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The CARES Act: Implications for businesses

By: David Erb
03.30.20

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act, which provides relief to taxpayers affected by the novel coronavirus and COVID-19. The CARES Act is the third round of federal government aid related to COVID-19. We have summarized the top provisions in the new legislation below, with more detailed alerts on individual provisions to follow. Click here for a link to the full text of the bill.

Compensation, benefits, and payroll relief
The law temporarily increases the amount of and expands eligibility for unemployment benefits, and it provides relief for workers who are self-employed. Additionally, several provisions assist certain employers who keep employees on payroll even though the employees are not able or needed to work. 

The cornerstone of the payroll protection aid is a streamlined application process for SBA loans that can be forgiven if an eligible employer maintains its workforce at certain levels. 

Additionally, certain employers affected by the pandemic who retain their employees will receive a credit against payroll taxes for 50% of eligible employee wages paid or incurred from March 13 to December 31, 2020. This employee retention credit would be provided for as much as $10,000 of qualifying wages, including health benefits. Eligible employers may defer remitting employer payroll tax payments that remain due for 2020 (after the credits are deducted), with half being due by December 31, 2021, and the balance due by December 31, 2022. 

Employers with fewer than 500 employees are also allowed to give terminated employees access to the mandated paid federal sick and child care leave benefits for which the employer is 100% reimbursed by the government through payroll tax credits, if the employer rehires the qualifying employees.

Any benefit that is driven off the definition of “employee” raises the issue of partner versus employee. The profits interest member that is receiving a W-2 may not be eligible for inclusion in the various benefit computations.

Eligible individuals can withdraw vested amounts up to $100,000 during 2020 without a 10% early distribution penalty, and income inclusion can be spread over three years. Repayment of distributions during the next three years will be treated as tax-free rollovers of the distribution. The bill also makes it easier to borrow money from 401(k) accounts, raising the limit to $100,000 from $50,000 for the first 180 days after enactment, and the payment dates for any loans due the rest of 2020 would be extended for a year.

Individuals do not have to take their 2020 required minimum distributions from their retirement funds. This avoids lost earnings power on the taxes due on distributions and maximizes the potential gain as the market recovers.

Two long-awaited provisions allow employers to assist employees with college loan debt through tax free payments up to $5,250 and restores over-the-counter medical supplies as permissible expenses that can be reimbursed through health care flexible spending accounts and health care savings accounts.

Deferral of net business losses for three years
Section 461(l) limits non-corporate taxpayers in their use of net business losses to offset other sources of income. As enacted in 2017, this limitation was effective for taxable years beginning after 2017 and before 2026, and applied after the basis, at-risk, and passive activity loss limitations. The amount of deductible net business losses is limited to $500,000 for married taxpayers filing a joint return and $250,000 for all other taxpayers. These amounts are indexed for inflation after 2018 (to $518,000 and $259,000, respectively, in 2020). Excess business losses are carried forward to the next succeeding taxable year and treated as a net operating loss in that year.

The CARES Act defers the effective date of Section 461(l) for three years, but also makes important technical corrections that will become effective when the limitation on excess business losses once again becomes applicable. Accordingly, net business losses from 2018, 2019, or 2020 may offset other sources of income, provided they are not otherwise limited by other provisions that remain in the Code. Beginning in 2021, the application of this limitation is clarified with respect to the treatment of wages and related deductions from employment, coordination with deductions under Section 172 (for net operating losses) or Section 199A (relating to qualified business income), and the treatment of business capital gains and losses.

Section 163(j) amended for taxable years beginning in 2019 and 2020
The CARES Act amends Section 163(j) solely for taxable years beginning in 2019 and 2020. With the exception of partnerships, and solely for taxable years beginning in 2019 and 2020, taxpayers may deduct business interest expense up to 50% of their adjusted taxable income (ATI), an increase from 30% of ATI under the TCJA, unless an election is made to use the lower limitation for any taxable year. Additionally, for any taxable year beginning in 2020, the taxpayer may elect to use its 2019 ATI for purposes of computing its 2020 Section 163(j) limitation. 

This will benefit taxpayers who may be facing reduced 2020 earnings as a result of the business implications of COVID-19. As such, taxpayers should be mindful of elections on their 2019 return that could impact their 2019 and 2020 business interest expense deduction. With respect to partnerships, the increased Section 163(j) limit from 30% to 50% of ATI only applies to taxable years beginning in 2020. However, in the case of any excess business interest expense allocated from a partnership for any taxable year beginning in 2019, 50% of such excess business interest expense is treated as not subject to the Section 163(j) limitation and is fully deductible by the partner in 2020. The remaining 50% of such excess business interest expense shall be subject to the limitations in the same manner as any other excess business interest expense so allocated. Each partner has the ability, under regulations to be prescribed by Treasury, to elect to have this special rule not applied. No rules are provided for application of this rule in the context of tiered partnership structures.

Net operating losses carryback allowed for taxable years beginning in 2018 and before 2021
The CARES Act provides for an elective five-year carryback of net operating losses (NOLs) generated in taxable years beginning after December 31, 2017, and before January 1, 2021. Taxpayers may elect to relinquish the entire five-year carryback period with respect to a particular year’s NOL, with the election being irrevocable once made. In addition, the 80% limitation on NOL deductions arising in taxable years beginning after December 31, 2017, has temporarily been pushed to taxable years beginning after December 31, 2020. 

Several ambiguities in the application of Section 172 arising as a result of drafting errors in the Tax Cuts and Jobs Act have also been corrected. As certain benefits (i.e., charitable contributions, Section 250 “GILTI” deductions, etc.) may be impacted by an adjustment to taxable income, and therefore reduce the effective value of any NOL deduction, taxpayers will have to determine whether to elect to forego the carryback. Moreover, the bill provides for two special rules for NOL carrybacks to years in which the taxpayer included income from its foreign subsidiaries under Section 965. Please consider the impact of this interaction with your international tax advisors. 

However, given the potential offset to income taxed under a 35% federal rate, and the uncertainty regarding the long-term impact of the COVID-19 crisis on future earnings, it seems likely that most companies will take advantage of the revisions. This is a technical point, but while the highest average federal rate was 35% before 2018, the highest marginal tax rate was 38.333% for taxable amounts between $15 million and $18.33 million. This was put in place as part of our progressive tax system to eliminate earlier benefits of the 34% tax rate. Companies may wish to revisit their tax accounting methodologies to defer income and accelerate deductions in order to maximize their current year losses to increase their NOL carrybacks to earlier years.

Alternative minimum tax credit refunds
The CARES Act allows the refundable alternative minimum tax credit to be completely refunded for taxable years beginning after December 31, 2018, or by election, taxable years beginning after December 31, 2017. Under the Tax Cuts and Jobs Act, the credit was refundable over a series of years with the remainder recoverable in 2021.

Technical correction to qualified improvement property
The CARES Act contains a technical correction to a drafting error in the Tax Cuts and Jobs Act that required qualified improvement property (QIP) to be depreciated over 39 years, rendering such property ineligible for bonus depreciation. With the technical correction applying retroactively to 2018, QIP is now 15-year property and eligible for 100% bonus depreciation. This will provide immediate current cash flow benefits and relief to taxpayers, especially those in the retail, restaurant, and hospitality industries. Taxpayers that placed QIP into service in 2019 can claim 100% bonus depreciation prospectively on their 2019 return and should consider whether they can file Form 4464 to quickly recover overpayments of 2019 estimated taxes. Taxpayers that placed QIP in service in 2018 and that filed their 2018 federal income tax return treating the assets as bonus-ineligible 39-year property should consider amending that return to treat such assets as bonus-eligible. For C corporations, in particular, claiming the bonus depreciation on an amended return can potentially generate NOLs that can be carried back five years under the new NOL provisions of the CARES Act to taxable years before 2018 when the tax rates were 35%, even though the carryback losses were generated in years when the tax rate was 21%. With the taxable income limit under Section 172(a) being removed, an NOL can fully offset income to generate the maximum cash refund for taxpayers that need immediate cash. Alternatively, in lieu of amending the 2018 return, taxpayers may file an automatic Form 3115, Application for Change in Accounting Method, with the 2019 return to take advantage of the new favorable treatment and claim the missed depreciation as a favorable Section 481(a) adjustment.

Effects of the CARES Act at the state and local levels
As with the Tax Cuts and Jobs Act, the tax implications of the CARES Act at the state level first depends on whether a state is a “rolling” Internal Revenue Code (IRC) conformity state or follows “fixed-date” conformity. For example, with respect to the modifications to Section 163(j), rolling states will automatically conform, unless they specifically decouple (but separate state ATI calculations will still be necessary). However, fixed-date conformity states will have to update their conformity dates to conform to the Section 163(j) modifications. 

A number of states have already updated during their current legislative sessions (e.g., Idaho, Indiana, Maine, Virginia, and West Virginia). Nonetheless, even if a state has updated, the effective date of the update may not apply to changes to the IRC enacted after January 1, 2020 (e.g., Arizona). 

A number of other states have either expressly decoupled from Section 163(j) or conform to an earlier version and will not follow the CARES Act changes (e.g., California, Connecticut, Georgia, Missouri, South Carolina, Tennessee (starting in 2020), Wisconsin). Similar considerations will apply to the NOL modifications for states that adopted the 80% limitation, and most states do not allow carrybacks. Likewise, in fixed-dated conformity states that do not update, the Section 461(l) limitation will still apply resulting in a separate state NOL for those states. 

These conformity questions add another layer of complexity to applying the tax provisions of the CARES Act at the state level. Further, once the COVID-19 crisis is past, rolling IRC conformity states must be monitored, as these states could decouple from these CARES Act provisions for purposes of state revenue.

2020 recovery refund checks for individuals
The CARES Act provides eligible individuals with a refund check equal to $1,200 ($2,400 for joint filers) plus $500 per qualifying child. The refund begins to phase out if the individual’s adjusted gross income (AGI) exceeds $75,000 ($150,000 for joint filers and $112,500 for head of household filers). The credit is completely phased out for individuals with no qualifying children if their AGI exceeds $99,000 ($198,000 for joint filers and $136,500 for head of household filers).

Eligible individuals do not include nonresident aliens, individuals who may be claimed as a dependent on another person’s return, estates, or trusts. Eligible individuals and qualifying children must all have a valid social security number. For married taxpayers who filed jointly with their most recent tax filings (2018 or 2019) but will file separately in 2020, each spouse will be deemed to have received one half of the credit.

A qualifying child (i) is a child, stepchild, eligible foster child, brother, sister, stepbrother, or stepsister, or a descendent of any of them, (ii) under age 17, (iii) who has not provided more than half of their own support, (iv) who has lived with the taxpayer for more than half of the year, and (v) who has not filed a joint return (other than only for a claim for refund) with the individual’s spouse for the taxable year beginning in the calendar year in which the taxable year of the taxpayer begins.

The refund is determined based on the taxpayer’s 2020 income tax return but is advanced to taxpayers based on their 2018 or 2019 tax return, as appropriate. If an eligible individual’s 2020 income is higher than the 2018 or 2019 income used to determine the rebate payment, the eligible individual will not be required to pay back any excess rebate. However, if the eligible individual’s 2020 income is lower than the 2018 or 2019 income used to determine the rebate payment such that the individual should have received a larger rebate, the eligible individual will be able to claim an additional credit generally equal to the difference of what was refunded and any additional eligible amount when they file their 2020 income tax return.

Individuals who have not filed a tax return in 2018 or 2019 may still receive an automatic advance based on their social security benefit statements (Form SSA-1099) or social security equivalent benefit statement (Form RRB-1099). Other individuals may be required to file a return to receive any benefits.

The CARES Act provides that the IRS will make automatic payments to individuals who have previously filed their income tax returns electronically, using direct deposit banking information provided on a return any time after January 1, 2018.

Charitable contributions

  • Above-the-line deductions: Under the CARES Act, an eligible individual may take a qualified charitable contribution deduction of up to $300 against their AGI in 2020. An eligible individual is any individual taxpayer who does not elect to itemize his or her deductions. A qualified charitable contribution is a charitable contribution (i) made in cash, (ii) for which a charitable contribution deduction is otherwise allowed, and (iii) that is made to certain publicly supported charities.

    This above-the-line charitable deduction may not be used to make contributions to a non-operating private foundation or to a donor advised fund.
  • Modification of limitations on cash contributions: Currently, individuals who make cash contributions to publicly supported charities are permitted a charitable contribution deduction of up to 60% of their AGI. Any such contributions in excess of the 60% AGI limitation may be carried forward as a charitable contribution in each of the five succeeding years.

    The CARES Act temporarily suspends the AGI limitation for qualifying cash contributions, instead permitting individual taxpayers to take a charitable contribution deduction for qualifying cash contributions made in 2020 to the extent such contributions do not exceed the excess of the individual’s contribution base over the amount of all other charitable contributions allowed as a deduction for the contribution year. Any excess is carried forward as a charitable contribution in each of the succeeding five years. Taxpayers wishing to take advantage of this provision must make an affirmative election on their 2020 income tax return.

    This provision is useful to taxpayers who elect to itemize their deductions in 2020 and make cash contributions to certain public charities. As with the aforementioned above-the-line deduction, contributions to non-operating private foundations or donor advised funds are not eligible.

    For corporations, the CARES Act temporarily increases the limitation on the deductibility of cash charitable contributions during 2020 from 10% to 25% of the taxpayer’s taxable income. The CARES Act also increases the limitation on deductions for contributions of food inventory from 15% to 25%.

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BerryDunn experts and consultants

Benchmarking doesn’t need to be time and resource consuming. Read on for four simple steps you can take to improve efficiency and maximize resources.

Stop us if you’ve heard this one before (from your Board of Trustees or Finance Committee): “I wish there was a way we could benchmark ourselves against our competitors.”

Have you ever wrestled with how to benchmark? Or struggled to identify what the Board wants to measure? Organizations can fall short on implementing effective methods to benchmark accurately. The good news? With a planned approach, you can overcome traditional obstacles and create tools to increase efficiency, improve operations and reporting, and maintain and monitor a comfortable risk level. All of this can help create a competitive advantage — and it  isn’t as hard as you might think.

Even with a structured process, remember that benchmarking data has pitfalls, including:

  • Peer data can be difficult to find. Some industries are better than others at tracking this information. Some collect too much data that isn’t relevant, making it hard to find the data that is.
     
  • The data can be dated. By the time you close your books for the year and data is available, you’re at least six months into the next fiscal year. Knowing this, you can still build year-over-year trending models that you can measure consistently.
     
  • The underlying data may be tainted. As much as we’d like to rely on financial data from other organization and industry surveys, there’s no guarantee that all participants have applied accounting principles consistently, or calculated inputs (e.g., full-time equivalents) in the same way, making comparisons inaccurate.

Despite these pitfalls, benchmarking is a useful tool for your organization. Benchmarking lets you take stock of your current financial condition and risk profile, identify areas for improvement and find a realistic and measurable plan to strengthen your organization.

Here are four steps to take to start a successful benchmarking program and overcome these pitfalls:

  1. Benchmark against yourself. Use year-over-year and month-to-month data to identify trends, inconsistencies and unexplained changes. Once you have the information, you can see where you want to direct improvement efforts.
  2. Look to industry/peer data. We’d love to tell you that all financial statements and survey inputs are created equally, but we can’t. By understanding the source of your information, and the potential strengths and weaknesses in the data (e.g., too few peers, different size organizations and markets, etc.), you will better know how to use it. Understanding the data source allows you to weigh metrics that are more susceptible to inconsistencies.
  1. Identify what is important to your organization and focus on it. Remove data points that have little relevance for your organization. Trying to address too many measures is one of the primary reasons benchmarking fails. Identify key metrics you will target, and watch them over time. Remember, keeping it simple allows you to put resources where you need them most.
  1. Use the data as a tool to guide decisions. Identify aspects of the organization that lie beyond your risk tolerance and then define specific steps for improvement.

Once you take these steps, you can add other measurement strategies, including stress testing, monthly reporting, and use in budgeting and forecasting. By taking the time to create and use an effective methodology, this competitive advantage can be yours. Want to learn more? Check out our resources for not-for-profit organizations here.

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Benchmarking: Satisfy your board and gain a competitive advantage

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.

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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

Read this if your company is considering outsourced information technology services.

For management, it’s the perennial question: Keep things in-house or outsource?

For management, it’s the perennial question: Keep things in-house or outsource? Most companies or organizations have outsourcing opportunities, from revenue cycle to payment processing to IT security. When deciding whether to outsource, you weigh the trade-offs and benefits by considering variables such as cost, internal expertise, cross coverage, and organizational risk.

In IT services, outsourcing may win out as technology becomes more complex. Maintaining expertise and depth for all the IT components in an environment can be resource-intensive.

Outsourced solutions allow IT teams to shift some of their focus from maintaining infrastructure to getting more value out of existing systems, increasing data analytics, and better linking technology to business objectives. The same can be applied to revenue cycle outsourcing, shifting the focus from getting clean bills out and cash coming in, to looking at the financial health of the organization, analyzing service lines, patient experience, or advancing projects.  

Once you’ve decided, there’s another question you need to ask
Lost sometimes in the discussion of whether to use outsourced services is how. Even after you’ve done your due diligence and chosen a great vendor, you need to stay involved. It can be easy to think, “Vendor XYZ is monitoring our servers or our days in AR, so we should be all set. I can stop worrying at night about our system reliability or our cash flow.” Not true.

You may be outsourcing a component of your technology environment or collections, but you are not outsourcing the accountability for it—from an internal administrative standpoint or (in many cases) from a legal standpoint.

Beware of a false state of confidence
No matter how clear the expectations and rules of engagement with your vendor at the onset of a partnership, circumstances can change—regulatory updates, technology advancements, and old-fashioned vendor neglect. In hiring the vendor, you are accountable for oversight of the partnership. Be actively engaged in the ongoing execution of the services. Also, periodically revisit the contract, make sure the vendor is following all terms, and confirm (with an outside audit, when appropriate) that you are getting the services you need.

Take, for example, server monitoring, which applies to every organization or company, large or small, with data on a server. When a managed service vendor wants to contract with you to provide monitoring services, the vendor’s salesperson will likely assure you that you need not worry about the stability of your server infrastructure, that the monitoring will catch issues before they occur, and that any issues that do arise will be resolved before the end user is impacted. Ideally, this is true, but you need to confirm.

Here’s how to stay involved with your vendor
Ask lots of questions. There’s never a question too small. Here are samples of how precisely you should drill down:

  • What metrics will be monitored, specifically?
  • Why do the metrics being monitored matter to our own business objectives?
  • What thresholds must be met to notify us or produce an alert?
  • What does exceeding a threshold mean to our business?
  • Who on our team will be notified if an alert is warranted?
  • What corrective action will be taken?

Ask uncomfortable questions
Being willing to ask challenging questions of your vendors, even when you are not an expert, is critical. You may feel uncomfortable but asking vendors to explain something to you in terms you understand is very reasonable. They’re the experts; you’re not expected to already understand every detail or you wouldn’t have needed to hire them. It’s their job to explain it to you. Without asking these questions, you may end up with a fairly generic solution that does produce a service or monitor something, but not necessarily all the things you need.

Ask obvious questions
You don’t want anything to slip by simply because you or the vendor took it for granted. It is common to assume that more is being done by a vendor than actually is. By asking even obvious questions, you can avoid this trap. All too often we conduct an IT assessment and are told that a vendor is providing a service, only to discover that the tasks are not happening as expected.

You are accountable for your whole team—in-house and outsourced members
An outsourced solution is an extension of your team. Taking an active and engaged role in an outsourcing partnership remains consistent with your management responsibilities. At the end of the day, management is responsible for achieving business objectives and mission. Regularly check in to make sure that the vendor stays focused on that same mission.

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Oxymoron of the month: Outsourced accountability

More and more emphasis is being put on cybersecurity by companies of all sizes. Whether it’s the news headlines of notable IT incidents, greater emphasis on the value of data, or the monetization of certain types of attacks, an increasing amount of energy and money is going towards security. Security has the attention of leadership and the board and it is not going away. One of the biggest risks to and vulnerabilities of any organization’s security continues to be its people. Innovative approaches and new technology can reduce risk but they still don’t prevent the damage that can be inflicted by an employee simply opening an attachment or following a link. This is more likely to happen than you may think.

Technology also doesn’t prepare a management team for how to handle the IT response, communication effort, and workforce management required during and after an event. Technology doesn’t lessen the operational impact that your organization will feel when, not if, you experience an event.

So let’s examine the human and operational side of cybersecurity. Below are three factors you should address to reduce risk and prepare your organization for an event:

  1. People: Create and maintain a vigilant workforce
    Ask yourself, “How prepared is our workforce when it comes to security threats and protecting our data? How likely would it be for one of our team members to click on a link or open an attachment that appear to be from our CFO? Would our team members look closely enough at the email address and notice that the organization name is different by one letter?”
     

    According to the 2016 Verizon Data Breach Report, 30% of phishing messages were opened by the target across all campaigns and 12% went on to click on the attachment or link.

    Phishing email attacks directed at your company through your team range from very obvious to extremely believable. Some attempts are sent widely and are looking for just one person to click, while others are extremely targeted and deliberate. In either case, it is vital that each employee takes enough time to realize that the email request is unusual. Perhaps there are strange typos in the request or it is odd the CFO is emailing while on vacation. That moment your employees take to pause and decide whether to click on the link/attachment could mean the difference between experiencing an event or not.

    So how do you create and cultivate this type of thought process in your workforce? Lots of education and awareness efforts. This goes beyond just an annual in-service training on HIPAA. It may include education sessions, emails with tips and tricks, posters describing the risk, and also exercises to test your workforce against phishing and security exploits. It also takes leadership embracing security as a strategic imperative and leading the organization to take it seriously. Once you have these efforts in place, you can create culture change to build and maintain an environment where an employee is not embarrassed to check with the CFO’s office to see if they really did send an email from Bora Bora.
  1. Plan: Implement a disaster recovery and incident response plan 
    Through the years, disaster recovery plans have been the usual response. Mostly, the emphasis has been on recovering data after a non-security IT event, often discussed in context of a fire, power loss, or hardware failure. Increasingly, cyber-attacks are creeping into the forefront of planning efforts. The challenge with cyber-events is that they are murkier to understand – and harder for leadership – to assist with.

    It’s easier to understand the concept of a fire destroying your server room and the plan entailing acquiring new equipment, recovering data from backup, restoring operations, having good downtime procedures, and communicating the restoration efforts along the way. What is much more challenging is if the event begins with a suspicion by employees, customers, or vendors who believe their data has been stolen without any conclusive information that your company is the originating point of the data loss. How do you take action if you know very little about the situation? What do you communicate if you are not sure what to say? It is this level of uncertainty that makes it so difficult. Do you have a plan in place for how to respond to an incident? Here are some questions to consider:
     
    1. How will we communicate internally with our staff about the incident?
    2. How will we communicate with our clients? Our patients? Our community?
    3. When should we call our insurance company? Our attorney?
    4. Is reception prepared to describe what is going on if someone visits our office?
    5. Do we have the technical expertise to diagnose the issue?
    6. Do we have set protocols in place for when to bring our systems off-line and are our downtime procedures ready to use?
    7. When the press gets wind of the situation, who will communicate with them and what will we share?
    8. If our telephone system and network is taken offline, how we will we communicate with our leadership team and workforce?

By starting to ask these questions, you can ascertain how ready you may, or may not be, for a cyber-attack when it comes.

  1. Practice: Prepare your team with table top exercises  
    Given the complexity and diversity of the threats people are encountering today, no single written plan can account for all of the possible combinations of cyber-attacks. A plan can give guidance, set communication protocols, and structure your approach to your response. But by conducting exercises against hypothetical situations, you can test your plan, identify weaknesses in the plan, and also provide your leadership team with insight and experience – before it counts.

    A table top exercise entails one team member (perhaps from IT or from an outside firm) coming up with a hypothetical situation and a series of facts and clues about the situation that are given to your leadership team over time. Your team then implements the existing plans to respond to the incident and make decisions. There are no right or wrong answers in this scenario. Rather, the goal is to practice the decision-making and response process to determine where improvements are needed.

    Maybe you run an exercise and realize that you have not communicated to your staff that no mention of the event should be shared by employees on social media. Maybe the exercise makes you realize that the network administrator who is on vacation at the time is the only one who knows how to log onto the firewall. You might identify specific gaps that are lacking in your cybersecurity coverage. There is much to learn that can help you prepare for the real thing.

As you know, there are many different threats and risks facing organizations. Some are from inside an organization while others come from outside. Simply throwing additional technology at the problem will not sufficiently address the risks. While your people continue to be one of the biggest threats, they can also be one of your biggest assets, in both preventing issues from occurring and then responding quickly and appropriately when they do. Remember focus on your People, Your Plan, and Your Practice.

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Follow these six steps to help your senior living organization improve cash flow, decrease days in accounts receivable, and reduce write offs.

From regulatory and reimbursement rule changes to new software and staff turnover, senior living facilities deal with a variety of issues that can result in eroding margins. Monitoring days in accounts receivable and creeping increases in bad debt should be part of a regular review of your facility’s financial indicators.

Here are six steps you and your organization can take to make your review more efficient and potentially improve your bottom line:

Step 1: Understand your facility’s current payer mix.

Understanding your payer mix and various billing requirements and reimbursement schedules will help you set reasonable goals and make an accurate cash flow forecast. For example, government payers often have a two-week reimbursement turn-around for a clean claim, while commercial insurance reimbursement may take up to 90 days. Discovering what actions you can take to keep the payment process as short as possible can lessen your average days in accounts receivable and improve cash flow.

Step 2: Gain clarity on your facility’s billing calendar.

Using data from Step 1, review (or develop) your team’s billing calendar. The faster you send a complete and accurate bill, the sooner you will receive payment.

Have a candid discussion with your billers and work on removing (or at least reducing) existing or perceived barriers to producing timely and accurate bills. Facilities frequently find opportunities for cash flow optimization by communicating their expectations for vendors and care partners. For example, some facilities rely on their vendors to provide billing logs for therapy and ancillary services in order to finalize Resource Utilization Groups (RUGs) and bill Medicare and advantage plans. Delayed medical supply and pharmacy invoices frequently hold up private pay billing. Working with vendors to shorten turnaround time is critical to receiving faster payments.

Interdependencies and areas outside the billers’ control can also negatively influence revenue cycle and contribute to payment delays. Nursing and therapy department schedules, documentation, and the clinical team’s understanding of the principles of reimbursement all play significant roles in timeliness and accuracy of Minimum Data Sets (MDSs) — a key component of Medicare and Medicaid billing. Review these interdependencies for internal holdups and shorten time to get claims produced.

Step 3: Review billing practices.

Observe your staff and monitor the billing logs and insurance claim acceptance reports to locate and review rejected invoices. Since rejected claims are not accepted into the insurer’s system, they will never be reflected as denied on remittance advice documents. Review of submitted claims for rejections is also important as frequently billing software marks claims as billed after a claim is generated. Instruct billers to review rejections immediately after submitting the bill, so rework, resubmission, and payment are timely.

Encourage your billers to generate pull communications (using available reporting tools on insurance portals) to review claim status and resolve any unpaid or suspended claims. This is usually a quicker process than waiting for a push communication (remittance advice) to identify unpaid claims.

Step 4: Review how your facility receives payments.

Challenge any delays in depositing money. Many insurance companies offer payment via ACH transfer. Discuss remote check deposit solutions with your financial institution to eliminate delays. If the facility acts as a representative payee for residents, make sure social security checks are directly deposited to the appropriate account. If you use a separate non-operating account to receive residents’ pensions, consider same day bill pay transfer to the operating account.

Step 5: Review industry benchmarks.

This is critical to understanding where your facility stands and seeing where you can make improvements. BerryDunn’s database of SNF Medicare cost reports filed for FY 2015 - 2018 shows:

Skilled Nursing Facilities: Days in Accounts Receivable

Step 6: Celebrate successes!

Clearly some facilities are doing it very well, while some need to take corrective action. This information can also help you set reasonable goals overall (see Step 1) as well as payer-specific reimbursement goals that make sense for your facility. Review them with the revenue cycle team and question any significant variances; challenge staff to both identify reasons for variances and propose remedial action. Helping your staff see the big picture and understanding how they play a role in achieving department and company goals are critical to sustaining lasting change AND constant improvement.

Change, even if it brings intrinsic rewards (like decreased days in accounts receivable, increased margin to facilitate growth), can be difficult. Acknowledge that changing processes can be tough and people may have to do things differently or learn new skills to meet the facility’s goal. By celebrating the improvements — even little ones — like putting new processes in place, you encourage and engage people to take ownership of the process. Celebrating the wins helps create advocates and lets your team know you appreciate their work. 

To learn more, contact one of our revenue cycle specialists.

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