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Due to the weather, our physical offices will be closed Wednesday, 2/15; however, our we will be serving clients remotely. Please contact us via phone or email. Our physical offices will reopen for regular business hours on Thursday, 2/16. Please stay safe and warm.
Managing cash flow is an ongoing priority for any business. Protecting an organization’s cash flow in times of economic distress is paramount. To retain liquidity in the short term, many organizations are examining their retirement plans for flexibility in cash outflows.
Adjusting or temporarily putting a hold on employer contributions to retirement plans stands out as a prominent option for some, but other less obvious tools can help plan sponsors operate more efficiently during a crisis as well.
Before making any changes, employers need to consider both the short-term and long-term consequences of these actions. While such decisions can provide some immediate cash flow relief, they can also increase long-term costs or negatively impact an organization’s employee morale and competitive positioning.
Eliminating or suspending the employer match, while a potentially effective tool employers can use to shore up cash, may not be an option, depending on how the plan document is written. Plans that include an annual safe harbor 401(k) contribution may include restrictions relating to the suspension or elimination of these contributions. Plan documents must be thoroughly reviewed before reaching a decision.
Even if eliminating or suspending the employer match is an option, employers should approach these decisions with care as they may negatively affect an organization’s ability to attract new employees. This potential backlash may be the reason many employers are hesitating to suspend contributions, even as we anticipate a continued quarantine. A recent survey by the Plan Sponsor Council of America (PSCA) showed that only 16 percent of benefit plans expect to suspend contributions.
Another option could be to reduce the number of participants in a plan to archive a lower administrative cost in upcoming quarters. Employers can achieve this is by removing inactive participants from the plan. The Internal Revenue Service (IRS) allows plan sponsors to cash out inactive participants with $1,000 or less in their accounts, and plan sponsors don’t need permission from the individual to do this. In addition, plan sponsors can roll accounts with balances of $5,000 or less into Individual Retirement Accounts (IRAs).
Participants with more than $5,000 in their accounts can’t be forced out of the plan, but plan sponsors are permitted to contact such participants and inquire if they would like to be cashed out. As always, it’s important for plan sponsors to refer to their plan documents before seeking to reduce the number of inactive participants or issue distributions.
Several other tools exist that may help plan sponsors operate more efficiently:
When examining the potential tools at your disposal for conserving cash, it’s important that employers don’t make these decisions in a vacuum. While certain actions can be taken to improve cash flow now, they could lead to greater expenses in the long term—and changes to retirement savings plans may ultimately weaken an organization’s ability to recruit and retain talent.
Your representative is available to help evaluate your plan and look for opportunities to create valuable flexibility while still being mindful of the long-term impacts of these changes.
By: Kim Flett and Beth Garner
Being selected for a Department of Labor (DOL) audit is not exactly a prize most plan sponsors want or intend to win. Often, plan sponsors think service providers will take the blame when compliance issues arise. But plan sponsors are ultimately responsible for plan administration and operation. Plan sponsors that don’t realize this can suffer devastating consequences and become a statistic on the agency’s annual enforcement report.
In fiscal year 2018, the DOL’s Employee Benefits Security Administration (EBSA) recovered more than $1.6 billion in direct payments to plans, participants and beneficiaries. This is about $500 million more than the $1.1 billion it recovered in 2017—even though the agency conducted about 400 fewer investigations in 2018 than it did in 2017.
This means that the agency, which carries extensive authority to investigate employee benefit plans, is getting better at its craft. More than half of the plans that were investigated by the EBSA in 2018 were assessed penalties or were subject to other corrective actions.
Plan sponsors need to realize they are absolutely responsible for those plans governed by the 1974 Employee Retirement Income Security Act (ERISA). They need to stay on top of service provider activity and make sure those vendors are performing tasks as expected—or face serious penalties. We examine how the EBSA enforces the law, identify some of the top investigation triggers and discuss what plan sponsors can do to avoid the agency’s attention.
ERISA’s fiduciary rule requires plan sponsors to act in the best interests of the plan beneficiaries. These plans include 401(k) and other defined contribution plans, defined benefit as well as health and welfare plans. In addition, since the passage of the Affordable Care Act (ACA) in 2010, the EBSA has been charged with enforcement and conducting audits on these health plans.
EBSA audits primarily focus on fiduciary issues as well as reporting and disclosure requirements. The issues can mostly be found in the Form 5500 that plans are required to file annually. Plan participants or others tied to the plan can file complaints against plans, employers or service providers. Last year, EBSA opened 524 new investigations because of participants’ complaints, resulting in $443.2 million restored to workers.
Form 5500 is a treasure trove for EBSA investigators. Filing late or incomplete forms is likely to get investigators’ attention. But the EBSA doesn’t stop there. Other red flags include:
The EBSA runs a Voluntary Fiduciary Correction Program, where plan sponsors can find 19 specific violations. The agency encourages plan sponsors to actively self-correct these violations. In some cases, plan sponsors who comply don’t pay the excise tax. Plan sponsors need to be careful because those that submit incomplete or inaccurate applications might wind up being audited by the EBSA. Last year, the Voluntary Fiduciary Correct Program received 1,414 applications and recovered $10.8 million.
It is worth noting that the EBSA is finding significant success in its Terminated Vested Participant Project (TVPP), which makes sure plan sponsors are actively looking for missing participants and notifying deferred vested participants of their benefit. Last year, total recoveries for this project rose to $808 million from $327 million in 2017.
The DOL fines for lack of compliance are heavy. Failure to file a Form 5500 will cost a plan sponsor $2,194 for each day it is late this year. ACA plans that don’t provide the summary of benefits and coverage can be fined between $1,128 to $1,156 for each failure.
Defined contribution 401(k) plan sponsors will be responsible for recordkeeping and reporting glitches, too. Those fees can be significant at $30 per participant.
It can’t be stressed enough: plan sponsors are the fiduciary to benefit plans. Service providers may say they are also fiduciaries, but the ultimate responsibility belongs to plan sponsors. It is imperative that they act in the best interests of plan participants; if they don’t, EBSA investigators will step in and make sure plan participants are protected and made whole.
First, make sure the “team” of other fiduciaries and service providers are aware of the design laid out in the plan document. Fiduciaries need to make sure everyone is doing what is prescribed in the plan document. Not every service provider is proficient in qualified plans, so it is important to ask about experience, internal controls and other qualities that will raise your comfort level when deciding which service provider to hire. Lastly, documenting the decision-making process will also help auditors understand whether certain actions were in the best interests of the participants.
There is no doubt that plan sponsors have many responsibilities to manage. But compliance issues should be a top priority. In certain cases, fines and other penalties can destroy not just the plan, but the company itself. Creating accountability standards and hiring a qualified team are some of the critical steps plan sponsors can take to avoid enforcement actions. Your BDO representative is here to help and answer your questions.
This article originally appeared in BDO USA, LLP’s “Insights” newsletter (July 2019). Copyright © 2019 BDO USA, LLP. All rights reserved. www.bdo.com
Ten Warnings Signs:
If you have compliance questions on your employee benefit plan, please contact the SKR+CO audit team.
By and large, today’s employees expect employers to offer a tax-advantaged retirement plan. A 401(k) is an obvious choice to consider, but you may not be aware that there are a variety of types to choose from:
Employees contribute on a pretax basis, with the employer matching all or a percentage of their contributions if it so chooses. Traditional 401(k)s are subject to rigorous testing requirements to ensure the plan is offered equitably to all employees and does not favor highly compensated employees (HCEs).
In 2018, employees can defer a total amount of $18,500 through salary reductions. Those age 50 or older by year end can defer an additional $6,000.
Employees contribute after-tax dollars but take tax-free withdrawals (subject to certain limitations). Other rules apply, including that employer contributions can go into only traditional 401(k) accounts, not Roth 401(k)s. Usually a Roth 401(k) is offered as an option to employees in addition to a traditional 401(k), not instead of the traditional plan.
The Roth 401(k) contribution limits are the same as those for traditional 401(k)s. But this applies on a combined basis for total contributions to both types of plans.
For businesses that may encounter difficulties meeting 401(k) testing requirements, this could be a solution. Employers must make certain contributions, which must vest immediately. But owners and HCEs can maximize contributions without worrying about part of their contributions being returned to them because rank-and-file employees have not been contributing enough.
To qualify for the safe harbor election, the employer needs to either contribute 3% of compensation for all eligible employees, even those who don’t make their own contributions, or match 100% of employee deferrals up to the first 3% of compensation and 50% of deferrals up to the next 2% of compensation. The contribution limits for these plans are the same as those for traditional 401(k)s.
Savings Incentive Match Plan for Employees (SIMPLE)
If your business has 100 or fewer employees, consider one of these. As with a Safe Harbor 401(k), the employer must make certain, immediately vested contributions, and there is no rigorous testing.
This has been but a brief look at these types of 401(k)s. Contact your financial adviser for more information on each, as well as guidance on finding the right one for your business.
Nonprofits nationwide are increasingly considering shared workspace arrangements to lower rising facility costs. These arrangements are particularly appealing in areas where nonprofits are being priced out of the real estate market and to those determined to cut operating costs. In the Pikes Peak region, the “health care” desert of services is in the 80916/10 area.
The term “shared space” refers to workspaces shared by small businesses, freelancers, consultants, start-ups and others. Depending on their needs, tenants can pay for short- or long-term access to private offices, conference rooms and common areas. Office equipment and services, such as high-speed Internet; photocopiers, printers and scanners; and coffee and office supplies, are shared among the tenants.
The shared space trend in recent years has led to the development of several options. For example, you could rent space in a dedicated shared workspace facility that also might provide “back-office” services such as HR. Many of these arrangements welcome a variety of businesses, but some cater primarily to nonprofits.
Similarly, some private foundations, with more space than they require, lease out the excess to nonprofits. As tax-exempt organizations, they avoid steep property taxes and pass the savings along to their tenants in the form of reduced rent.
When two or more nonprofits serve the same population, they may rent a shared facility and slice the cost in half. You may also rent out unused space to other organizations, generating revenue to offset your rent obligations.
The most obvious benefit of sharing space lies in potential cost savings. Why, for example, pay annual rent on space that includes a conference room you only use for semiannual board meetings? Organizations of all sizes benefit by efficient use of supplies and equipment, utilities and maintenance expenses.
Flexibility is especially valuable for nonprofits in the early stages of development or entry into a new market. Organizations usually do not want to commit to long-term leases before they have a handle on how much space they will need in the future.
Workspace is not the only expense you can share with other organizations to reap impressive savings. You also can cut your costs by:
Sharing staff. Your organization may, for instance, be too small to justify a full-time IT person — you might not have the need or the budget. But perhaps you and another organization together have sufficient need and funding for such support.
Sharing equipment. You probably have equipment that goes unused or is used below capacity. Think about sharing it with another organization whose needs for such equipment complement yours. (For example, a summer music program could share instruments with a program that operates during the school year.)
Sharing buying power. Consolidate your buying power with that of other nonprofits to obtain lower rates, discounts and possibly even improved service.
Shared space is not all rainbows and unicorns, though. Organizations need to take a variety of factors into consideration before taking the plunge. Some nonprofits, for example, may not want to share space with “competing” organizations that serve the same population or pursue similar funding sources.
You also should think about:
You can assess many of these issues by making site visits, both scheduled (to get the sales pitch) and unscheduled (to get a more realistic lay of the land).
As nonprofit budgets get tighter and come under more scrutiny, cutting your space-related costs may provide some peace of mind and pave the way to sustainability. Your CPA can help you determine whether moving your operations to shared space is a solid financial decision.
Whistleblower policies encourage staff, volunteers and others to discreetly provide credible information on illegal practices or violations of organizational policies. They protect individuals who risk their careers or take other kinds of risks to report illegal or unethical practices. According to its Report to the Nations, the Association of Certified Fraud Examiners identified tips as the No. 1 method by which fraud is detected. Whistleblower policies (and the use of hotlines) are important to ensuring tips are received by the organization. IRS Form 990 asks nonprofits to report whether they’ve adopted a whistleblower policy. And although no federal law specifically requires organizations to have such policies in place, several state laws do.
Your whistleblower policy should be tailored to your not-for-profit’s unique circumstances. But here are some general tips to consider when forming, or refining, your policy’s provisions:
1. Be clear about whom the policy covers. Spell out who’s covered by your policy. In addition to employees, volunteers and board members, you might want to include clients and third parties that conduct business with your organization, such as vendors and independent contractors.
2. State which types of wrongdoing are covered. Financial misdeeds often get the most attention, but whistleblower policies can have a longer reach. For example, you might include violations of your organization’s client protection policies, conflicts of interest and unsafe work conditions.
3. Spell out reporting procedures. Explain the procedures for reporting concerns. Must claims be made to a compliance officer or can they be reported anonymously? Is a confidential hotline available? Whom can whistleblowers turn to if the designated individual is suspected of wrongdoing? Your procedures should be clear and simple enough to encourage individuals to come forward.
4. Describe investigative procedures. State that every concern raised by a whistleblower will be promptly and thoroughly investigated and that designated investigators will have adequate independence to conduct an objective query. Ideally, investigators should report directly to your nonprofit’s board of directors.
5. Describe postinvestigation steps. Let everyone know what will happen after the investigation is complete. For instance, will the reporting individual receive feedback? Will the individual responsible for the illegal or unethical behavior be punished? If your organization opts not to take corrective action, be sure to document your reasoning.
6. Promise confidentiality. A guarantee of confidentiality can make whistleblowing more appealing. But it may not be possible to make such promises if whistleblowers need to become witnesses in criminal or civil proceedings. However, your policy should assure confidentiality to the greatest extent possible.
7. Describe disciplinary action. Not every whistleblower is motivated by pure intentions. State that your organization will take disciplinary action against individuals who make unfounded allegations that are reckless, malicious or intentionally false.
8. Forbid retaliation. A critical component of a whistleblower policy is the prohibition against retaliation. Make clear that no retaliation — including harassment, termination or blacklisting — will be tolerated against anyone who raises concerns about potentially illegal or otherwise wrongful practices in good faith. “Good faith” means the individual has a reasonable belief that a problem exists. Specify the party to whom complaints of retaliation can be addressed. Violators should be disciplined promptly and appropriately.
Whistleblower policies send a strong message about your commitment to good governance and ethical behavior. Make sure that your policy echoes your adherence to an environment of accountability and employee empowerment.
Employ analytical analysis to get a better view of your organization’s revenue picture. Techniques such as pinpointing year-to-year trends and benchmarking to other nonprofits can be useful in planning your short- and long-term future.
To some degree, most nonprofits rely on contributions from supporters to balance their budgets. Compare the dollars raised to past years and see if you can pinpoint any trends. For example, have individual contributions reached a plateau in recent years? What fundraising campaigns have you launched during that period?
Go beyond the totals and determine, for instance, if the number of major donors — say, those who give $1,000 or more a year — has been rising. You get more bang for your fundraising buck when you’re able to add major donors to your roster of supporters.
Also estimate what portion of contributions is restricted by donors as to how or when the money can be used. If your organization has a large percentage of donations tied up in restricted funds, you might want to re-evaluate your gift acceptance policy. You also might want to review your fundraising materials to make sure you’re pursuing contributions that give your organization the most flexibility.
Grants include funding from corporate, foundation and government sources. They can vary dramatically in size and purpose, from grants that cover operational costs, to monies for launching a program, to payment for providing services to clients. For example, a state agency may pay you $500 for each low-income, unemployed individual who receives your job training.
Pay attention to trends here, too. For instance, did a particular funder supply 50% of total revenue in 2014, 75% in 2015, and 80% last year? A growing reliance on a single funding source — an example of a “concentration” that will increase your risk — is a red flag to auditors and it should be to you, too. In this case, if funding stopped, your organization might be forced to find a new funding source, curtail a program or even close its doors.
Fees from clients or other third parties can be similar to fees for-profit organizations earn. Fees are generally viewed as exchange transactions, because the client receives something of value in exchange for its payment. Some not-for-profits charge fees on a sliding scale based on income or ability to pay. In other cases, fees (such as rent paid by low-income individuals) are subject to legal limitations set by government funding agencies.
On an ongoing basis, your nonprofit will need to assess if providing certain services pays for itself. For instance, fees set four years ago for a medical procedure may no longer be sufficient to cover costs. A decision to raise fees or discontinue the services will probably need to be made.
If your nonprofit is a membership organization, you likely charge membership dues. Has membership grown or declined in recent years, and how do your dues compare with similar groups?
Make informed predictions about the future of membership dues, especially if you rely on them substantially for revenue. If you suspect that dues income will continue to decline, your organization might consider dropping dues altogether and restructuring. If so, examine other income sources for growth potential.
Once you’ve gained a deeper understanding of your revenue picture, apply that knowledge to various aspects of managing your organization. This will likely involve educating your management team and setting or revising goals.
According to published reports, more than two dozen Virginia organizations, as well as organizations around the country, received emails from an individual in England, unknown to the organizations, offering an approximately $30,000 donation.
Here’s how the check-kiting scheme works: After receiving the original email, the nonprofit gets a check for $40,000. Another email arrives concurrently, saying that the overpayment is the result of a clerical error and asking the nonprofit to return the excess payment. A victim nonprofit might deposit the check and not know for several days that it bounced, during which time it might send a $10,000 “refund,” money that will never be seen again.
Seventy-two percent of respondents in software provider Abila’s Donor Loyalty Survey say their decision to give is affected by an organization’s messaging. In February 2016, Abila surveyed 1,136 U.S. donors of all ages who had made at least one donation during the previous 12 months.
Seventy-five percent of respondents said they prefer a “short, self-contained email” with no links, while 73% prefer a short (two to three paragraphs) letter or online article. Sixty percent prefer short (under two minutes) YouTube videos.
About 71% of respondents feel more engaged when they receive personalized content. But personalization gone wrong — for example, with misspelled names or irrelevant information — can alienate donors.
GuideStar has launched a new tier of Nonprofit Profiles called GuideStar Platinum. The no-charge Platinum tier allows nonprofits to report their progress against their missions using metrics they select. GuideStar has collected about 700 suggested metrics, but nonprofits may opt to share the metric(s) they already track and that matter the most to them. For example, a homeless shelter could report the number of people no longer living in substandard housing as a result of its efforts.
According to GuideStar, more than 500 nonprofits signed up within 48 hours of the first announcement of Platinum in April 2016.
Has your organization outgrown its bylaws? Sometimes, as a nonprofit expands and matures, the guiding rules set when it was just a twinkle in its founders’ eyes need to be revisited and brought up to date.
Revising your bylaws involves more than just altering the language of rarely visited documents. The process provides you with an opportunity to look closely at how your nonprofit is evolving and whether such developments are consistent with your original mission.
Bylaws are the rules and principles that define your governing structure. They serve as your not-for-profit’s architectural framework. Although bylaws aren’t required to be public documents, making them available to the public can boost your accountability and transparency.
Your bylaws might cover such topics as the broad charitable purpose of the organization; the size and function of your board; and the election, terms and duties of your nonprofit’s directors and officers. They also usually cover your nonprofit’s basic rules for voting, holding meetings, electing directors and appointing officers. And without being too specific, your bylaws should provide procedures for resolving internal disputes, such as the removal and replacement of a board member.
Before you attempt to revise the bylaws, make sure you have the authority to do so. Most bylaws contain an amendment paragraph that defines the procedures for changing these rules.
Then consider creating a bylaw committee made up of a cross-section of your organization’s membership or constituency. This committee will be responsible for reviewing existing bylaws and recommending revisions to your board or members for a full vote.
It’s important that your bylaw committee focus on your not-for-profit’s mission, not organizational politics. A bylaw revision is appropriate only if you want to change your nonprofit’s governing structure — not to cater to one of your leader’s pet projects.
If your nonprofit is incorporated, you’ll need to ensure that any proposed bylaw changes conform with your articles of incorporation, which spell out your nonprofit’s purpose and outline its allowable activities. For example, the “purposes” clause in your bylaws must match that in your articles of incorporation. Any new provision or language changes in your bylaws, contrary to the objectives and ideals included in your incorporation documents, could invalidate the revisions.
Wanting to change the rules about how you operate suggests that you may have drifted from your original purpose. Bylaw revisions that indicate you’ve strayed from your initial mission can jeopardize your federal tax-exempt status. By all means, make sure your bylaw amendments remain consistent with your tax-exempt purpose. And notify the IRS if they represent a “structural or operational” change by reporting the amendments on your Form 990.
In addition, review your state’s statute that governs nonprofits, because it may contain mandatory provisions that affect your bylaws. In the absence of bylaws, when faced with issues about your governance, your state may dictate a proper course of action. If you don’t coordinate your bylaws with such a statute, you may unwittingly hinder your governing board’s ability to operate.
Through the years, your nonprofit is likely to experience a number of changes: Its constituency and support may grow and its goals and priorities may shift. Your professional advisors can work with you to amend your bylaws and make sure they accurately reflect your organization as it exists today.