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Secure 2.0 Act of 2022 introduces key changes for workplace retirement plans

03.07.23

The Consolidated Appropriations Act, 2023 (Public Law No. 117-328) that was signed into law on December 29, 2022 by President Joe Biden includes the SECURE 2.0 Act of 2022, which introduces over 90 changes to the federal rules governing workplace retirement plans. 

This landmark legislation builds on the original SECURE Act enacted on December 19, 2019, and aims to expand coverage and increase retirement savings while simplifying and clarifying retirement plan rules.

Every employer, whether for-profit or tax-exempt, that currently maintains a qualified retirement plan or is evaluating a future plan should consider implementing these new rules, since the changes are generally beneficial for employees.  

Unless the Internal Revenue Service (IRS) announces otherwise, employers that operate in accordance with the mandatory or optional changes in the law as of the provisions’ applicable effective date have until the end of the plan year beginning in 2025 to adopt the written amendment. Government employers have until the end of their 2027 plan year to amend their plan document. 

To help prioritize the evaluation of the changes, the following summary of the SECURE 2.0 provisions is organized by the year in which the change is required or may be incorporated into plan operations, without regard to the plan type. Future articles will discuss various aspects of SECURE 2.0, including strategic opportunities and implementation challenges for employers.

Changes with immediate effective dates

Insight: Employers need to consider immediately updating employee notices and plan procedures for these important changes in the law.

  • Later Required minimum distributions (RMDs). SECURE 2.0 increases the age at which retirement plan participants must begin receiving RMDs from 72 to 73, starting January 1, 2023. The original SECURE Act increased the starting age for RMDs from 70½ to 72. 
  • Aggregation of distributions on tax-preferred retirement accounts that hold annuities. Effective December 29, 2022, RMDs can be determined by aggregating distributions from both the annuity and non-annuity investments.
  • Reduced excise tax for a failure to take RMDs. Effective for taxable years beginning after December 29, 2022, the excise tax rate is reduced from 50% to 25% of the missed RMD for workplace retirement plans and IRAs. Further, if an IRA makes a corrective distribution generally within two years, the excise tax is reduced to 10% for the IRA (but not for workplace retirement plans).
  • Encourages life annuities. SECURE 2.0 eliminates certain actuarial tests in the RMD regulations that operated as barriers to the availability of life annuities in qualified plans and IRAs. Effective for contracts purchased or received in an exchange on or after December 29, 2022, SECURE 2.0 repeals the 25% limit and allows up to $200,000 (indexed) to be used from an account balance to purchase a qualifying longevity annuity contract (QLAC). It also clarifies that “free look” periods are permitted up to 90 days for contracts purchased or received in an exchange on or after July 14, 2014. 
  • Reduces disclosures for unenrolled employees. Effective for plan years beginning after December 31, 2022, employers are no longer required to provide most notices under ERISA or IRS rules to employees who do not participate in the employer’s retirement plan. However, employers must provide an annual reminder of the employee’s eligibility and deadline, if applicable, to participate in the plan. Employers must also provide such individuals with any plan documents they request.
  • Allows incentives for 401(k) and 403(b) elections. Effective for plan years beginning after December 29, 2022, employers may provide de minimis financial benefits, such as low-value gift cards, as an incentive for employees to elect to contribute to a 401(k) or 403(b) plan without violating IRS’s “contingent benefit rule.”

    Insight: The legislation does not define what dollar amount would be considered de minimis, so IRS guidance is needed. Based on long-standing IRS guidance in other contexts (for example, “de minimis” fringe benefits) the dollar value threshold is very low, which may not be sufficient to motivate anyone to enroll in the plan. The incentives cannot be paid from plan assets. 
     
  • Employer contributions may be designated as Roth contributions. Effective December 29, 2022, employers may allow plan participants to designate employer matching and nonelective contributions as after-tax Roth contributions. Such contributions would be included in the participant’s taxable wage income for the year made. Employer contributions designated as Roth contributions must be immediately 100% vested. 
  • Permanent relief for federally declared disasters. Effective for federally declared disasters occurring on or after January 26, 2021 (i.e., this provision is effective retroactively), plans or IRAs may allow affected participants additional access to retirement funds. Penalty-free distributions up to $22,000 per participant, per disaster may be taken into taxable income over three years and participants can recontribute those amounts to a tax-preferred retirement account within three years. Plans can also increase the affected participant’s loan limit to $100,000 (instead of the regular $50,000 loan limit) or the participant’s vested account balance. Also, if the affected participant has a non-disaster plan loan outstanding, the repayment period can be extended by one year. 

    Insight: This is permanent relief that eliminates the need for specific disaster relief to be issued by the IRS.
     
  • Reliance on employee’s certification for hardship distributions. For plan years beginning after December 29, 2022, plan sponsors can rely on employees’ self-certification that the employee has experienced a deemed hardship for purposes of taking a hardship withdrawal from a 401(k) or 403(b) plan and that the distribution is not in excess of the amount required to satisfy the financial need. Future regulations might restrict reliance if the sponsor has information that contradicts the employee’s certification. 
  • 10% early withdrawal penalty waived for terminally ill. Effective for distributions made after December 29, 2022, the 10% penalty on early withdrawals before age 59 1/2 is waived for distributions to terminally ill individuals whose physician certifies that they have a condition that is expected to result in death within 84 months.
  • Repayment of qualified birth or adoption distributions. Effective for distributions made after December 29, 2022 (and retroactively to the three-year period beginning on the day after the date on which such distribution was received), repayment of qualified birth or adoption distributions is limited to three years. Previously, such distributions could be recontributed at any time, but due to the IRS’s three-year statute of limitations to amend an income tax return, taxpayers might not receive a refund of the taxes that were paid in the year of withdrawal. This change aligns the repayment period with the eligibility for refund. 
  • Cash balance plan interest crediting rates. Effective for plan years beginning after December 29, 2022, cash balance plans with variable interest crediting rates may use a projected “reasonable” interest crediting rate that does not exceed 6%. This means that those plans can use graded pay credits that increase for older, longer service workers without risking failing the anti-backloading rules that otherwise may create problems for cash balance plans that use market-based interest crediting rates. 
  • Elimination of variable rate premium indexing. Effective on December 29, 2022, SECURE 2.0 replaces the “applicable dollar amount” language for determining the premium funding target for purposes of unfunded vested benefits and replaces it with a flat $52 for each $1,000 of unfunded vested benefits.
  • Correction of mortality tables. Effective December 29, 2022, pension plans are not required to assume certain mortality improvements. The IRS must amend the applicable regulations within 18 months.
  • 403(b) investments in Collective Investment Trusts (CITs). Effective December 29, 2022, CITs are permissible investments for 403(b) plans. Previously, under IRS rules, 403(b) plans could invest only in mutual funds or annuity contracts, which generally have higher fees than CITs.

    Insight: Although this changes the tax rules, it appears that federal securities laws will need to be updated before 403(b) plans can invest in CITs.
     
  • Multiple Employer 403(b) Plans. Effective for plan years beginning after December 31, 2022, 403(b) plans can participate in Multiple Employer Plans (MEPs).
  • Expanded Employee Plans Compliance Resolution System (EPCRS). Effective December 29, 2022, SECURE 2.0 enhances the IRS’s self-correction program to: (1) allow more types of errors to be self-corrected without an IRS filing, (2) apply to inadvertent IRA errors, and (3) exempt certain RMD failures from the otherwise applicable excise tax. For example, operational errors that can be self-corrected without an IRS filing now include significant errors and plan loan errors, provided the error is corrected within a reasonable time after it is discovered (and the IRS has not identified the error). Employers are no longer required to attempt to recoup certain overpayments made to participants. The IRS was directed to update the EPCRS revenue procedure accordingly within two years and the US Department of Labor (DOL) is required to coordinate its Voluntary Fiduciary Compliance Program (VFCP) accordingly.
  • Auditor’s report for “group of plans." Effective December 29, 2022, defined contribution plans filing a single Form 5500 as a “group of plans” must submit an auditor’s opinion if any plan in the group, individually, has 100 participants or more at the beginning of the plan year. The auditor’s report will relate only to each individual plan that would otherwise be subject to an independent accountant’s report. Thus, the DOL and the IRS will continue to receive the same number of audit reports (and content) about plans with 100 or more participants that would be filed if the “group of plans” was not filed as a single Form 5500.
  • $500 small plan tax credit for military spouses. Effective for taxable years beginning after December 29, 2022, employers with 100 or fewer employees earning at least $5,000 in annual compensation can receive a general tax credit of up to $500 for three years, if they make military spouses (1) eligible for defined contribution plan participation within two months of hire; (2) upon plan eligibility, they are eligible for any match or non-elective contribution that they would have been otherwise eligible for at two years of service; and (3) 100% vested in employer contributions. The credit is $200 per participating non-highly compensated military spouse, plus 100% of employer contributions made to the military spouse, up to $300. No credit is available for highly compensated employees. The credit is available for the year the military spouse is hired and the two succeeding taxable years. Employers may rely on the employee’s certification that they are an eligible military spouse.
  • Small employer plan start-up credit. Effective for taxable years beginning after December 31, 2022, the start-up credit for adopting a workplace retirement plan increases from 50% to 100% of administrative costs for small employers with up to 50 employees. The credit remains 50% for employers with 51-100 employees. Employers with a defined contribution plan may also receive an additional credit based on the amount of employer contributions of up to $1,000 per employee. This additional credit phases out over five years for employers with 51-100 employees. The start-up credits are available for three years to employers that join an existing MEP, regardless of how long the plan has been in existence. The MEP rule is retroactively effective for taxable years beginning after December 31, 2019.
  • SIMPLE and Simplified Employee Pension (SEP) Roth IRAs. Effective for taxable years beginning after December 31, 2022, SIMPLE IRAs can accept Roth (i.e., after-tax) contributions. In addition, employers can offer employees the ability to treat employee and employer SEP contributions as Roth contributions (in whole or in part).
  • SEPs for Domestic Workers. Effective for tax years beginning after December 29, 2022, employers of domestic employees (nannies, housekeepers, etc.) can provide retirement benefits for those employees under a SEP. Previously, employers were not permitted to offer domestic employees a workplace retirement plan because the employer was not engaged in a trade or business.

Changes effective in 2024

The following changes take effect in 2024. Employers should consider how these changes may affect their plan document and operation.

  • Elimination of RMDs for Roth 401(k) and 403(b) plans. Currently, Roth IRAs are not subject to RMDs before the account owner’s death, but RMDs from Roth 401(k) and 403(b) plans generally must begin at age 72. Effective for taxable years beginning after December 31, 2023, SECURE 2.0 eliminates the pre-death RMD requirement for Roth 401(k) and 403(b) plans. However, this change does not apply to distributions that are required with respect to years beginning before January 1, 2024 but are permitted to be paid on or after that date. 
  • RMDs for surviving spouses. Effective for calendar years beginning after December 21, 2023, surviving spouses can elect to be treated as the deceased employee for purposes of the RMD rules.
  • Student loan repayments matching contributions. Effective for contributions made for plan years beginning after December 31, 2023, employers may treat an employee’s qualified student loan payments as employee contributions to a 401(k) plan, 403(b) plan, governmental 457(b) plan, or SIMPLE IRA that is entitled to an employer matching contribution. For nondiscrimination testing of elective contributions, plans may separately test the employees who receive matching contributions on student loan repayments. Eligible student loan repayments include any indebtedness incurred by the employee solely to pay his or her qualified higher education expenses (in other words, student loan debt for an employee’s children is not eligible). 

    Insight: This provision is in response to years of retirement industry pressure, based on the notion that employees who are overwhelmed with student debt may not be able to save for retirement and are missing out on available matching contributions.
     
  • Emergency savings accounts. Effective for plan years beginning after December 31, 2023, employers may amend their defined contribution plans to offer short-term emergency savings accounts to non-highly compensated employees. These accounts will be funded with after-tax Roth salary deferrals up to $2,500 (indexed for inflation). Participants can make up to one withdrawal per month. Employers may automatically enroll employees into these accounts at no more than 3% of their salary. Contributions are treated as after-tax elective deferrals and are eligible to receive matching contributions. The first four withdrawals each plan year cannot be subject to any withdrawal fees. When employees terminate employment, they may take their emergency savings accounts as cash or roll them over into their new employer’s Roth 401(k) plan (if any) or into a Roth IRA. 

    Insight: Although this sounds simple, over 33 pages of legislative text amending both ERISA and the Internal Revenue Code (IRC) were needed to create this new law. IRS and/or DOL guidance will be needed before employers can implement this optional plan design feature.
     
  • Rothification of catch-up contributions for high earners. Effective for taxable years beginning after December 31, 2023, catch-up contributions for participants who are 50 or older and who earned more than $145,000 in the prior year (indexed for inflation) must be made on a Roth (after-tax) basis. Also, retirement plan service providers can provide automatic portability services (that is, the plan automatically could move such forced cash-outs into a default IRA or into the employee’s new employer’s retirement plan, unless the participant opts out).
  • Higher forced rollover limit. The involuntary IRA rollover limit is increased from $5,000 to $7,000 for distributions made after December 31, 2023. Thus, workplace retirement plans can force a tax-free rollover distribution without the participant’s consent if the participant’s account is over $1,000 but less than $7,000, when the participant is otherwise eligible to receive a distribution from the plan.
  • Retroactively amending plan to increase benefits for prior plan year. Effective for plan years beginning after December 31, 2023, employers can retroactively amend a workplace retirement plan to increase participants’ benefits for the prior plan year, so long as the amendment is adopted no later than the extended due date of the employer’s federal income tax return for the such prior year.

    Insight: For decades, employers could fund a workplace retirement plan for the prior year, so long as the contribution was deposited into the plan no later than the extended due date of the employer’s federal income tax return. The original SECURE Act improved on that concept by allowing employers to retroactively adopt a new workplace retirement plan (e.g., an ESOP, cash balance plan, or profit-sharing plan) for the prior year, so long as it was adopted no later than the extended due date of the employer’s federal income tax return for the prior year. That change allowed employers to finalize their financials for the tax year before contributing to the retirement plan. SECURE 2.0 further expands employer flexibility by allowing employers to retroactively adopt amendments to increase plan benefits for the prior plan year.
     
  • Waiver of early withdrawal penalties for certain distributions. Effective for distributions made after December 31, 2023, the 10% penalty on early withdrawals before age 59 1/2 is waived for certain distributions. Participants can self-certify that they meet the criteria for (i) up to $1,000 per year for certain unforeseen personal or family emergency expenses, and (ii) up to the lesser of $10,000 (indexed for inflation) or 50% of the participant’s vested account balance for distributions in connection with domestic abuse (for example, when the participant needs funds to escape an unsafe situation). Participants may repay the withdrawn money over three years and claim a refund for the income taxes paid on the distribution. However, additional emergency distributions are prohibited for three years unless repayment occurs.
  • Permanent safe harbor for correcting auto-enrollment and auto-escalation failures. Effective for errors that occur after December 31, 2023, the current safe harbor for correcting employee elective deferral elections becomes permanent. The existing safe harbor was scheduled to expire on December 31, 2023.

    Insight: Plans that use auto-enrollment and auto-escalation can avoid significant penalties for honest mistakes if notice is given to the employee, correct deferrals begin within certain time periods, and the employer provides the employee with any matching contributions that would have been made had the failure not occurred. Corrections generally must be made before 9 ½ months after the end of the plan year in which the mistakes were made.
     
  • Uniform rollover forms. No later than January 1, 2025, the IRS must issue sample forms for direct rollovers that may be used by the distributing or receiving retirement plan or IRA. This is intended to simplify and standardize the tax-free rollover process.
  • 403(b) hardship distributions conform to 401(k) rules. Effective for plan years beginning after December 31, 2023, SECURE 2.0 aligns the 403(b) plan hardship distribution rules with the 401(k) plan hardship distribution rules. This change brings the rules for the operation and administration of 403(b) plans closer to those for 401(k) plans.
  • Starter 401(k) or 403(b) plans. Employers that do not sponsor a workplace retirement plan may offer a new, safe harbor “starter” deferral-only plan that automatically enrolls employees at 3% to 15% of their compensation. The annual contribution limit is the same as for IRAs ($6,500, with an additional $1,000 for catch up contributions for employees who are age 50 or older). Starter plans are exempt from most nondiscrimination testing rules. This change is effective for plan years beginning after December 31, 2023.
  • Separate top-heavy tests allowed. Effective for plan years beginning after December 31, 2023, employers can separately test excludable and non-excludable employees when determining whether the plan is top heavy.

    Insight: This change may increase retirement plan coverage for more workers because it removes the general requirement for employers to contribute 3% of compensation to all employees who are eligible to participate in a top-heavy plan.
     
  • SIMPLE plan updates. Effective for plan years beginning after December 31, 2023, employers may replace a SIMPLE IRA during the plan year with a SIMPLE 401(k) that requires mandatory employer contributions. Also, employers with SIMPLE plans may make additional employer contributions above the existing 2% of compensation or 3% of employee elective deferrals requirement. Additional employer contributions must be uniformly made and cannot exceed the lesser of 10% of compensation or $5,000 (indexed for inflation). In addition, the annual deferral limit and the catch-up contribution at age 50 are increased by 10% percent in the case of an employer with no more than 25 employees. An employer with 26 to 100 employees would be permitted to provide higher deferral limits, but only if the employer either provides a 4% matching contribution or a 3% employer contribution.
  • Reform of family attribution rules. Effective for plan years beginning after December 31, 2023, two changes to the family attribution rules provide relief to certain related businesses. One change addresses inequities between spouses with separate businesses who reside in a community property state and spouses who reside in a separate property state. The other change modifies attribution of stock ownership between parents and minor children.

    Insight: These changes will help businesses owned by each spouse provide retirement benefits to their respective employees only.  
     
  • Improved defined benefit plan annual funding notices. Effective for plan years beginning after December 31, 2023, defined benefit plan annual funding notices will be revised to identify more clearly the plan’s funding status.
  • Indexing IRA catch-up limit. Effective for taxable years beginning after December 31, 2023, the $1,000 catch-up limit for IRAs for individuals 50 and older will be indexed annually for inflation, in multiples of $100 (rounding down to the next lower multiple of $100).
  • Section 529 rollovers. Effective for distributions after December 31, 2023, beneficiaries of an IRC Section 529 college savings account that has been open for more than 15 years can roll over up to $35,000 from any 529 account in their name to a Roth IRA over the course of their lifetime. Such rollovers are subject to annual contribution limits to Roth IRAs. This new rollover feature may encourage contributions to 529 plans since they can now be used for retirement and not just for college.
  • Retirement savings lost and found. DOL must create a lost and found database no later than December 29, 2024, to help reunite participants with money that they may have left behind in workplace retirement savings plans. 

    Insight: This may help employers deal with missing participants and uncashed checks.

Changes effective in 2025

The following changes take effect in 2025. Employers should consider how these changes may affect their plan document and operation.

  • Later RMDs. On January 1, 2025, the RMD starting age increases from 73 to 75. 
  • Mandatory automatic enrollment for new plans. New 401(k) and 403(b) plans adopted after December 29, 2022, must provide for automatic contributions for plan years starting after December 31, 2024. The deferral percentage must be between 3% and 10% of compensation, with automatic escalation of at least 1% per year up to a deferral rate of not less than 10% but not more than 15% (10% until January 1, 2025). Participants can opt out of automatic enrollment or automatic escalation.

    Insight: Plans in effect on or before December 29, 2022, are exempt from the new requirements.
     
  • Catch-up contribution increases. Participants age 50 and older can make a catch-up contribution in 2023 of $7,500, as indexed except in the case of SIMPLE plans that are limited to $3,500, as indexed.  Effective for taxable years beginning after December 31, 2024, the catch-up contribution limits for participants who are age 60 to 63 will increase to the greater of (i) $10,000 or (ii) 150% of the regular catch-up contribution limit for 2024 (indexed for inflation after 2025).
  • Coverage of long-term part-time employees. Under the original SECURE Act, part-time employees who work at least 500 hours per year for at least three consecutive years, and who have reached age 21 as of the end of the three-year period, must be allowed to enroll and make elective deferrals under the employer’s 401(k) plan at the end of the three-year period. Those employees also earn vesting credit for years with 500 hours of service. Effective for plan years beginning after December 31, 2024, SECURE 2.0 reduces the three-year period to two years and disregards service before January 1, 2021, for both eligibility and vesting. It also extends the rule to 403(b) plans that are subject to ERISA (not all 403(b) plans are subject to ERISA). This rule does not apply to union plans or defined benefit plans.
  • Distributions for certain long-term care premiums. Effective December 29, 2025, retirement plans can distribute up to $2,500 per year to pay for certain long-term care insurance premiums. Such distributions are exempt from the 10% early withdrawal penalty that might otherwise apply.

Next steps 

While many of the retirement plan provisions in SECURE 2.0 are not effective until later years (including some, like the new federal “Saver’s Match” and mandatory paper benefit statements, that will not take effect until 2026), a number of important provisions require immediate attention. Some of the changes are especially helpful to small employers. 

Almost all workplace retirement plans will need to be reviewed for possible amendments and operational changes to reflect SECURE 2.0. 

While further guidance on many of the new provisions is needed, employers should review their plan document and operations in the meantime to determine what, if any, amendments will be needed, what operations need to be changed, and what systems or processes should be updated. 

Written by Joan Vines and Norma Sharara. Copyright © 2023 BDO USA, P.A. All rights reserved. www.bdo.com

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Do you know what would happen to your company if your CEO suddenly had to resign immediately for personal reasons? Or got seriously ill? Or worse, died? These scenarios, while rare, do happen, and many companies are not prepared. In fact, 45% of US companies do not have a contingency plan for CEO succession, according to a 2020 Harvard Business Review study.  

Do you have a plan for CEO succession? As a business owner, you may have an exit strategy in place for your company, but do you have a plan to bridge the leadership gap for you and each member of your leadership team? Does the plan include the kind of crises listed above? What would you do if your next-in-line left suddenly? 

Whether yours is a family-owned business, a company of equity partners, or a private company with a governing body, here are things to consider when you’re faced with a situation where your CEO has abruptly departed or has decided to step down.  

1. Get a plan in place. First, assess the situation and figure out your priorities. If there is already a plan for these types of circumstances, evaluate how much of it is applicable to this particular circumstance. For example, if the plan is for the stepping down or announced retirement of your CEO, but some other catastrophic event occurs, you may need to adjust key components and focus on immediate messaging rather than future positioning. If there is no plan, assign a small team to create one immediately. 

Make sure management, team leaders, and employees are aware and informed of your progress; this will help keep you organized and streamline communications. Management needs to take the lead and select a point person to document the process. Management also needs to take the lead in demeanor. Model your actions so employees can see the situation is being handled with care. Once a strategy is identified based on your priorities, draft a plan that includes what happens now, in the immediate future, and beyond. Include timetables so people know when decisions will be made.  

2. Communicate clearly, and often. In times of uncertainty, your employees will need as much specific information as you can give them. Knowing when they will hear from you, even if it is “we have nothing new to report” builds trust and keeps them vested and involved. By letting them know what your plan is, when they’ll receive another update, what to tell clients, and even what specifics you can give them (e.g., who will take over which CEO responsibility and for how long), you make them feel that they are important stakeholders, and not just bystanders. Stakeholders are more likely to be strong supporters during and after any transition that needs to take place. 

3. Pull in professional help. Depending on your resources, we recommend bringing in a professional to help you handle the situation at hand. At the very least, call in an objective opinion. You’ll need someone who can help you make decisions when emotions are running high. Bringing someone on board that can help you decipher what you have to work with and what your legal and other obligations may be, help rally your team, deal with the media, and manage emotions can be invaluable during a challenging time. Even if it’s temporary. 

4. Develop a timeline. Figure out how much time you have for the transition. For example, if your CEO is ill and will be stepping down in six months, you have time to update any existing exit strategy or succession plan you have in place. Things to include in the timeline: 

  • Who is taking over what responsibilities? 
  • How and what will be communicated to your company and stakeholders? 
  • How and what will be communicated to the market? 
  • How will you bring in the CEO's replacement, while helping the current CEO transition out of the organization? 

If you are in a crisis situation (e.g., your CEO has been suddenly forced out or asked to leave without a public explanation), you won’t have the luxury of time.  

Find out what other arrangements have been made in the past and update them as needed. Work with your PR firm to help with your change management and do the right things for all involved to salvage the company’s reputation. When handled correctly, crises don’t have to have a lasting negative impact on your business.   

5. Manage change effectively. When you’re under the gun to quickly make significant changes at the top, you need to understand how the changes may affect various parts of your company. While instinct may tell you to focus externally, don’t neglect your employees. Be as transparent as you possibly can be, present an action plan, ask for support, and get them involved in keeping the environment positive. Whether you bring in professionals or not, make sure you allow for questions, feedback, and even discord if challenging information is being revealed.  

6. Handle the media. Crisis rule #1 is making it clear who can, and who cannot, speak to the media. Assign a point person for all external inquiries and instruct employees to refer all reporter requests for comment to that point person. You absolutely do not want employees leaking sensitive information to the media. 
 
With your employees on board with the change management action plan, you can now focus on external communications and how you will present what is happening to the media. This is not completely under your control. Technology and social media changed the game in terms of speed and access to information to the public and transparency when it comes to corporate leadership. Present a message to the media quickly that coincides with your values as a company. If you are dealing with a scandal where public trust is involved and your CEO is stepping down, handling this effectively will take tact and most likely a team of professionals to help. 

Exit strategies are planning tools. Uncontrollable events occur and we don’t always get to follow our plan as we would have liked. Your organization can still be prepared and know what to do in an emergency situation or sudden crisis.  Executives move out of their roles every day, but how companies respond to these changes is reflective of the strategy in place to handle unexpected situations. Be as prepared as possible. Own your challenges. Stay accountable. 

BerryDunn can help whether you need extra assistance in your office during peak times or interim leadership support during periods of transition. We offer the expertise of a fully staffed accounting department for short-term assignments or long-term engagements―so you can focus on your business. Meet our interim assistance experts.

Article
Crisis averted: Why you need a CEO succession plan today

Read this if your CFO has recently departed, or if you're looking for a replacement.

With the post-Covid labor shortage, “the Great Resignation,” an aging workforce, and ongoing staffing concerns, almost every industry is facing challenges in hiring talented staff. To address these challenges, many organizations are hiring temporary or interim help—even for C-suite positions such as Chief Financial Officers (CFOs).

You may be thinking, “The CFO is a key business partner in advising and collaborating with the CEO and developing a long-term strategy for the organization; why would I hire a contractor to fill this most-important role?” Hiring an interim CFO may be a good option to consider in certain circumstances. Here are three situations where temporary help might be the best solution for your organization.

Your organization has grown

If your company has grown since you created your finance department, or your controller isn’t ready or suited for a promotion, bringing on an interim CFO can be a natural next step in your company’s evolution, without having to make a long-term commitment. It can allow you to take the time and fully understand what you need from the role — and what kind of person is the best fit for your company’s future.

BerryDunn's Kathy Parker, leader of the Boston-based Outsourced Accounting group, has worked with many companies to help them through periods of transition. "As companies grow, many need team members at various skill levels, which requires more money to pay for multiple full-time roles," she shared. "Obtaining interim CFO services allows a company to access different skill levels while paying a fraction of the cost. As the company grows, they can always scale its resources; the beauty of this model is the flexibility."

If your company is looking for greater financial skill or advice to expand into a new market, or turn around an underperforming division, you may want to bring on an outsourced CFO with a specific set of objectives and timeline in mind. You can bring someone on board to develop growth strategies, make course corrections, bring in new financing, and update operational processes, without necessarily needing to keep those skills in the organization once they finish their assignment. Your company benefits from this very specific skill set without the expense of having a talented but expensive resource on your permanent payroll.

Your CFO has resigned

The best-laid succession plans often go astray. If that’s the case when your CFO departs, your organization may need to outsource the CFO function to fill the gap. When your company loses the leader of company-wide financial functions, you may need to find someone who can come in with those skills and get right to work. While they may need guidance and support on specifics to your company, they should be able to adapt quickly and keep financial operations running smoothly. Articulating short-term goals and setting deadlines for naming a new CFO can help lay the foundation for a successful engagement.

You don’t have the budget for a full-time CFO

If your company is the right size to have a part-time CFO, outsourcing CFO functions can be less expensive than bringing on a full-time in-house CFO. Depending on your operational and financial rhythms, you may need the CFO role full-time in parts of the year, and not in others. Initially, an interim CFO can bring a new perspective from a professional who is coming in with fresh eyes and experience outside of your company.

After the immediate need or initial crisis passes, you can review your options. Once the temporary CFO’s agreement expires, you can bring someone new in depending on your needs, or keep the contract CFO in place by extending their assignment.

Considerations for hiring an interim CFO

Making the decision between hiring someone full-time or bringing in temporary contract help can be difficult. Although it oversimplifies the decision a bit, a good rule of thumb is: the more strategic the role will be, the more important it is that you have a long-term person in the job. CFOs can have a wide range of duties, including, but not limited to:

  • Financial risk management, including planning and record-keeping
  • Management of compliance and regulatory requirements
  • Creating and monitoring reliable control systems
  • Debt and equity financing
  • Financial reporting to the Board of Directors

If the focus is primarily overseeing the financial functions of the organization and/or developing a skilled finance department, you can rely — at least initially — on a CFO for hire.

Regardless of what you choose to do, your decision will have an impact on the financial health of your organization — from avoiding finance department dissatisfaction or turnover to capitalizing on new market opportunities. Getting outside advice or a more objective view may be an important part of making the right choice for your company.

BerryDunn can help whether you need extra assistance in your office during peak times or interim leadership support during periods of transition. We offer the expertise of a fully staffed accounting department for short-term assignments or long-term engagements―so you can focus on your business. Meet our interim assistance experts.

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Three reasons to consider hiring an interim CFO

As construction companies look for new ways to cut costs, the annual bonus is often one of the first items on the chopping block.

Rather than eliminating financial incentives, consider developing an incentive compensation program that’s designed to help achieve your firm’s goals.


Here are five tips for designing a program that works.

  1. Reward the right things 
    Incentive programs frequently backfire because companies reward employees for the wrong things. Bonuses tied strictly to profits, for example, can motivate employees to adopt short-term strategies that increase their pay at the expense of the firm’s long-term performance.

    Unfortunately, short-term strategies sometimes sacrifice quality or safety to boost profits. Cutting corners on jobs may create short-term savings, but could hurt the firm’s bottom line over the long run. Safety issues can threaten a contractor’s very existence. 

    Instead, tie compensation to all aspects of an employee’s job. When designing an incentive program for superintendents, for example, reward projects that get done on time and within budget—while maintaining quality and safety standards. If you offer bonuses only for staying on schedule, then cost, quality and safety may suffer. Instead, make sure your program rewards excellence in all four areas.
     
  2. Link pay to results 
    For incentive compensation to work, it’s critical to reward employees for achieving quantifiable results that are within their control. Discretionary annual bonus plans are often ineffective because employees typically view bonuses as a “gift” rather than a reward for good performance. If year-end bonuses become an expected component of compensation, not only are they poor motivators, but they can quickly turn into “demotivators” should they be reduced or taken away.

    Establish performance goals that are attainable with hard work, but not too easily achieved. The goals should be simple and straightforward enough so that employees understand both what they’re expected to do and what they stand to gain if they do it. Sometimes companies create incentive pay formulas that are so complex and difficult to understand that employees become disillusioned with the program. As you develop your plan, seek input from eligible participants to gain employee buy-in.
     
  3. Establish benchmarks
    The only way to gauge employee performance is to measure your firm’s recent performance and establish goals for improvement. You can’t reward employees for reducing the time to completion unless you know your average building time on similar jobs. 

    To reward cost reduction, for example, you might measure decreases in labor hours or overtime. To reward quality improvement, you might track defects per square foot or amounts spent on warranty calls. The right benchmarks depend on the nature of your firm and its specific goals.
     
  4. Time it right
    For your incentive program to be truly effective, timing is everything. To maximize the impact, compensation should be linked closely in time with the performance that earned it—by paying bonuses quarterly, for example, rather than annually.

    Consider deferring part of the bonus, however, to reflect future events that bear on an employee’s performance. Some firms hold back a portion of the bonus and reduce it based on warranty expenses during the year following a project’s completion, for example.
     
  5. Think long term
    To align your employees’ interests with the company’s long-term goals, consider using stock options, restricted stock or other equity-based awards. Giving employees an ownership stake in the business provides them with a financial incentive to stay with the company and maximize its long-term value. 

    To be effective, these incentives should vest over a substantial period of time. Otherwise, they might encourage actions that artificially boost the value of the company’s stock or other equity interests in the short term.  And be sure to discuss these with your accounting and tax advisors before implementation—these awards come with some accounting and reporting requirements and may also trigger tax consequences.  

Tying it all together
By tying compensation to performance, you can identify, motivate and retain your most valuable employees. Unlike across-the-board bonuses, a carefully targeted incentive program can pay for itself. Some contractors have even convinced employees to accept lower base salaries in exchange for an opportunity to earn higher performance pay.

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Five tips for building an incentive compensation program

Cloud services are becoming more and more omnipresent, and rapidly changing how companies and organizations conduct their day-to-day business.

Many higher education institutions currently utilize cloud services for learning management systems (LMS) and student email systems. Yet there are some common misunderstandings and assumptions about cloud services, especially among higher education administrative leaders who may lack IT knowledge. The following information will provide these leaders with a better understanding of cloud services and how to develop a cloud services strategy.

What are cloud services?

Cloud services are internet-based technology services provided and/or hosted by offsite vendors. Cloud services can include a variety of applications, resources, and services, and are designed to be easily scalable, cost effective, and fully managed by the cloud services vendor.

What are the different types?

Cloud services are generally categorized by what they provide. Today, there are four primary types of cloud services:

Cloud Service Types 

Cloud services can be further categorized by how they are provided:

  1. Private cloud services are dedicated to only one client. Security and control is the biggest value for using a private cloud service.
  2. Public cloud services are shared across multiple clients. Cost effectiveness is the best value of public cloud services because resources are shared among a large number of clients.
  3. Hybrid cloud services are combinations of on-premise software and cloud services. The value of hybrid cloud services is the ability to adopt new cloud services (private or public) slowly while maintaining on-premise services that continue to provide value.

How do cloud services benefit higher education institutions?

Higher education administrative leaders should understand that cloud services provide multiple benefits.
Some examples:

Cloud-Services-for-Higher-Education


What possible problems do cloud services present to higher education institutions?

At the dawn of the cloud era, many of the problems were technical or operational in nature. As cloud services have become more sophisticated, the problems have become more security and business related. Today, higher education institutions have to tackle challenges such as cybersecurity/disaster recovery, data ownership, data governance, data compliance, and integration complexities.

While these problems and questions may be daunting, they can be overcome with strong leadership and best-practice policies, processes, and controls.

How can higher education administrative leaders develop a cloud services strategy?

You should work closely with IT leadership to complete this five-step planning checklist to develop a cloud services strategy: 

1. 

Identify new services to be added or consolidated; build a business case and identify the return on investment (ROI) for moving to the cloud, in order to answer:

• 

What cloud services does your institution already have?

• 

What cloud services does your institution already have?

• 

What services should you consider replacing with cloud services, and why?

• 

How are data decisions being made?

2. 

Identify design, technical, network, and security requirements (e.g., private or public; are there cloud services already in place that can be expanded upon, such as a private cloud service), in order to answer:

• 

Is your IT staff ready to migrate, manage, and support cloud services?

• 

Do your business processes align with using cloud services?

• 

Do cloud service-provided policies align with your institution’s security policies?

• 

Do you have the in-house expertise to integrate cloud services with existing on-premise services?

3. 

Decide where data will be stored; data governance (e.g., on-premise, off-premise data center, cloud), in order to answer:

• 

Who owns the data in the institution’s cloud, and where?

• 

Who is accountable for data decisions?

4. 

Integrate with current infrastructure; ensure cloud strategy easily allows scalability for expansion and additional services, in order to answer:

• 

What integration points will you have between on-premise and cloud applications or services, and can the institution easily implement, manage, and support them?

5. 

Identify business requirements — budget, timing, practices, policies, and controls required for cloud services and compliance, in order to answer:

• 

Will your business model need to change in order to support a different cost model for cloud services (i.e., less capital for equipment purchases every three to five years versus a steady monthly/yearly operating cost model for cloud services)?

• 

Does your institution understand the current state and federal compliance and privacy regulations as they relate to data?

• 

Do you have a contingency plan if its primary cloud services provider goes out of business?

• 

Do your contracts align with institutional, state, and federal guidelines?

Need assistance?

BerryDunn’s higher education team focuses on advising colleges and universities in improving services, reducing costs, and adding value. Our team is well qualified to assist in understanding the cloud “skyscape.” If your institution seeks to maximize the value of cloud services or develop a cloud services strategy, please contact me.

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Cloud services 101: An almanac for higher education leaders

For over four years the business community has been discussing the impact Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, will have on financial reporting. As you evaluate the impact this standard will have on a manufacturers’ financial reporting practices, there are certain provisions of ASC 606 you should consider.

Then: Prior to ASC 606, manufacturers generally recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fees are fixed or determinable, and collection is reasonably assured. For most, this typically occurs when a product ships and the title to the product transfers to the customer.

Now: Under ASC 606, effective for annual reporting periods beginning after December 15, 2018 for non-public entities (December 15, 2017 for public entities), an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Under this core principle, an entity should:

  1. Identify its contracts with its customers,
  2. Identify performance obligations (promises) in the contract,
  3. Determine the transaction price,
  4. Allocate the transaction price to the performance obligations in the contract; and
  5. Recognize revenue when (or as) the entity satisfies the performance obligation. 

Who does it impact, and how?

For some manufacturers, ASC 606 will not impact their financial reporting practices since they satisfy their performance obligation when the product is shipped and the title has transferred to the customer. However, entities who manufacture highly specialized products may be required to recognize revenue over time if the entity’s performance creates an asset without an alternative use to the entity, and the entity has an enforceable right to compensation for performance completed to date.

Limitations

To determine if a product has an alternative use, the entity must assess whether it is restricted contractually from redirecting the asset for another use during production, or if there are practical limitations on the entity’s ability to redirect the product for another use. A contractual limitation must be substantive for it to be determined to not have an alternative use, e.g., the customer can enforce rights for delivery of the product. A restriction is not substantive if the product is largely interchangeable with other products the entity could transfer between customers without incurring a significant loss.

A practical limitation exists if the entity’s ability to redirect the product for another use results in significant economic losses, either from significant rework costs or having to sell the product at a loss. The alternative use assessment should be done at contract inception based on the product in its completed state, and not during the production process. Therefore, the point in time during production when a product becomes customized and not generic is irrelevant. If it is determined there is no alternative use, the entity has satisfied this criterion and must evaluate its enforceable right to compensation for performance completed to date.

Definitions and Distinctions

ASC 606 defines a contract as “an agreement between two or more parties that creates enforceable rights and obligations”. Accordingly, the definition of a contract may include, but not be limited to, a Purchase Order, Agreement for the Sale of Goods, Bill of Sale, Independent Contractor Agreement, etc. In applying this definition to business operations and revenue recognition, an entity must consider its individual business practices, and possibly individual customer arrangements in determining enforceability.

Once it is determined that the entity has an enforceable right to a payment, the amount of payment must also be considered. The amount that would “compensate” an entity for performance to date should be the estimated selling price of the goods or services transferred to date (for example, recovery of costs incurred plus a reasonable profit margin) rather than compensation for only the entity’s potential loss of profit if the contract were to be terminated. Accordingly, a payment that only covers the entity’s costs incurred to date or for the entity’s potential loss of profit if the contract was terminated does not allow for the recognition of revenue over time.

Compensation for a reasonable profit margin need not equal the profit margin expected if the contract was fulfilled as promised. Once the “enforceable right to compensation for performance completed to date” requirement has been met, an entity will then assess the appropriate method of recognizing revenue over a period of time using input or output methods, as provided under ASC 606.

For manufacturers of highly specialized products there may not be a simple answer for determining appropriate revenue recognition policies for each customer contract and evaluating the impact can be a challenging endeavor.

Next steps

If you would like guidance in analyzing the impact ASC 606 will have on a manufacturer’s financial reporting practices, including the potential impact it may have on bank covenants, borrowing base calculations, etc., please contact one of our dedicated commercial industry practice professionals.
 

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New revenue recognition rules: Evaluating the impact on manufacturers

The late science fiction writer (and college professor) Isaac Asimov once said: “I do not fear computers. I fear the lack of them.” Had Asimov worked in higher ed IT management, he might have added: “but above all else, I fear the lack of computer staff.”

Indeed, it can be a challenge for higher education institutions to recruit and retain IT professionals. Private companies often pay more in a good economy, and in certain areas of the nation, open IT positions at colleges and universities outnumber available, qualified IT workers. According to one study from 2016, almost half of higher education IT workers are at risk of leaving the institutions they serve, largely for better opportunities and more supportive workplaces. Understandably, IT leadership fears an uncertain future of vacant roles—yet there are simple tactics that can help you improve the chances of filling open positions.

Emphasize the whole package

You need to leverage your institution’s strengths when recruiting IT talent. A focus on innovation, project leadership, and responsibility for supporting the mission of the institution are important attributes to promote when recruiting. Your institution should sell quality of life, which can be much more attractive than corporate culture. Many candidates are attracted to the energy and activity of college campuses, in addition to the numerous social and recreational outlets colleges provide.

Benefit packages are another strong asset for recruiting top talent. Schools need to ensure potential candidates know the amount of paid leave, retirement, and educational assistance for employees and employee family members. These added perks will pique the interest of many candidates who might otherwise have only looked at salary during the process.

Use the right job title

Some current school vacancies have very specific job titles, such as “Portal Administrator” or “Learning Multimedia Developer.” However, this specificity can limit visibility on popular job posting sites, reducing the number of qualified applicants. Job titles, such as “Web Developer” and “Java Developer,” can yield better search results. Furthermore, some current vacancies include a number or level after the job title (e.g., “System Administrator 2”), which also limits visibility on these sites. By removing these indicators, you can significantly increase the applicant pool.

Focus on service, not just technology

Each year, institutions deploy an increasing number of Software as a Service (SaaS) and hosted applications. As higher education institutions invest more in these applications, they need fewer personnel for day-to-day technology maintenance support. In turn, this allows IT organizations to focus limited resources on services that identify and analyze technology solutions, provide guidance to optimize technology investments, and manage vendor relationships. IT staff with soft skills will become even more valuable to your institution as they engage in more people- and process-centric efforts.

Fill in the future

It may seem like science fiction, but by revising your recruiting and retention tactics, your higher education institution can improve its chances of filling IT positions in a competitive job market. In a future blog, I’ll provide ideas for cultivating staff from your institution via student workers and upcoming graduates. If you’d like to discuss additional staffing tactics, send me an email.

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No science fiction: Tactics for recruiting and retaining higher education IT positions

As a leader in a higher education institution, you'll be familiar with this paradox: Every solution can lead to more problems, and every answer can lead to more questions. It’s like navigating an endless maze. When it comes to mobile apps, the same holds true. So, the question: Should your institution have a mobile app? The Answer? Absolutely.

Devices, not computers, are how millenials communicate, gather, inform, and engage. Millennials, on average, spend 90 hours per month on mobile apps, not including web searches and website visits.

Students are no exception. A 2016 Nielsen study showed that 98% of millennials aged 18 – 24, and 97% of millennials aged 25 – 34, owned a smartphone, while a 2017 comScore report stated that one out of five millennials no longer use desktop devices, including laptops. Mobile apps have quickly filled the desktop void, and as students grow more reliant on mobile technology, colleges and universities are in the mix, creating apps to bolster student engagement.

So should you create an app? Here are some questions you should answer before creating a mobile app. Welcome to the labyrinth! But don’t be frustrated—answer these questions to help you avoid dead ends and overspending.

1. Is a mobile app part of your IT Strategy? Including a mobile app in your IT strategy minimizes confusion at all levels about the objectives of mobile app implementation. It also helps dictate whether an institution needs multiple mobile apps for various functions, or a primary app that connects users with other functionality. If an institution has multiple campuses, should you align all campuses with a single app, or if will each campus develop their own?

2. What will the app do? Mobile apps can perform a multitude of functions, but for the initial implementation, select a few key functions in one main area, such as academics or student life. Institutions can then add functionality in the future as mobile adoption grows, and demand for more functions increases.

3. Who will use the app? Mobile apps certainly improve engagement throughout the student life cycle—from prospect to student to alumni—but they also present opportunities for increased faculty, staff, and community engagement. And while institutions should identify the immediate audience of the app, they should also identify future users, based upon functionality.

4. Who will manage the app? Institutions should determine who is going to manage the mobile app, and how. The discussion should focus on access, content, and functionality. Is the institution going to manage everything in house, from development to release to support, or will a mobile app vendor provide this support under contract? Depending on your institution, these discussions will vary.

5. What data will the app use? Like any new software system, an app is only as good as its supporting data. It’s important to assess the systems to integrate with the mobile app, and determine if the systems’ data is up-to-date and ready for integration. Consider the use of application program interfaces, or APIs. APIs allow apps and platforms to interact with one another. They can enable social media, news, weather, and entertainment apps to connect with your institution’s app, enhancing the user experience with more content for users.

6. How much data security does your app need? Depending on the functionality of the app you create, you will need varying degrees of security, including user authentication safeguards and other protections to keep information safe.

7. How much can you spend for the app? Your institution should decide how much you will spend on initial app development, with an eye toward including maintenance and development costs for future functionality. Complexity increases costs, so you will need to  budget accordingly. Include budget planning for updates and functionality improvements after launch.

You will also need to establish a timeline for the project and roll out. And note that apps deployed toward the end of the academic year experience less adoption than apps deployed at the beginning of the academic year.

Once your institution answers these questions, you will be off to a good start. And as I stated earlier, every answer to a question can lead to more questions. If your institution needs help navigating the mobile app labyrinth, please reach out to me

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The mobile app labyrinth: Seven questions higher education institutions should ask