Preparing for the Government’s Impact on Flexible Spending Accounts

Many churches and charities provide flexible spending accounts (FSAs). Using an FSA is often good stewardship. The new health care reform law requires certain changes to FSAs:

• In 2011, employees will no longer be able to receive pre-tax reimbursements from their FSA for non-prescribed over-the-counter medications. Thus, the cost of over-the-counter medicine (other than insulin or doctor prescribed medicine) cannot be reimbursed on a tax-free basis through an FSA. FSA plans should be modified to exclude these reimbursements.
  
• In 2013, employee contributions to FSAs will be capped at $2,500 annually, with the cap adjusted annually to the Consumer Price Index. FSA plans should be modified in accordance with the new cap, plus annual adjustments.

Planning opportunity: Most charities do not have a properly established plan to reimburse out-of-pocket medical expenses. Even though FSAs will be capped at $2,500 annually in 2013, the benefit of offering an FSA to all staff members on a salary reduction basis is significant. For example, a staff member with marginal (the tax rate on his or her last dollars of income) state and federal tax rates, including social security, of 40% could save $1,000 if they have $2,500 of out-of-pocket medical expenses that are covered by an FSA.

Like someone once said: “You save $1,000 here and another $1,000 there and after a while you are talking about some real money.”

The Government’s Vanishing Charitable Deduction?

Several states are considering capping charitable deductions—New York is the latest. The Administration proposed capping charitable deductions (and other itemized deductions) to fund health care proposals and has stated an intention to include such a proposal in the 2011 budget.

A bipartisan proposal introduced by Senators Wyden (D-OR) and Gregg (R-NH) bears watching. Under their tax reform bill (S. 3018), standard deductions would soar: $30,000 for those married filing jointly, $15,000 for singles and $22,500 for heads of households. Such a change would effectively eliminate the charitable deduction (and other itemized deductions) for most taxpayers other than high-income individuals.

And, the chorus of those opposed to the charitable deductions is also rising. Just one example is found in Edward Kleinbard’s blog.

What does the future hold for the charitable deduction? While it is unclear, it appears there will be increasing pressure to reduce the value of the deduction or eliminate it all together.

Churches and other Christ-centered nonprofits have always relied on committed givers. The commitment level may be raised in the future—giving without respect to a tax deduction.

In searching the Scriptures, I find no requirement to obtain a tax deduction before we give. No, giving is a spiritual issue of the heart. It is an act of obedient worship.

Fraud … and Lessons in the Lack of Accountability

The August 16, 2010 edition of The Wall Street Journal featured two poignant articles on fraud. While the examples in the articles are from the for-profit world, this is a teachable moment on accountability for the Christian nonprofit arena as well.

There were other issues than money involved in the departure of Mark Hurd as Hewlett-Packard’s CEO. But apparently, it was something as simple as inaccurate expense reporting that tripped him up.

In another story, the founder of Courette Building Systems, Salem, VA, tells how he placed one employee in charge of both receipts and disbursements. Among other fraudulent acts, the employee pocketed over $300,000 he was supposed to send to the IRS to cover payroll taxes.

At Interactive Solutions, Memphis, TN, the founder and CEO took some occasional days off while mourning the death of his brother. His bookkeeper had been referred by an attorney and someone that had sung with her in the church choir. After reading an article about fraud, something clicked with the CEO and he said to himself, “That could happen to me.” He began looking and quickly discovered thefts in the form of bogus bonuses and commissions by the dozens.

In both instances, the guilty parties are serving time in prison but the losses were mostly unrecovered and the fraud nearly devastated the two organizations.

According to the Association of Certified Fraud Examiners, 31 percent of all business frauds nationally were within companies of fewer than 100 employees. Only 21 percent were committed in companies with over 10,000 employees. So most fraud happens in small organizations. It can happen to you!

While it is not practical to illuminate all fraud, it is possible to minimize the risk of fraud. See http://www.ecfa.org/Fraud.aspx.

The challenge is to respond but not over-react when fraud is discovered. Determine where your organization is most at risk and investigate those risks. Modify procedures to reduce risks. But the mission of the nonprofit must go on—and your nonprofit organization can be stronger because of the painful fraud that you experienced.

Your mission is still the main thing. Don’t take your eye off the ball.

Preparing for the Impact of the Government’s Health Care Reform

No matter what you think about health care reform, one expectation is clear: health insurance costs are going up soon. Based on a recent Mercer study, employers expect health insurance costs to jump as early as the 2011 plan year. [1]

The Mercer study also revealed health care reform provisions that concern employers the most. Here are a couple of the areas of concern:

• Dependent care coverage. Beginning September 23, 2010, all organizations must extend dependent coverage to all dependent children—even married ones—up to, and including, age 26. Most employers will need to change their dependent eligibility rules to comply with the reform law.

• Providing coverage to more part-time workers. The reform law will require employers to offer “affordable” health care coverage to all employees who average 30 hours per week or more in a month—starting in 2014. This provision will especially impact organizations that heavily rely on part-time labor at the 30 or more hours a week level.

Making appropriate plans to meet the health care reform laws are very important (adherence to laws is required by ECFA’s Standard 4) but it will not be easy. The temptation will be to simply offset increased health insurance by decreasing benefits to staff. But should staff shoulder the burden of increased health care cost? The issue is more complex.

Most surveys of workers show that benefits are second in importance only to job security. The importance of compensation usually ranks last or nearly so.

So, if benefits are so important, why do employers considering cutting benefits as one of the first cost-saving options? As long as employer-provided health insurance is tax-free, why not maximize the tax-free benefit and make other adjustments to balance the budget!

Consider offsetting the coming increases in health care costs with employee engagement, motivation and efficiency. Even after making recession-related adjustments, most organizations have many ways to increase efficiencies and reduce costs by focusing on issues that are really important.

[1] http://www.mercer.com/summary.htm?idContent=1380755

Billionaires Pledge to Give—But to Whom?

Bill Gates and Warren Buffet are lining up the billionaires to give to charity. The gifts will be significant—and undoubtedly will help humankind.

But which charities will receive these new-found billions of gifts? Christ-centered charities? Most of the gifts will go to education, the arts, and so on. While some of the new giving will find its way to the Christ-centered word, it will remain the responsibility of believers to give generously to causes to fulfill the Great Commission.

In Bob Buford’s last newsletter, he shares good news about giving. His encouragement is “mirrored by Pamela Hawley, a bright young person who is Founder and CEO of Universal Giving, who said, ‘I can see the fear if I want to. And yet, I am resolutely encouraged.

'Giving is being pushed down. It is no longer about the 50-year old who has it made and wants to give back. Giving is taking place at the age of 10. College students are using their spring vacation to build homes. Media stations are using their news stations to get people involved.

'Good people, good things, good partnerships are transpiring. Find them, see them, stoke them, cherish them. And goodness will begin to explode across the world in the most wonderful way. It already is.’”

Credibility

It generally takes years for a church or a nonprofit organization to gain significant credibility.

(A linchpin in obtaining credibility is accountability—that is where ECFA comes in.)

And yet credibility can be lost or seriously impaired in a very short period of time.

Credibility should be carefully guarded. But even when we are protecting our credibility, it is possible for others to inappropriately borrow it.

In recent weeks, ECFA’s credibility has been borrowed by an individual who alleges to have residential real estate for rent and offers it on a popular website. The imposter purports to be a volunteer for ECFA in Africa.

The problem? This person has no real estate to rent. And, ECFA does not have any volunteers in Africa.

Sadly, we have received reports that individuals have actually transferred funds to this scam artist.

While we have reported this matter to law enforcement authorities, there is little ECFA can do to prevent people from improperly borrowing our credibility.

What is the lesson? Credibility…challenging to obtain…important to maintain…easily lost…easily borrowed.

Always remember credibility’s place in the chain: accountability leads to greater credibility….which leads to more resources for ministry….which enhances our ultimate goal of fulfilling the Great Commission.

White-Water

Kayaks are designed for various purposes—some for light touring or day-tripping on lakes and gentle rivers, sometimes known as flat-water. They are for folks who want to take in beautiful scenery.

Other kinds of kayaks are designed for white-water—those fast moving streams littered with rocks and whirlpools and ledges. White-water kayakers don’t get to chat or rhapsodize about the scenery or shoot pictures of wildlife. They’re too busy figuring out how to remain right side up.

Some churches and other Christ-centered nonprofits are designed for flat-water. Yes, they are open to certain changes and innovations, but these are done at a pace where adjustments may reasonably be made.

In a flat-water environment, revenue and expenses moderately increase each year. Givers consistently and faithfully provide support.

Today, churches and other Christ-centered organizations are in a white-water world. The U.S. recession continues to linger. The U.S. federal government debt load of more than $13 trillion is staggering (http://www.usdebtclock.org/). Our federal government is spending at the rate of $3.6 trillion per year when the revenue is only $2.2 trillion per year.

California, New York and other states show similar signs of debt overload that recently took Greece to the brink—budgets that will not balance and accounting that masks debt.

Harvard professor and financial historian, Niall Ferguson, recently stated that the U.S. is “on the edge of chaos” suggesting that there is an increasing prospect of the American “empire” to collapse suddenly due to the country’s rising debt.

The co-chairmen of the Administration’s debt and deficit commission offered an ominous assessment of the nation’s fiscal future, calling current budgetary trends a cancer “that will destroy the country from within” unless checked by tough action in Washington.

There are increasing challenges to religious freedom: a court case that challenges the housing allowance for many ministers is moving forward and the failure to balance budgets will significantly impact nonprofits and givers who support them in the next few years.

Yes, white-water times are here to stay. Leadership designed for flat water no longer works.

What should we do in white-water times? It’s time to think like Jesus (I borrow George Barna’s wonderful book title). What would Jesus do if He were in our shoes right now? Surely he would tell us to:

• Be prepared. Anticipate white-water times; be prepared for events to turn against you.
• Avoid panic. Continue to do what is right, wise, and consistent with biblical principles.
• Encourage one another. Reaffirm truths. Thank God for His promises.
• Anticipate His coming. Look forward to the day history will be cleansed by the return of the King of Kings.
• Be not afraid. Live not in fear but in confidence in a sovereign God.
• Be absolutely integral and noble in carrying out your call.

And, above all, I believe Jesus would tell us to be steadfast in our focus on the Great Commission. As my friend, Dr. Walt Russell, says: “As in every era of history, we as God’s people have been given a very specific historical task to accomplish. Our historical task is appropriate for the ‘last days’ and the culmination of the ‘fullness of time’ under Jesus the Messiah. Commissioned by King Jesus and implemented by the Apostles in the Book of Acts, our present priority of the Church’s mission is the rapid advancement of the worldwide harvest and the ongoing preservation and ripening of its fruit through the planting of vibrant local churches among every people group.”

Inspired by an article of the same title written by Gordon MacDonald.

Understanding the Government’s Crackdown on Form 990-N Filers

Much has been written about the government’s crackdown on small charities. Websites are replete with information about the Form 990-N filing requirement for nonprofits with gross receipts of $25,000 or less.

Sadly, much of the reporting has been less than accurate—and that is being very polite. Here are a few examples that are reflected on the Internet today by four different highly respected organizations:

• “Most faith-based organizations are not required to file Form 990.” Highly confusing. This statement would be true only if churches are included in the definition of “faith-based organizations.” When the term “faith-based organizations” is used, the reference is usually to parachurch organizations exclusive of churches.
• “What organizations are exempt from filing Form 990? Faith-based organizations.” False—same reason as above.
• “Certain organizations are not required to file Form 990. This includes religious organizations.” False. There is no general exemption from filing Form 990 for religious organizations.
  
• “Charitable organizations other than churches that do not file a tax return with the IRS for three consecutive years now automatically lose their exempt status.” Close, but not quite. This is almost true but not quite. There are charitable other than churches that are not subject to this requirement, i.e, religious orders and integrated auxiliaries of churches.
  

So, it is no wonder there is confusion about how to comply with the law concerning Form 990-N. ECFA requires its members to comply with the law (Standard 4), but since ECFA members must annually have $$50,000 or more of gross receipts, the Form 990-N does not directly apply to ECFA members. However, some of our members provide assistance to other ministries which have $25,000 or less of annual gross receipts. Thus, this is an important issue for those member organizations.

Here are the short-strokes on this issue:

• Certain small (gross receipts of $25,000 or less during tax years beginning in 2007, 2008, and 2009) tax-exempt organizations that fail to satisfy annual filing requirements for three consecutive years are at risk of losing their tax-exempt status if they have not filed for 2007, 2008 and 2009.
  
• The “drop-dead” deadline initially set for May 17, 2010 has been delayed until October 15, 2010
  
• The latest announcement from the IRS is reflected on their website: http://www.irs.gov/charities/article/0,,id=225705,00.html
• Certain religious organizations are exempt from filing Forms 990, 990-EZ and 990-N. As described in the instructions for Form 990 (http://www.irs.gov/pub/irs-pdf/i990.pdf), those exempted from the filing requirement are:
  
• A church, an interchurch organization of local units of a church, a convention or association of churches, or an integrated auxiliary of a church as described in Regulations section 1.6033-2(h) (such as a men’s or women’s organization, religious school, mission society, or youth group).
  
• A church-affiliated organization that is exclusively engaged in managing funds or maintaining retirement programs and is described in Rev. Proc. 96-10, 1996-1 C.B. 577.
  
• A school below college level affiliated with a church or operated by a religious order described in Regulations section 1.6033-2(g)(1)(vii).
  
• A mission society sponsored by, or affiliated with, one or more churches or church denominations, if more than half of the society’s activities are conducted in, or directed at, persons in foreign countries.
  
• An exclusively religious activity of any religious order described in Rev. Proc. 91-20, 1991-1 C.B. 524.
• An entity under a group exemption. If you represent such an entity, it is wise to confirm your organization is listed on the annual Form 990 or other filing made by the organization representing the group. Otherwise, the filing of the Form 990-N may be appropriate.
  

Final thoughts. Some organizations that believe they are exempt from the Form 990-N filing requirement are really subject to the filing of Form 990-N. Conversely, some who think they are subject to the filing are really exempt. How do you know whether your organization is subject to the filing or exempt from it? Consult your tax advisor.