Non Profit Report - July 2013
What Nonprofits Don't Know About Healthcare Reform Can Hurt Them
By: Theodore P. Stein, Esq.
Take-away. The federal Patient Protection and Affordable Care Act (“ACA”) enacted by Congress in 2010 will affect nonprofit organizations as much as for-profit companies. All nonprofits should determine if they are “large employers” and are subject to the penalties imposed by the ACA if their health plans fail to provide a minimum level of coverage to their full-time employees or if benefits offered are not “affordable.” On July 2, the Obama Administration announced it was delaying until January 1, 2015 the effective date of the employer mandate, which includes fines for employers who do not provide qualified and affordable health care and new reporting requirements. Nevertheless, there are still good reasons for nonprofits to focus on their health care plans now. The postponement will give employers the ability to roll out modified or new health care plans without risking expensive penalties. And, employees should be reminded that their obligations to obtain health care coverage, either at work or via a state health benefit exchange, commences on January 1, 2014. Employees who obtain health care coverage from an exchange may be eligible for premium tax credits. Nonprofits, like other companies, also will have to review new guidance for the transition that the Obama Administration says will be issued this summer.
Are you a "large employer"? The first calculation a nonprofit must make is whether it is a “large employer” subject to the ACA’s penalties, known as Employer Shared Responsibility payments. Under the current guidance, if in 2013 your organization had at least 50 full-time employees, in 2014 it is a “large employer.” (Keep in mind that the calculation may be bumped to 2014 because the effective date of the shared responsibility payments has moved to January 1, 2015.) But even organizations that employ fewer than 50 may be considered a “large employer.” The reason is that the ACA requires an employer to count full-time equivalents, not just full-time employees, to determine if it qualifies as a “large employer.” Thus, if an organization has 40 full-time employees (who average at least 30 hours per week) plus 20 half-time employees employed 15 hours per week on average, this is equivalent to 50 full-time employees. If the number of employees is right around 50, an organization will have to do the math each year to see if it will be considered a “large employer” for the following year. There is a challenge for employers whose work force dipped below 50 in any given year. Under the existing rule, the employer can pick a look-back period of any 6-month consecutive period to determine if it meets the 50 full-time employee threshold for the following year. There are special rules for dealing with salaried employees who do not keep track of their time and seasonal workers.
Do you have affiliates? There’s more. If two or more companies have a common owner or are otherwise affiliated, all such companies are combined for the purpose of deciding if they employ at least 50 full-time employees or their equivalents. The rule renders each affiliated company a “large employer” even if, on its own, it employs fewer than 50 full-time employees.
Is your health care plan affordable? Starting in 2015, a large employer will be hit with an Employer Shared Responsibility payment, if it fails to offer health insurance coverage to 95% of its full-time employees or, if the offered coverage is not “affordable” or does not provide “minimum value.” Coverage is not “affordable” if it would cost the employee more than 9.5% of the employee’s annual household income. Coverage does not provide “minimum value” if, according to a calculator that will be made available by the IRS and Department of Health and Human Services, the plan fails to cover at least 60% of the total allowed cost of benefits that are expected to be incurred by the plan.
Penalties. If the employer fails to meet either test, it has to pay the piper. If the employer fails to meet the coverage requirements, and at least one full-time employee gets a premium tax credit via an American Health Benefit Exchange, which each state is required to have starting on January 1, the employer owes a payment equal to the number of its full-time employees employed for the month, minus 30, times 1/12 of $2,000. If the plan offered is not “affordable” or does not provide “minimum value,” the employer will be tagged with a monthly payment equal to the number of full-time employees who receive a premium tax credit for the month times 1/12 of $3,000. The payment is capped so that the penalty for coverage that is not affordable or does not provide minimum value will not exceed the penalty for providing no coverage.
And in D.C… For D.C. small-business employers, there is an added wrinkle. Under a statute passed in June, health insurers that offer individual or small group health benefit plans will be required to do so for employers who have plans in 2013 exclusively from the District’s health benefit exchange starting in 2015. Small group health benefit plans offered in 2014 to any small businesses not insured in 2013 will have to be offered via the exchange.
Summary. Nonprofits should review their situations with their legal advisors and determine if their group health plans offer a minimum level of coverage and are “affordable” and otherwise comply with the ACA. They should also consult with their legal counsel as to new guidance that likely will be issued this summer to see if the rules of the road have changed. In this way, nonprofits will be prepared for the dramatic changes that the ACA will establish in the workplace commencing in 2015.
If you have questions, contact Theodore P. Stein, Esquire, at firstname.lastname@example.org or (301) 804-3617.
New Rules for Association Foundations from the IRS
By: Eileen Morgan Johnson, Esq.
This article originally appeared in the May 2013 issue of Associations Now, the journal of ASAE: The Center for Association Leadership.
Associations with related foundations that are considered to be “supporting organizations” under Internal Revenue Code section 509(a)(3) should pay attention to a recent decision by the Internal Revenue Service. The IRS published the final and proposed regulations for supporting organizations on December 28, 2012 in T.D. 9605 - Payout Requirements for Type III Supporting Organizations That Are Not Functionally Integrated.
The title of this Treasury Decision is a misnomer – it goes beyond addressing the payout requirements for non-functionally integrated supporting organizations. T.D. 9605 makes changes to some of the other proposed regulations for supporting organizations that were published for comment in an Advance Notice of Proposed Rulemaking in 2009 (the “proposed regulations”). It also identifies a few areas where the IRS will be publishing proposed rules in the future. T.D. 9605 was effective on December 28, 2012, but it provides for up to a two-year phase in of some regulations. The following is an explanation of several areas covered by T.D. 9605.
Types of Supporting Organizations
There are three types of supporting organizations under Internal Revenue Code Section 509(a)(3):
Type I: a supporting organization that is “operated, supervised or controlled by” one or more publicly supported organizations.1 A majority of the supporting organization’s officers, directors or trustees are appointed or elected by the supported organization’s officers, directors, trustees or members. This is the most common type of supporting organization. It is usually described as a parent/subsidiary relationship.
Type II: a supporting organization supervised or controlled in connection with one or more publicly supported organizations. Control or management of the supporting organization is placed with the same persons that control or manage the supported organization(s). A Type II supporting organization usually involves overlapping board membership between the supported organization and the supporting organization with at least a majority of the board members of the supporting organization also on the board of the supported organization. This is described as a sibling relationship with two or more organizations working side by side for similar exempt purposes.
Type III: a supporting organization that is operated in connection with one or more publicly supported organizations. Type III supporting organizations operate with some degree of independence. They may have one or more board members appointed by the supported organization and governance provisions to ensure that they are responsive to the needs of the supported organization. They may provide financial support to their supported organization or may directly carry out programs or functions on behalf of the supported organization.
Type III supporting organizations are further classified as either being functionally integrated or non-functionally integrated.
Type III Functionally Integrated: a supporting organization which is not required to make payments to its supported organizations because the supporting organization performs some of the functions of, or carries out the purposes of, its supported organization(s).2 Due to their close relationship with the organizations they support, Type III functionally integrated supporting organizations are exempt from some of the rules imposed on Type III non-functionally integrated supporting organizations. If a supporting organization supports more than one supported organization, that alone can qualify it as a Type III functionally integrated supporting organization.
Type III Non-Functionally Integrated: a supporting organization which is required to make annual distributions to its supported organization(s) and follow other rules similar to those applicable to private foundations. Because of their similarity to private foundations, they may not receive contributions from private foundations.
The final regulations prohibit a Type I or Type III supporting organization from accepting a contribution from “a person who, alone or together with certain related persons, directly or indirectly controls the governing body of a supported organization of the Type I or Type III supporting organization, or from persons related to a person possessing such control.” The IRS and Treasury intend to issue a proposed definition of “control” for this purpose in the near future.3
Required Notice to Supported Organizations
The final regulations require all Type III supporting organization to provide each of their supported organizations with: “(1) a written notice addressed to the principal officer of the supported organization describing the amount and type of support provided to the supported organization; (2) a copy of the supporting organization’s most recently filed Form 990 . . . and (3) a copy of the supporting organization’s governing documents, including any amendments. The required notification documents must be postmarked or electronically transmitted by the last day of the fifth calendar month following the close of the supported organization’s taxable year.”4
This required notice was in the proposed regulations. Its purpose is to give the supported organization an opportunity to provide information to the supporting organization on the specific needs of the supported organization. The theory is that when the supported organization receives this information, it can in turn provide guidance to the supporting organization of its needs for the year ahead. Once the supporting organization (the foundation) has this information, it can better meet the needs of the supported organization (typically an association) in providing funding or other assistance.
The IRS has clarified that the notice must be sent to the principal officer of each supported organization, even if the same person holds that position in both organizations. Rather than providing paper or electronic copies of the required documents, the notice may include a link to where the supported organization can find the most recently filed Form 990 and/or governing documents online. The supporting organization may redact the name and address of any contributors before providing the Form 990 to the supported organization.
Scholarships and Other Payments to Individuals
If a supporting organization provides grants, scholarships or other payments to individual beneficiaries, it must meet three additional requirements:
- The individual beneficiaries must be members of the charitable class benefitted by the supporting organization;
- The officers, directors or trustees of the supported organization must have a significant voice in the timing of the payments, the selection of recipients, and the manner in which payments are made; and
- The individual beneficiaries must be selected on an objective and nondiscriminatory basis.5
For association foundations with scholarship programs, this means that those selected for scholarships or other financial awards must be among those people intended to be benefited by the activities of the foundation. The association’s volunteer leaders must have a significant say in determining the timing of scholarship awards and the manner in which they are paid. They must also have a role in the selection of scholarship award recipients. This does not mean that every officer and director of the association must be involved in the scholarship selection and award process. There are several ways for the association leadership to have a “significant voice” in the operation of the scholarship program. The association board could work with the foundation to establish criteria for scholarship applicants, the budget for scholarship awards each year, and the number of applicants selected. Or the association board could review and approve criteria for scholarships and the award budget. Or the association board could form a committee to work with the foundation staff or board in selecting scholarship award winners. The point of this regulation is that the foundation and the association must collaborate on the scholarship program.
A supporting organization is the “parent of a supported organization if the supporting organization exercises a substantial degree of direction over the policies, programs, and activities of the supported organization and a majority of the officers, directors, or trustees of the supported organization is appointed or elected, directly or indirectly, by the governing body, members of the governing body, or officers (acting in their official capacity) of the supporting organization.”6
The IRS intends to issue proposed regulations in the near future to provide a new definition of “parent” that addresses the power to remove and replace officers, directors or trustees of the supported organization.
Nonfunctionally Integrated Payout Rule
A nonfunctionally integrated Type III supporting organization has payout (i.e., distribution) requirements that were initially designed under the Pension Protection Act of 2006 to be similar to the payout requirements of private foundations. However, based on a number of negative comments the IRS received during the comment period, the final regulations change the payout rule for non-functionally integrated supporting organizations. Rather than paying out 5% of the fair market value of its non-exempt-use assets, a non-functionally integrated Type III supporting organization is required to distribute a “distributable amount” that is “equal to the greater of 85 percent of adjusted net income or 3.5 percent of the fair market value of the supporting organization’s non-exempt-use assets.” The distributable amount is based on the fair market value of the organization’s non-exempt-use assets in the immediately preceding tax year.7 This pay out requirement is the primary reason why many Type III supporting organizations do not want to be found to be non-functionally integrated as it takes away some of the organization’s control of its distributions.
Failure to Meet Requirements
If a Type III supporting organization fails to meet the requirements of the final and temporary regulations in T.D. 9605 and otherwise fails to qualify as a public charity under 509(a)(1), (2) or (4), it will be classified as a private foundation. Note that failure to provide the required annual notice to the supported organization(s) is considered to be a failure to meet the requirements of the regulations. For this reason, it is critical for foundations to provide the annual report to the association, even if the same staff is involved in overseeing both entities.
Organizations that were Type III supporting organizations as of December 28, 2012 were granted an extension of time to meet the notice requirements that matches the extension of time to file their Form 990. This means that if an organization obtains an extension until November 15, 2013 to file its Form 990 for 2012, then its notice to its supported organizations is not due until November 15, 2013. Thereafter, the notice to supported organizations is due at the end of the fifth month following the close of the taxable year (or by May 31 for those organizations with a calendar tax year). If the Form 990 for the just completed tax year is not ready to accompany the notice by May 31, then the supporting organization should provide its most recently filed Form 990 to its supported organization.8
Non-functionally integrated supporting organizations have been given two years to comply with the distribution requirement so that those who have invested in non-liquid assets have time to convert those assets to cash.
Associations with related foundations that qualify as supporting organizations should become familiar with the regulations applicable to their relationship as failure to comply could cause the foundation to be reclassified as a private foundation with all of the compliance requirements that accompany private foundation status.
1. Section 509(a)(1) or 509(a)(2)) organizations.
2. IRC § 4943(f)(5)(B).
3. § 1.509(a)-4(f)(5).
4. § 1.509(a)-4(i)(2).
5. § 1.509(a)-4(i)(4)(ii)(D).
6. § 1.509(a)-4(i)(4)(iii).
7. § 1.509(a)-4(i)(5)(ii).
8. § 1.509(a)-4(i)(11).