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

By:

A Senior in the firm's Assurance Practice and a member of our
Employee Benefit Plan Audit Group, Rich provides assurance
services to a spectrum of plans throughout New England. He also
serves as a member of the firm's Financial Services Group, working
with community banks, credit unions, and other financial institutions.

Richard Marchi
04.19.21

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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Read this if you are a plan sponsor of employee benefit plans.

This article is the fifth 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.

With increasing regulations surrounding employee benefit plans, plan sponsors are under more scrutiny than ever to ensure that they meet their fiduciary responsibilities. One of the most common mistakes made by plan sponsors is failing to timely deposit employee elective deferrals into the plan’s trust (the plan). 

Employee elective deferrals: What are the regulations?

Under the Department of Labor (DOL) guidelines, employee elective deferrals should be deposited into the plan as soon as they can be reasonably segregated from the employer’s general assets. However, in no event can the deposit be later than the 15th business day of the month following the month in which the employee deferrals are received by the employer. Failure to deposit employee deferrals into the plan by the 15th business day timeframe may constitute both an operational mistake (if the plan specifies a date by which the employer must deposit elective deferrals) and a prohibited transaction.

Important to note, the 15-business day rule does not provide a safe harbor against penalties for untimely deposits of employee deferrals to the Plan. In general, employee salary deferrals and participant loan payments should be deposited into the plan within one to three business days following the payroll pay date from which withheld. 

Correcting late deposits

The best strategy is to avoid late remittances. If, however, it does happen, there are steps that plan sponsors should take to correct the error. You should first deposit any delinquent contributions to the plan as soon as possible, including lost earnings on all late contributions. Plan sponsors who opt to correct under the DOL’s Voluntary Fiduciary Correction Program (VFCP) can calculate lost earnings using the DOL’s online calculator. Alternatively, plan sponsors who opt to self-correct generally use the greater of the plan’s actual rate of return or the rate set by the IRS for underpayment. You should also consider reviewing your procedures to determine the cause of the delay, and adjust as necessary to avoid untimely deposits going forward. 

Potential tax ramifications

Internal Revenue Service (IRS) Form 5330, Return of Excise Taxes Related to Employee Benefit Plans may also be required to be completed by plan sponsors after correcting for late deposits and lost earnings. The amount of excise tax the IRS applies equals 15% of the lost earnings, and must be paid each year until the corrections are made. 

Plan sponsors who opt to self-correct should note that you forfeit the opportunity to have the IRS waive the excise tax requirement as potentially afforded under the VFCP.

Continued monitoring

Monitoring the timeliness of deferral remittances is an important step to ensure that plan sponsors are meeting their fiduciary responsibilities. If you have established procedures in place for this process, make sure to review the procedures periodically to ensure compliance.  If issues arise, take prompt corrective action under either the VFCP or self-correct options so that the errors are remediated as soon as possible.

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Timeliness is next to godliness: Depositing participant elective deferrals

Read this if you work for a healthcare organization that serves uninsured or self-pay patients.

The No Surprises Act was passed in 2020 as part of a COVID relief package, with the goal of reducing surprise bills for patients who received medical or surgical services. One part of the act requires healthcare facilities and providers to give Good Faith Estimates (GFEs) to uninsured and self-pay patients starting on January 1, 2022. Read on for frequently asked questions about this topic, an update for 2023, and resources where you can find more information.

Frequently asked questions about good faith estimates for healthcare

What is a good faith estimate?

A Good Faith Estimate (GFE) is a document provided to a patient that details the expected charges for healthcare services provided. It is not a bill.

Who needs to provide GFEs, and to whom?

At this time, GFEs need to be provided to uninsured and self-pay patients. 

The following healthcare facilities must comply:

  • Federally Qualified Health Centers (FQHCs)
  • FQHC Look-Alikes
  • Tribal/Urban Indian Health Centers
  • Rural Health Clinics (RHCs)
  • Hospitals
  • Hospital outpatient departments
  • Critical access hospitals
  • Title X Family Planning Clinics
  • Health care providers who serve uninsured and self-pay patients

How should information about the GFE process be communicated to uninsured and self-pay individuals?

Information about the availability of GFEs for uninsured or self-pay individuals must be:

  • Written in a clear and understandable manner and prominently displayed:
  • On the facility’s website and easily searchable from a public search engine
  • In the office (such as in the patient waiting room), and
  • Onsite where scheduling or questions about the cost of items or services occur, such as at the registration or check-out areas
  • Explained verbally when scheduling an item or service or when questions about the cost of items or services occur
  • Made available in accessible formats, and in the languages spoken by individuals considering or scheduling items or services

How does the US Department of Health and Human Services (HHS) define uninsured and self-pay individuals?

HHS has a two-fold definition:

  • Individuals who have no health insurance coverage
  • Individuals who do have health insurance coverage, but do not want to have a claim submitted to their insurer

Both of these groups of individuals must receive a GFE.

What content is required in a GFE?

A GFE must include the following:

Patient information

  • The patient’s name and date of birth

Services estimated

  • A description of the primary item or service in clear and understandable language and, if applicable, the date the primary item or service is scheduled
  • A list of items or services reasonably expected to be furnished for the primary item or service

Information about services, providers, and estimated charges

  • Applicable diagnosis codes, expected service codes, and expected charges associated with each listed item or service
  • The name, National Provider Identifier, and Tax Identification Number of each provider or facility represented in the GFE, and the State and office of the facility’s location where the items are services are expected to be provided
  • Lists of items or services that the provider or facility anticipates will require separate scheduling and that are expected to occur before or following the expected period of care for the primary item or service. (A disclaimer should state that separate GFEs will be issued upon scheduling or upon request of the listed items or services.)

Disclaimers

  • A disclaimer that there may be additional items or services that the provider or facility recommends as part of the course of care that must be scheduled or requested separately and are not included in the GFE
  • A disclaimer that the information provided in the GFE is only an estimate and that actual items, services, or charges may differ from the GFE
  • A disclaimer that the individual has a right to initiate the patient-provider dispute resolution process if the actual billed charges are substantially in excess of the expected charges included in the GFE.
  • “Substantially in excess” is defined as at least $400 more than the total amount of expected charges.
  • This disclaimer must include instructions about where an uninsured or self-pay individual can find information about how to initiate the patient-provider dispute resolution process and state that the initiation of the patient-provider dispute resolution process will not adversely affect the quality of health care services that are furnished.
  • HHS strongly encourages providers and facilities to include an email address and telephone number for someone within the provider’s or facility’s office that has the authority to represent the provider or facility in a billing dispute.
  • A disclaimer that a GFE is not a contract and does not require the uninsured or self-pay individual to obtain the items or services identified in the GFE.

HHS encourages sliding fee discount providers and facilities to include information about the provider’s or facility’s sliding fee schedule and any other financial protections that it offers. Sliding fee discount providers and facilities have flexibility to determine how best to demonstrate the expected charges associated with each listed item or service, and to determine what additional information to include, if any.

What are the required methods for providing a GFE?

A GFE must be provided in written form either on paper or electronically, based on the individual’s requested method of delivery and within the required time frames. GFEs that are provided electronically must be provided in a manner that the individual can both save and print. A GFE must be written using clear and understandable language that can be understood by the average uninsured or self-pay individual.

If the individual requests a GFE in a method other than on paper or electronically (such as by telephone or verbally in person), the provider or facility may verbally inform the individual of the information contained in the GFE. However, the provider or facility must also issue the GFE in written form.

What is the timeline for providing a GFE?

When providing a GFE to an uninsured or self-pay patient, the following time frames must be followed.

When the service is scheduled: When the GFE must be provided:
If scheduled at least 3 business days prior to the date that the item or service will be furnished Not later than 1 business day after the date of scheduling
If scheduled at least 10 business days prior to the date that the item or service will be furnished Not later than 3 business days after the date of scheduling

Please note, when a GFE is requested by an uninsured or self-pay patient, a GFE must be provided not later than 3 business days after the date of the request.

How long should a provider or facility retain a copy of GFEs?

A GFE is considered part of the patient’s medical record and must be maintained in the same manner. At the request of an uninsured or self-pay individual, the provider or facility must provide a copy of any previously issued GFE within the last six years.

Update for 2023

  • As of the start of 2023, all of the preceding requirements remain in place.
  • As of January 1, 2023, HHS has paused enforcement on the next phase of GFE implementation

The next phase of GFE implementation, which began on January 1, 2023, requires that GFEs for uninsured and self-pay patients include expected charges from co-providers or co-facilities that are part of an episode of care for a patient coordinated by a provider or facility. However, on December 2, 2022, HHS paused its enforcement of this requirement based on comments it received during the rulemaking process indicating that compliance with this provision was likely not possible by January 1, 2023.

HHS is extending enforcement discretion, pending future rulemaking, for situations where GFEs for uninsured or self-pay individuals do not include expected charges from co-providers or co-facilities. We will provide an update when HHS issues any communication about changes to GFE-related enforcement.

Helpful resources for FQHC, RHCs, and other healthcare facilities

If you have questions about the information provided in this article or are interested in an external review of your healthcare facility’s compliance with current GFE requirements, please contact Robyn Hoffmann or Mary Dowes.

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Healthcare Good Faith Estimates (GFEs): Updates for 2023

Read this if you are a provider who works with MaineCare and files an annual cost report.

Each year the Department of Health and Human Services (DHHS) Division of Audit releases updated MaineCare cost report templates in Excel format. In the most recent revision of the templates, DHHS has made some significant changes that providers should be aware of when preparing to file their cost reports. We’ve highlighted them here. 

  • Supplemental Payments (Schedule GG)—DHHS has updated the format of Schedule GG to a new simplified form where providers no longer need to report expenses in each individual cost center, but rather will only need to identify the total expense in each component (i.e., direct, fixed, routine, and PCS for Residential Care Facilities (RCF) Appendix C). DHHS has designated specific cost centers for each offset in each component. In addition, there are now multiple Schedule GGs, including a separate schedule for each level of service within each template. Each level of service must complete one schedule for the payments received in the first round (September and October 2021) and a second to reflect the payments received in the second round (August 2022). Each Schedule GG includes a line to report supplemental payments earned in a prior period and a reconciliation of any amounts unearned.
    • For providers who have already filed their 2022 cost reports and wish to adjust their Schedule GG, they can refile just Schedule GG on the simplified form. An entire updated cost report is not necessary or suggested as the Division of Audit will incorporate the updated Schedule GG at the time of audit. This also applies to any providers wishing to amend and refile their 2021 Schedule GG. 
  • RCF High MaineCare Utilization (HMU)—Effective 7/1/2022, HMU is a new component of the RCF rate pursuant to 2022 P.L. Ch. 635. The new HMU payment required DHHS to update the cost report forms to include a settlement of these payments. As such, DHHS has added a new schedule, Schedule HH, to all RCF Appendix C, including multi-level cost reports that report HMU earned. In addition, a table was added to the bottom of Schedule L-R&B to calculate the payments received. The payments received flows to Schedule HH, where a settlement is calculated that flows to the RCF room and board settlement page. 
  • Minimum Occupancy Penalty—Per the Office of MaineCare Services News Release from November 15, 2022, the Office of MaineCare Services is temporarily waiving the minimum occupancy penalty for nursing facilities (NF), found in Chapter III, Section 67, principle 18.9, through the end of the federal Public Health Emergency (PHE). Additionally, DHHS is temporarily waiving the minimum occupancy penalty for RCF, Private Non-Medical Institution (PNMI) Appendix C facilities, found in DHHS Rule Chapter 115, principle 34.3, through the end of the federal PHE. In order to accommodate this within the cost report, the penalty calculation has been removed from Schedule G (NF), Schedule X (multi-level), and Schedule A (RCF free-standing). 
  • Revenue—DHHS also added a new schedule, Schedule D (B-1 on the ICF template), which is a summary of revenue by payor.

There were also some minor changes made last summer including:

  • Schedule F & R (NF), Schedule E (RCF/PNMI), and Schedule B (Intermediate Care Facilities (ICF))—Added a new cost center to the fixed costs section for “COVID Staff Universal & Surveillance Testing.” 
  • Schedule B (NF)—Added a Direct Care add-on column for the AAAA add-on (125% of minimum wage) based on updated rate letters. 
  • Schedule E (NF)—Removed the median question due to LD 684. There is now no need to be under the medians to qualify for ultra-high MaineCare utilization (over 80% utilization). 
  • Schedule J (NF and ICF), Schedule L-PNMI (RCF/PNMI), and Schedule B (Appendix F)—Updated wording from TRI (temporary rate increase) to ECA (extraordinary circumstances allowance) funding.

Cost reports must be submitted in Excel format and DHHS is no longer accepting locked or protected cost report files or files that have hidden tabs. Cost reports and supporting documentation should be filed using MOVEit. If you have not established an account with DHHS yet for MOVEit, please reach out to Lucas Allen, Manager of Data Analytics

Please note the following specifications for online submission to MOVEit:

  • Each filename will need to contain: facility/agency name, four-digit year, what the document relates to, and what the document is (i.e., cost report).
  • Files cannot be a zipped file.
  • Files cannot be password protected or restricted in any way.
  • No folders are to be uploaded.
  • It is recommended that supporting documentation be combined into one PDF document with appropriate bookmarks for each supporting document, but this is not a requirement. If the supporting documentation is not in one PDF file, label all files with the facility/agency name, four-digit year, and what the document is.
  • Files need to be in one of the following formats: Microsoft product or Adobe PDF to ensure it is machine readable.

As a reminder, when submitting your cost report and supporting documentation:

  • Complete all schedules in the cost report. If a specific schedule does not apply to your facility, mark “N/A” on the schedule.  
  • Do not alter the schedules in the cost report.  
  • Submit a completed cost report checklist, and place a checkmark for each section that applies to your facility or “N/A” for any section that does not apply.  
  • Submit all supporting documentation identified on the checklist in an acceptable format (Microsoft product or Adobe PDF).

If you have any questions on these changes or would like to talk about your specific needs, please contact our senior living team. We are here to help.

Article
MaineCare cost report templates: What providers should know about the current year changes

Read this if you are at a financial institution and concerned about fraud.

Financial fraud by the numbers

Back in 2021, BerryDunn’s David Stone wrote about occupational fraud at financial institutions. This article mainly cited information from a 2020 Report to the Nations: Banking and Financial Services Edition (2020 Report) published by the Association of Certified Fraud Examiners (ACFE). Fast forward to 2023, and the ACFE’s 2022 Report to the Nations (2022 Report) displays that occupational fraud continues to be a concern.

Financial institutions account for 22.3% of all occupational fraud worldwide, up from 19% in the 2020 Report. These fraud causes have a median loss of $100,000 per case—which was the same as the 2020 Report. Cases had decreased from the 2020 Report from 368 to 351; however, financial institutions remain the most susceptible industry to occupational fraud.

What does a fraudster look like, and how do they commit their crimes? How do you prevent fraud from happening at your organization? And how can you strengthen an already robust anti-fraud program? These questions, raised in David’s 2021 article, remain relevant today. 

Profile of a fraudster

One of the most difficult tasks any organization faces is identifying and preventing potential cases of fraud. This is especially challenging because most employees who commit fraud are first-time offenders with no record of criminal activity, or even termination at a previous employer.

The 2022 Report reveals a few commonalities between fraudsters. The amounts from the 2020 Report are shown in parentheses for comparison purposes:

  • 6% of fraudsters had a prior criminal background (3%)
  • Men committed 73% of fraud and women committed 27% (71%, 29%)
  • 37% of fraudsters were an employee, 39% worked as a manager, and 23% operated at the executive/owner level (56%, 27%, 14%)
  • The median loss for fraudsters who had been with their organizations for more than five years was $193,500 compared to $75,000 for fraudsters who had been with their organizations for five years or less ($150,000, $86,000)

Employees who committed fraud displayed certain behaviors during their schemes. The ACFE reported these top red flags in its 2022 Report:

  • Living beyond means—39% (42%)
  • Financial difficulties—25% (33%)
  • Unusually close association with vendor/customer—20% (15%)
  • Divorce/family problems—11% (14%)

These figures give us a general sense of who commits fraud and why. But in all cases, the most pressing question remains: how do you prevent the fraud from happening?

Preventing fraud: A two-pronged approach

As a proactive plan for preventing fraud, we recommend focusing time and energy on two distinct facets of your operations: leadership tone and internal controls.

Leadership tone

The Board of Directors and senior management are in a powerful position to prevent fraud. By fostering a top-down culture of zero tolerance for fraud, you can diminish opportunity for employees to consider, and attempt, fraud.

It is crucial to start at the top. Not only does this send a message to the rest of the company, but frauds committed at the executive level had a median loss of $337,000 per case, compared to a median loss of $50,000 when an employee perpetrated the fraud. This is compared to a median loss of $1,265,000 and $77,000 per case, respectively, in the 2020 Report.

Internal controls

Every financial institution uses internal controls in its daily operations. Override of existing internal controls, lack of internal controls, and lack of management review were cited in the 2022 Report as the most common internal control weaknesses that contribute to occupational fraud.

The importance of internal controls cannot be overstated. Every organization should closely examine its internal controls and determine where they can be strengthened—even financial institutions with strong anti-fraud measures in place.

The experts at BerryDunn have created a checklist of the top 10 controls for financial institutions, available in our whitepaper on preventing fraud. This is a list we encourage every financial leader to read. By strengthening your foundation, your company will be in a powerful place to prevent fraud. 

Read more to prevent fraud

Employees are your greatest strength and number one resource. Taking a proactive, positive approach to fraud prevention maintains the value employees bring to a financial institution, while focusing on realistic measures to discourage fraud.

In our free white paper on preventing financial institution fraud, we take a deeper look at how to successfully implement a strong anti-fraud plan. Download the white paper here.

Commit to strengthening fraud prevention and you will instill confidence in your Board of Directors, employees, customers, and the general public. It’s a good investment for any financial institution. If you have questions about your specific situation, please visit our Ask the Advisor page to submit them, or contact a member of the Financial Institutions team. We’re here to help.

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Preventing fraud at financial institutions 2023 update: An anti-fraud plan is the best investment you can make

Read this if you are a financial institution.

Whether you think of New Year’s resolutions or goal setting, it’s that time of year where we traditionally take time for reflection (current state, desired state) in order to take action on the change we want to see. Understandably, as many institutions have been so focused on developing and understanding their CECL model and results, evolving the internal control environment may have, well, lagged a little. Which is why, in the spirit of starting the new year on the right foot, now is the perfect time to think about internal CECL controls.

CECL internal controls: Where to start?

Let’s acknowledge this right away: there is no “best” place to start. Some folks like to review what controls they already have in place and then think about how best to evolve or tweak them. Others may prefer to take a clean slate approach—map out the CECL workflows, identify risks, and then determine what controls are needed. One way to bridge these approaches is after you’ve mapped out the process, risks, and controls, then compare that to what you already have and make the necessary adjustments. We’ve seen all of these approaches work, but there are some pros and cons and pitfalls to consider for each. 

Existing controls

If you choose to begin by reviewing and tweaking the controls you already have, one pitfall is that you may not challenge your thinking enough to recognize where new risks have been introduced with your CECL methodology. For example, how does the CECL calculation—and all the new data you are now relying on—impact controls? Is your area responsible for making choices about all those numbers, values, and codes, or are those calculations, choices, and decisions taking place in other areas where controls may need to be developed, or reviewed and enhanced for CECL?

Another good example: if you’ve invested in software, have you recognized the need for new controls over data flow in and out of that system, including the manual calculations you’re doing outside of the system and then keying those results into the system as model inputs? We have found that some people go into this approach thinking it will save them time—like a short-cut—only to realize later they’ve missed the opportunity to identify one or more key risks/controls.

Clean slate mapping

Speaking from experience, this approach can take some time but may be a great way to ensure your thinking is not limited by “what you’ve always” done or had in place. That said, we can appreciate that while staring at a blank page is energizing to some, it can feel overwhelming to others. Moreover, that overwhelmed feeling may be the underlying reason why it is tough to engage in this approach.

Here’s the big tip: put some sort of starting point on paper (maybe even the middle of the paper) understanding that as you think about it, you could be adding to the workflow before, above, under, or past that starting point. It’s okay that you don’t know all the related workflows because you’re identifying that there are related workflows whose risks/controls may be in other areas that need to be further explored. Maybe take this activity, initially, to a conference room with a big dry-erase board (there are online versions of this, too)! 

Now, just like those new year’s resolutions for increased exercise that sometimes are easier to stick to when you have an accountability partner—is there someone in your organization that is particularly adept at creating workflows whose strengths and talents you can tap into to help you create this one? 

Tips for helping ensure CECL internal control success

No matter which approach you end up taking, here are some of our top tips for helping ensure CECL internal control success:

Communicate: Outreach and awareness are foundational to engaging others in this process. It is so understandably easy for people not directly involved in the day-to-day CECL calculation to even realize they have a key role to play when it comes to CECL controls. 

Cooperate: Invite others into the process, especially when it comes to helping you evaluate how changes under CECL relate to work they do day-to-day. Work together to simply understand or clarify how the pieces fit together. 

Collaborate: There are lots of ways to design, test, and monitor internal controls. Lean into the strengths and talents of others to help create efficient and effective controls that can save you and others a lot of time and headache. I recommend this no matter how mature the control practice is—there may be ways to make it better and easier.

Coach, train, and support: I advise against the “control dump and run”—letting someone know they have one or two new controls, and then leaving them to it. Certainly, there is value in having to solve something from the ground up. However, helping others connect the dots between why controls are important, ways to evaluate and structure them, and who in the organization can collaborate with them to make them as easy and effective as possible, goes a long way toward getting the most value out of your control environment.

Seek advice: CECL is new for almost everyone, and controls are not a one-size fits all. Engaging someone experienced in both CECL and controls can help challenge your thinking, open your eyes to pitfalls, prevent over-engineering, provide perspective, and help you transition as you grow. 

No matter your CECL challenge or pain point, our team of experts is here to help you navigate the requirements as efficiently and effectively as possible. For more information, visit the CECL page on our website. If you would like specific answers to questions, please visit our Ask the Advisor page to submit your questions.

For more on CECL, stay tuned for our next article in the series, or enjoy our CECL Radio podcasts. You can also follow Susan Weber on LinkedIn.

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Resolve to consider internal CECL controls

Read this if your organization receives charitable donations.

As the holiday season has passed and tax season is now upon us, we have our own list of considerations that we would like to share—so that you don’t end up on the IRS’ naughty list!

Donor acknowledgment letters

It is important for organizations receiving gifts to consider the following guidelines, as doing some work now may save you time (and maybe a fine or two) later.

Charitable (i.e., 501(c)(3)) organizations are required to provide a contemporaneous (i.e., timely) donor acknowledgment letter to all donors who contribute $250 or more to the organization, whether it be cash or non-cash items (e.g., publicly traded securities, real estate, artwork, vehicles, etc.) received. The letter should include the following:

  • Name of the organization
  • Amount of cash contribution
  • Description of non-cash items (but not the value)
  • Statement that no goods and services were provided (assuming this is the case)
  • Description and good faith estimate of the value of goods and services provided by the organization in return for the contribution

Additionally, when a donor makes a payment greater than $75 to a charitable organization partly as a contribution and partly as a payment for goods and services, a disclosure statement is required to notify the donor of the value of the goods and services received in order for the donor to determine the charitable contribution component of their payment.

If a charitable organization receives noncash donations, it may be asked to sign Form 8283. This form is required to be filed by the donor and included with their personal income tax return. If a donor contributes noncash property (excluding publicly traded securities) valued at over $5,000, the organization will need to sign Form 8283, Section B, Part IV acknowledging receipt of the noncash item(s) received.

For noncash items such as cars, boats, and even airplanes that are donated there is a separate Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, which the donee organization must file. A copy of the Form 1098-C is provided to the donor and acts as acknowledgment of the gift. For more information, you can read our article on donor acknowledgments.

Gifts to employees

At the same time, many employers find themselves in a giving spirit, wishing to reward the employees for another year of hard work. While this generosity is well-intended, gifts to employees can be fraught with potential tax consequences organizations should be aware of. Here’s what you need to know about the rules on employee gifts.

First and foremost, the IRS is very clear that cash and cash equivalents (specifically gift cards) are always included as taxable income when provided by the employer, regardless of amount, with no exceptions. This means that if you plan to give your employees cash or a gift card this year, the value must be included in the employees’ wages and is subject to all payroll taxes.

There are, however, a few ways to make nontaxable gifts to employees. IRS Publication 15 offers a variety of examples of de minimis (minimal) benefits, defined as any property or service you provide to an employee that has a minimal value, making the accounting for it unreasonable and administratively impracticable. Examples include holiday or birthday gifts, like flowers, or a fruit basket, or occasional tickets for theater or sporting events.

Additionally, holiday gifts can also be nontaxable if they are in the form of a gift coupon and if given for a specific item (with no redeemable cash value). A common example would be issuing a coupon to your employee for a free ham or turkey redeemable at the local grocery store. For more information, please see our article on employee gifts.

Other year-end filing requirements

As the end of the calendar year approaches, it is also important to start thinking about Form 1099 filing requirements. There are various 1099 forms; 1099-INT to report interest income, 1099-DIV to report dividend income, 1099-NEC to report nonemployee compensation, and 1099-MISC to report other miscellaneous income, to name a few.

Form 1099-NEC reports non-employment income which is not included on a W-2. Organizations must issue 1099-NECs to payees (there are some exclusions) who receive at least $600 in non-employment income during the calendar year. A non-employee may be an independent contractor, or a person hired on a contract basis to complete work, such as a graphic designer. Payments to attorneys or CPAs for services rendered that exceed $600 for the tax year must be reported on a Form 1099-NEC. However, a 1099-MISC would be sent to an Attorney for payments of settlements. For additional questions on which 1099 form to use please contact your tax advisor.

While federal income tax is not always required to be withheld, there are some instances when it is. If a payee does not furnish their Tax Identification Number (TIN) to the organization, then the organization is required to withhold taxes on payments reported in box 1 of Form 1099-NEC. There are other instances, and the rates can differ so if you have questions, please reach out to your tax advisor. 1099 forms are due to the recipient and the IRS by January 31st.

Whether organizations are receiving gifts, giving employee gifts, or thinking about acknowledgments and other reporting we hope that by making our list and checking it twice we can save you some time to spend with your loved ones this holiday season. We wish you all a very happy and healthy holiday season!

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Making a year-end list and checking it twice

Read this if you are a not-for-profit executive, CFO, or audit professional.

You may have heard—or tried not to—a lot about the new Current Expected Credit Loss (CECL) accounting standard1 that has consumed much of the banking industry for the past few years. While the impact to banks has snagged most of the headlines, webinars, and conference sessions, the new accounting standard applies to a broad range of financial instruments, meaning it affects a lot of companies and organizations outside the banking industry. Assessing your readiness is critical, as the standard goes into effect for all remaining organizations in 2023. 

Does CECL affect your organization? 

The first step is determining if you have any in-scope financial instruments; ASU 326-20-15-2 is the section of the new standard that identifies these assets. Please do consult the standard directly but, to briefly explain, it applies to financial assets measured at amortized cost basis, including financing receivables, held-to-maturity debt securities, trade and other receivables, net investments in leases recognized by lessors, and off-balance-sheet credit exposures for loans, letters of credit, and financial guarantees not accounted for as insurance. If your organization has any of these financial assets – receivables and leases are likely the major categories for non-banks – then you will need to ensure you comply with the requirements of the new standard. 

What’s different?

In addition to applying to many more types of financial instruments, CECL meaningfully changes the way in which reserves are calculated. First, all in-scope assets must be segmented—or grouped—by common risk-based characteristics, determined and documented by each organization. ASC 326-20-55-5 provides examples of risk characteristics that individually, or in combination, may define a segment—a few examples include financial asset type, credit score or rating, geographical location, or term.

Once you have determined your segments, there are at least seven new methods for calculating the segment-level reserve. While the methods are mentioned in the standard, we’ve compiled a brief overview of the various methods for reference.

Another key change is that all in-scope assets must be considered for reserve—even those for which the likelihood of loss is small. Regardless of which allowable method(s) you choose for your calculation, the method is based on a life-of-asset time frame, meaning that you need to estimate risk of loss over the remaining time you believe the financial asset will be on your books.

Additionally, the standard requires you consider how this risk might change given a reasonable and supportable forecast of economic conditions over that remaining life. As a result of these key new elements, any in-scope financial asset(s) for which you compute and carry a $0 reserve must be very well-documented and explained.

New required financial statement disclosures

One final note: There are some new financial statement disclosures required with CECL adoption. Beyond those, there may be other CECL-related information either you want to share, or your audit/tax firm recommends be disclosed. Consulting with your auditor at least one quarter prior to financial statement preparation will help make sure you aren’t scrambling last minute to draft new language or tables. 

No matter what stage of CECL readiness you are in, our team of experts are here to help you navigate the requirements as efficiently and effectively as possible.
 

1Accounting Standards Codification (ASC) 326

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CECL isn't just for banks: Are you ready?

Read this if your company is considering financing through a sale leaseback.

In today’s economic climate, some companies are looking for financing alternatives to traditional senior or mezzanine debt with financial institutions. As such, more companies are considering entering into sale leaseback arrangements. Depending on your company’s situation and goals, a sale leaseback may be a good option. Before you decide, here are some advantages and disadvantages that you should consider.

What is a sale leaseback?

A sale leaseback is when a company sells an asset and simultaneously enters into a lease contract with the buyer for the same asset. This transaction can be used as a method of financing, as the company is able to retrieve cash from the sale of the asset while still being able to use the asset through the lease term. Sale leaseback arrangements can be a viable alternative to traditional financing for a company that owns significant “hard assets” and has a need for liquidity with limited borrowing capacity from traditional financial institutions, or when the company is looking to supplement its financing mix.

Below are notable advantages, disadvantages, and other considerations for companies to consider when contemplating a sale leaseback transaction:

Advantages of using a sale leaseback

Sale leasebacks may be able to help your company: 

  • Increase working capital to deploy at a greater rate of return, if opportunities exist
  • Maintain control of the asset during the lease term
  • Avoid restrictive covenants associated with traditional financing
  • Capitalize on market conditions, if the fair value of an asset has increased dramatically
  • Reduce financing fees
  • Receive sale proceeds equal to or greater than the fair value of the asset, which generally is contingent on the company’s ability to fund future lease commitments

Disadvantages of using a sale leaseback

On the other hand, a sale leaseback may:

  • Create a current tax obligation for capital gains; however, the company will be able to deduct future lease payments.
  • Cause loss of right to receive any future appreciation in the fair value of the asset
  • Cause a lack of control of the asset at the end of the lease term
  • Require long-term financial commitments with fixed payments
  • Create loss of operational flexibility (e.g., ability to move from a leased facility in the future)
  • Create a lost opportunity to diversify risk by owning the asset

Other considerations in assessing if a sale leaseback is right for you

Here are some questions you should ask before deciding if a sale leaseback is the right course of action for your company: 

  • What are the length and terms of the lease?
  • Are the owners considering a sale of the company in the near future?
  • Is the asset core to the company’s operations?
  • Is entering into the transaction fulfilling your fiduciary duty to shareholders and investors?
  • What is the volatility in the fair value of the asset?
  • Does the transaction create any other tax opportunities, obligations, or exposures?

The Financial Accounting Standards Board’s new standard on leases, Accounting Standards Codification (ASC) Topic 842, is now effective for both public and private companies. Accounting for sale leaseback transactions under ASC Topic 842 can be very complex with varying outcomes depending on the structure of the transaction. It is important to determine if a sale has occurred, based on guidance provided by ASC Topic 842, as it will determine the initial and subsequent accounting treatment.

The structure of a sale leaseback transactions can also significantly impact a company’s tax position and tax attributes. If you’re contemplating a sale leaseback transaction, reach out to our team of experts to discuss whether this is the right path for you.

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Is a sale leaseback transaction right for you?