Nonprofit Advisor For the Nonprofit Executive and Board of Directors Member
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
“ . . . 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-
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
■ New FSA Rules
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
(301) 652-9100 ■
■ Accounting Software for
■ More Nonprofits Face Single
■ Automatic Loss of Tax
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
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
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
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
or dental procedures before the new limit
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
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.
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.
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,
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
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
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