9/12/ Developing Tax Issues and ACA Implementation for Non Profit Organizations

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1 Developing Tax Issues and ACA Implementation for Non Profit Organizations Well publicized scandals in the IRS have created significant turnover in leadership: Director of Rulings & Agreements EO Division Director of Exempt Organizations Commissioner of Exempt & Government Division Deputy Commissioner for Services & Enforcement IRS Commissioner All removed following TIGTA Report to Congress 1 Treasury Inspector General for Tax Administration report to Congress revealed: Failures in Management Failures in Operations Suggested actions for correction of the failures New leadership in the IRS has accepted all of the findings and is moving forward with adopting the suggested actions. 2 1

2 Management Failures: 16 months of inappropriate activity before the EO Director was briefed Failure to expedite/escalate these issues to the highest levels of Senior Leadership Senior Leadership did not effectively control the Exempt Organization Division Failure of Senior Leadership to end the activities and/or inform the appropriate Committees of Congress 3 Operational Failures: Exempt status requests were unresolved well beyond the 120 day IRS standard for determinations. Note: Currently, the IRS is processing exemption recognition applications received in April of Clearly these issues did not effect only 501(c)(4) political activity 4 Actions to address these issues Change in leadership Suspension of all use of BOLO lists in the Exempt Organization Division Review of processes and criteria used for screening applications in light of IRS Mission Statement 5 2

3 IRS Mission Statement "provide America s taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all." 6 Actions to address these issues Implement an Enterprise Risk Management program for capturing, reporting and addressing the risk areas across the IRS. Initiate educational program both within and without the IRS regarding the role of the Taxpayer Advocate s Office (TAO) in resolving issues with the IRS. 7 Actions to address these issues Better documentation for referring cases to higher levels of review and analysis. The objective is a more efficient business process coupled with enhanced documentation to substantiate determination decisions. 8 3

4 Pending Actions Education of staff on how to apply the appropriate screening criteria in the absence of BOLO lists. Complete assessment of existing processes and documentation regarding determinations. Develop training and education programs regarding what constitutes political activity versus campaign activity. 9 Colleges and Universities Compliance Report Underreporting of Unrelated Business Taxable Income 90% of Colleges and Universities showed and increase in UBTI Disallowance of more the $170 million in Net Operating Losses 10 Colleges and Universities Compliance Report Causes of the changes Lack of Profit Motive Nearly 70% of Colleges and Universities deducted losses from activities that showed no profit motive Disallowing expenses not connected to unrelated business activities 60% of Colleges and Universities inappropriately allocated expenses to eliminate UBI 11 4

5 Colleges and Universities Compliance Report Activities resulting in the most adjustments Fitness, recreation centers and sports camps Advertising Facility Rentals Arenas Golf 12 Colleges and Universities Compliance Report Compensation and Comparability Data 20% of Colleges and Universities failed to meet the Rebuttable Presumption Standard related to Comparability data Institutions were not similarly situated Documentation of Selection Criteria for comparability was lacking Surveys did not specify whether amounts reported included only salary or total compensation 13 Colleges and Universities Compliance Report Next Steps: Expanded look at UBI reporting especially at recurring losses and expense allocations. Increase awareness of the importance of appropriate comparability data through education and examinations. 14 5

6 Customer Education and Outreach More education equals better compliance Expanding use of webinars Education supplied via EO Update E newsletter Increasing workshops and seminars for small to medium sized tax exempt organizations 15 Federal and State Coordination State agencies can register with the IRS to share certain information about exempt organizations between agencies. Currently, 8 agencies in 7 states are registered IRS is looking to expand this program 16 Federal and State Coordination Issues most commonly involved in information sharing are: Private Benefit and Inurement Nonfilers Political Activities Employment Tax Issues Organizations not Operating according to Status Includes proposed approval, denial or revocation of exempt status. 17 6

7 Governance Initiative: Due to the mixed findings in the initial study, examinations of a statistical sample of 501(c)(3) and (4) organizations are expected. Planned examinations regarding governance practices in the event of a significant diversion of assets 18 International Activities of Charities Review of organizations with foreign bank accounts found problems in: Failure to file FBARs Inadequate recordkeeping Lack of discretion or control over funds abroad Failure to file employment tax returns Shifting focus to organizations with high amounts of foreign grant expenditures 19 International Activities of Charities Gifts in Kind programs transferring non cash items to foreign organizations Poor recordkeeping of the gifts in kind Inaccurate reporting of the activity on Form 990 Inadequate discretion or control over the final disposition of the items 20 7

8 Uses of the Form 990 information Charitable Spending Initiative use of funds in the charitable sector relative to charitable accomplishments Large fundraising expenses relative to charitable programs. Expanding program to organizations with large fundraising income and little or no fundraising expenses. 21 Uses of the Form 990 information Compensation Transparency Organizations reporting high annual gross receipts with low total compensation of ODTKEs Political Activity EO has identified indicators of potential noncompliance from the Form 990 Highly reliant on referrals from outside sources 22 Form 990 T Unrelated Business Income Organizations reporting substantial gross UBI but reporting no income tax. 23 8

9 Prior to 2013 Expanded Young Adult Coverage Non Discrimination Rules Small Business Tax Credit Grandfathered Plans Defined OTC Medications excluded from HSA/FSA distribution Increased HSA Penalties to 20% Expanded W 2 Reporting MLR (Medical Loss Ratio) Payments 24 Small Employer Heath Insurance Premium Tax Credit. Small employers have less than 25 full time equivalent employees (FTEs) and have average wages per employee of less than $50,000. FTE s are all employees, full or part time, and their hours worked relative to the 30 hour/week benchmark. Employers must pay at least 50% of the qualifying employees health insurance costs. The credit is 25% of the qualified health insurance premiums 25 Small Employer Heath Insurance Premium Tax Credit. (cont.) HRAs, FSAs and HSAs do not qualify as premiums Qualified health insurance premiums are limited to the average premium for the small group market in which the health insurance coverage is offered Self insured plans may not qualify for purposes of the credit. Beginning in 2014, only plans purchased through the Small Business Health Options Program (SHOP) are eligible for the credit. 26 9

10 Grandfathered Health Care Plans A plan in existence on March 23, Benefits: Non Discrimination Exempt Cost sharing for preventive care and immunizations Revamped appeals process w/ external review Authorization or cost sharing for emergency services Authorization or referral for OB GYN services Requirements regarding primary care provider choices 27 Grandfathered Health Care Plans (cont.) 2014 protections Annual out of pocket maximums Deductible maximums of $2,000/$4,000 Required coverage of certain clinical trial expenses 28 Grandfathered Health Plans (cont.) Triggers to lose Grandfathered status Entering into a new policy Eliminating benefits to diagnose or treat a particular condition Increasing a percentage cost sharing requirement Increasing deductibles and out of pocket limits by more than medical inflation + 15% Increasing copayments by medical inflation + 15% OR $5 increased by medical inflation measured from March 23,

11 Grandfathered Health Plans (cont.) Triggers to lose Grandfathered status Decreasing the employer s contribution rate toward any tier of coverage for any class by more than 5% Imposing an overall limit that did not previously exist A self employed plan can change third party administrator without losing status 30 Expanded W2 Reporting Cost of health coverage must be included on Form W2, Box 12 code DD. Required for all coverage Major Medical Health FSA value plan in excess of employee contributions Hospital indemnity or specified illness paid pre tax Domestic partner coverage included in income. 31 Expanded W2 Reporting Not included in Cost Salary reduction contributions under a 125 HSA. Contributions to MSAs and HSAs Costs of coverage for military personnel provided by the government Excess reimbursement for highly compensated individuals or 2% shareholders of an S corporation 32 11

12 Summary of Benefits and Coverage Employers must provide employees with a standard Summary of Benefits and Coverage form explaining what their plan covers and what the plan costs Provisions FSA contributions limited to $2,500 Additional Medicare tax on individuals >$200,000 and joint filers >$250, % additional withholdings on excess earnings Employers are responsible for withholding the additional tax when their compensation exceeds $200,000. Excess withholdings will be applied towards the individuals overall tax liability Provisions Disallowed deduction for drug benefits provided to Medicare eligible retirees Patient Centered Outcomes Research Institute Fees due on major medical, HRAs, Health FSAs, dental and vision plans and EAPs. Excise tax reported on Form 720 by plan issuers and selfinsurers. Fee is $1 per insured life

13 2013 Provisions: Exchanges Exchanges open on October 1, 2013 to begin enrollment for Note: There are different marketplaces for Individuals and Small Businesses that work in tandem. Available to Employers with 50 or fewer FTEs Expands to employers with 100 or fewer FTEs in 2016 Coverage must be offered to all full time employees (> 30 hrs/week) Provisions: Exchanges Most states require at least 70% participation by employees Beginning no later than October 1, 2013, employers must inform their employees of the coverage options available to them through the Marketplace. Subsequent new employees must be informed at the time of their hire Tax Provisions Small Business Tax Credits increase to 50% of employer s contribution (35% for Tax Exempts) Tax Credit is only available for plans purchased through SHOP Workplace wellness programs rewards will increase from 20% to 30% of cost of health care. Reduction of tobacco use may be as much as 50% 38 13

14 2014 Tax Provisions (cont.) 90 Day Maximum waiting period goes into effect Transitional Reinsurance Program Fees Fees are paid by Insurers, including self insured employers, for each plan participant, into a pool to reimburse insurers who are participating in the marketplaces for potential high claim costs during the transition into the marketplace. Health and Human Services estimates the 2014 fee will be $5.25 per month per individual ($63/year for each plan participant.) Tax Provisions Employer Shared Responsibility Payment Originally set for 2014, but deferred until 2015 $2,000 per full time employee (above the first 30) for employers who do not offer insurance $3,000 per each non covered full time employee for employers who offer insurance, but who have at least one or more employees who receive a premium tax credit through the marketplace Tax Provisions (cont.) Information returns under IRC 6055 is for minimum essential coverage and includes information on the insured individuals, how long they were covered under the plan, whether the plan was purchased through an exchange and if any credits were issued to the individual from the exchange

15 2015 Tax Provisions (cont.) Information returns under IRC 6056 require employers to supply information regarding the specifics of the plans offered to full time employees, information on the employees, including those who were participants and how long they were participants in a given plan. This information was also to be provided to the plan providers for inclusion in their 6055 reports. Final Regulations are yet to be issued Tax Provisions (cont.) All employers and insurers are encouraged to voluntarily comply with the information reporting provisions in Real world testing of reporting systems and plan designs through voluntary compliance for 2014 will contribute to a smoother transition to full implementation in Tax Provisions (cont.) Limitations on out of pocket medical expense set to go into effect in 2014 have been delayed until

16 QUESTIONS? 45 5 Takeaway Questions 1. What were the three findings presented to Congress by the TIGTA? 2. What were the two primary causes of the changes to UBI in the Colleges and Universities study? 3. What two qualifications allow businesses to participate in the SHOP Marketplace? 4. What information is disclosed by employers under IRC 6056? 5. What year do the IRC 6055 and 6056 reporting requirements become mandatory? 46 Weaver provides the information in this presentation for general guidance only, and it does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information included herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax information is not intended to be used and cannot be used by any taxpayer for the purpose of avoiding accuracy related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose