Caplaw Update Fall 2014

Legal and financial information for the Community Action network

fall 2014

Affordable Care Act Employer Mandate Q&A

By Eleanor A. Evans, Esq. and Graham Rogers, CAPLAW After a one-year delay, the so-called “employer mandate” provisions of the federal health care reform law are set to take effect January 1, 2015. These rules require employers with 50 or more full-time employees and full-time equivalent employees to offer health insurance coverage to substantially all of their full-time employees and their dependents. The coverage offered must provide “minimum value” and be “affordable.”1 The employer mandate rules (which are sometimes referred to as the employer “pay or play” rules or employer “shared responsibility” rules) apply not only to for-profit employers but also to tax-exempt organizations and federal, state, local and Indian tribal governmental entities.

This Q&A is intended to help employers in the Community Services Block Grant (CSBG) network better understand, in light of final employer mandate regulations issued earlier this year, how the employer mandate rules affect them and to help them comply with those rules. Ultimately, however, each employer should consult with a qualified professional to determine whether it is subject to the employer mandate rules and, if so, the best way for it to comply.

To determine whether it is subject to the employer mandate rules, an employer converts the total hours of its part-time Continued on page 5

Inside This Issue :

Why It’s Important for Your Organization to Use Custom Business Email Addresses

By Jean Carr, Esq., CAPLAW Some CSBG network organizations may not use custom business email addresses but instead may permit employees to use individual accounts, such as janedoe@yahoo.com or johndoe3@sbcglobal.net, for work purposes. A custom business email address is one that reflects the company domain name, such as janedoe@yourorganization.org.

Employee email accounts used for business purposes Continued on page 10

Affordable Care Act Employer Mandate ● Why It’s Important to Use Custom Business Email Addresses ●How Does a CAA Minimize Liability Arising from Completed WAP Units? ● Lessons Learned from Recent Head Start Disallowances

CAPLAW Board Winston A. Ross, President Westchester Community Opportunity Program David Brightbill, Vice President Washington-Morgan Counties Community Action Program Gale F. Hennessy, Treasurer Southern New Hampshire Services Jerralynn Ness, Secretary Community Action serving Washington County Cynthia Burton Community Service Programs of West Alabama, Inc. Hal Cohen Central Vermont Community Action Council Patricia Steiger Management Consultant Douglas D. Rauthe Community Action Partnership of Northwest Montana Leonard Dawson, Board Member Emeritus David Bradley, CAPLAW Coordinator National Community Action Foundation

CAPLAW Staff Eleanor A. Evans, Esq. Executive Director and General Counsel R. Allison Ma’luf, Esq. Deputy Director and Senior Counsel Jean Carr, Esq. Assistant Counsel Michael Shepsis, Esq. Staff Attorney Stephanie Knechtle Communications Coordinator Ashley Billingsley Administrative Coordinator/Executive Assistant This report contains general information and is not intended to constitute legal advice.

About CAPLAW CAPLAW is a nonprofit membership organization dedicated to providing the legal and financial resources necessary to sustain and strengthen the national Community Action Agency (CAA) network. For over 50 years CAAs have been fighting poverty, helping individuals become self-sufficient, building communities, and changing lives. Nationwide, approximately 1,000 CAAs leverage almost $10 billion in total funding, and provide a multitude of services, including job training, Head Start, economic development, energy assistance, and housing. Through its in-house legal and financial staff and a network of private attorneys and financial consultants, CAPLAW provides legal and financial consultations, training, and publications on a wide variety of legal and management topics. This assistance enables CAAs to operate legally and fiscally sound organizations and to promote the effective participation of low-income people in the planning and delivery of CAA programs and services, thereby enhancing CAAs’ ability to provide the nation’s poor with opportunities to improve their quality of life and to achieve their full potential.

© 2014 Community Action Program Legal Services, Inc.

For membership information visit www.caplaw.org or call (617) 357-6915.

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• To weatherize further units that were partially weatherized during the period of September 30, 1975 through September 30, 1993.1

How Does a CAA Minimize Liability Arising from Completed WAP Units?

By: Allison Ma’luf, Esq., CAPLAW Has your community action agency (CAA) ever faced or expressed concern about a scenario like the following?: A CAA’s in-house weatherization crew installs a new, high-efficiency water heater in Jane Doe’s home. The CAA conducts a final inspection of the home and reported to the Department of Energy (DOE) a completed unit, i.e., Jane Doe’s home. Six months later Jane Doe calls the CAA to complain that the water heater is leaking and the water never gets hot but is consistently lukewarm. The CAA regularly promises to perform high-quality work and wants to re-inspect and make any necessary repairs but is not sure whether it can use federal Weatherization Assistance Program (WAP) Act funds to do so.

The CAA’s hesitation is an appropriate response – WAP funds may not be used on a weatherized home after a final inspection has occurred except in a few, limited circumstances. The DOE WAP regulations specifically prohibit the use of WAP funds to install or provide weatherization materials to a unit previously weatherized with WAP funds except: • To conduct low-cost/no-cost weatherization which entails (i) using inexpensive weatherization materials such as s water flow controllers, furnace or cooling filters, or items which are primarily directed toward reducing infiltration, including weather stripping, caulking, glass patching, and insulation for plugging and (ii) not paying labor to install the weatherization materials ($50 in material costs per unit is all that is allowed unless prior approval from DOE to spend more is obtained); • To repair damage to weatherization materials not covered by insurance if a unit is damaged by fire, flood or an act of God; and

At the end of 2010, DOE emphasized “WAP funds further that WAP funds may not be used may not be for repairs on completed units in DOE used for Weatherization Program Notice (WPN) repairs on 11-3. DOE explained that money spent completed for “call-backs,” “re-works”, “add-ons”, units...” “missed opportunities,” etc. for previously reported completed homes is not a permissible use of DOE WAP funds. Rather, the required, final inspection is intended to ensure that that all applicable work performed was done in a workmanlike manner, including all work that may have been contracted out such as furnace work, etc. WAP funds may not be used to conduct routine maintenance, repairs or warranty-type work beyond those costs already invoiced for a completed unit.

So, how can a CAA minimize potential liability arising from a similar scenario? A CAA could ask clients to sign a waiver or release of liability. Waivers or releases are subject to a state’s laws and every state’s laws regarding waivers and releases are typically different. Thus, if a CAA decides to explore using waivers or releases it should work with an attorney in its state who is familiar with how enforceable such releases and waivers are and how they may be drafted to provide the CAA with protection under its state’s laws.

A CAA could also contract with a thirdparty to perform all of the CAA’s WAP work rather than use in-house crews.

WPN 11-3 explains that subgrantees primarily using contractors are less likely to face the liability scenario because the contractor bid process must include “adequate guarantees of workmanship, implied or otherwise.”

Moreover, the DOE WAP Procurement Toolkit available via WPN 10-03 references the inclusion of “work quality standards” as part of a bid package. When a CAA enters into an agreement with the selected contractor, it should consider including language requiring the contractor to cover all costs associated with defective materials and/or work for up to a year or more. Here is an example of such language: “A CAA could also contract with a thirdparty to perform all of the CAA’s WAP work rather than use inhouse crews.”

Contractor shall guarantee any defect in materials, manufacture, design or installation of any material provided and/or installed pursuant to this Agreement for a period of one year from the date said materials are provided or are installed, whichever is later. Contractor shall remedy such defects promptly upon notice by the client or CAA, without charge. In the event of Contractor’s failure to remedy such defects promptly, CAA may withhold payment to Contractor for any other weatherization work performed by Contractor pursuant to this Agreement. CAA shall be entitled to return to Contractor without payment therefor all materials of quality inferior to that agreed to by CAA and Contractor Continued on page 12

CAPLAW Update Newsletter, Fall 2014 | 3

DAB DECISIONs

The Head Start Act also specifies that HHS may approve a higher percentage of federal participation in the award if it determines that doing so is required to further the purposes of the Head Start Act. In making that determination, HHS will consider the following factors:

“HHS may approve a higher percentage of federal participation in the award if...”

• The lack of resources available in the community that may prevent the Head Start grantee from providing all or a portion of the required non-Federal share

Document, Review, Follow & Plan: Lessons Learned from Recent Head Start Disallowances

By Michael Shepsis, Esq., CAPLAW In four Department of Health and Human Services (HHS) Departmental Appeals Board (DAB) decisions, the Administration for Children and Families (ACF) disallowed Head Start program costs ranging from tens of thousands of dollars to upwards of a million. The DAB decisions addressed issues relating to: the non-federal share requirement; the drawing down of federal funds to pay costs; consulting and professional service contracts; and incentive compensation.

Action steps discussed in this article concerning effective documentation and good practices, if followed, may help grantees avoid future, costly disallowances similar to the ones addressed in these DAB decisions.

Insufficient Non-Federal Share Documentation A California Community Action Agency’s (CAA’s) failure to either raise the necessary non-federal share amount or obtain a waiver resulted in the DAB upholding ACF’s disallowance of $79,286.52 in Head Start costs. The CAA which operated Head Start, Early Head Start, and Migrant and Seasonal Head Start programs failed to provide adequate documentation showing that it made a reasonable effort to meet the requirement for its 2008-2009 program year.1 Because the Head Start Act generally caps the permissible federal share of the total costs of a Head Start program at 80%,2 a Head Start grantee must obtain 20% of its Head Start budget through non-federal sources. When doing so, the grantee must ensure that funding from state sources does not include federal source funds.3 HHS’ uniform administrative grant requirements also allow any portion of the non-federal share requirement to consist of an “in-kind” donation of goods or services.4

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• The impact of the cost the Head Start grantee may incur in initial years it runs the Head Start program • The impact of unanticipated increase in costs the grantee may incur to carry out the program • The impact of a major disaster on the grantee’s community • The impact on the community if the grantee were to cease operating the Head Start program5 The Head Start Program Performance Standards provide that a grantee may seek a waiver to the non-federal share requirement if (a) it has made a “reasonable effort” to meet the requirement, and (b) the grantee is located in either (i) a county that has a personal per capita income of less than $3,000 per year, or (ii) a county that has been involved in a major disaster.6 (This provision was adopted before passage of the current non-federal share language in the Head Start Act, which expanded HHS’s authority to issue waivers.)

The CAA contended that it should have been granted a retroactive waiver of the non-federal share requirement because it is located in a county that experienced a major drought adversely effecting its ability to maintain enrollment in its Migrant Head Start program and to obtain in-kind contributions in the form of parental volunteering and business service donations. The CAA requested the waiver Continued on page 13

sidebar In 2012, ACF issued further guidance on the nonfederal share requirement in the form of Program Instruction 12-02 which states that: “Grantees actively seeking non-Federal share but facing community circumstances that create a concern that the 20 percent match requirement cannot be met should consider submitting a written request for waiver with their annual refunding application.

If match requirements cannot be met due to circumstances arising during the budget period, grantees are encouraged to immediately submit a request for waiver to their Regional Office.”7 However, this guidance was not mentioned in the DAB decision, which related to the use of funds from the 2008-2009 program year.

counting FTEs. An employer will not be required to make either type of payment unless at least one of its full-time employees applies for and receives subsidized coverage through a state health insurance exchange.3 As noted in Q&A 1 below, applicable large employers that have at least 50 but fewer than 100 full-time employees and FTEs in 2014 and that meet certain additional criteria will not be subject to employer mandate payments until 2016.

ACA Employer Mandate (continued from cover)

employees into full-time equivalent employees (FTEs) and adds that number to the number of its actual full-time employees. If the result is equal to or greater than 50, the employer is considered an “applicable large employer” that must comply with the employer mandate.2 (See “Determining Whether Your Organization Is a Large Employer,” Spring 2013 CAPLAW Legal Update, p. 4.)

Starting in 2015, an applicable large employer that fails to offer “...an applicable affordable coverage providing large employer minimum value to substantially all that fails to of its full-time employees will be offer affordable required to make one of two types coverage providing of payments to the IRS. The first minimum value type of payment (the “no offer to substantially payment”) will apply to those all of its full-time applicable large employers that employees will be fail to offer coverage to required to make substantially all of their full-time one of two types employees and their dependent of payments to the children up to age 26. This IRS.” payment, which is calculated on a monthly basis, is $2,000 per year for every full-time employee, excluding the first 30 full-time employees and not counting FTEs. The second type of payment (the “inadequate coverage payment”) applies to those employers that offer coverage, but that coverage is not “affordable” or does not provide “minimum value” (see discussion of what it means for coverage to be affordable and to provide minimum value in Q&As 15 and 16 below). In this case, the payment, which is calculated on a monthly basis, is the lesser of: (1) $3,000 per year for each full-time employee receiving subsidized coverage on a state health insurance exchange, or (2) $2,000 per year for each full-time employee, excluding the first 30 full-time employees and not

“...applicable large employers that have at least 50 but fewer than 100 full-time employees... will not be subject to employer mandate payments until 2016.”

Congress passed the health reform law, formally known as the Patient Protection and Affordable Care Act (ACA) in 2010. The IRS issued proposed employer mandate regulations in January 2013 (see “Health Care Reform ‘Pay or Play’ Q&A,” Spring 2013 CAPLAW Update, p. 3). In July 2013, the IRS issued Notice 2013-45 delaying enforcement of the employer mandate from January 1, 2014 to January 1, 2015. On February 10, 2014, the IRS issued final employer mandate regulations. Among other things, the final regulations provide a number of transition rules intended to aid employers as they prepare for compliance in the coming months.

Transition Rules 1. When will the employer mandate begin to apply to our organization, which has 50 or more fulltime employees (including FTEs) in 2014?

Starting in 2015, the employer mandate rules will apply to employers that had 100 or more full-time employees and FTEs in 2014. An applicable large employer with at least 50 but fewer than 100 full-time employees and FTEs in 2014 will not be subject to the employer mandate rules until 2016, as long as it meets three requirements. First, it must not reduce the size of its workforce or overall hours of service of its employees between February 9, 2014 and December 31, 2014 in order to delay application of the employer mandate until 2016. (It may, however, reduce its workforce or overall hours of employees’ service during that time for a bona fide business reason unrelated to qualifying for this transition rule.) Second, during the period between February 9, 2014 and December 31, 2015 (or, for a noncalendar year plan, the last day of the plan year that began in 2015), it must not drop or materially reduce the level of health insurance coverage it offered to its employees as of February 9, 2014. Third, it must certify its eligibility for this relief to the IRS.4

2. How do the final employer mandate regulations affect our organization’s determination of whether it is an “applicable large employer” for 2015?

Whether an employer is considered an “applicable large employer” subject to the employer mandate rules depends Continued on page 6

CAPLAW Update Newsletter, Fall 2014 | 5

ACA Employer Mandate (continued from page 5)

on whether it had 50 or more full-time employees and FTEs in the prior calendar year. Usually, this calculation is to be made based on the entire prior calendar year. However, a special transition rule applies for purposes of determining applicable large employer status for 2015. Instead of basing its calculation on the full 2014 calendar year, an employer may choose any period of at least six consecutive months in the 2014 calendar year on which to base its calculation.5 (See “Determining Whether Your Organization Is a Large Employer,” Spring 2013 CAPLAW Legal Update, p. 4.)

The transition rules described in questions 3-7 apply only to those employers subject to the employer mandate rules in 2015. These rules will be effective only for the 2015 calendar year (or, if the employer’s plan year does not coincide with the calendar year, for the plan year beginning in 2015). These rules will not apply to those applicable large employers with fewer than 100 full-time employees and FTEs that meet the requirements discussed in Q&A 2 above which delay the application of the employer mandate until 2016.

3. Because of the way our organization’s pay periods fall, offering coverage to employees on January 1, 2015 would be administratively difficult. Do we have to offer coverage on that exact date?

No. If an employer offers coverage to a full-time employee effective no later than the first payroll period that begins in January 2015, the employee will be treated as having been offered coverage for the entire month. Note that this rule applies to January 2015 only.6

4. Our organization, which employs more than 100 full-time employees, has a non-calendar year plan. When will the employer mandate rules take effect for us?

The final regulations include transition relief from employer mandate payments for non-calendar year plans during the period in 2015 before the start of the 2015 plan year.

This relief gives employers with non-calendar year plans additional time to expand eligibility for coverage in those plans. If eligible for the relief, the employer will not be subject to employer mandate payments with respect to any full-time employees who are offered affordable coverage that provides minimum value effective by the first day of the 2015 plan year.

To qualify for the relief, the non-calendar year plan in question must not have been modified after December 27, 2012 to begin at a later calendar date. The relief applies to non-calendar year plans in the following circumstances, either or both of which may apply to a particular plan. First, a non-calendar year plan will be eligible for this relief if fulltime employees who are eligible for coverage on the first day of the 2015 plan year under the terms of the plan as in effect on February 9, 2014 are offered affordable coverage that provides minimum value effective by the first day of the 2015 plan year. Second, a non-calendar year plan will 6 | CAPLAW Update Newsletter, Fall 2014

be eligible for relief if: (1) it covered at least ¼ of all the employer’s employees (or 1/3 of its full-time employees) as of any date in the 12 months ending on February 9, 2014 or (2) the employer offered coverage to at least 1/3 of all of its employees (or half of its full-time employees) during the open enrollment period ending closest to and before February 9, 2014.7

5. How should our organization determine whether it offers coverage to “substantially all” its employees in 2015?

To avoid the no offer payment, an employer must offer affordable coverage that provides minimum value to substantially all of its full-time employees and their dependents. For an employer subject to the employer mandate rules in 2015, this means offering health insurance coverage to at least 70% of its full-time employees and their dependents (unless transition relief for dependent coverage applies as described in Q&A 7 below). This number will rise to 95% of full-time employees in 2016 and future years.8

6. Will there be any temporary changes to how employer mandate payments are calculated?

“An employer subject to the ‘pay or play’ rules in 2015 will be permitted to disregard 80 of its full-time employees when calculating the no offer payment...”

Yes. An employer subject to the “pay or play” rules in 2015 will be permitted to disregard 80 of its full-time employees when calculating the no offer payment or the cap on the inadequate coverage payment for any month in 2015 (or, for non-calendar year plans any month in the 2015 plan year). For all subsequent years, employers will only be permitted to disregard 30 full-time employees.9

7. Does our organization need to offer coverage to dependents of full-time employees starting in the 2015 plan year?

The final regulations state that an employer will not be subject to an employer mandate payment for failing to offer coverage to dependents of its full-time employees in the 2015 plan year, as long as it takes steps in its 2014 or 2015 plan years (or both) to extend coverage to dependents starting with the 2016 plan year. If an employer offered coverage to dependents in its 2013 or 2014 plan years, it may not subsequently reduce or drop that coverage. The term “dependent” means a full-time employee’s natural or adopted child or a child placed with the employee for adoption through the calendar month that the child turns age 26. Note that the term “dependent” does not include the employee’s spouse.10

benefits (including length of service awards) and nominal fees customarily paid by similar entities in connection with the performance of services by volunteers.14 Note that, with respect to student employees, hours of work that a student performs for an employer outside of a work-study program must be counted toward the student employee’s full-time status. This includes work performed by students working in paid internships or externships.15

11. What about participants in job training programs or paid interns employed on a short-term basis?

Do we need to count their hours?

Determining Which Employees Qualify as Full-Time and When Those that Do Must Be Offered Coverage An employer needs to know the number of full-time employees it has to determine: (1) whether it is subject to the employer mandate rules as an applicable large employer; and (2) whether it may owe an employer mandate payment for failing to offer coverage to an eligible full-time employee and the amount of any such payments.

8. How is the term “full-time employee” defined?

An employee is considered to work full-time for a calendar month if he or she averages at least 30 hours of service per week or 130 hours of service per month.11

9. What counts as an hour of service?

Generally, an hour of service means each hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer, and each hour for which an employee is paid, or entitled to payment, for a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence.12

10. Our organization has a number of volunteers and students in work-study jobs. Do we need to track their hours of service?

No. The final regulations exclude several categories of work from the definition of hours of service. Of particular relevance to CSBG network organizations is work performed by bona-fide volunteers and students participating in federal, state, or locally-funded work-study programs.13 For these purposes, a “bona-fide volunteer” is an individual who volunteers for a government entity or tax-exempt organization and whose only compensation from that entity or organization is in the form of (1) reimbursement (or reasonable allowance) for reasonable expenses incurred in the performance of volunteer services, or (2) reasonable

Yes; if a participant in a job training program or an intern employed on a short-term basis performs services for an employer and is paid or entitled to payment for those services, his or her hours worked count as “hours of service” for purposes of the employer mandate rules and must be tracked. However, the employer need not offer coverage to a job training participant or paid intern if he or she has left the organization before the date on which the employer mandate rules specify that the employer must offer coverage to avoid employer mandate penalties (see Q&As 12 and 13 below). Because of the fact-specific nature of these situations, a CSBG network organization with questions about application of these rules to job training participants, paid interns and other short-term employees should consult with an attorney or other qualified professional.

12. How do we determine whether an employee is a full-time employee?

There are two methods employers may use to determine which employees are full-time employees: the monthly method and the look-back method. The final employer mandate regulations provide a detailed explanation of these different methods. An employer may choose to apply one of these methods to all of its employees or to apply a different method to salaried vs. hourly employees or to collectively bargained vs. non-collectively bargained employees. For example, an employer might choose to apply the monthly method to all salaried employees and the look-back method to all hourly employees. Alternatively, the employer could choose to apply one method (either the monthly method or the look-back method) to all employees, whether they are salaried or hourly.16 Whichever method an employer uses with respect to a particular employee, it must generally offer the employee coverage for an entire month to avoid employer mandate payments for that month (however, note the special exception to this rule for January 2015 discussed in Q&A 3).17 Monthly Method Under the monthly method, the employer tracks an employee’s hours of service for each calendar month to determine if the employee is full-time and must be offered coverage for that month. An employer will not be subject to employer mandate payments for failing to offer coverage to new full-time employees on the date they first meet the plan’s eligibility requirements (other than the completion Continued on page 8

CAPLAW Update Newsletter, Fall 2014 | 7

ACA Employer Mandate (continued from page 7)

of a waiting period) if it offers them coverage effective by the first day of the fourth full calendar month after that date.18 Employers using the monthly method may choose to measure hours of service on a weekly basis over a four- or five-week period (depending on the length of the month), rather than by calendar month, to correspond with the employer’s payroll periods.19 Look-back Method Under the look-back method, an employer determines an employee’s status as a fulltime employee during a future period (referred to as the stability period), based upon the employee’s hours of service in a prior period (referred to as the measurement period). An employee who is credited with enough hours of service during the measurement period to be considered a full-time employee during the stability period must be offered coverage effective for the entire duration of the stability period regardless of the number of hours the employee actually works during the stability period, as long as he or she remains employed by the employer.

The measurement period may last anywhere from three to 12 consecutive months. The stability period must last for six consecutive months or the length of the measurement period, whichever is longer. An administrative period of up to 90 days can be scheduled between the end of the measurement period and the beginning of the stability period to give the employer time to determine which employees qualified as full-time during the measurement period and to enroll employees in coverage for the stability period.20 “Under the look-back method, an employer determines an employee’s status as a full-time employee during a future period... based upon the employee’s hours of service in a prior period...”

The final regulations include a transition rule permitting employers to adopt a measurement period as short as six consecutive months for the stability period beginning in 2015. This is true even if the stability period is 12 months, which would normally require a 12-month measurement period. However, the measurement period must begin no later than July 1, 2014, and must end no earlier than 90 days before the first day of the 2015 plan year.21 The look-back method may be used to determine the status of both new hires and ongoing employees (i.e., those who have worked a full measurement period); complex rules apply to the transition of a new employee to an ongoing employee. Although the employer sets the length of the initial measurement period, the start date of each new employee’s initial measurement is based on his or her first day of employment. After a new employee becomes an ongoing employee, he or she will be subject to standard measurement, administrative and stability periods that the employer applies uniformly to ongoing employees. For example, an employer with a calendar year plan might 8 | CAPLAW Update Newsletter, Fall 2014

choose to use a standard 12-month measurement period that starts on November 1 of Year A and continues through October 31 of Year B; followed by a standard two-month administrative period from November 1 through December 31 of Year B, during which it determines which employees qualified as full-time based on their hours of service in the preceding measurement period and conducts open enrollment; followed by a standard 12-month stability period that runs from January 1 through the following December 31 of Year C.22 An employer initially must categorize each new hire either as an employee who, as of his or her start date: (1) is reasonably expected to work full-time; or (2) for whom it cannot be determined whether he or she is reasonably expected to work full-time (i.e., a variable hour, seasonal or part-time employee).23 An employer will not be subject to employer mandate penalties for failing to offer coverage immediately to a new employee it reasonably expects to be full-time upon hire if it offers him or her coverage no later than the first day of his or her fourth full calendar month of employment. Whether the employer’s determination that a new hire is a full-time employee is reasonable is based on the facts and circumstances. Factors to be considered include: whether the employee is replacing an employee who was or was not a full-time employee; the extent to which employees in the same or comparable positions are or are not full-time employees; and whether the job was advertised, or otherwise communicated to the new hire or otherwise documented (for example, through a contract or job description), as requiring more or less than 30 hours of service per week.)24 A different rule applies with respect to new employees who the employer cannot determine are reasonably expected to work full-time, but who are later determined to work full-time during their initial measurement period. For such an employee, an employer will not be subject to employer mandate penalties during the employee’s initial measurement period (and any associated administrative period) if it offers coverage to the employee that will become effective no later than the first of the month following the 13-month anniversary of the employee’s start date.25

13. May our organization’s plan impose a waiting period?

Generally speaking, group health plans are not permitted to impose a waiting period longer than 90 days. This rule is separate from the employer mandate rules and applies regardless of the size of the employer sponsoring the plan.26 A waiting period is the period of time that must pass before coverage for an employee or dependent who is otherwise eligible to enroll under the terms of the plan can become effective.

“Eligibility For this purpose, being eligible for conditions coverage means having met the plan’s based solely substantive eligibility conditions (such on the passage as being in an eligible job classification of time cannot or achieving job-related licensure exceed 90 requirements specified in the plan’s days...”

terms).27 Eligibility conditions based solely on the passage of time cannot exceed 90 days (note that 90 days means 90 calendar days, including weekends and holidays, and not three months). However, requiring employees to complete a certain number of hours of service before becoming eligible for coverage is also generally allowed under the waiting period regulations as long as the number of required hours of service is capped at 1,200.28 The waiting period regulations also explain that the measurement period used in the look-back method under the employer mandate rules (i.e., the time period for determining whether a variable-hour employee meets the plan’s hours of service per period eligibility condition) will not be considered to be designed to avoid compliance with the 90-day waiting period limitation if coverage is made effective no later than 13 months from the employee’s start date (plus any time remaining until the first day of the next calendar month if the employee’s start date is not the first day of a calendar month).29

14. If an individual previously employed at our organization has recently been rehired, must he or she be offered coverage upon his or her return to work?

For purposes of the employer mandate rules, under both the monthly and look-back measurement methods, a full-time employee returning to a previous employer after a break in service lasting less than 13 consecutive weeks is treated as a continuing employee and must generally be offered coverage as of the first day he or she is credited with an hour of service upon returning to work or as soon as administratively practicable thereafter (i.e., by the first day of the calendar month after returning to work) . A break in service is a period during which an employee is not credited with any hours of service for the employer. The employer may treat an employee experiencing a break in service of 13 weeks or longer as a new hire. Additionally, an employer may choose to treat an employee as a new hire even if he or she experiences a break in service shorter than 13 consecutive weeks, if the break is at least four consecutive weeks and is longer than the employee’s period of employment immediately preceding the break.30 “A break in service is a period in which an employee is not credited with any hours of service for the employer.”

Under these rules, for example, if a Community Action Agency lays off Head Start staff for 10 weeks in the summer, those staff will be generally be considered continuing employees who must be offered coverage upon or shortly after their return to work at the end of the summer.

Definitions of Affordability and Minimum Value 15. How will we know if the coverage offered under our organization’s plan is “affordable” to employees?

An employer’s coverage is considered “affordable” if an employee’s required premium contribution for the lowest cost employee-only coverage offered by the employer is equal to no more than 9.5 percent of the employee’s household income. Because employers generally will not have access to data on their employees’ household incomes, employers have three possible optional “safe harbor” methods for determining affordability. Under these rules, coverage is affordable if a full-time employee’s premium contribution for the lowest cost individual coverage providing minimum value does not exceed either: (1) 9.5 percent of the employee’s wages reported on Form W-2 for the year in question; (2) 9.5 percent of the employee’s rate of pay at the beginning of the coverage period (generally the plan year); or (3) 9.5 percent of the federal poverty line for a single individual; (for this purpose, an employer may use any of the federal poverty guidelines in effect within six months before the first day of the plan year). The Form W-2 safe harbor is applied on a yearly basis after the end of the calendar year but its application may be pro-rated if an employee is only offered coverage for part of the year. The rate of pay and federal poverty line safe harbors are applied on a monthly basis. An employer may choose to apply any one of these safe harbors for any reasonable category of employees, as long as it does so on a uniform and consistent basis for all employees in a particular category. Reasonable categories generally include specified job categories, nature of compensation (hourly or salaried), geographic location, and similar bona fide business criteria.31

16. What does it mean for a health plan to provide “minimum value”?

“A plan provides A plan provides minimum value minimum value if if it covers at least 60 percent of it covers at least the total allowed cost of benefits 60% of the total that are expected to be incurred allowed cost of under the plan.32 The Department benefits that are of Health and Human Services expected to be (HHS) and the IRS have produced incurred under the a minimum value calculator. By plan.” entering certain information about the plan, such as deductibles and co-pays, into the calculator employers can obtain a determination as to whether the plan provides minimum value.

Allowability of Employer Mandate Payments under OMB Cost Principles 17. Will our organization be able to charge employer mandate payments to its federal grants?

To date, no guidance specifically addresses whether employer mandate payments will be allowable costs under the federal cost principles that apply to employers receiving federal grant funds.

On the one hand, the payments could be construed as penalties, which are unallowable costs under the cost principles. Costs of fines and penalties resulting from Continued on page 10

CAPLAW Update Newsletter, Fall 2014 | 9

ACA Employer Mandate (continued from page 9)

violations of, or failure of a federal grantee to comply with federal, state, and local laws and regulations are unallowable except when incurred as a result of compliance with specific provisions of an award or instructions in writing from the awarding agency.33 The Affordable Care Act, however, gives large employers a choice of whether to “play” or to “pay.”

Only if an employer neither plays nor pays will it be violating or failing to comply with the Act. Therefore, it seems unlikely that employer mandate payments would be considered unallowable fines or penalties under this provision.

On the other hand, the payments could be construed as taxes. Taxes that a federal grantee is required to pay are generally allowable, except for taxes from which an exemption is available to the grantee.34 Although the treatment of employer mandate payments under the federal cost principles is not clear, the cost principles clearly state that costs of providing health insurance to employees are allowable.35

More Information For more information about the rules discussed in this Q&A, see the following publications: • The IRS’s “Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act” • The Federal Register notices containing the final employer mandate regulations, the final 90-day waiting period regulations, and the final regulations regarding orientation periods • Health care reform articles for large employers from the Leavitt Group, a multistate insurance brokerage • Deciding Whether to Play or Pay Under the Affordable Care Act – 2014 Updates from the law firm Jones Day • A series of alerts for employers from the national employment law firm Seyfarth Shaw on selected health care reform topics. See, in particular, Issues 77 (final employer mandate regulations), 79 (final regulations on the 90-day waiting period limitation) 80 (employer reporting requirements) and 82 (final 90-day waiting period regulations on orientation periods).

• The Health Care Reform Dashboard, created and maintained by the law firm Ballard Spahr LLP, contains information and alerts on various aspects of the Affordable Care Act, including the employer mandate.

The site also includes “The ACA Tracker,” which tracks and includes links to regulations and other guidance issued by federal agencies on the ACA. (See endnotes on page 20)

10 | CAPLAW Update Newsletter, Fall 2014

Custom Business Email Addresses (continued from cover)

contain data that must be protected, preserved, and readily accessible by the organization at all times. Using customized business emails will enable your organization to fully control, access and store information in employees’ email accounts, thereby protecting the organization from legal liability of various kinds. It will also project a more professional image and enable recipients to readily identify emails as being sent in connection with the official business of your organization.

Establishing custom business emails is not difficult or expensive to do; some “how-to” tips are provided later in this article.

Risks of Using Individual Email Accounts for Business Purposes There are a number of legal risks associated with using individual email accounts for business purposes. Following are some examples of those risks: • Safeguarding Confidential Information: A variety of state and federal privacy laws require organizations to protect certain sensitive information, such as social security numbers, driver’s license or passport numbers, health information, and financial account information.

Email messages exchanged in the conduct of the organization’s business may contain information that requires protection under these laws. Without the ability to fully control and safeguard its employees’ email accounts, an organization will not be able to protect confidential information in those accounts to the extent required by law.

• Securing Data: Email sent or received from personal accounts is unlikely to be protected by the organization’s data backup systems, firewalls, encryption or other data protection procedures,

increasing risk of data breaches or loss of data due to viruses, malware, or malfunctions in data backup.

• Retaining Records: CSBG network organizations are subject to record retention requirements imposed by various laws, including those that apply to them as employers and recipients of government funds. To foster compliance with these laws, organizations often adopt record retention policies specifying how long records, which may include emails or information contained in them, are to be retained and when they may be destroyed. (For a sample record retention policy, see CAPLAW’s Sample Record Retention Policy).

If organization business is conducted through the use of individual email accounts the organization does not control, it will not be able to comply with the record retention requirements of these various laws or with its own record retention policy with respect to records contained in those accounts.

• Producing Documents: An organization may be required to produce emails in response to a discovery request in litigation or in connection with a government audit or investigation. If emails are located in individual email accounts, it may be difficult, if not impossible, for the organization to retrieve and produce them.

• Controlling Access after an Employee Leaves: If an employee who uses a personal email account to conduct organization business leaves the organization, the organization may not be able to access information contained in or connected with that account or to block the individual’s access to the account. Requiring staff to use office email accounts enables an organization to control and ensure access to work product and important organizational information at all times.

Using Custom Business Email Addresses to Reinforce the Organization’s Brand Online communication plays a key “Online role in establishing an organization’s communication public profile, including the plays a key role professionalism with which the in establishing organization operates. Part of an an organization’s organization’s brand is established by public profile...” the email messages sent from the organization. When an organization’s employees send email from individual email addresses, such as janedoe@hotmail.com or john30@aol.com, recipients are less likely to connect that email correspondence with the organization’s mission and work. Also, email addresses using a web mail service provider’s name (such as Hotmail) may include advertising that may make the organization’s communications appear unprofessional and/or imply that the organization is endorsing the products or services being advertised. On the other hand, use of custom business email helps build awareness of the organization’s brand and projects a professional image.

In addition to using custom business email addresses, the use of a standard email signature block by every employee

reinforces the organization’s “...the use of a brand identity and helps ensure standard email that recipients can easily signature block by identify and contact the sender every employee and the organization. Email reinforces the systems generally enable users organzation’s to establish signature blocks brand identity and that will automatically appear helps ensure that at the end of each new email recipients can easily message as it is created. An email identify and contact signature block typically contain the sender...” the staff person’s full name and title, the full name of the organization, the employee’s work address and telephone number(s), and the organization’s website address.

Setting Up A Custom Business Email Address If your organization has a website, obtaining email addresses with your organization’s name may be accomplished by the web host, a company which connects your website with the Internet. The email address would use your organization’s “domain name” (discussed further below), that is the address on the Internet identifying where the website is located. An example of an email account set up this way would be john. doe@yourCAA.org.

Even if your organization does not have a website, it may utilize a service provider for email services, several of which are marketing low-cost or free services to eligible nonprofits.

Two of these providers are GoogleApps and Office 365 for Nonprofits. An email service provider can link your email accounts to your organization’s domain name, rather than the name of the service provider. For IT information and resources tailored to nonprofits, visit the Tech Soup website.

Establishing a Domain Name A domain name, as noted earlier, is your organization’s address on the Internet that identifies where your website is located so that the public (and funders) can learn more about your organization and how to contact your staff. For example, CAPLAW’s domain name is www.caplaw.org. In picking a domain name, it is important to keep it simple and easy to remember, avoid numbers and repeated letters, and make it a communication tool that helps make your services known and accessible. Sometimes the domain name is an acronym (as in CAPLAW) for the name of the organization, particularly if it is a long name. When you have picked a name or list of names, do an online search for those names to ensure that no one else is using them. (For additional information, here is a link to an article on choosing a domain name).1 The next step in the process is to register the domain name by submitting an electronic application to any one of 240 registries, such as GoDaddy or Network Solutions. Once you have chosen the domain name for your organization, choose a suffix that further identifies it. The domain suffix “.org” Continued on page 12

CAPLAW Update Newsletter, Fall 2014 | 11

Custom Business Email Addresses (continued from page 11)

was originally designed for nonprofits and will probably be the most suitable as it indicates a trustworthy organization dedicated to serving the public interest. Also registering a domain name with the suffixes “.com” and “.net” may be a good idea to prevent misdirection during web searches. The cost for each domain name is fairly low. In addition, it will reduce risk if someone at your organization ensures that the domain is registered in the name of the organization (not in a staff member’s name) and that fees for retaining the registration are paid promptly so that you will not lose that domain name to another organization. Note that legal issues can arise if an organization did not establish the domain in its own name. For example, the service provider may not agree to renew the domain name if it has been registered in the name of a staff person who has left the organization.

With a domain name established, your organization can proceed to set up email accounts linked to your domain name (see discussion above). If each person’s email address includes his or her full name or at least the first initial and last name, the recipient can easily identify the sender.

Using custom business email for all emails sent on behalf of your organization will help protect the information the organization holds as well as prevent loss and legal liability. It enables your organization to present a consistent, professional message through its email communications.

(See endnotes on page 20)

Minimize Liability from Completed WAP Units (continued from page 3)

If a CAA decides to contract out all or most of its WAP work, it should again consult with an attorney licensed in its state when drafting a contractor agreement as such an agreement will be enforced under its state’s laws. An attorney should also be able to identify what, if any, implicit or explicit warranties are available under the applicable state laws.

Additionally, a CAA may obtain insurance that will cover costs relating to construction errors caused by a CAA’s in-house WAP crew and/or contractors. The DOE WAP Procurement Toolkit requires CAAs to obtain as part of the contractor bidding process documentation showing that the contractor maintains insurance that meets the minimum professional and equipment liability insurance requirements in a state. CAAs will also typically include in the contractor agreement language requiring a contractor to provide proof of such insurance.

If your CAA has questions or concerns about the Community Service Block Grant Act (CSBG) child support referal requirements, check out CAPLAW’s recent analysis. With this analysis, CAPLAW proposes practical ways to approach and implement these sections of the Act. It is important to note that the analysis does not represent the opinions of the federal Office of Community Services (OCS).

Learn more and download the Q&A!

12 | CAPLAW Update Newsletter, Fall 2014

Generally, under the Office of Management and Budget (OMB) Cost Principles2 and the Omni Circular3 (which will replace the Cost Principles in 2015) the cost of insurance required or approved and maintained pursuant to a federal grant award is allowable where as the cost of other insurance maintained by the organization in connection with the general conduct of its operations is allowable subject to certain limitations.4 Also, it is important to note that actual losses which could have been covered by permissible insurance are unallowable unless the losses are (1) expressly provided for in an award, (2) not covered under a nominal deductible and are in keeping with sound business practice or (3) minor ones not covered by insurance (spoilage, breakage, and disappearance of supplies) which occur in the ordinary course of operations.5 Under the WAP regulations, the cost of liability insurance for personal injury

and property damage resulting from weatherization projects is an allowable expense.6 However, this type of insurance may not cover all of the scenarios leading to additional work that may need to be done on a completed unit. Ultimately, a CAA should work with an insurance specialist as well as an attorney in its state that specializes in construction matters to determine what, if any, insurance may be available.

What should a CAA do if it is currently facing the scenario? A CAA should initially determine if it is liable for the repair.

If the CAA used in-house crews and determines that it is wholly or partially liable, its insurance may cover the cost of repairs on a completed unit and/or the CAA may use unrestricted funds to pay for such repairs. If the CAA used a contractor, the agreement it entered into with the contractor may require the contractor to take responsibility for the repair and, if not, the CAA should consider working with an attorney in its state that specializes in construction matters to determine what, if any, implied warranties may apply.

Additionally, the contractor’s insurance may cover the cost of such repairs.

(See endnotes on pages 20-21)

declarations by the CAA’s management that “best efforts” had been made did not shed light on what the efforts had actually been, and, as a result, the DAB could not assess the reasonableness of the CAA’s attempts to find sources of non-federal funds. The DAB explained that sufficient documentation would describe the steps that the CAA had taken to generate non-federal share donations despite the challenges that it faced.

The CAA also argued that it had not received enough guidance from ACF on the procedure for requesting a waiver, and that it was unclear who had the burden of initiating the application and providing supporting evidence. The DAB rejected this argument by pointing out that the CAA’s notice of award indicated that the award was subject to various regulations, including Performance Standards at 45 C.F.R. Part 1301. Among other things, these regulations outline the non-federal share requirement and that additional federal financial assistance may be approved by an HHS official “on the basis of a written application and any supporting evidence he or she may require.”8 These regulations, therefore, put the CAA on notice that it needed to provide 20% of the program costs and obtain approval from ACF to contribute a lesser amount. The regulations also make clear that the CAA initiates the waiver request, since it is in a position to know if such a request is necessary and would possess evidence supporting the request.

Lessons Learned: • If your organization anticipates difficulty in meeting the non-federal share requirement, apply for a waiver with your annual refunding application or submit a waiver request to the ACF Regional Office as early as possible in the program year.

• Document all steps taken to obtain non-federal share funds and in-kind donations. The documentation should evidence the reasonable efforts made to obtain funding and donations and can later be used to support a waiver request.

Improper Draw Downs and Lack of Records

Head Start Disallowances (continued from page 4)

eight months after the budget period had ended. In support of its request, it provided statements by its former chief financial officer (CFO) and its current executive director that it had made its “best efforts” to meet the non-federal share requirement. The CAA explained that in addition to the drought, there was a shortage of community resources because of the location and demographics of the community.

ACF rejected the CAA’s waiver request, and the DAB agreed.

Without deciding if an untimely request could be approved retroactively, the DAB found that the CAA failed to provide sufficient evidence showing it had made the reasonable effort required by the Performance Standards to meet the non-federal share requirement. The DAB explained that

A Nebraska CAA incurred a “The timing and disallowance totaling $172,399.52 amount of cash resulting from: (1) drawing down advances must its remaining program funds, be as close as $80,917.32, for program year administratively (PY) 2010 nearly two weeks prior feasible to to using the funds and failing to the actual produce records showing how the disbursements for funds were spent and (2) using program costs.” $91,482.20 of PY 2011 funds for payroll expenses incurred in PY 2010.9 The HHS uniform administrative grant requirements specify that cash advances to a federal grant recipient must be limited to the minimum amount needed and timed to be in accordance with an organization’s actual, immediate cash requirements. The timing and amount of cash advances must be as close as administratively feasible to the actual Continued on page 14

CAPLAW Update Newsletter, Fall 2014 | 13

Head Start Disallowances (continued from page 13)

disbursements for program costs.10 A grantee may only charge to an award the allowable costs that result from obligations incurred during the funding period.11 Grant expenditures incurred before or after a budget period are not allocable to that budget period.12 Furthermore, for costs to be allowable, the federal cost principles require, among other conditions, that the costs be adequately documented and allocable to the award.13 The grant recipient bears the burden of documenting the existence and allowability of costs.14

Disallowance of $80,917.32 Several days prior to October 31, 2010, the end of the CAA’s PY 2010, it drew down the remainder of its Head Start funds in the amount of $80,917.32. The CAA asserted that at the time of the drawdown it had obligated $82,333.98 of its $91,482.20 bi-monthly payroll expense for the twoweek period between October 16, 2010 and October 31, 2010. The CAA also asserted that pursuant to its policy of paying payroll on the 10th and the 25th of every month, on November 10, 2010 it used the drawn down to pay most of the $91,482.20 payroll. When ACF questioned the drawdown during its on-site review, the CAA’s fiscal officer “stated simply that he had drawn the Head Start balance of [the program year] available funds”. The CAA later noted that even though the funds were not needed until November 10, they were obligated and connected to an expense that had accrued by the date of the draw down.

The DAB found that the CAA failed to comply with its obligation to draw down the minimum amount of funds required to meet its immediate cash requirements. The DAB explained that the obligation of a cost does not demonstrate the existence of an “immediate cash requirement.” Even if the funds had “...the obligation been obligated by October 28, they of a cost does not were not needed until November demonstrate the 10. According to the DAB, the CAA existence of an provided no evidence that it ‘immediate cash actually spent the $80,917.36 to requirement.’” make the November 10 payroll payment. In fact, the CAA admitted to having used the other disallowed amount, $91,482.20 from PY 2011, to pay for the PY 2010 payroll expenses that it initially claimed to have paid in part with the $80,917.32 amount. The DAB found further that the fiscal officer’s comment during the on-site review and the complete drawdown of the remaining PY 2010 funds created the appearance that the funds were drawn down simply because the PY was ending and not to meet an immediate and permissible cash need.

The DAB also found that the CAA failed to meet its burden of documenting that the funds were spent on allowable and allocable charges to its Head Start grant for PY 2010. The records the CAA produced reflected payments for payroll expenses accrued in PY 2009 rather than PY 2010 and listed all expenditures for its Head Start and Early Head 14 | CAPLAW Update Newsletter, Fall 2014

Start programs rather than showing a breakdown of costs allocated to the appropriate program.

Disallowance of $91,582.20 The CAA did not contest the DAB’s decision to sustain ACF’s disallowance of $91,482.20 from PY 2011 based on the CAA having used those funds to pay for payroll expenses incurred during PY 2010. Rather, the CAA argued that it had offset the improper use of the funds because it “used corporate money acquired by cashing out certain certificates of deposit owned by the program to pay the final payroll of grant year 2011” which equaled $91,482.20. In support of its argument, the CAA relied on a prior DAB decision recognizing that a grantee may reduce or offset a disallowance by documenting that it incurred previously unclaimed allowable and allocable costs that it paid for with its own funds.15 The CAA also produced general ledger transactions and “payroll expense allocations” that showed payment of $91,482.20 in payroll expenses on November 10, 2010, and that as of March 12, 2013, it had reversed the journal entries charging those costs to PY 2011.

The DAB rejected the CAA’s offset argument and distinguished the facts surrounding its prior decision with the ones here. Unlike the grant recipient in the prior decision, the CAA in this case failed to show that it had spent $91,482.20 of its own non-federal funds on allowable Head Start program costs that it had not previously charged to Head Start funds. The grant recipient in the prior case had submitted a 66-page spreadsheet that detailed previously unclaimed Head Start expenditures, including the date, the payee, the purpose, a check number where applicable, and an account classification number.16 These records sufficiently evidenced that the grant recipient had paid allowable costs that it had not previously charged to federal funds with non-federal funds. The records also sufficiently showed that the non-federal funds used by the grantee in the prior decision to offset the improper charge had not also been used to meet its required non-federal share. In the case here, however, the DAB concluded that the CAA failed to provide documentation sufficient to establish that the CAA used non-federal funds to pay for $91,482.20 in previously unclaimed Head Start program expenses for PY 2011 and that any non-federal funds used as an offset were not also part of the CAA’s required non-federal share. Subsequently, the CAA failed to meet its burden of documenting the existence and allowability of its expenditures of federal funds.

Lessons Learned: • Do not draw down on federal funds simply because the money is available. Draw downs must be supported by documentation evidencing what the funds will be used for and that the use is both allowable and allocable to the budget period to which they are being charged.

• Avoid using Head Start funds or any other federal funds available on an advance basis to cover costs of other programs or activities of the organization, even for a short period. “Loans” of this sort are strictly prohibited.

• Limit draw downs of cash advances to the minimum amount needed and time those draw downs as close as administratively feasible to actual disbursements for program costs.

on demand

• Monitor carefully your organization’s cash flow and have procedures in place to minimize the time that federal funds sit in your organization’s bank account (and keep in mind that interest on those funds must generally be remitted to the federal government).

• Maintain detailed records of all program expenditures, including, for example: information on the date of payment, payee, purpose, check number where applicable, account classification number, and the source of funds used to pay each expenditure. If a federal funding source disallows costs, an organization may be able to reduce the amount of the disallowance by showing that it spent non-federal funds on allowable costs that it had not previously charged to the federal grant at issue. However, your organization must be able to produce adequate documentation to show that no federal money was used for the offset and that amounts used to offset the disallowance were not also used to support the non federal share requirement.

Insufficient Consulting and Professional Services Documentation Inadequate documentation led to a $34,700 disallowance for consulting and IT professional services incurred by a Texas CAA’s Head Start program.17 Under the federal cost principles, a cost may be charged to a federal award if, among other requirements, it is reasonable and allocable, and adequately documented.18 When determining if a cost related to consulting or professional services is reasonable and allowable, the following factors should be considered and supported with evidence: “Under the federal cost principles, a cost may be charged to a federal award if... it is reasonable and allocable, and adequately documented.”

Miss a webinar in our series encouraging a CAA’s executive management team and board to proactively tackle legal issues that impact the health and sustainability of its organization? Learn more and listen. »»

Employee Benefits Check-Up: Are You in Compliance with the Affordable Care Act?

»»

Critical Indicators for CAA Sustainability

»»

When the Going Gets Tough, Who Gets Going?: Employment Laws Affecting Staffing Options

»»

Ins and Outs of the OMB Super Circular, Part I

»»

Ins and Outs of the OMB Super Circular, Part II

»»

Changing Needs and Expectations for Chief Financial Officers in Community Action

»»

Significant CSBG Issues to Examine when Planning for the Future

»»

Head Start Risk Management

• The nature and scope of the service rendered in relation to the service required; • The necessity of contracting for the service, considering the organization’s capability in the particular area; • The qualifications of the individual rendering the service and the customary fee charged; and • The adequacy of the contractual agreement for the service (e.g., description of the service, estimate of time required, rate of compensation, and termination provisions).19 Furthermore, the HHS uniform administrative grant requirements require a Head Start grantee to have in place a financial management system that provides effective Continued on page 16

If your CAA has questions or concerns about the Community Service Block Grant Act (CSBG) carryover requirements, check out CAPLAW’s recent analysis. With this analysis, CAPLAW addresses commonly faced issues associated with the carryover requirements. It is important to note that the analysis does not represent the opinions of the federal Office of Community Services (OCS).

Learn more and download the Q&A! CAPLAW Update Newsletter, Fall 2014 | 15

Head Start Disallowances (continued from page 15)

control over money and property, maintains records that identify the source and application of federal funds, and consists of accounting records that are supported by source documentation.20 The Texas CAA entered into two consulting contracts and one contract for professional IT services. Upon the request of ACF, the federal Office of Inspector General (OIG) conducted an audit of the CAA’s Head Start program which questioned costs associated with these contracts.21 In the first consulting contract, the CAA paid another organization a nonrefundable fixed fee of $20,000 for technical training and assistance (T&TA) on an “ongoing, as needed basis.” In support of this cost, the CAA provided the contract, a general ledger entry, and sign-in sheets indicating that some training had occurred. OIG found, and the DAB agreed, that the documentation was inadequate because it did not sufficiently support the reasonableness of the payment for the services provided. According to the DAB, the CAA should have produced detailed descriptions of services and time spent such as an invoice that could have been used to compare the services provided with the amount paid. Both OIG and the DAB found the sign-in sheets to be inadequate because they did not contain sufficient detail on the amount or type of training provided. The CAA failed to provide adequate documentation detailing the specific trainings that had been conducted or technical assistance received, an explanation as to why it was necessary to contract for such services, and the customary fees charged for such services.

In the second consulting contract, the CAA paid the executive director of another organization $7,500 to assist with preparing a facilities acquisition application “on an as needed basis.” To support this cost the CAA provided OIG with the completed facilities application, the consulting contract and a general ledger excerpt recording this cost.

OIG found this support to be insufficient, and the DAB agreed, as the documentation failed to show that the $7,500 payment was a reasonable fee for the contracted services.

The facilities application did not show the “type or amount of work” the consultant provided and neither the consulting contract nor the ledger contained information about the specific assistance the consultant provided or the number of hours she worked.

16 | CAPLAW Update Newsletter, Fall 2014

In the third contract for maintenance and support of the CAA’s information technology (IT) system, the estimated total cost for the services provided was $4,519 per month, with the IT vendor donating $2,334 per month and the CAA paying the remaining $2,185 per month. The CAA allocated $600 per month of this cost to its Head Start program for a total program year cost of $7,200. The CAA provided OIG with the IT contract, which based the vendor’s monthly rate on projections about the CAA’s IT needs, monthly invoices, and excerpts from the CAA’s general ledger. The DAB found this documentation insufficient to determine whether the costs were reasonable, and consequently, allowable. The DAB explained that costs are not allowable simply because they were incurred pursuant to a written contract and invoices. The CAA’s invoices failed to provide a detailed monthly listing of the services provided and the ledger only showed that the CAA’s Head Start program had paid $600 per month for IT support services. Even though the contract detailed the office locations and IT-related systems the vendor agreed to support along with the vendor’s projected average number of support hours and monthly costs, it was not clear which of the listed office locations were used for Head Start-related activities and how the $600 allocation to the Head Start grant was determined. Also, the CAA failed to provide information about the vendor’s qualifications or customary fees charged for IT services. The DAB found that it was impossible to know whether the projected monthly rate was reasonable in relation to the services provided because the CAA failed to submit documentation showing either the services actually provided or the hours actually worked.

Lessons Learned: Consulting and professional service costs should be supported by documentation that shows that the costs are reasonable in relation to the services provided.

Supporting documentation should address the: • Purpose of the services, • Need for the services, • Qualifications of the service provider, • Services actually provided and the realized benefit to the organization, • Time spent providing the services and • Customary fees for similar services from a similar provider.

Failure to Follow Incentive Compensation Policy and Properly Obligate Repair Costs Another Texas CAA’s failure to follow its own compensation policies and maintain adequate documentation to support the reasonableness of payments made pursuant to those policies resulted in a disallowance of incentive compensation in the amount of $1,332,608 charged by the CAA for 2010, 2011, and 2012 program years. The DAB also affirmed a disallowance of repair costs in the amount of $59,653 for the CAA’s charging of costs to the incorrect program year.22

The federal cost principles allow the charging of incentive compensation that is tied to cost reduction, or other efficient performance, such as improving productivity or safety, to the extent that the overall compensation is reasonable and pursuant to an agreement entered into in good faith before services are rendered, or pursuant to an established plan that is so consistently followed by the organization as to imply, in effect, an agreement to make such payment.23 The Head Start performance standards require written personnel policies including a description of procedures for conducting staff performance appraisals that are approved by the Policy Council “...the federal cost or Policy Committee.24 principles require Additionally, the Head Start that for costs to uniform administrative be allowable they requirements and the federal cost must be supported principles require that for costs to by evidence that be allowable they must be they are allocable supported by evidence that they to the program year are allocable to the program year in which they are in which they are being charged.25 charged.”

Disallowance of $1,332,608 The CAA maintained an incentive compensation policy (Policy) that paid staff additional amounts for consistent or exemplary job performance pursuant to an incentive plan approved by its executive director. The Policy contained the following guidelines: • To be eligible for incentive compensation awards, managerial staff must present to the executive director a plan of performance that contains specific measures that must be met prior to payment of any incentive award. Performance measures may include cost reduction, efficient performance, safety awards, or other measurable performance indicators.

• Incentive compensation payments must be budgeted for, available, and allowable within contractual and grant award requirements.

• Incentive compensation cannot be awarded to an employee who had received a verbal or written performance warning within 90 days of the payment.

• For employees who have been with the CAA for more than one year, a current employee evaluation with a satisfactory evaluation on file.

• The Policy meets the criteria for the establishment of a consistent plan of incentive awards.

The CAA also adopted a compensation plan (Plan) that allowed for all staff to receive incentive compensation if management was successful in operating programs efficiently. The Plan provided higher pay for superior work performance than for average or below average performance and contained a matrix for “determining employee worth to the organization.” The matrix listed criteria on which different types of employees were to be rated and assigned points and specific letter grades. Also, pursuant to the Plan, manager ratings had to be composed of evaluations of

personnel performance appraisals, disciplinary history, and “discretionary input.”

2010 Program Year During its 2010 program year, the CAA awarded the same rate of incentive compensation to most of its nonmanagement employees irrespective of their individual performance. The CAA evaluated the employees in groups based on their work locations and the organizational savings achieved by each group. In support of its actions, the CAA relied on two prior DAB decisions, one that allowed for an organization-wide one-time supplemental salary payment26 and another that allowed for organizationwide bonus payments without evaluating individual employee performance.27 The CAA also awarded incentive compensation to its management staff but, unlike the nonmanagement employees, management was evaluated on individual performance pursuant to the Plan and the criteria outlined in the matrix. In support of those payments, the CAA initially provided payroll records that documented the ratings earned from individual performance evaluations. The CAA later provided the performance appraisal of a single non-management employee and stated that “appraisal documentation” could be provided for an additional unidentified 20 employees.

The DAB disallowed all of these incentive payments. As to the non-management employee payments, the DAB found that the CAA failed to follow its established policies by not evaluating each employee’s performance. The DAB differentiated the CAA’s situation from the prior DAB decisions by explaining that the supplemental salary and bonus payments that were allowed in the prior decisions were awarded in compliance with the grant recipients’ incentive compensation and personnel policies. As to the management payments, the DAB also found that the CAA failed to follow its established policy. Although managers were evaluated pursuant to the CAA’s Policy and Plan, the pay awarded was not linked to these evaluations. The documentation showed that some higher-rated managers received less compensation than lower-rated managers, and in other “...the CAA... failed instances, managers that received to provide the equivalent ratings received performance different compensation awards. appraisals, The CAA only provided records disciplinary records, containing the tallied ratings, or documentation... scores, and grades for each to support how manager, and failed to provide the these ratings, performance appraisals, scores, and grades disciplinary records, or were determined.” documentation on “discretionary input” to support how these ratings, scores, and grades were determined. The DAB noted that it was unclear if the CAA could provide appraisal documentation for all employees who were managers and, even with the appraisal documentation, it would be not be possible to determine if the Plan was followed without also reviewing disciplinary records and documentation on discretionary input. In addition, the DAB noted that, although Continued on page 18

CAPLAW Update Newsletter, Fall 2014 | 17

Head Start Disallowances (continued from page 17)

the Plan stated that memoranda would be placed in employees’ files to document that payment of incentive compensation was pursuant to factors in the Plan, the CAA did not produce any examples of these memoranda.

2011 and 2012 Program Years During its 2011 budget year the CAA again awarded incentive compensation pay to all of its employees. Unlike the prior year, the CAA conducted individual performance evaluations and determined ratings and grades for both non-management and management staff. In support of these payments, the CAA submitted payroll records containing all of the grades that employees received, and documentation for management employees containing the ratings that those employees received from the criteria in the Plan.

The DAB found, however, that the documentation submitted revealed that the CAA had once again failed to follow its established policy. The DAB noted that several employees received less generous incentive compensation than did employees that received lower or equivalent grades.

Additionally, the CAA again did not provide records to document the disciplinary actions and discretionary input on evaluations of management. Thus, the DAB could not determine how the management employee ratings were determined, and whether compensation awards were in compliance with its Plan. “...the documentation submitted revealed that the CAA had once again failed to follow its established policy.”

As in the prior two years, during its 2012 program year the CAA awarded incentive compensation to its employees. The DAB found again that the CAA failed to follow its policies.

The CAA did not provide documentation substantiating that certain non-management employees met the qualifications to receive payments or to justify the varying amounts received. Additionally, like in prior years, the compensation awarded to some highly rated and graded management employees fell below, or was equivalent to less rated and graded employees.

Incentive Compensation Not Reasonable Not only did the CAA fail to follow its Policy and Plan, it also was unable to show that the incentive compensation awards were reasonable. The federal cost principles require for costs to be allowable they must be reasonable.28 For a cost to be reasonable it cannot exceed what a reasonable person under the circumstances would be willing to pay.29 The cost should also be one that is ordinary and necessary for the operation of the organization or the performance of the grant award.30 Prior DAB decisions have established the following factors should be considered to determine if incentive compensation is reasonable: • The organization’s compensation levels 18 | CAPLAW Update Newsletter, Fall 2014

• The compensation levels of comparable workers in the same geographic area • Bonuses of similarly situated organizations • Other bonuses paid to employees31 ACF asserted that the CAA failed to provide documentation showing that incentive compensation payments amounting to 9.35% of its total salary costs for fiscal year (FY) 2010, 12.19% of its total salary costs for FY 2011 and 6.99% of its total salary costs for FY 2012 were reasonable.

One management employee received a payment that was 47.66% of her salary and, in FY 2011, 10 out of 12 management employees received incentive payments in excess of 10% of their salaries. The executive director received payments ranging from 8.10% to 29.49% of his salary.

The CAA argued that the awards were reasonable because employees’ total compensation never exceeded the compensation set for Level II Executives by the federal government and was generally in line with the CAA’s 2009 wage comparability study. The study showed compensation levels of comparable workers in the same geographic area; established salary ranges with minimum, midpoint, and maximum rates; and anticipated that the CAA would hire employees at the minimum rate unless a higher salary could be justified.

The DAB found the CAA’s documentation insufficient to establish the reasonableness of the payments. The DAB explained that the CAA did not provide documentation to show that Level II Executives were comparable to the management positions at the CAA in terms of duties, responsibilities, and geography.

The DAB acknowledged that “...wage comparability wage comparability studies studies represent one represent one factor to factor to consider in consider in the reasonableness the reasonableness analysis but noted that it is analysis but noted not a determinative factor. that it is not a Moreover, the study provided determinative factor.” by the CAA was from 2009 and only addressed base salaries, not bonuses or other incentive awards. The DAB explained that an employee’s total compensation falling below the maximum range in the wage comparability study did not establish the reasonableness of pay for any particular employee. The DAB also noted that the total compensation paid to three employees exceeded the maximum amount established by the wage comparability study and that the CAA’s Plan specifically limited an employee’s total compensation to the maximum compensation in the study. The DAB found the incentive compensation payments to be arbitrary and not in conformity with what a reasonable person in similar circumstances would award. The DAB noted that incentive compensation to individuals with similar ratings was often inconsistent, and pay to employees with lower ratings was sometimes greater than the pay awarded to better rated employees.

Disallowance of $59,653 ACF disallowed floor repair costs of $59,653 that the CAA charged to its Head Start program for fiscal year 2012 with a year end of April 30 because all of the quotes, invoices, purchase orders, check requests, and issued checks for these costs were dated July 2012. The CAA countered by providing a memorandum dated March 1, 2012, which was addressed to the floor repair contractor and expressed an interest in retaining the contractor to conduct work on the floors. The memorandum requested that a quote be provided as soon as possible.

The DAB rejected the CAA’s arguments citing to the HHS uniform administrative grant requirement that grant recipients “charge to an award only allowable costs resulting from obligations incurred during the funding period.”32 The DAB found that the memorandum had not obligated the repair costs as the contractor had not yet provided a quote for the cost of the job. Since the purchase order and all other support originated in July, 2012, the DAB found that the costs were not obligated until the 2013 program year and should not have been charged to the 2012 program year.

• Support costs with records documenting that they were obligated in the budget period in which they will be charged. Examples of adequate documentation are quotes, invoices, purchase orders, check requests, and issued checks that reflect a date within the relevant budget period.

(See endnotes on page 21)

Tools for Top-Notch CAAs A Practical Approach to Governance and Financial Excellence

Lessons Learned: • Proceed with caution in adopting and implementing an incentive compensation policy. Although incentive compensation is an allowable expense under federal awards, federal funding sources carefully scrutinize incentive compensation arrangements to determine whether they meet the detailed requirements for allowability. Charging incentive compensation to a federal award requires, in part, that an organization possess an approved policy and that the policy is consistently applied and followed.

• Work with a qualified professional (such as a lawyer or C.P.A.) who is well-versed in federal funding requirements to develop both a written incentive compensation policy and clear, straightforward procedures for implementing and documenting implementation of the policy in a manner that complies with applicable requirements.

• Document how the criteria in an incentive compensation policy used for evaluating employees was consistently applied. For example, show that incentive compensation paid by percentage of salary is consistent with the amount paid to other similar employees in the organization.

• Determine how the organization will evaluate and document the reasonableness of payments made pursuant to an incentive compensation policy. Work with a qualified professional and refer to prior DAB decisions when making this determination.

This six-section toolkit is intended to assist boards and management in their collaborative efforts to build wellgoverned and effective CAAs. Learn more and download!

Exemplary Legal Practices and Policies In the face of ever increasing scrutiny, it’s crucial for Community Action Agencies to establish and maintain a strong ethical culture within their organizations, and adopt policies that address applicable requirements.

Learn more and download!

Stay Tuned

for a special edition OMB Super Circular newsletter!

CAPLAW Update Newsletter, Fall 2014 | 19

Article End Notes Affordable Care Act Employer Mandate Q&A

2. 26 C.F.R. § 54.4980H-1(a)(4), -1(a)(21), -1(a)(22) and -2.

30. 26 C.F.R. § 54.4980H-3(c)(4) and -3(d)(6) (in the case of an “educational organization,” the relevant break in service period is 26 weeks rather than 13 weeks.

However, CSBG network organizations are generally not likely to qualify as educational organizations.)

3. 26 C.F.R. § 54.4980H-4 and -5.

31. 26 C.F.R. § 54.4980H-5(e).

4. 26 C.F.R. § 54.4980H-6(b) and 79 Fed. Reg. 8543, 8574 (Feb. 12, 2014).

32. 26 C.F.R. § 54.4980H-1(28) and 26 U.S.C. § 36B(c)(2)(C)(ii) and 45 C.F.R. § 156.145.

5. 79 Fed. Reg. 8543, 8574.

33. 2 C.F.R. Part 230, App. B, ¶16 (O.M.B. Circular A-122, which applies to nonprofit grantees); see similar provision in 2 C.F.R. Part 225, App. B, ¶16 (O.M.B. Circular A-87, which applies to state and local government grantees). See also 2 C.F.R. § 200.441 (O.M.B. “Super Circular” cost principle rules, which when effective, will apply to both nonprofit and state and local government grantees).

1. 26 C.F.R. § 54.4980H.

6. 79 Fed. Reg. 8543, 8573.

7. 79 Fed. Reg. 8543, 8570-8571.

8. 79 Fed. Reg. 8543, 8575.

9. 79 Fed. Reg. 8543, 8576.

10. 79 Fed. Reg. 8543, 8574-8575 and 26 C.F.R. § 54.4980H-1(a)(12).

11. 26 C.F.R. § 54.4980H-1(a)(21).

12. 26 C.F.R. § 54.4980H-1(a)(24).

13. 26 C.F.R. § 54.4980H-1(a)(24)(ii).

14. 26 C.F.R. § 54.4980H-1(a)(7).

15. 79 Fed. Reg. 8543, 8550-8551.

16. 26 C.F.R. § 54.4980H-3(e).

17. 26 C.F.R. § 54.4980H-5(c).

18. 26 C.F.R. § 54.4980H-3(c)(2).

19. 26 C.F.R. § 54.4980H-3(c)(3).

21. 26 C.F.R. § 54.4980H-5(c).

20. 26 C.F.R. § 54.4980H-3(d).

21. 79 Fed. Reg. 8543, 8573.

34. 2 C.F.R. Part 230, App. B, ¶47.a. (O.M.B. Circular A-122, which applies to nonprofit grantees); see similar provision in 2 C.F.R. Part 225, App. B, ¶40 (O.M.B. Circular A-87, which applies to state and local government grantees). See also 2 C.F.R. § 200.470 (O.M.B. “Super Circular” cost principle rules, which when effective, will apply to both nonprofit and state and local government grantees).

35. 2 C.F.R. Part 230, App. B, ¶8.g. (O.M.B. Circular A-122, which applies to nonprofit grantees); see similar provision in 2 C.F.R. Part 225, App. B, ¶8.d. (O.M.B. Circular A-87, which applies to state and local government grantees). See also 2 C.F.R. § 200.431 (O.M.B. “Super Circular” cost principle rules, which when effective, will apply to both nonprofit and state and local government grantees).

Why It’s Important for Your Organization to Use Custom Business Email Addresses 1. When using this link, note that the pdf will automatically open in the Download folder.

22. 26 C.F.R. § 54.4980H-3(d).

23. 26 C. F. R. § 54.4980H-3(d)(2)-(3).

24. 26 C.F.R. § 54.4980H-3(d)(2).

25. 26 C.F.R. § 54.4980H-3(d)(3).

26. 26 C.R.R. § 54.9815-2708.

27. 26 C.F.R.§ 54.9815–2708(b)-(c)(1).

28 26 C.F.R. § 54.9815-2708(c).

29. 26 C.F.R.§ 54.9815–2708(c)(3)(i).

How Does a CAA Minimize Liability Arising from Completed WAP Units?

1. 10 C.F.R. § 440.18(e)(2).

2. OMB Circular A-122; OMB Circular A-87.

3. 2 C.F.R. Part 200.

4. See OMB Circular A-122, Attachment B, ¶ 22.a(1), (2); OMB Circular A-87, Attachment B, ¶ 22.a, b; 2 C.F.R. § 200.447(a), (b).

5. See OMB Circular A-122, Attachment B, ¶ 22.a(3); OMB

20 | CAPLAW Update Newsletter, Fall 2014

Article End Notes Circular A-87, Attachment B, ¶ 22.c; 2 C.F.R. § 200.447(c).

6. See 10 C.F.R. § 440.18 (d)(10).

Document, Review, Follow & Plan: Lessons Learned from Recent Head Start Disallowances 1. Kings Community Action Organization, DAB No. 2534 (2013).

2. 42 U.S.C. § 9835(b).

3. 45 C.F.R. § 74.23(a)(5) and § 92.24(b)(1).

4. 45 C.F.R. §74.23.

5. 42 U.S.C. § 9835(b). See also Administration for Children and Families Program Instruction 12-02, Feb. 2012.

6. 45 C.F.R. § 1301.21.

23. 2 C.F.R. Part 230, App. B ¶ 8.j.

24. 45 C.F.R. § 1301.31.

25. 45 C.F.R. § 74.28.

26. Seaford Community Action Agency, DAB No. 1433 (1993).

27. Washington County Opportunities, Inc., DAB No. 1464 (1994).

28. 2 C.F.R. Part 230, App. A ¶¶ A.2.a, A.2.g.

29. 2 C.F.R. Part 230, App. A ¶A.3.

30. 2 C.F.R. Part 230, App. A ¶A.3.a.

31. Washington County Opportunities, Inc., DAB No. 1464 (1994).

32. 45 C.F.R. § 74.28.

7. Administration for Children and Families Program Instruction 12-02, Feb. 2012.

8. 45 C.F.R. § 1301.20; 45 C.F.R. § 1301.21.

9. Community Action Partnership of Western Nebraska, DAB No. 2537 (2013).

10. 45 C.F.R. § 74.22(b)(2).

11. 45 C.F.R. § 74.28.

12. Community Action Partnership of Western Nebraska, DAB No. 2537 (2013), citing Cent. Piedmont Action Council, Inc., DAB No. 1916 (2004).

13. 2 C.F.R. Part 230, App. A ¶¶ A.2.a, A.2.g.

14. Suitland Family & Life Dev. Corp., DAB No. 2326 (2010).

15. Cent. Piedmont Action Council, Inc., DAB No. 1916, at 3-4 (2004); Seminole Nation of Okla., DAB No. 1385 (1993).

16. Cent. Piedmont Action Council, Inc., DAB No. 1916, at 3-4 (2004); Seminole Nation of Okla., DAB No. 1385 (1993).

17. Galveston County Community Action Council, Inc., DAB No. 2514 (2013).

18. 2 C.F.R. Part 230, App. A ¶¶ A.2.a, A.2.g.

19. 2 C.F.R. Part 203, App. B ¶ 37.b(1), (2), (7), (8).

This publication is part of the National T/TA Strategy for Promoting Exemplary Practices and Risk Mitigation for the Community Services Block Grant (CSBG) program and is presented free of charge to CSBG grantees. It was created by Community Action Program Legal Services, Inc. (CAPLAW) in the performance of the U.S. Department of Health and Human Services, Administration for Children and Families, Office of Community Services Cooperative Agreement – Grant Award Number 90ET0433. Any opinion, findings, and conclusions, or recommendations expressed In this material are those of the author(s) and do not necessarily reflect the views of the U.S. Department of Health and Human Services, Administration for Children and Families.

20. 45 C.F.R. § 74.21(b)(2)-(b)(3).

21. Although OIG is not typically involved in auditing individual grantees, the OIG was likely called in because of serious concerns by ACF. 22. Texas Neighborhood Services, Inc., DAB No. 2571 (2014).

CAPLAW Update Newsletter, Fall 2014 | 21