Non Profit Report - January 2014

Date: January 30, 2014

I Got This Thing From the IRS...
By: Mary Claire Chesshire

The Internal Revenue Service is now launching questionnaire projects to gather information about retirement plans, in addition to conducting random, full scope audits. What should you do if a questionnaire is received? First - do not ignore it and, second, ask your advisor to help with the responses. A proactive review of your retirement plans’ operations is never a bad idea.

The Internal Revenue Service is the federal government agency that, along with the US Department of Labor, oversees an employer’s operation tax qualified and non-qualified retirement and deferred compensation plans. Many of our clients have received the often-dreaded audit notice, complete with a five page request for documents pertaining to the employer’s retirement plan and payroll records. After utilizing substantial internal and outside professional resources to prepare for the “full scope” audit and respond to the document request, an IRS “specialist” graces you with his or her company for however many days it takes to complete the review, followed by a wait of an indeterminate period of time, until you (hopefully) receive the letter advising that all is well with your retirement plan.

However, the IRS is now utilizing short questionnaires to identify those employers whose retirement plans may warrant review, in addition to conducting random audits. These questionnaires were first mailed to 1,200 401(k) plan sponsors in May of 2010. The questionnaires requested information regarding the Plan’s demographics, plan participation, employer and employee contributions, application of “top heavy” and “discrimination” testing, participation in voluntary compliance programs and plan administration. Generally, a 15 day deadline for a response is imposed on the recipient.

The IRS issued a report in April of 2013 on the statistics gathered following a review of the questionnaire responses. Although the report did not address the number of full scope audits triggered by the questionnaire responses and lack of responses, IRS representatives made clear that an employer’s outright failure to respond to the questionnaire did result in a full scope audit.

The IRS recently announced that it was launching another questionnaire project, this one aimed at deferred compensation plans sponsored by tax-exempt organizations. Recipients of the questionnaires are being identified from a review of Forms W-2 filed by employers in 2011 with Code “G” in box 12, indicating sponsorship of a deferred compensation plan for a tax exempt organization. The questionnaires seek to identify certain impermissible provisions in these plans. Therefore, careful attention should be paid to the responses.

A likely subject of the next questionnaire project will be tax deferred annuity programs (“403(b) plans”) sponsored by tax exempt organizations.

Takeaway for employers: If you receive a questionnaire from the IRS, do not ignore it. Responses should be reviewed by counsel or a retirement plan professional to ensure that the questions are being answered accurately and, if the questionnaire responses trigger issues, that proactive, corrective action can be taken. There is no time like the present, before you get a questionnaire, to conduct a check of plan operations to confirm that the operations conform to both the terms of your retirement plan and the requirements of the Internal Revenue Code and ERISA.

Managing Risk With Technology Contractors
By: Heather A. James, Esq.

Tips to minimize the potential legal pitfalls in contracting for technology systems

Acquiring the right technology systems is often critical to an association’s success. Too often, however, associations rush through technology system acquisitions and sign unfavorable vendor contracts that ultimately provide little protection to the association if the system or its vendor doesn’t perform as expected. To minimize the potential legal pitfalls in contracting for technology systems, consider the following five contracting tips:

  • Carefully assess your requirements. Critically assess the goals of the association and identify what technology system functionality and capabilities are required to achieve those goals. You should clearly identify the project scope, duration of the project, budget, and how the new system will be managed after deployment. Careful acquisition planning should give you a clear understanding of your technology system requirements, which you should then use to identify viable technology systems and their vendors.
  • Consider issuing an RFP. Consider issuing a request for proposals to help you evaluate potential technology system proposals from an objective baseline. A well-written RFP can be invaluable to avoiding disputes later on about expectations and performance obligations. Include in your RFP (1) a detailed description of the project scope, (2) specifications regarding key system functionality and capabilities, (3) your evaluation scheme for reviewing vendor proposals, and (4) the initial contract framework, especially contract terms you want. A vendor’s proposal submitted in response to your RFP should be attached and incorporated into the resulting contract so that commitments made by the vendor in its proposal become enforceable contract requirements.
  • Don’t skimp on the due diligence. Review each proposal against the RFP evaluation criteria and perform due diligence on each vendor under serious consideration. You will want to ensure that potential vendors have adequate financial health to perform the project successfully to completion. Request vendor references and check them – a vendor should have a positive past performance record on similar projects and a good industry reputation. You also should investigate any previous and pending litigation against the vendor that could potentially impact your project. And it’s best not just to select one vendor, but rather choose the final two and negotiate with them to determine the right fit when the association has the most leverage.
  • Don’t accept a boilerplate contract. Technology vendor contracts are almost always written to protect the vendor’s interests, not yours. Don’t accept the vendor’s “standard” contract without insisting on contract terms that are equitable and that provide a reasonable amount of protection to you. Read the contract thoroughly and challenge any terms that are unclear or too one-sided. Insist on having any ambiguous language clarified, and make sure that contract terms are equitable. In particular, focus on the vendor’s payment terms, warranty provisions (and warranty disclaimers) and terms regarding contract termination, indemnification, and limitations on damages. You should incorporate any RFP terms that specify minimum core system functionality and performance to avoid later disputes about system capabilities. Finally, if a vendor insists that its boilerplate contract can’t be changed or altered, and the terms are too one-sided, consider other vendors.
  • Monitor deliverables and performance carefully. You must keep track of vendor and system compliance with the contract terms. If the system is not performing as required, address the issue with the vendor at once. If you do not promptly inform the vendor of system defects or deficiencies, you may waive your right to have these things fixed. For that reason, it is especially important to understand both the inspection/ acceptance, deliverable and warranty provisions in the contract. If your contract contains service level agreements or uptime guarantees and the vendor fails to meet them, actively pursue your contract remedies.

This article orginally appeared in the Association TRENDS newsletter.

Lessons Learned: The Importance of Effective Financial Governance and Internal Controls in the Wake of Reported Embezzlements at Prominent Nonprofits
By: Charles F. Tate, CP

Charles Tate is a Partner at Tate & Tryon, which provides accounting services to numerous nonprofit organizations. This article is reprinted with the permission of Tate & Tryon.

The Washington Post recently reported that an administrative assistant admitted to stealing more than $5 million from the Association of American Medical Colleges (AAMC) in one of the largest embezzlement schemes at a Washington area nonprofit organization. AAMC said it would "apply the lessons we have learned from this experience, as well as share them with others in the nonprofit community." A few days earlier the Post reported on an alleged embezzlement at the Progressive Policy Institute (PPI). A month earlier the Post reported that the American Legacy Foundation (Legacy) had allowed a $3.4 million diversion of assets to go unreported for 3 years and then minimized its impact on its Form 990. Following the Post report, Senator Charles Grassley (R-IA) requested that Legacy provide context and understanding for its actions concerning the alleged $3.4 million embezzlement. Beyond the embezzled funds, Grassley says that Legacy's Form 990 contains several entries regarding fundraising, administrative expenses, travel expenses, and salaries that raise more questions. In fact, Grassley's letter contains 30 requests for information to which Legacy was asked to respond. Many of the items relate to Legacy's financial governance and, therefore, the underlying internal controls.