Nonprofit Organizations Update - Fall 2008
Retirement Plans 2009 -- Are You Ready For Compliance?
By: Mary Claire Chesshire, Esq.
After more than 40 years of virtual silence from the Internal Revenue Service on regulatory issues governing tax deferred annuity [403(b)] plans, the deadline for compliance with the new 403(b) regulations is looming.
As of January 1, 2009, all tax deferred annuity plans will be required to comply with the overhaul of the requirements for these plans. The following is a description of many of the new or clarified requirements arising out of the final regulations.
Plan Document Requirement
All 403(b) plans must now be maintained pursuant to a written plan document. This requirement applies even if the only contributions made to the plan are salary deferrals made by employees. Failure to maintain a written plan document would result in all contributions to the plan being subject to immediate taxation. The contents of the document should include eligibility requirements, a description of features such as loans or hardship withdrawals, a description of the employer contributions, if any, and timing and form of distributions from the plan. The terms of the plan documents should not conflict with the provisions of any annuity contracts that may be in place as funding vehicles.
If no plan document is in place, the providers of the annuity contracts that receive contributions are good sources for preparation of the required plan document.
Tax deferred annuity plans must allow, generally, all employees of the plan sponsor to participate for purposes of making salary deferral contributions. Exceptions to this rule include employees who will not defer at least $200 per year, employees regularly scheduled to work less than 20 hours per week, certain student employees, and employees eligible to participate in another retirement plan. The regulations provide that, not only must the plan document provide for universal availability, the plan sponsor must notify employees at least annually of the existence of the plan.
Employees' salary deferrals are not subject to discrimination testing. However, if the employer provides a matching contribution or the plan allows for after-tax employee contributions, those contributions must be tested to ensure that contributions made on behalf of "highly compensated employees" are not disproportionate to the contributions made on behalf of non-highly compensated employees. For 2009, a highly compensated employee is, generally, an employee who earns more than $110,000.
Controlled Group Rules
The universal availability and discrimination testing requirements were not added by the new regulations - these requirements are already in place. However, the new regulations confirm that the "controlled group" rules applicable in the for-profit sector apply to the non-profit sector. Under these rules, employees of an organization affiliated by common control with the sponsor of a 403(b) plan will be treated as employees of the sponsor of the 403(b) plan for purposes of determining compliance with the universal availability and discrimination testing requirements. "Common control" exists if 80% of the directors or trustees of one organization are representatives of, or otherwise controlled by, another organization. These rules prevent commonly controlled organizations from manipulating benefits for highly compensated employees by employing non-highly compensated employees in separate, but related organizations.
A prior drawback of 403(b) plans is that they could not be properly terminated. For example, a non-profit organization that decided to curtail its 403(b) plan in favor of a 401(k) plan could not force participants to take distributions from the plan following plan termination. The new regulations provide that termination of the 403(b) plan is a triggering event for plan distributions. Now, employers may close out the arrangements and cease filing Forms 5500 for the plan.
Speaking of Forms 5500, an expanded annual return filing requirement will apply to organizations beginning in 2010. Stay tuned for more information.
The Internal Revenue Code requires that contributions to a 403(b) plan be nonforfeitable when made, in theory eliminating the availability of a vesting schedule whereby employees would have to remain in employment with a contributing employer for a specified period of time to vest in the employer's contributions upon termination of employment. The regulations clarify that, if contributions are not vested when made, they must be separately accounted for until the employee meets the vesting requirement set forth in the plan. Furthermore, the non-vested contributions will not be counted for purposes of the overall limitations on contributions until the contributions vest. Given the accounting issues attendant to non-vested contributions, plan sponsors may wish to re-think the advisability of subjecting employer contributions to a vesting schedule.
Deadline to Deposit Contributions
The new 403(b) regulations mirror the requirements for private sector retirement plans regarding the deadline for deposit of employees' salary deferral contributions. Specifically, employees' salary deferral contributions must be deposited as soon as reasonably practical following the pay date for which the contributions were withheld. Although there is a "safe harbor" deadline of the 15th business day of the month following the month during which the contributions were withheld, plan sponsors are strongly advised to deposit the contributions as soon as possible after withholding. A deposit of seven days following withholding should be the goal.
All sponsors of tax deferred annuity plans are encouraged to review their current arrangements now - prior to the January 1, 2009 deadline - to determine compliance with the new regulations.
Federal Funding Guidelines for Non-Profit Organizations
By: Eileen Morgan Johnson, Esq.
Congressional appropriation for nonprofit activities is expected to be reduced as the next president and Congress seek to balance the budget. Some organizations, however, may be lucky and find federal support for their programs. If your organization is new to the world of federal funding, you will want to become familiar with OMB Circular A-110. Bearing the unwieldy title of Uniform Administrative Requirements for Grants and Agreements With Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations, Circular A-110 establishes guidelines for federal funding for nonprofit organizations. The circular provides information on the application process, budgeting, appropriate use of funds, and reporting requirements.
Applicants for federal funding must use the SF-424 forms to apply. The federal agency decides the type of funding it will award. The type of award that is made can depend on the type of program for which funding is sought and the agency's own agenda. The recipient cannot issue sub-awards or contracts to any party that is ineligible for federal assistance programs. Applicants must be careful in preparing the application. They should include a realistic budget, set reasonable and achievable goals and objectives, and identify and document the eligibility of all potential sub-contractors or sub-award recipients.
Receiving Federal Funds
Federal funding can be paid to the recipient in three basic ways:
- Advances. Recipients receive funding through advances if they have procedures in place to minimize the time between the transfer of funds and disbursement by the recipient as well as financial management systems that meet fund control and accountability standards.
- Reimbursements. If the criteria for receiving advances are not met, the reimbursement method is used. Each month, recipients can request advancements or reimbursements by filing either an SF-270 or SF-271
- Working Capital. If the requirements for advances and reimbursements are not met, cash is provided on a working capital basis.
An advance is the preferred method of federal funding from the nonprofit organization's view as the funding is available when needed without dipping into reserves or borrowing from other budget areas. Applicants should review their financial management systems before they apply for funding and ensure that the appropriate procedures are in place to enable them to qualify for advancements.
In managing the federally funded program, the recipient must accurately and completely disclose each project's financial results. The recipient must maintain records of the source and application of funds for each project and submit a report to the agency using either the SF-269 or the SF-269A form.
The recipient must also update the federal agency with periodic financial and performance reports, which should compare actual accomplishments with the goals for the period, explain reasons why goals were not met, and describe any cost overruns. The importance of these reports is often overlooked. By explaining the project's progress, including honestly addressing setbacks, the recipient has an opportunity to document the organization's commitment to the project and develop a constituency at the federal agency which could lead to approval of future funding requests.
Federal funding recipients must have in place procedures to determine cost allowance and allocation. A recipient may only charge any authorized pre-award costs and allowable costs to the award that are incurred during the funding period. All contributions are considered part of the recipient's cost sharing and matching if they satisfy certain requirements. For example, contributions must be verifiable from the recipient's records and necessary for accomplishing project objectives.
Recipients must report income to the government. The recipient can (1) add program income to project funds, (2) use it to finance the non-federal share of the project, or (3) deduct it from the total allowable costs to determine net allowable costs. If the federal agency does not mandate a use, income from research projects will be used for number (1), while all other project income is used for number (3). Recipients also must report any deviations from the budget or project plans. This includes requesting prior approval for some actions, such as accepting additional federal funding and contracting out of project work. Budget forms used in the application should be submitted to request approval for budget revisions.
Buying Property with Federal Funds
The funding recipient must provide the same amount of insurance coverage for federally funded property as it provides for its own property. The property can be used for other federally funded projects if it does not interfere
with use on the original project. When property is no longer needed for the project, the recipient can use it for other federally funded projects with agency approval. Recipients must submit to the federal agency an annual inventory of the property purchased with federal funds. There are guidelines for procuring property and other necessities for the project. Written procedures must be created for procuring these items to prevent purchases of
unnecessary items, provide economical alternative procurement methods, and explain procedures for soliciting goods and services. Procurement records for purchases exceeding $25,000 must include the basis for contractor selection, justification for not obtaining competitive bids (if none were received), and the basis for award cost.
The recipients' contracts with others for the federally funded project must also abide by certain requirements. Contracts above $25,000 must include termination provisions and remedies for breaches of contract by contractors. In addition, all contracts must provide for Equal Employment Opportunity. Contracts for construction or repair exceeding $2,000 must comply with the Copeland "Anti-Kickback" Act, the Davis-Bacon Act, and the Contract Work Hours and Safety Standards Act. Other contracts that exceed $2,500 and employ mechanics and laborers must also comply with the Contract Work Hours and Safety Standards Act. Any contract above $100,000 has to follow the Clean Air Act standards. Contractors applying or bidding for an award of $100,000 or more must comply with the Byrd Anti-Lobbying Amendment.
All of these requirements may appear to discourage federal funding applications. There is an initial investment of staff and volunteer time and developing resources to comply with financial management and reporting requirements. But once an organization is familiar with the requirements and has the financial management and reporting systems in place, it is positioned to capitalize on its investment by seeking additional federal funding year after year.
The federal agency and the recipient may each terminate funding under certain circumstances. In addition, if the recipient fails to comply with the funding terms, the agency may withhold cash payments until the recipient complies, disallow costs for the nonconforming activity, or suspend part or all of the funding.
If a recipient experiences unexpected complications or delays with a project or finds that the initial project as envisioned is no longer practical or beneficial, it may apply for an amendment to its grant or cooperative agreement. It is usually better to amend the agreement and obtain permission to use the funds in a different manner than to lose the funding altogether. Once federal funding has been terminated for noncompliance by the recipient, that recipient may have difficulty in obtaining future federal funding.
Within 90 days after funding is complete, recipients must submit all financial, performance, and other reports and liquidate all project obligations. Also, they have to refund any unobligated cash advanced by the agency that they are not authorized to retain for other projects.