New Incentives and Reporting Requirements for Tax-exempt Organizations

March 30, 2011

Two new developments have been released posing new benefits and risks to tax-exempt organizations. Some tax-exempt 501(c)(3) organizations may be missing billions of dollars in tax incentives, while new reporting requirements may be burdensome.

New Tax Incentives

The retention credit offered under the Hiring Incentives to Restore Employment (HIRE) Act allows employers to claim an income tax credit for new hires retained for more than one year. It is available for the lesser of $1,000 or 6.2% of wages paid. The credit can only be claimed against unrelated trade or business income (UBIT) only for the employees of the entity engaged in that business. The HIRE Act provides a retroactive payroll tax exemption for the employer’s 6.2% share of Social Security tax paid for qualified hires who were unemployed for at least 60 days between Feb. 3, 2010, and Jan. 1, 2011. One example is that a tax-exempt hospital hired 1,500 employees in 2010, then could see almost $500,000 total value from the payroll tax exemption.

In addition, economic development agencies are looking for a way to partner with tax-exempt hospitals and universities on infrastructure projects that benefit the community – like roadways providing access to new buildings. Also, government agencies are providing advantageous grants, abatements, credits, property tax exemptions, and tax exempt financing.

New 403(b) Plan Reporting Requirements

Beginning with the 2009 plan year, the Department of Labor (DOL) is requiring section 501(c)(3) tax-exempt employers who provide 403(b) retirement plans for employees to include audited financial statements with their forms 5500. The issue concerning employers is about establishing an opening asset balance on the audited financial statements for existing 403(b) plans that may not accurately reflect the value of plan assets.

Prior to FY 2009, DOL had exempted 403(b) plans from ERISA plan audit requirement. Therefore, such plans have generally not received a statement of net assets at the plan level that was prepared in accordance with GAAP requirements. Instead, such 403(b) plans were generally treated more as individual retirement arrangements than consolidated plans – especially critical for 501(c)(3) hospitals and universities that not only have to track of 403(b) contributions, but also section 415 contribution limits for employees who have section 401(a) plans associated with consulting or medical practices. Pension professionals and actuaries are requesting that DOL issue regulatory guidance on reasonable alternatives to the GAAP reporting requirements, citing potential difficulties in the preparation of audited opinions.

McGuireWoods LLP Nonprofit and Tax-Exempt Organizations Group

The lawyers in our nonprofit and tax-exempt organizations group provide advice and guidance on a variety of legal issues to enable charities and other nonprofits to operate more efficiently and effectively in the increasingly complicated, regulated, and competitive environment.

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Our employee benefits lawyers provide comprehensive services to a wide range of clients, including publicly held companies, small and large privately held companies, tax-exempt organizations and educational institutions.