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Nonprofit Advisor For the Nonprofit Executive and Board of Directors Member

Winter 2011

A New Retirement Plan Option A provision in the Small Business Jobs Act of 2010 permits 401(k), 403(b), and, starting in 2011, governmental 457(b) plans to offer a new option: an in-plan Roth conversion. If your organization’s benefit package includes one of these retirement plans, you may want to review this new opportunity.

amount converted.* So, from a tax standpoint, it’s a tradeoff: A Roth conversion allows participants to pay taxes now and potentially enjoy tax-free distributions from the plan later. Otherwise, current taxes are deferred but plan distributions will be taxed when taken.

Roth conversions were in the news early

distributions (those made while the partici-

Participants who convert their accounts

in 2010 when a provision from an earlier tax

pant is still working), the following amounts

to Roth IRAs have some leeway to change

law eliminated income restrictions on Roth

may be converted:

their minds and recharacterize their accounts

IRA conversions. In-plan Roth conversions provide another option.

Pretax deferrals (and related earnings)

as traditional IRAs. (A time limit applies.)

if the participant is age 59½ or older

But once an in-plan Roth conversion is completed, it can’t be reversed. Also, unlike

Roth Basics

“ . . . as long as tax law

Roth IRAs, Roth plan accounts are subject

tax-free distributions. Contributions to Roth

requirements are met,

to required minimum distributions during

accounts are not made on a pretax basis.

distributions from Roth

the account holder’s lifetime (generally,

However, earnings on these Roth accounts

accounts are tax free.”

once the participant reaches age 70½ or

What’s the Roth attraction? In a nutshell:

retires from the plan sponsor, if later).

accumulate tax deferred. And, as long as tax law requirements are met, distributions

from Roth accounts are tax free.

Vested employer matching and profit sharing contributions (and related earnings) if they have been in the plan

A Planning Matter

at least two years or if the employee

If your plan already has a Roth contribu-

five years

feature to allow participants to roll over (or ■

“convert”) eligible distributions from their

After-tax contributions and rollover amounts (and related earnings) that are

regular plan account to a Roth account. Plans that do not offer a Roth contribution option must adopt one and then add the conversion feature.

■ A New Retirement Plan Option

1

any time

■ New FSA Rules

2

matching and nonelective contributions

Only certain plan balances may be

are not permitted until after a participant is

converted. Generally, plan assets that are eligible to be distributed and rolled over are also eligible to be converted to a Roth

(410) 783-4900

(301) 652-9100 ■

■ Accounting Software for

Nonprofits

Anne.Schrantz@reznickgroup.com

Philip.Cornblatt@reznickgroup.com

2

■ More Nonprofits Face Single

Audits

3

■ Automatic Loss of Tax

Exemption

With an in-plan Roth conversion, income tax will be due on the taxable portion of the

plan’s provisions concerning in-service

age 59½. Tax Factors

account within the plan. Depending on your

In This Issue

held in a separate plan account at In-service conversions of certain employer

Philip Cornblatt, CPA

* Participants younger than age 59½ who convert pretax assets to a Roth won’t be subject to the 10% early withdrawal penalty upon conversion. However, a penalty may still apply with respect to those amounts in the event of a Roth account distribution that is not considered qualified.

has participated in the plan for at least

tion program, you can add the conversion

Anne E. Schrantz, CPA

Copyright © 2010

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Nonprofit Advisor

2

New FSA Rules If your organization provides a health flexible spending arrangement (FSA) as an employee benefit, take note: The health care reform law has changed the rules regarding reimbursement for over-thecounter medicines and drugs. And more changes are on the way. The FSA is a popular benefit. It allows

reimbursement arrangements (HRAs) and

But the new over-the- counter restriction is a game changer for administrators since there is no simple way to distinguish overthe- counter purchases that are eligible for reimbursement from those that are not. Another Change Coming

employees to pay for a variety of out -of-

tax-free distributions from health savings

pocket medical expenses, such as doctor

accounts (HSAs) and Archer medical savings

limit is set by the employer. (There is no tax

visit copays, dental treatments, prescription

accounts (MSAs).

law dollar limit.) Beginning in 2013, however,

drugs, etc., with pretax dollars. The account

Medical supplies and equipment (e.g.,

Currently, the annual FSA contribution

an employee’s annual FSA contributions

is typically funded through convenient

bandages, contact lens solution, crutches,

can’t exceed $2,500. If your plan currently

payroll deductions.

etc.) and diagnostic devices (e.g., blood

has a higher limit, you’ll want to make your

sugar test kits) are still eligible for reimburse-

employees aware of this change so they

ment (or tax-free distribution) without a

can plan ahead to schedule elective medical

prescription.

or dental procedures before the new limit

Processing Dilemma

takes effect.

Prescription Required Effective January 1, 2011, the costs of over-the- counter drugs and medicines are reimbursable only when purchased with a prescription (with the exception of insulin

Many of the companies that administer

purchases, which do not require prescrip-

benefit plans facilitate FSA-eligible purchases

tions). This new rule also applies to health

by issuing debit cards to account holders.

Accounting Software for Nonprofits Nonprofits that are looking for accounting software have more choices than ever. If you’re in the market, the right software will depend on the size and complexity of your organization.

transition from your old system to the new software carefully. Unless your staff and volunteers have prior experience with the new program, it’s a good idea to plan

Do you intend to integrate fundraising

one or two get-acquainted training ses-

complicate the decision-making process,

activities with your accounting soft-

sions. Additional training may be needed

you may ultimately end up with a more

ware?

to address questions that come up after

Although having more choices may

compatible, efficient system. Be sure to

allow plenty of time to thoroughly assess your organization’s current needs and the effect that future growth will have on your needs.

from other programs? ■

Is the program user-friendly?

How much does the software cost?

The Search Phase Here are some questions to help you

Does the program support all the basic accounting functions you need (e.g., accounts receivable, accounts payable, payroll, etc.)?

Does the program support additional capabilities, such as fund accounting?

Do you need an Internet interface?

What reports can be generated and are they easily customizable?

fine-tune your software search: ■

Can data be exported to and imported

the new system has been up and running for a while. We Can Help As experienced financial professionals, we can help you decide on the most efficient accounting system for your nonprofit. We also can provide the ongoing

What security features does the software have?

What are the installation options?

What kind of support is available and how much does it cost?

The Transition Period Maintaining the integrity of your financial records is key, so plan and implement the

accounting support you’ll need to make your system a success.


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More Nonprofits Face Single Audits The American Recovery and Reinvestment Act of 2009 (ARRA) channeled billions of dollars in federal funds through federal agencies to nonprofit organizations and nonfederal entities in an effort to stimulate job growth and invigorate the economy. The funding certainly stimulated one thing: growth in the number of organizations that are required to have a single audit performed.

controls necessary to reasonably ensure compliance with federal laws, regulations, and the provisions of the contract or grant agreement for each federal program. ■

Maintain complete and accurate records of projects and activities and provide required reports in a timely

Any time a nonprofit organization

(OMB) provides single audit standards in its

receives funding from the federal govern-

publication OMB Circular A-133: Audits of

ment, various compliance and accountability

States, Local Governments, and Non-Profit

requirements must be met. A single audit

Organizations. The publication is updated

is generally required when a nonfederal

annually. The OMB Circular A-133 Compliance

organization spends $500,000 or more of

Supplement provides information to help

federal awards in a year. As a result of

recipient organizations manage awards

the flood of ARRA funds, many recipient

from various federal programs and assist

organizations now meet or exceed the

auditors in performing single audits.

$500,000 threshold and are subject to the single audit requirement, perhaps for the first time. The Single Audit A single audit combines an audit of an organization’s annual financial statements

specific tasks. Organizations must: ■

principles governing a nonprofit organization’s

Prepare a Schedule of Expenditures of Federal Awards (SEFA). (Auditors use the SEFA to select programs for testing.)

The Organization’s Role Transparency and accountability are key

Account for all federal funds received and expended by each individual award.

Work with their auditor to complete and submit a reporting package.

Follow up on any compliance issues or audit findings.

use of public monies. The following guidelines should apply to all federal awards: ■

Be sure to fully understand all program requirements.

and a compliance audit of federal awards. The Office of Management and Budget

manner. The single audit process requires several

Establish and maintain internal

ARRA Differences Accountability requirements for ARRA funds are strict: Records must be maintained to separately identify the source and application of ARRA awards. Audit reports must be filed promptly. Also, funds must be identified in a specific manner in the SEFA.

Internal Control Structure Establishing internal controls is a critical step in ensuring that an organization meets the compliance requirements associated with federal funding. There are five interrelated components: ■

The OMB compliance supplement provides specific instructions regarding ARRA awards. If you’d like more information, please contact us.

Control environment sets the overall tone by addressing such factors as integrity and ethical values and provides discipline and structure for the other control components.

Risk assessment is the process of identifying and analyzing the risks involved

cation is not intended to be nor should

and laying the groundwork for managing those risks.

it be treated as tax, legal, or accounting

Control activities are the procedures and policies that are put in place to ensure

advice. Additional issues could exist

that directives are carried out in all functions and at all levels.

that would affect the tax treatment of

Information and communication involves identifying and capturing pertinent information on a timely basis, establishing adequate reporting procedures, and ensuring that the flow of communication throughout the organization is effective.

The general information in this publi-

Monitoring involves evaluating and assessing the quality of internal control performance over time.

a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor

Part 6 of the annual OMB Circular A-133 Supplement provides characteristics and examples of the five components that may be helpful in establishing internal controls.

can it be used by any taxpayer for the purpose of avoiding tax penalties.


Nonprofit Advisor

4

Automatic Loss of Tax Exemption Prior to the Pension Protection Act of 2006 (PPA), when the IRS granted an organization tax-exempt status, it retained that exemption unless the IRS took action to revoke it. That has changed.

organizations whose exempt status has been automatically revoked for failure to file, and a list will be published on the IRS website in 2011. Individual donors, private

(by “operation of law”). The first filing

foundations, and sponsors of donor-advised

ing track of the hundreds of thousands of

deadline to potentially trigger automatic

funds can check the website to verify the

tax-exempt organizations before PPA was

revocation was in 2010 (for organizations

exempt status of the charities they are

enacted. Larger organizations were required

that did not file returns for 2007, 2008,

considering for a gift.

to file annual information returns (Form 990,

and 2009).

The IRS had no way of accurately keep-

990-EZ, or 990-PF), but small charities were not.

When a nonprofit organization loses taxexempt status, it may be required to file

How May We Help You?

a federal income-tax return and pay income

Reznick Group offers a broad

organizations to file an annual information

tax (and possible penalties). In addition,

range of audit, tax information,

return or electronic notice. (Certain excep-

it can no longer accept tax-deductible con-

return preparation, and executive

tions apply.) Failure to file for three

tributions and will likely lose funding from

board advisory services to non-

consecutive years results in the automatic

private and government entities, since

profit organizations. If we can be

revocation of an organization’s tax-exempt

grants generally are given only to exempt

of service to you, please call.

status, effective as of the filing due date

organizations. The loss of trust is another

Anne E. Schrantz, CPA

of the third year. This is not a determination

potentially serious side effect.

Philip Cornblatt, CPA

The PPA requires almost all exempt

made by the IRS; revocation is automatic

(301) 652-9100

(410) 783-4900

Revocation letters will be sent to

PRESRT STD U.S. Postage PAID 7700 Old Georgetown Road, Suite 400 Bethesda, Maryland 20814 Telephone: 301-652-9100

ADDRESS SERVICE REQUESTED

Permit No. 2446 Merrifield, VA

Nonprofit Advisor: Winter 2011 Issue  

Information on tax, legislation and other key issues impacting the nonprofit executive and Board of Director member. Nonprofit Advisor is on...