 1 to Quarter 2 budgeted revenue and 2021 Quarter 1 to Quarter 2 actual revenue.

Next steps

In the wake of this new guidance, providers should undertake the following steps:

  • Register in the HHS portal and establish an account as soon as possible.
  • Revisit lost revenue calculations to determine if current methodology is appropriate or if an updated methodology would be more appropriate under the new guidance.
  • Understand the ability to transfer general and targeted distributions and the impact on reporting of these funds.
  • Develop reporting procedures for lost revenue and increased expense for reporting in the HHS portal.

If you have questions about accounting for, or reporting on, funds that you have received as a result of the COVID-19 pandemic, please contact a member of our team. We’re here to help.

Article
Coronavirus Response and Relief Act impacts on the HHS Provider Relief Fund