Is Your Nonprofit Organization a Voluntary Health & Welfare Organization?

By Kimberly A. Robinson, CPA, Partner

What is a voluntary health and welfare organization?

    Voluntary health and welfare organizations (VHWO’s) are those not-for-profit organizations that derive their revenue primarily from voluntary contributions from the general public to be used for general or specific purposes connected with health, welfare, or community services. There are two separate parts to this definition: 
1.  the organization must derive its revenue from voluntary contributions from the general public (which does not include governmental entities), and
2.  the organization must be involved with health, welfare, or community services.

    Many organizations fit the second part of this definition, but receive a substantial portion of their revenues from sources other than public contributions. For example, an opera company would not be a VHWO even though it exists for the common good, since its primary source of income would be box office receipts.  Likewise, a community organization like the YMCA would be excluded because it normally receives most of its revenues from dues and program fees.  On the other hand, a museum would be excluded even if most of its revenue came from contributions, since its activities are essentially educational and not focused on the areas of health and welfare.

    Some additional examples of VHWO’s are: Salvation Army, Red Cross, Goodwill (local chapters), United Way, Boy Scouts, Girl Scouts, Boys & Girls Clubs, and nonprofit organizations whose purpose is to find cures for diseases or to assist people diagnosed with diseases such as cancer, diabetes, heart disease or muscular dystrophy.

How does this impact my organization?

    FASB ASC 958 differentiates between voluntary health and welfare entities and other nonprofit entities.  For example, only VHWO’s are required to present a statement of functional expenses as a basic financial statement.  Therefore, it is important to how your organization should be defined to know if this requirement applies to your financial statements.  But, as noted above, sometimes the distinction can be difficult to make.  If you are unsure, it is recommended to include a statement of functional expense as a basic financial statement.

Where can I find additional guidance?
    There is additional guidance available in a book titled Standards of Accounting and Financial Reporting for Voluntary Health and Welfare Organizations, Fourth Edition, 1998 (also known as the Black Book).  The Black Book’s objective is to attain uniform accounting and external financial reporting in compliance with GAAP by all voluntary health and welfare organizations.  The Black Book does not establish GAAP but rather explains existing authoritative literature and gives illustrations relevant to VHWO’s. 

    The Black Book expands on the definition and notes that voluntary contributions from the general public may include the following:
- Direct gifts from board members
- Private foundations
- Corporations
- Allocations of contributions that federated fund-raising organizations or affiliated organizations receive from the general public

    Finally, the Black Book states that an organization’s membership in, or affiliation with, the National Health Council, Inc., the National Human Services Assembly, or the United Way of America is usually an indicator that the organization should be identified as a VHWO.

Excess Benefit Transactions: Do You Have Any?

by Kimberly A. Robinson, CPA, Partner


What is an excess benefit transaction?
    This is a term used by the Internal Revenue Service (IRS) to describe a transaction between an applicable tax-exempt organization and individuals of authority in the tax-exempt organization where the organization pays more than they would in a regular arm’s length transaction. 
    To be more specific, the IRS names the individuals of authority in these cases as “disqualified persons.” They are defined as those persons who are in a position to exercise substantial influence over the affairs of a tax-exempt organization.  Individuals of authority could include voting members of the governing body, any individual who has the ultimate responsibility for implementing the decisions of the governing body, or any individual who supervises the management, administration, or operation of the tax-exempt organization.   In addition, the IRS definition extends to include the family members of the individuals of authority or any organizations in which individuals of authority (or their family members) have a major interest.  (These definitions can be found in the Code of Federal Regulation Title 26 Section 53.4958-3 and Title 26 Section 53.4958-4.)


How can our organization avoid excess benefit transactions?
    Your best bet to ensure that this type of transaction does not occur is to obtain at least 3 quotes prior to engaging in services provided by any disqualified person.  Defensive recordkeeping is truly an organization’s best friend and will assist you if a transaction is called into question by the IRS.

What will happen if an excess benefit transaction occurs?
    If the IRS determines that an excess benefit transaction has occurred, there are several potential consequences.  The IRS may require the disqualified person who received the benefit to repay the “excess” to the organization.  Your organization may also be required to file a corrected 990 and/or make a disclosure to your auditors for inclusion in the audited financial statements.  The goal of these IRS penalties is generally to punish those responsible for creating private inurement without punishing the organization as a whole.

Health Care Cost Reporting on Your Employees' W-2 Forms

by Tracy McLaughlin, CFE, Consulting Manager

    In a recent article, the Internal Revenue Service (IRS) provided new guidance on the information that employers are required to provide to employees relating to the health care costs that employers provide through group health care.

When will I be required to report this information on our W-2’s?
    The Patient Protection and Affordable Care Act, P.L. 111-148, requires employers to report the “aggregate reportable cost” of “applicable employer-sponsored coverage” under an employer-sponsored group health plan on Form W-2, Wage and Tax Statement. To give employers more time to update their payroll systems, the IRS made this requirement optional for all employers for 2011 Forms W-2 due in 2012 (Notice 2010-69). Moreover, the IRS has provided further relief for small employers filing fewer than 250 Forms W-2 by making the reporting requirement optional for them for 2012 Forms W-2 (Notice 2011-28). 
    So, if you issue 250 W-2’s or more, currently you will be required to include the additional health care cost information on the 2012 forms furnished in January 2013.  However, if you issue less than 250 forms, you will be required to include the additional information on the 2013 forms. 

What information needs to be included as part of the health care cost reporting?
    The aggregate reportable cost generally includes the portion of the cost paid by the employer and the portion paid by the employee.  Both portions should be included, regardless of whether the employee paid through pretax or after-tax contributions.  However, contribution amounts made to Archer MSAs and HSAs are excluded. 
    Salary reduction contributions to a health FSA are also generally excluded.  However, to the extent the amount of a health FSA exceeds the employee’s salary reduction contributions for the year, it is included in the aggregate reportable cost.

For the most current information: 
    While the information presented here discusses Notice 2011-28, be sure to review newer notices issued by the IRS online at www.irs.gov.

New Form 990 Released by IRS

The IRS recently posted its final version of the 2011 990 form, which is used by not-for-profit organizations.  Significant changes to this version of the 990 are outlined in the IRS instructions, available here: http://www.irs.gov/pub/irs-pdf/i990.pdf

A recent article published in the AICPA's Journal of Accountancy also summarized the significant changes on the form.  The article is available here: http://www.journalofaccountancy.com/Web/20125042.htm

Employer's Tax Guide for 2012

The IRS recently released their Employer's Tax Guide (Publication 15) for 2012.  It is available here: http://www.irs.gov/pub/irs-pdf/p15.pdf

Payroll Tax Cut Extention Includes Recapture Tax Provision for Higher Wage Earners

As you probably have heard, the reduced payroll tax rate was recently extended through February 2012.  (This continues the reduction of employees' Social Security tax withholding rate from 6.2% to 4.2% of wages paid through Feb. 29, 2012.)

However, the law also includes a "recapture" provision.  This new provision applies only to employees who receive more than the Social Security wage base for the two-month period.  Therefore, employees receiving more than $18,350 for January and February 2012 (calculated as two months of the 12-month amount of $110,100) will need to pay an additional amount equal to 2% of the wages received during the extension time.  This "recapture tax" will be considered an add-on to income tax liability for higher wage earners and will be due in 2013 when the employee files his/her 2012 income tax return.

Additional info on the tax cut and the recapture provision are discussed on the IRS website: http://www.irs.gov/newsroom/article/0,,id=251650,00.html

IRS Extends 990 Filing Deadlines

The IRS announced recently that they will be extending the January and February submission deadlines for tax-exempt organizations' annual returns until March 30, 2012.   (This extension applies to organizations with a fiscal year end of August 31st or September 30th.)  The extension applies to Forms 990, 990-EZ, 990-PF, or 1120-POL.  Form 990-N filers will not be affected. 

This extension was granted because the part of the online e-file system that processes returns for tax-exempt organizations will be off-line for those two months. (The rest of the e-file system will be operational during this time.)  

Organizations with 8/31 or 9/30 fiscal year ends will not need to apply to get the March 30th extension; however, in order to avoid receiving a late filing penalty notice, a statement outlining the reasonable cause should be attached to the tax return.   If your organization receives a late-filing penalty notice, you should contact the IRS so that the penalties can be abated. 

Further details are available here: http://www.irs.gov/pub/irs-drop/n-12-04.pdf