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Wednesday, October 6, 2010

Nonprofit Form 990 and Plan 403(b) Receive Makeovers


In 2009, nonprofits will need to look more closely at their Form 990 and 403(b) plans. And when they do, they will find plenty of people looking over their shoulder.

Form 990

The annual tax form is getting its first makeover in more than 20 years. Transparency is the new watchword. Donors to charitable organizations want more information about where their money goes, and so does the IRS.

Bruce Coblentz, tax partner at Armanino LLP, said the old forms were criticized for lack of detail: too much allowance for broad answers as well as the grouping of some income or expense items.

The revised forms, which become effective for the 2008 tax year, require more specificity. The information that nonprofits will need to marshal in preparing for tax season isn’t new, but the amount of detail to report about it will be.

More detail is requested, for instance, about other tax filings like 1099s, the sale of donated assets, and officer compensation.

And, there is a new section “Governance, Management and Disclosure” that includes questions nonprofits aren’t technically required to answer, but might want to do so anyway. Would the lack of answers increase the likelihood of an audit? Hard to say, and providing such information, if appropriate, may provide some level of audit protection.

Although the Internal Revenue Service has included questions not required for compliance, leaving the answers blank could raise the eyebrows of potential donors. Examples would be information such as the number of voting members and the number that are “independent”, the existence of an audit and compensation committee, a written conflict of interest policy, and other best practices inquiries not necessarily related to tax.

One of the suggested best practices is having a committee or governing board at the nonprofit review the 990 before it’s filed. And that suggestion is one of the two primary impacts that the new form will have on nonprofits, said Coblentz. Nonprofits will need more time upfront to understand the form and more time to help board members understand how to evaluate it.

“Although we have had many inquiries from clients regarding these issues, the changes aren’t on the radar screen of most nonprofits yet, but will be. People will start paying attention when we start asking for more detail,” Coblentz said.

Compensation Requirement

As part of the completion of the 990, you are required to list the compensation for the Executive Director and all key employees of the organization that have significant financial or organizational control. Listing the compensation is not a new requirement to the 990. But what is new is you are now instructed to describe the process of determining compensation and to indicate if the compensation included a review and approval by independent persons, comparability data and contemporaneous substantiation of the deliberation and decision. While this is technically an optional disclosure, best practices may make it prudent to complete the section so your organization discloses the information which the IRS is paying attention to and donors alike are concerned with.

From Armanino's experience, many nonprofits either lack the proper documentation to meet IRS minimum standards or do not fulfill the process requirements with enough detail to complete the 990 accurately. Armanino can help your organization properly document and determine comparability data. AM Search, Armanino’s search and permanent placement service line, has put together a compensation study with a comparison and analysis of the nonprofit executives with comparable data from both the nonprofit and the for-profit sector. This report is designed to support the IRS reasonableness test and the Rebuttable Presumption requirements which will be a part of your back up for describing the process.

To review the entire IRS announcement, visit the IRS' website.

403 (b) Plans

On the employee benefit plan side, November of 2007 saw the Department of Labor issue amended regulations eliminating an exemption granted to 403(b) plans from the annual Form 5500 reporting, disclosure and audit requirements under Part 1 of Subtitle B of title 1 of ERISA. As a result, ERISA-covered 403(b) benefit plans will now be subject to the same Form 5500 reporting and audit requirements that currently exist for section 401(k) plans, effective with their 2009 filings.

"Plans that meet the new requirements will be required to engage an independent audit firm to audit their 403(b) plan", said Paul O’Grady, an audit partner at Armanino LLP.

Tax exempt organizations may encounter certain challenges dealing with these requirements. Items of importance include ensuring that accurate historical plan financial information and participant records are accumulated and maintained. Administration of the plan in accordance with the provisions of the plan document will also be a key factor to ensure audits run smoothly. Plan sponsors should consider engaging a third party consultant with expertise in 403(b) plan design to assist with the evaluation of their 403(b) plans as they prepare for the new ERISA reporting and disclosure requirements.

As ERISA contains specific reporting and disclosure requirements, including a comparative statement of net assets, plan sponsors should consider contacting their plan administrators sooner rather than later to discuss the logistical issues that the new audit requirement may present to tax exempt organizations that sponsor such plans. Additionally, the accumulation of plan financial information and participant records is something that should be done proactively rather than reactively by plan sponsors. Making a call now to the plan's Third Party Administrator ("TPA") to determine how information to satisfy the new audit requirements can be efficiently and effectively accumulated makes a lot of sense.

"It is critical that sponsors of such plans begin planning for these audits now to address any challenges that the new audit requirements will present,” O’Grady said.

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