Uniform Cost Accounting Standards

The Office of Policy and Management (OPM) has issued a draft of the Uniform Cost Accounting Standards which must be used by all State agencies in determining the costs of work performed by organizations under State awards.  The proposed effective date of these standards is January 1, 2007. Under these standards, the costs of employee bonuses are unallowable; however employee incentive compensation costs are allowable.  OPM defines incentive compensation as compensation paid to employees based on established written organizational policies (e.g., cost reduction, efficient performance, suggestion awards, safety awards). Overall the employees’ compensation must be reasonable and such costs are paid or accrued pursuant to an agreement entered into in good faith between the organization and the employees before the services were rendered.  Under the policy, criteria for awarding incentives must be specific, objective and measurable, and related specifically to the organization’s objectives and goals.

 Government Encourages Automatic Enrollment in 401(k) Plans

On August 17, 2006, President Bush signed into law the Pension Protection Act of 2006.  The 900-page reform promises to strengthen pension plan funding and increase workers’ retirement savings.  The new legislation will mostly affect 401(k) plans by encouraging employers to automatically enroll their workers and to automatically increase worker contribution levels each year. 

Currently less than 70% of workers have a 401(k) and this new Act will help employees at all income levels save for retirement. By automatically enrolling eligible employees, participation rates are expected to top 90%.  It should be noted that those employees who do not wish to be enrolled in a 401(k) plan should inform their employer.  No action needs to be taken otherwise. 

Low-income workers are the least likely to save; however automatic enrollment will ensure they are able to save for the future. 

Automatic enrollment also benefits employees at higher income levels as well by raising contribution levels. The reason for this is workers making more than $95,000 are limited in the amount they are allowed to contribute to a 401(k) by the average contribution rate of other employees. With automatic enrollment, average contribution levels will rise, thus allowing high-income employees to contribute more to their plan.

The new law permanently sets the contribution level on 401(k) plans at $15,000 and will increase based on cost of living adjustments.  In addition to the federal contribution level, those employees over fifty will be allowed to contribute an extra $5,000.

The new guidelines allow employers to set default contribution levels for new employees of at least 3 percent of compensation and allow for an automatic escalation of a percentage point per year up to a minimum 6 percent by the fourth year of participation. Companies who choose to do so will be required to match these contributions at a rate of at least 2 percent, but not exceeding 3.5 percent annually. They must also provide full vesting within two years. 

There are now limits to how long an employer may require you to keep your money in company stock.  Employees will now be able to sell their stock after no less than three years of service. If you have company stock prior to this new law and have given at least three years of service, then you will be allowed to sell one-third of your stock the first year this bill goes into effect, another third in the second year, and then the final stock the year after that.  However, any stock that you invest in after the new law goes into effect, provided you have worked there at least three years, may be sold at any time.

In addition to encouraging companies to automatically enroll employees in 401(k) plans, the Pension Protection Act of 2006 also opens the door to investment advice.  Employees will now be able to receive individualized advice on how to invest their plan contributions.

 HSA: An Alternative to Traditional Health Insurance

Health Savings Accounts (HSA) have been growing in popularity as an alternative to traditional health insurance since their start in December 2003. They are exactly what they sound like: a savings account into which you deposit money on a tax-free basis that is then used to pay for your medical expenses. The Health Savings Account itself is free of charge.

In order to qualify for an HSA, you must first purchase a High Deductible Health Plan (HDHP) which is simply an inexpensive plan that covers your medical bills should they exceed the amount you have available in your HSA. The way HDHPs work is that in general they do not cover the first several thousand dollars of health care expenses (similar to a “deductible”) but will generally cover you after that.  This is why you should also have a Health Savings Account with money available to help cover the cost that the HDHP does not. 

You can sign up for a Health Savings Account with banks, credit unions, insurance companies and other approved companies; however not all of them offer HSAs. It is also possible that your employer may set up a plan for employees.

One of the great advantages of having an HSA is that the funds in your account are treated similar to IRAs.  The funds available remain in your account and are automatically rolled over from year to year and job to job so you never have to worry about losing your money.  The funds will remain in your account indefinitely until used.  There is no time limit. 

Once you reach the age of 65, you can use your account for things other than medical expenses without paying a penalty. The money withdrawn will be taxable as income if not used for medical expenses.  Once you enroll in Medicare, the account may be used tax-free for Medicare deductibles, copays, premiums, and coinsurance under any part of Medicare; however beginning the first of the month that you are enrolled in Medicare, you are no longer allowed to contribute to your HSA.

Those individuals under the age of 65 who choose to use their HSA for other than qualified medical expenses must pay income tax and also will incur a 10% penalty on the amount withdrawn.

For more information about the rules and regulations of Health Savings Plans, please contact your Anquillare, Ruocco, Traester and Company representative.

 Charitable Giving Incentives and Reform

As part of the Pension Protection Act, signed by President Bush on August 17, the bill contains a charitable giving incentives package as well as a charitable reform package.

The charitable giving incentives package is designed to encourage charitable donations and will be effective for two years until 2007.  The package includes tax-free distributions of up to $100,000 from a traditional IRA, or a Roth IRA, as long as the contribution is made to a tax-exempt organization to which deductible contributions can be made.

There will be a charitable deduction for contributions of book inventory to public schools.  A charitable deduction for contributions of food inventory for all trades and businesses is also part of the provision.

For qualified conservation contributions, the provision raises the charitable deduction limit from 30 percent of adjusted gross income to 50 percent of adjusted gross income, provided that such contributions do not prevent the land from being used for farming or ranching.  For those qualified farmers and ranchers, the charitable deduction limit has been raised to 100 percent of adjusted gross income.

Under current law, rent, royalty, annuity, and interest income paid to a tax-exempt organization by a controlled taxable subsidiary is generally treated as unrelated business income, which is taxable to the tax-exempt parent organization.  Under the charitable giving incentives provision, payments received by certain exempt parents from taxable controlled subsidiaries will no longer be treated as unrelated business taxable income.

The Pension Protection Act of 2006 also contains a charitable reform package which is designed to better regulate tax-exempt organizations. Some of the provisions included in the charitable reform package are:

• There will be no deduction allowed for clothing and household items unless they are in good, usable condition or better.
• If a donor makes a charitable contribution of money, the donor must keep his own record of the transaction in the form of a cancelled check, bank record, or receipt from the donee including the organization’s name, date of the contribution, and the amount of the contribution.
• An amendment of the definition of “gross investment income” to include capital gains, annuities, and other substantially similar investment income.
• Doubles the amount of excise taxes applicable to certain activities by charities, social welfare organizations, private foundations, and exempt organization managers.

For a complete detailed summary of the charitable giving incentives package and the charitable reform package, please visit www.irs.com or contact your Anquillare, Ruocco, Traester and Company representative.