GASB No. 101 Compensated Absences

GASB No. 101, also known as Compensated Absences, is a standard issued by the Governmental Accounting Standards Board (GASB) that addresses the accounting and financial reporting of employee compensated absences in the public sector. The Standard provides guidance on how governmental entities should recognize, measure, and disclose obligations related to compensated absences, such as vacation leave, sick leave, and other similar benefits. GASB No. 101 requires governmental entities to report these obligations in their financial statements and disclose relevant information to ensure transparency and accountability.

To further enhance your understanding and implementation of GASB No. 101 Compensated Absences, we have prepared this presentation that overviews the Standard. If you have questions, we encourage you to contact our team of professionals at Yeo & Yeo. Our knowledgeable professionals are well-versed in governmental accounting standards and can help with any questions or concerns regarding GASB compliance. Whether you need assistance identifying and measuring compensated absences liabilities, ensuring proper disclosures, or conducting a thorough audit, we are here to help.

Mike Rolka was a co-contributor of this article and presentation.

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For many people, summertime is moving time. With kids out of school and the weather relatively amenable in most regions, it’s the ideal time for those changing jobs or work locations to load up their stuff and head off to a new chapter of life.

If your organization, like many, has expanded its hiring reach to job candidates well outside your immediate area, you might consider reimbursing new hires for moving expenses or existing employees for relocation costs. Maybe you even want to do both. Although this can certainly be an enticing fringe benefit, the applicable tax rules have changed quite a bit in recent years.

TCJA changes

Signed into law in 2017, the Tax Cuts and Jobs Act (TCJA) suspended:

The moving expense deduction for individuals, and
The exclusion from income (tax-free treatment) for employer reimbursements for moving expenses.

The suspension period applies to taxable years beginning after 2017 and before 2026. During this period, only members of the Armed Forces on active duty who move pursuant to a military order and incident to a permanent change of station can still qualify for the deduction and the exclusion for employer reimbursements.

What employers should know

Loss of the long-standing tax breaks for moving does affect employees, but it doesn’t mean employers can’t continue paying for employees’ moving expenses. In most cases, those expenses should continue to be fully deductible by employers. Loss of the exclusion at the employee level, however, makes employer reimbursements for moving costs more expensive for your organization.

Before the TCJA, qualified moving expenses reimbursed or paid by an employer weren’t subject to federal income tax or Social Security and Medicare taxes if paid under the accountable plan rules. Under those rules, an expense reimbursement was exempt from the taxes in question if:

The expense had a business connection,
The employee adequately accounted for the expense within a reasonable time, and
Any excess reimbursement was timely returned.

Thereby, tax-free moving expense reimbursements weren’t subject to the employer or employee portion of Social Security and Medicare taxes before the TCJA.

But, during the TCJA suspension period (through 2025), both the employer and employee portions of the Social Security and Medicare taxes apply to moving expense reimbursements because they’re treated as additional taxable wages. Federal income tax withholding also applies.

Higher costs but …

If your organization decides to continue reimbursing moving expenses, its total cost could be higher than in pre-TCJA years because of the employer’s share of Social Security and Medicare taxes. However, reimbursements aren’t limited by the previous rules that applied to moving expense reimbursements before passage of the TCJA.

So, you now have more flexibility to define reimbursable moving expenses and can relax — or even eliminate — substantiation requirements. You may simply provide payments for unsubstantiated moving expenses as a taxable employee benefit or as part of a taxable signing bonus.

Forgoing substantiation altogether does simplify administration. But, without substantiation, you can’t confirm that employees are using the payments entirely for moving expenses. You might be giving them an unnecessarily large amount.

A tricky decision

In many industries, competition for highly skilled employees is tough. Offering reimbursement for moving costs could give you an edge in hiring and retention. However, you’ll need to weigh the potential benefits against the higher cost, all the while bearing in mind that the old rules could return in 2026. Our firm can provide further information and help you make the right decision.

For many people, the disposition of a family home is an emotionally charged estate planning issue. And emotions may run even higher with vacation homes, which often evoke even fonder memories. So, it’s important to address your vacation home carefully in your estate plan.

Keeping the peace

Before you do anything, talk with your loved ones about the vacation home. Simply dividing the home equally among your children or other family members may be an invitation to conflict and hurt feelings. Some may care more about keeping the home in the family than about any financial benefits it might provide. Others may prefer to sell the home and use the proceeds for other needs.

One solution is to leave the vacation home to the family members who want it and leave other assets to those who don’t. Alternatively, you can develop a buyout plan that establishes the terms under which family members who want to keep the home can buy the interests of those who want to sell. The plan should establish a reasonable price and payment terms, which might include payment in installments over several years.

You also may want to create a usage schedule for nonowners whom you wish to continue enjoying the vacation home. And to help alleviate the costs of keeping the vacation home in the family, consider setting aside assets that will generate income to pay for maintenance, repairs, property taxes and other expenses.

Transferring the home

After determining who will receive your vacation home, there are several traditional estate planning tools you can use to transfer it in a tax-efficient manner. It may make sense to transfer interests in the home to your children or other family members now, using tax-free gifts.

But if you’re not yet ready to give up ownership, consider a qualified personal residence trust (QPRT). With a QPRT, you transfer a qualifying vacation home to an irrevocable trust, retaining the right to occupy the home during the trust term. At the end of the term, the home is transferred to your beneficiaries, though it’s possible to continue occupying the home by paying them fair market rent. The transfer is a taxable gift of your beneficiaries’ remainder interest, which is only a fraction of the home’s current fair market value.

You must survive the trust term, and the vacation home must qualify as a “personal residence,” which means, among other things, that you use it for the greater of 14 days per year or more than 10% of the total number of days it’s rented out.

Discussing your intentions

These are only a few of the issues that may be involved in passing on a vacation home. Estate planning for a vacation home may be complicated but it doesn’t have to be. The key is to sit down with your family to discuss the options. Only then can you put together a plan that meets everyone’s needs. Contact us with questions about the most tax-efficient way to proceed.

Manufacturers must comply with all relevant tax laws to avoid dire consequences. While the most attention is generally directed toward federal income and payroll taxes, there’s another potential aspect to consider: state sales tax.

The good news is that manufacturers may be able to take advantage of various sales tax exemptions. For example, many states offer exemptions for items used in the manufacturing process, such as machinery, equipment and supplies. The result? Tax savings for your manufacturing company.

Definition of “manufacturing” counts

How does your company’s home state define the term “manufacturing”? More often than you might think, the state’s interpretation differs from a traditional view. Notably, some states include nontraditional processes in their definition of “manufacturing” for exemption purposes while others may allow some leeway in the determination of when manufacturing “begins” and when it “ends.”

Your tax advisor can provide insights into the regulations affecting exemptions in your state. While the details can vary state-to-state, here are four “out-of-the-norm” situations where a manufacturing exemption may be available.

In Florida, a printer may be labeled as an eligible manufacturing business.
In Texas, a restaurant, a bakery in a grocery store and even a caterer may qualify for a manufacturing exemption on equipment purchases.
In Maine, tax regulations include certain biological processes in their definition of “production” for purposes of the state’s sales tax exemption.
In Kentucky, the state has authorized an exemption for electricity used or consumed in the commercial mining of cryptocurrency.

The lesson here is to not be so quick to dismiss the possibility of a manufacturing sales tax exemption for your company.

Determining what falls under an exemption

On the other side of the coin, some items used by manufacturers, or parts of items, may not qualify for an exemption if they fail to meet state law requirements. Generally, the determination boils down to either one of two applications:

Machinery and equipment that’s “necessary and integral” to the manufacturing process, or
Machinery and equipment that’s used directly in making a change to the physical product.

The outcome isn’t always clear at the outset. Here are a few areas that often come under scrutiny:

Production supplies. The exemption for production supplies generally is a broad one. Note, however, that a smattering of states, including California, don’t have one. In some states exemptions are available only for production supplies that come in direct contact with the manufactured product, while others provide exemptions for supplies exhausted in the manufacturing process. In still other states, the supplies must be necessary and integral to the manufacturing process. For states in the middle ground, the exemption may require the production supplies to come in direct contact with the manufactured product.

Storage and handling. Generally, the storage of raw materials or finished products is treated as a taxable part of the manufacturing process. Some states allow an exemption for storage racks if they’re used during the manufacturing process. In addition, machinery used in handling items for storage may qualify for an exemption.

Safety apparel. Absent a specific exemption allowed by the state, safety apparel worn by employees is subject to tax. Nevertheless, certain states offer an exemption, including North Carolina, where the apparel is exempt if it protects the product, but not the employee. Other states, including Georgia, allow an exemption where safety apparel is necessary and integral to the manufacturing process.

Maintenance and repairs. Manufacturers frequently have to make repairs or perform upkeep on machinery, equipment or supplies. Many states offer exemptions for repair parts. But they’re not automatic. In some cases, maintenance equipment and supplies may be taxable in your state, depending on the wording of the applicable exemption.

Janitorial supplies. Generally, janitorial supplies used to clean the administrative offices of a manufacturing plant are taxable and aren’t eligible for an exemption. However, supplies used to clean the manufacturing machinery, or areas close to manufacturing operations, may qualify for an exemption in certain states. For instance, a manufacturer can claim an exemption in South Carolina for supplies used to clean a manufacturing machine if the cleaning is integral and necessary to the manufacturing process as part of a continuous activity.

Seek expert help

Many variables exist in determining whether a manufacturer can take advantage of sales tax exemptions. To better ensure you’re not missing a tax-saving opportunity, please contact us.

President Biden has signed into law the new debt ceiling agreement that he reached with U.S. House of Representatives Speaker Kevin McCarthy (R-CA). The Fiscal Responsibility Act (FRA) suspends — as opposed to raising — the debt ceiling until 2025, after the next presidential election.

The FRA also makes a variety of changes related to domestic spending, although it falls far short of the cuts included in the Republican bill that the House passed in April 2023, with no changes to the GOP’s long-time targets of Social Security and Medicare. Nonetheless, the Congressional Budget Office (CBO) projects the law will reduce the federal deficit by about $1.5 trillion over 10 years.

The main provisions

The new law primarily tackles discretionary spending. The notable provisions address:

IRS funding. The Inflation Reduction Act (IRA), which was enacted in 2022, included an additional $80 billion in funding for the tax agency, with much of it designated for heightened enforcement activity against wealthy taxpayers. The FRA immediately rescinds $1.39 billion and pares back the funding by about $10 billion each year for 2024 and 2025. However, White House officials have indicated that they expect the funding cuts to make little difference in the IRS’s pending expansion plans because the agency planned to spend the original funding over several years. It may be able to spend some of the funds earmarked for later years earlier and then return to Congress to request more funding in the future.

Spending caps. One of the more contentious focuses of the negotiations was non-defense discretionary funding for programs such as scientific research, domestic law enforcement, forest management, environmental protection, air traffic control and nutritional assistance for mothers. The final result is a virtual freeze on this spending, facilitated in part by the reduced funding for the IRS. The spending will drop by about $1 billion in the 2024 fiscal year, compared to this fiscal year, with a 1% increase slated for the 2025 fiscal year. This amounts to a cut, as inflation is expected to grow at a rate greater than 1%. The final non-defense figures are $704 billion for 2024 and $711 billion for 2025.

Defense and veterans affairs spending. The FRA provides Biden’s budgeted funding for the military and veterans affairs for 2024, adjusted for inflation. Total defense spending will grow to $886 billion in 2024 and $895 billion in 2025.

Student loan debt. The new law codifies Biden’s previous announcement that the moratorium on student loan payments precipitated by the COVID-19 pandemic won’t be extended beyond this summer. His plan to cancel student loan debt for many borrowers — to the tune of $430 billion — isn’t part of the law. (However, the plan currently is under review by the U.S. Supreme Court.)

Work requirements. Certain recipients of Supplemental Nutrition Assistance Program (SNAP) and Temporary Assistance for Needy Families (TANF) benefits will face new work requirements, although Medicaid recipients won’t. Specifically, the FRA raises the top age at which adults without children living in their homes must work to receive SNAP assistance, from 49 to 54, phased in over three years. However, the law includes exemptions for the homeless, veterans and individuals age 24 or younger who were children in foster care. It also includes provisions that could increase the number of individuals who must satisfy work requirements to receive TANF benefits from their state programs. Yet, the CBO estimates that the various changes will actually result in more people receiving assistance.

COVID-19 clawback. Much of the remaining unspent COVID-19 relief funds, estimated to equal $30 billion to $70 billion, will be “clawed back.” Portions of that funding will be retained, though, including a certain amount for vaccines.

Permitting for energy projects. The FRA includes rules designed to make it easier for new energy projects, including fossil fuel projects, to obtain permit approval.

The leftovers

As noted, the original House debt ceiling bill was much more aggressive. Republicans sought larger spending cuts and tighter work requirements. They also aimed to repeal hundreds of billions in tax incentives in the IRA intended to increase the use of renewable energy and combat climate change.

On the other side of the aisle, Democrats hoped to raise taxes on corporations and taxpayers who earn more than $400,000. In addition, they wanted to institute measures to reduce Medicare spending on prescription drugs.

None of these priorities are included in the new law.

The bottom line

Professionals have noted that the outcome of the latest debt ceiling challenge largely resembles the likely outcome of budget negotiations in a divided government, albeit with much more drama and more drastic potential implications for the global economy. Moreover, additional bills related to appropriations — what the parties have referred to as “agreed upon adjustments” — are expected in coming months, which could reduce the effects of some of the spending cuts.

If you and your employees are traveling for business this summer, there are a number of considerations to keep in mind. Under tax law, in order to claim deductions, you must meet certain requirements for out-of-town business travel within the United States. The rules apply if the business conducted reasonably requires an overnight stay.

Note: Under the Tax Cuts and Jobs Act, employees can’t deduct their unreimbursed travel expenses on their own tax returns through 2025. That’s because unreimbursed employee business expenses are “miscellaneous itemized deductions” that aren’t deductible through 2025.

However, self-employed individuals can continue to deduct business expenses, including away-from-home travel expenses.

Rules that come into play

The actual costs of travel (for example, plane fare and cabs to the airport) are deductible for out-of-town business trips. You’re also allowed to deduct the cost of meals and lodging. Your meals are deductible even if they’re not connected to a business conversation or other business function. Although there was a temporary 100% deduction in 2021 and 2022 for business food and beverages provided by a restaurant, it was not extended to 2023. Therefore, there’s once again a 50% limit on deducting eligible business meals this year.

Keep in mind that no deduction is allowed for meal or lodging expenses that are “lavish or extravagant,” a term that’s been interpreted to mean “unreasonable.”

Personal entertainment costs on the trip aren’t deductible, but business-related costs such as those for dry cleaning, phone calls and computer rentals can be written off.

Mixing business with pleasure

Some allocations may be required if the trip is a combined business/pleasure trip, for example, if you fly to a location for four days of business meetings and stay on for an additional three days of vacation. Only the costs of meals, lodging, etc., incurred for the business days are deductible — not those incurred for the personal vacation days.

On the other hand, with respect to the cost of the travel itself (plane fare, etc.), if the trip is primarily business, the travel cost can be deducted in its entirety and no allocation is required. Conversely, if the trip is primarily personal, none of the travel costs are deductible. An important factor in determining if the trip is primarily business or personal is the amount of time spent on each (although this isn’t the sole factor).

If the trip doesn’t involve the actual conduct of business but is for the purpose of attending a convention, seminar, etc., the IRS may check the nature of the meetings carefully to make sure it isn’t a vacation in disguise. Retain all material helpful in establishing the business or professional nature of this travel.

Other expenses

The rules for deducting the costs of a spouse who accompanies you on a business trip are very restrictive. No deduction is allowed unless the spouse is an employee of you or your company, and the spouse’s travel is also for a business purpose.

Finally, note that personal expenses you incur at home as a result of taking the trip aren’t deductible. For example, let’s say you have to board a pet while you’re away. The cost isn’t deductible. Contact us if you have questions about your small business deductions.

Many people are familiar with Roth IRAs. These popular retirement accounts feature tax-free withdrawals as long as certain conditions are met. But did you know that employers can offer designated Roth contributions as part of the 401(k) plans they sponsor for employees?

Indeed, it is possible — but you’ll want to familiarize yourself with the finer points of this feature before adding it to your organization’s plan.

Key differences

Roth contributions differ from other elective deferrals in two key tax respects. First, they’re irrevocably designated to be made on an after-tax basis, rather than pretax. Second, if all applicable requirements are met and the distribution is a “qualified distribution,” the earnings won’t be subject to federal income tax when distributed.

To be qualified, a distribution generally must occur after a five-year waiting period, as well as after the participant reaches age 59½, becomes disabled or dies. Because of the different tax treatment, plans must maintain separate accounts for designated Roth contributions.

Upsides and risks

The Roth option gives participants an opportunity to hedge against the possibility that their income tax rates will be higher in retirement. However, if tax rates fall or participants are in lower tax brackets during retirement, Roth contributions may provide less after-tax retirement income than comparable pretax contributions. The result could also be worse than that of ordinary elective deferrals if Roth amounts aren’t held long enough to make distributions tax-free.

Nonetheless, if your organization employs a substantial number of relatively highly paid employees, a Roth 401(k) component may be well-appreciated. This is because participants can make much larger designated Roth 401(k) contributions than they can for a Roth IRA. In 2023, the limit is $22,500 for designated Roth 401(k) contributions versus $6,500 for Roth IRA contributions.

Catch-up contributions for individuals 50 or older are also considerably higher for designated Roth 401(k) contributions than they are for Roth IRA contributions. In 2023, the limit is $7,500 for designated Roth 401(k) catch-up contributions versus $1,000 for Roth IRA catch-up contributions.

Naturally, participants will need to know what they’re getting into. They’ll have to consider current and future tax rates, various investment alternatives, and the potential loss of some rollover options. They’ll also need to anticipate the risk of needing a distribution before they qualify for tax-free treatment of earnings, which would trigger taxation of those earnings.

For plan sponsors, the separate accounting required for Roth contributions may raise plan costs and increase the risk of error. (One common mistake: treating elected contributions as pretax when the participant elected Roth contributions, or vice versa.)

And because Roth contributions are treated as elective deferrals for other purposes — including nondiscrimination requirements, vesting rules and distribution restrictions — plan administration and communication will be more complex.

Look before you leap

The addition of Roth contributions to your employer-sponsored 401(k) could be an enticing enhancement for job candidates and current employees. However, you’ll need to determine whether your participants will truly value and use the feature before you revise your plan. We can assist you in deciding whether this would be an advisable move for your organization.

The 2023 Compliance Supplement was released, which did not classify E-Rate as a federal program subject to Single Audit. The Supplement is effective for audits of fiscal years beginning after June 30, 2022. Therefore, for the 2023 fiscal year, E-Rate reimbursement dollars:

will not be included on the Schedule of Expenditures of Federal Awards (SEFA);
will not apply to the single audit; and
will not be included in total federal awards to determine thresholds for Single Audit and major program calculations.

The above guidance applies for all fiscal years beginning after June 30, 2022. The guidance may change with the 2024 Compliance Supplement, and we will inform you if it does.

For more information, refer to the 2023 Compliance Supplement. Contact Yeo & Yeo if you need assistance.

The 2023 Compliance Supplement was released, which did not classify E-rate as a federal program subject to Single Audit. The Supplement is effective for audits of fiscal years beginning after June 30, 2022. Therefore, for the 2023 fiscal year, E-Rate reimbursement dollars:

will not be included on the Schedule of Expenditures of Federal Awards (SEFA);
will not apply to the single audit; and
will not be included in total federal awards to determine thresholds for Single Audit and major program calculations.

The above is the final guidance related to fiscal year 2023. The Audit Risk Alert issued by the Michigan Department of Education (MDE) will also be updated to reflect this change. This guidance may change for the 2024 fiscal year, and we will inform you if it does.

For more information, refer to the 2023 Compliance Supplement. Contact Yeo & Yeo if you need assistance.

The General Sales Tax Act and the Use Tax Act have been amended. Effective April 26, 2023, delivery and installation charges are exempt from Michigan sales tax and use tax if both of the following conditions are met:

The charges are separately stated on the invoice, bill of sale, or similar document provided to the purchaser; and
The seller (taxpayer) maintains its records to show separately the transactions used to determine the sales or use tax, as applicable.

Delivery charges are charges by the seller for preparation and delivery to a location designated by the purchaser, including transportation, shipping, postage, handling, crating, and packing.

Delivery and installation charges that involve the sale of electricity, natural gas or artificial gas by a utility remain subject to sales tax and use tax.

Unpaid assessment balances

Additionally, the Treasury will cancel within 90 days any outstanding balances on notices of assessments issued before the effective date and related to delivery or installation charges that are now exempt under the amendments. While Treasury will be proactive in locating and canceling assessments, taxpayers with outstanding balances for delivery or installation charges are encouraged to contact Treasury at Treas-TCB-Technical@michigan.gov.

Taxpayers cannot receive a refund for sales tax or use tax on delivery or installation charges that were remitted to the Treasury before the effective date of April 26, 2023. Neither will purchasers be able to seek refunds for sales or use tax paid on delivery or installation charges.

Businesses should update their sales tax and use tax processes so that tax is not applied to exempt delivery or installation charges. For assistance, contact Yeo & Yeo.

Traditional business models in many sectors have been disrupted by the COVID-19 pandemic, geopolitical uncertainty, rising costs and falling consumer confidence. If your company is planning a major strategic shift this year, management may need to comply with the updated accounting rules for reporting discontinued operations that went into effect in 2015.

Discontinued operations typically don’t happen every year, so it’s important to review the basics before preparing your year-end financial statements.

Defining discontinued operations

The scope of what’s reported as discontinued operations was narrowed by Accounting Standards Update (ASU) No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. Since the updated guidance went into effect in 2015, the disposal of a component (including business activities) must be reported in discontinued operations only if the disposal represents a “strategic shift” that has or will have a major effect on the company’s operations and financial results.

Examples of a qualifying major strategic shift include the disposal of:

A major geographic area,
A line of business, or
An equity method investment.

When such a strategic shift occurs, a company must present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections of the balance sheet.

Disclosing the details

In addition, ASU 2014-08 calls for expanded disclosures when reporting discontinued operations. The goal is to show the financial effect of such a shift to the users of the entity’s financial statements, allowing them to better understand continuing operations.

The following disclosures must be made for the periods in which the operating results of the discontinued operation are presented in the income statement:

Major classes of line items constituting the pretax profit or loss of the discontinued operation,
Either 1) the total operating and investing cash flows of the discontinued operation, or 2) the depreciation, amortization, capital expenditures, and significant operating and investing noncash items of the discontinued operations, and
Pretax profit or loss attributable to the parent if the discontinued operation includes a noncontrolling interest.

Management also must provide various disclosures and reconciliations of items held for sale for the period in which the discontinued operation is so classified and for all prior periods presented in the balance sheet. Additional disclosures may be required if the company plans significant continuing involvement with a discontinued operation — or if a disposal doesn’t qualify for discontinued operations reporting.

For more information

Major strategic changes don’t happen often, and in-house personnel may be unfamiliar with the latest guidance when preparing your company’s year-end financial statements. Contact us to help ensure you’re complying with the updated guidance.

The IRS recently released guidance providing the 2024 inflation-adjusted amounts for Health Savings Accounts (HSAs).

HSA fundamentals

An HSA is a trust created or organized exclusively for the purpose of paying the “qualified medical expenses” of an “account beneficiary.” An HSA can only be established for the benefit of an “eligible individual” who is covered under a “high-deductible health plan.” In addition, a participant can’t be enrolled in Medicare or have other health coverage (exceptions include dental, vision, long-term care, accident and specific disease insurance).

Within specified dollar limits, an above-the-line tax deduction is allowed for an individual’s contributions to an HSA. This annual contribution limitation and the annual deductible and out-of-pocket expenses under the tax code are adjusted annually for inflation.

Inflation adjustments for next year

In Revenue Procedure 2023-23, the IRS released the 2024 inflation-adjusted figures for contributions to HSAs, which are as follows:

Annual contribution limitation. For calendar year 2024, the annual contribution limitation for an individual with self-only coverage under an HDHP will be $4,150. For an individual with family coverage, the amount will be $8,300. This is up from $3,850 and $7,750, respectively, in 2023.

There is an additional $1,000 “catch-up” contribution amount for those age 55 and older in 2024 (and 2023).

High-deductible health plan defined. For calendar year 2024, an HDHP will be a health plan with an annual deductible that isn’t less than $1,600 for self-only coverage or $3,200 for family coverage (up from $1,500 and $3,000, respectively, in 2023). In addition, annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) won’t be able to exceed $8,050 for self-only coverage or $16,100 for family coverage (up from $7,500 and $15,000, respectively, in 2023).

Advantages of HSAs

There are a variety of benefits to HSAs. Contributions to the accounts are made on a pre-tax basis. The money can accumulate tax-free year after year and can be withdrawn tax-free to pay for a variety of medical expenses such as doctor visits, prescriptions, chiropractic care and premiums for long-term care insurance. In addition, an HSA is “portable.” It stays with an account holder if he or she changes employers or leaves the workforce. Contact your employee benefits and tax advisors if you have questions about HSAs at your business.

Financial statements are central to understanding any business. A public company’s balance sheet, income statement and cash flow statement enable investors, lenders, the media and other stakeholders to value the company, forecast short- and long-term performance, and determine potential credit risk, among other purposes. To ensure analysis of a company is accurate and insightful, financial statements must be reliable.

For this reason, financial statement fraud — the exaggeration or outright fabrication of numbers by insiders, such as owners and executives — is extremely dangerous. It can lead to criminal charges, lawsuits, large financial losses and even the company’s demise. It’s critical that your business do everything possible to prevent this type of fraud.

More common than you might think

Financial statement fraud involving large public companies has received considerable press coverage in the past couple of decades. But small and mid-sized businesses aren’t immune to this type of fraud. In fact, such schemes generally are easier to perpetrate in small companies where there’s less oversight.

Regardless of size and sector, financial statement fraud is probably more prevalent than you think. A well-received 2023 study by a University of Toronto finance professor finds that 10% of publicly traded companies are committing securities fraud.

These schemes can involve everything from overstating revenue and inflating assests, to understating expenses, hiding liabilities and omitting disclosures. According to the Anti-Fraud Collaboration of the Securities and Exchange Commission, the most common enforcement actions involving financial statements feature:

Improper revenue recognition (43%),
Operational reserves manipulation (24%),
Inventory misstatement (11%), and
Loan impairment issues (11%).

6 red flags

Although each fraud scheme is as unique as the company it victimizes, financial statement scams share certain characteristics that can tip off fraud professionals and eagle-eyed stakeholders. These include:

Implausible revenue growth. A sudden or sustained increase in revenue, especially when the company faces harsh economic conditions, can be a cause for concern and deserves further investigation.
Relationship between expenses and revenues. Expenses typically increase as revenue grows. If a company reports significant revenue growth, its costs should also generally rise, unless there are extenuating circumstances.
Inconsistencies and anomalies. Closer scrutiny may be warranted if financial statements include numbers that are out of line with industry benchmarks, report a trend reversal with no plausible explanation or merely appear inconsistent with historical performance.
Related-party transactions. Transactions with related parties aren’t inherently problematic. There can be good reasons to engage in such transactions. But exercise skepticism if they’re hard to understand or seem to serve no purpose.
Changes in accounting methods. A company may have a legitimate reason for switching accounting methods. But such changes can mask weaknesses because they make it more difficult to compare performance between accounting periods and spot suspicious numbers.
Frequent changes in auditors. If a company changes auditors frequently, it could be a sign of conflict or represent an effort to conceal material financial misstatements.

Reducing risk

To minimize the threat of financial statement fraud, always encourage — and model — ethical business practices. This includes communicating clear expectations to executives regarding acceptable behavior. Be sure to empower rank-and-file employees (and other stakeholders) who may witness illicit activities by providing an anonymous reporting hotline.

Include a separation of duties and multiple layers of approval and oversight in your internal control policies. And make it nearly impossible for managers to override controls. Education also plays a critical role in preventing financial statement fraud. Put the basics of financial statement fraud and potential warning signs in your company’s training materials.

Personal stake

One of the most common reasons executives commit financial statement fraud is because their compensation depends on company performance. For this reason, look for ways to evaluate and compensate managers on several fronts — including on leadership and coaching — not simply on financial performance. Also rely on outside advisors who have no personal stake in your business’s financial results. Contact us for help.

The sudden onset of the pandemic in 2020 triggered a mental health crisis that has affected people everywhere. By extension, it has touched employees of many, if not most, organizations. Employers have generally ramped up mental health benefits in response over the last few years or, at the very least, become more aware of their importance.

If your organization’s benefits package includes mental health resources, it’s a good idea to check in on whether your employees are using them and if you should revise or add to your offerings.

Study results

A recent study illustrates a common conundrum regarding mental health benefits. That is, though the resources are there, employees just aren’t widely accessing them. Membership-based primary care provider One Medical recently surveyed 800 HR/benefits organizational leaders, as well as 800 full-time employees, and reported the results in its The State of Workplace Health 2023 report.

The data showed that, while 61% of respondents took advantage of their “routine care” health benefits, only 19% used their mental health benefits. The survey asked employees why they chose not to access their employer-provided mental health resources and:

22% said costs played into their decision,
25% reported feeling embarrassed about getting help, and
45% cited a busy schedule.

On the bright side, the study found that 26% of respondents said their mental health had improved in the last year, and 42% believed it had stayed the same. Then again, 32% reported that their mental health had declined since last year, though that is 2% less than the decline reported in 2022.

Benefits to consider

The cumulative message of all these data points is relatively clear: Employers can’t simply lay out a menu of mental health benefits and expect workers to partake. If you want to reap the morale, retention and productivity upsides of a well-cared-for staff, you’ve got to encourage participation through strong benefits education and communication.

Also, you may need to occasionally tweak your benefits selection to meet the distinctive and evolving needs of your workforce. Here are a few mental health benefits to consider:

An Employee Assistance Program (EAP). An EAP is a voluntary and confidential work-based intervention program designed to help employees and their dependent family members deal with issues that may be affecting their mental health and job performance. Such issues can include workplace stress, grief, depression, marriage/family problems, psychological disorders, and alcohol and drug dependency.

Revised paid time off (PTO) policies. Many employers are finding that the old “X number of vacation days and X number of sick days” approach lacks the flexibility employees need to care for themselves. Your staff may appreciate a bank of PTO that can be used for any purpose without question. Some employers are also adding “mental health days” to their lists of organizational holidays.

Trainings related to mental health. Employers are often in a unique position to teach groups of people to lessen behaviors that hurt mental health and emphasize behaviors that improve it. For example, stress management programs can train workers to recognize high-stress situations and better cope with them. Leadership training programs can help create leaders who communicate, coach and coordinate work more effectively, reducing everyone’s stress.

Bottom-line impact

There can be a very real, positive bottom-line impact to helping employees care for their mental health. But it’s a challenge that calls for a high degree of awareness and a constant eye on necessary changes. Our firm can help you identify and analyze your benefits and training costs.

Recent reports have raised anew concerns about the impending insolvency of the Social Security program, absent congressional action. Social Security reform has long been considered a “third rail” of American politics and understandably so — the options for heading off insolvency will inevitably cause pain for significant segments of the population. Yet some in Congress have stepped forward with proposals that aim to tackle the problem.

The impending shortfall

Social Security currently provides benefits to more than 66 million recipients. The Congressional Budget Office (CBO) estimates that about 78 million people, or about 20% of the U.S. population, will receive benefits from the Old-Age and Survivors Insurance (OASI) Trust Fund in 2032.

The CBO and the trustees of the Social Security and Medicare trusts have both raised alarms about how soon Social Security will become “insolvent.” Insolvency in this context refers to the point at which the trust fund will be depleted, and payments would come solely from income generated by payroll tax and income tax on benefits.

The 2023 Trustees Report states that the OASI Trust Fund will be able to pay 100% of total scheduled benefits only until 2033, one year earlier than the trustees projected last year. The program would then be able to pay 77% of scheduled benefits.

The CBO’s forecast is even more dire. It predicts the OASI fund will be exhausted in 2032. As a result, it says, payable benefits would be 25% less than scheduled benefits.

The declining ratio of workers to beneficiaries is one reason for the trust fund’s shrinkage, and the retirement of Baby Boomers has only accelerated this trend. High interest rates and historic inflation also play a large role. Due to inflation, beneficiaries saw an 8.7% cost-of-living adjustment (COLA) in 2023, the largest such hike since 1981.

According to the Congressional Research Service, the trust fund’s depletion, whenever it occurs, would create a conflict between two federal laws. Beneficiaries would remain entitled to their full scheduled benefits under the Social Security Act. But the Antideficiency Act prohibits government spending in excess of available funds, so the Social Security Administration (SSA) would lack legal authority to pay full benefits on time.

Limited options

Congress has a limited arsenal of weapons for addressing the shortfall in the OASI fund. It generally can increase trust fund revenues or reduce benefits by taking various steps, such as:

Raising the retirement age. Retirees normally begin receiving benefits at age 66 or 67, depending on their year of birth (reduced early benefits are available at age 62). Various legislators and others have called for increasing the full retirement age. For example, some have suggested raising it to age 70 for people born in 1978 or later.

The American Academy of Actuaries (AAA) points out several potential problems with this approach, though. For example, raising the retirement age is essentially a cut in benefits, and jobs might not be available for people ages 67 to 69 who would have to keep working, particularly those who perform manual labor. A higher retirement age would disproportionately affect low-wage workers and those who have higher mortality rates. In addition, it would likely increase disability insurance costs and the costs for employer-provided insurance.

Increasing payroll tax. Workers and employers each pay 6.2% payroll taxes, for a total of 12.4% on the first $160,200 of wages in 2023. Payroll taxes could be boosted in two ways — increasing the tax rate and adjusting or eliminating the wage cap.

The AAA says that, of all the many proposals and bills for addressing the impending deficit, “raising the tax rate best preserves the current system structure.” The CBO says that trust fund balances would be sufficient to pay scheduled benefits through 2097 if the total payroll tax rate was increased immediately and permanently to 17.6% (before accounting for the effects of such changes on the economy).

Others have proposed applying the tax to greater amounts of wages. Some would apply the tax to earnings greater than a specific threshold (for example, $400,000), creating a “doughnut hole” of income not subject to the tax.

The AAA explains that, if the contribution base is increased but not the benefit base, the fund could raise revenue with no increase in benefits. The effect would be similar to increasing the tax rate, but the additional tax revenue would come only from workers with earnings in excess of the benefit base. In other words, this would negatively affect higher earners.

But the AAA says that even including the additional taxed earnings in the benefit formula would help. That’s because the additional earnings in the benefit formula would be at the high end of the earnings scale, where the benefit formula percentage is lowest. Moreover, while the additional tax revenue would begin immediately, the additional benefits would slowly phase in over time.

Changing benefits formulas. COLAs currently are based on changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers. A different inflation index could be used to slow the annual increases. This would produce net benefit reductions as smaller benefit increases in early retirement years compound over time.

Other ideas include changing the primary formula for benefits for retirees or those for eligible spouses and dependents. For example, the basic Social Security benefit is called the primary insurance amount, based on average indexed monthly earnings (AIME) — generally, the average of a beneficiary’s highest earning years over a period of up to 35 years.

The number of averaging years included when calculating AIME could be increased, which would reduce the AIME for most workers. However, the AAA says this could have “especially adverse consequences” for workers who don’t have steady earnings, such as parents who leave the workforce to care for children.

Implementing means testing. Means testing generally refers to reducing or eliminating Social Security benefits for wealthy and/or high-income retirees whose current income or assets exceed a certain threshold. Supporters of means testing argue that the program shouldn’t benefit those who don’t have financial need.

Opponents contend that cutting or eliminating benefits for the wealthy would be unfair, as those individuals have contributed and been promised benefits just as others have. They also warn that it could undermine public support for Social Security, disincentivize work in later years and encourage consumption over saving.

Some recent proposals

Despite its third-rail status, several legislators on both sides of the aisle are working to confront the Social Security solvency crisis. For example, in February 2023, Sens. Bernie Sanders (I-VT) and Elizabeth Warren (D-MA), along with several Democratic colleagues, introduced the Social Security Expansion Act.

Among other things, it would apply the payroll tax to earnings above $250,000, without crediting the additional taxed earnings for benefit purposes. It also would impose a 12.4% tax on investment income and change the inflation index for COLAs. The SSA’s Office of the Chief Actuary estimates that enactment of the bill would extend the ability of the combined OASI and Disability Insurance program to pay scheduled benefits in full and on time for 75 years. In addition, the bill would add $2,400 to beneficiaries’ annual benefits.

Sens. Angus King (I-ME) and Bill Cassidy (R-LA) are heading a bipartisan coalition exploring other options. They’re reportedly discussing the creation of a so-called “sovereign wealth fund” separate from Social Security. The fund would invest $1.5 trillion or more in the U.S. economy and accrue returns over 70 years. If it fails to produce an 8% return, the maximum taxable income and the payroll tax rate would be increased to ensure solvency for 75 years. Cassidy says this approach would “solve 75% of the problem.”

A political conundrum

Both parties acknowledge the need for some type of action regarding Social Security. Generally, Democrats oppose cuts to benefits and Republicans oppose higher taxes. And the political climate isn’t favorable for reaching a compromise. We’ll follow the developments and keep you informed of any significant changes coming your way.

Estate planning can be complicated enough if you don’t have a spouse. But things can get more difficult for married couples. Even if you and your spouse have agreed on most major issues in the past — such as child rearing, where to live and other lifestyle choices — you shouldn’t automatically assume that you’ll both be on the same page when it comes to making estate planning decisions.

A worst-case scenario is when one spouse moves forward with his or her estate plan without the knowledge or approval of the other, to the eventual detriment of the family. Thus, it’s critical for both spouses to clearly communicate their estate planning goals to each other.

Where to begin?

Start with the basic premise that state law generally governs estate matters. Therefore, state law determines if your property is community property, separate property or tenancy by the entirety. For instance, California is a community property state. That means half of what a resident owns is his or her spouse’s property and vice versa. There’s no circumventing this law when planning for a joint estate.

Next, consider your family’s dynamics. Emotions can run high and tensions may result, for example, if a family includes children from a prior marriage. If these issues aren’t addressed beforehand, it could lead to legal squabbles.

Don’t forget about the tax implications. Currently, married couples can take advantage of a record-high federal gift and estate tax exemption that shelters most estates from tax. However, if you and your spouse are high earners (or otherwise have large estates) ensure that you incorporate estate tax minimization techniques into your coordinated plans.

Finally, decide together on distributions of assets to designated beneficiaries. You may intend, for example, for expensive jewelry to go to one child, but your spouse might have other ideas.

Keep lines of communication open

Indeed, clear communication is essential for married couples when developing estate plans. We can help ensure that you and your spouse both have plans that work in harmony.

Working capital — the funds your company has tied up in accounts receivable, accounts payable and inventory — is a critical performance metric. During times of rising inflation and interest rates, managers search for ways to free up cash and eliminate waste. However, determining the optimal amount of working capital can sometimes be challenging.

Balancing act

The amount of working capital your company needs depends on the costs of your sales cycle, upcoming operating expenses and current repayments of debts. Essentially, you need enough working capital to finance the gap between payments to suppliers and creditors (cash outflows) and payments from customers (cash inflows).

Having too much working capital on the balance sheet can drain cash reserves, requiring a company to tap into credit lines to make ends meet. In addition, money tied up in working capital can detract from growth opportunities and other spending options, such as expanding to new markets, buying equipment, hiring additional workers and paying down debt.

But having too little working capital to act as a buffer can also create problems — as many companies learned from supply chain shortages during the pandemic. Ongoing geopolitical uncertainty has caused some companies to scale back on just-in-time inventory practices, causing working capital balances to increase.

3 keys to reducing working capital

Working capital best practices vary from industry to industry. Here are three effective ways to manage working capital more efficiently:

1. Expedite collections. Possible solutions for converting accounts receivable into cash include the following: tighter credit policies, early bird discounts, collection-based sales compensation and in-house collection personnel. Companies also can evaluate administrative processes — including invoice preparation, dispute resolution and deposits — to eliminate inefficiencies in the collection cycle.

2. Trim inventory. This account carries many hidden costs, including storage, obsolescence, insurance and security. Consider using computerized inventory systems to help predict demand, enable data-sharing up and down the supply chain and more quickly reveal variability from theft.

It’s important to note that, in an inflationary economy, rising product and raw material prices may bloat inventory balances. Plus, higher labor and energy costs can affect the value of work-in-progress and finished goods inventories for companies that build or manufacturer goods for sale. So rising inventory might not necessarily equate to having more units on hand.

3. Postpone payables. By deferring vendor payments, when possible, your company can increase cash on hand. But be careful: Delaying payments for too long can compromise a firm’s credit standing or result in forgone early bird discounts. Many companies have already pushed their suppliers to extend their payment terms, so there may be limits on using this strategy further.

For more information

There’s no magic formula for reducing your company’s working capital requirements, but continuous improvement is essential. Contact us for help evaluating working capital accounts and brainstorming solutions to minimize working capital without compromising supply chain relationships.

If you’ve received, or will soon receive, a significant inheritance, it may be tempting to view it as “found money” that can be spent freely. But unless your current financial plan ensures that you’ll comfortably reach all your goals, it’s a good idea to have a plan of action for managing your newfound wealth.

Take time to reflect

Generally, when you receive an inheritance, there’s no need to act quickly. Take some time to reflect on the significance of the inheritance for your financial situation; consult with a team of trusted advisors (including an attorney, accountant, and financial advisor); and carefully review your options.

While you’re planning, park any cash or investments in a bank or brokerage account. If you’re married, consider holding the assets in an account in your name only. An inheritance is usually considered your separate property in the event of a divorce, but it may lose that status if it’s commingled with marital property in a joint account.

Avoid making quick financial commitments

If your loved one’s estate is still being administered, don’t start spending — or make any financial commitments based on your inheritance — until you understand what your net proceeds from the estate will be. Once all fees and taxes are accounted for, the final settlement may be less than you expect.

If you’re receiving your inheritance through a trust, talk with the trustee, familiarize yourself with the trust’s terms, and be sure you understand the timing and amount of distributions and any conditions that must be satisfied to receive them.

Beware of income and estate tax consequences

An inheritance generally isn’t subject to income tax, but depending on the types of assets you inherit, they may have an impact on your tax situation going forward. For example, certain income-producing assets — such as those from real estate, an investment portfolio or a retirement plan — may substantially increase your taxable income or even push you into a higher tax bracket.

Depending on the size of the inheritance, it may also have an impact on your estate plan. If it increases the value of your estate to a point where estate tax becomes a concern, talk with your advisor about strategies for reducing those taxes and preserving as much wealth as possible for your heirs.

Review and revise your financial plan

Treating an inheritance separately from your other assets may encourage impulsive, unplanned spending. A better approach is to integrate inherited assets into your overall financial plan.

Consider using some of the inheritance to pay down credit card or other high-interest debt (if you have it) or to build an emergency fund. The rest should be available, along with your other assets, for funding your retirement, college expenses for your children, travel or other financial goals.

Have a plan

If you receive a sizable inheritance, there’s nothing wrong with taking a small portion of it and splurging a bit. But for the most part, you should treat inherited assets as you’d treat the assets you’ve earned over the years and incorporate them into a comprehensive financial plan. You’ll also want to address any inherited assets in your estate plan. Contact us for more information.

Businesses today are under increased pressure to fully understand and thoroughly respond to the issue of pay equity. And neither of these two broad undertakings is particularly easy.

First, fully understanding what pay equity is and whether and how it’s played out at your company calls for research, analysis and perhaps some difficult discussions. The second part, responding to it in practical and effective ways, can entail changing long-standing employment processes and investing in additional training and communications initiatives.

Philosophy and practice

Simply defined, pay equity is the philosophy and practice of “equal pay for equal work.” That doesn’t mean everyone receives the same amount of pay. It means compensation is free of unjust biases historically related to demographic factors such as age, race, gender, disability, national origin and sexual orientation. Employees’ pay, both upon hire and as adjusted through raises, should be determined on the basis of objective, relevant factors such as education and training, experience, skills, performance, and tenure.

As mentioned, determining whether pay inequities exist within your business will entail a careful and honest assessment. Many companies conduct a formal pay equity audit. This is a thorough statistical analysis of compensation history, policies and structure. The audit’s objective is to identify any inconsistencies, gaps and incongruities that can’t be rationally explained.

Best prevention practices

To prevent instances of inequitable pay at your company, here are some best practices to consider:

Use only initials or random ID numbers during early screenings of job candidates. Minimizing the ability to distinguish candidates by ethnicity or gender can reduce the likelihood of biases in hiring and initial compensation decisions.

Refrain from asking candidates their pay histories. Women and people of color are more likely to have been paid less in their previous positions. Using historical compensation to set their current salaries only compounds pay disparities.

Generate objective criteria for recruiting, hiring, compensating, evaluating and promoting employees. Implement standard pay ranges that reflect each position’s value to the business.

Limit the ability of managers or supervisors to singlehandedly adjust pay for specific individuals. Such one-off decisions can lead to pay inequities.

Help managers and supervisors understand pay equity. Training will help them recognize how to best develop a culture that embraces pay equity and discuss the issue with their employees.

Communicate openly and regularly with staff. Let employees know how you set compensation and reassure them that they can discuss pay with their supervisors without fear of retaliation. More transparency tends to foster greater pay equity.

Tough questions

Make no mistake, pay equity is a tricky issue that can raise a lot of tough questions. Dealing with it won’t be a “one and done” activity. However, establishing your business as one that pays equitably will bolster your “employer brand” in today’s competitive labor market. Our firm can help you conduct a pay equity audit as well as better understand all aspects of your compensation structure.