Tuesday, April 21, 2015

Inside the 501(c)(9) – Voluntary Employee Benefit Organizations

Employee benefits by and for employees – that’s the idea behind organizations described under section 501(c)(9) of the Internal Revenue Code.  Under 501(c)(9), voluntary employee benefits associations (“VEBAs”) receive exemption from federal income tax.  Individuals sharing a common “employment-related bond” may pool resources to establish qualified benefit programs for employee members.  For employees interested in having a greater voice in shaping their benefit programs, the 501(c)(9) may provide that opportunity. 

Benefits for those sharing an employment-related bond 

As the acronym suggests, VEBAs are groups of employees who voluntarily associate for the common purpose of providing benefits to those in the association.  The principal underlying exemption here is similar to that of Section 501(c)(7) social clubs.  Namely, through individuals’ common bond of shared employment, they may voluntarily contribute their post-tax earnings to provide for certain benefits without paying a second level of tax on the money they contribute to such organization.  To qualify as a 501(c)(9), the following requirements must be met:

(a)            The organization is an association of employees;
(b)           Participation in the association is voluntary;
(c)            The purpose of the organization is to provide for the payment of life, sick, accident, or other benefits to its members or their dependents or designated beneficiaries, and substantially all of its operations are in furtherance of providing such benefits; and
(d)           No part of the net earnings of the organization inures, other than by payment of the benefits referred to in (c), to the benefit of any private shareholder or individual.

Significantly, the treasury regulations do not allow sole proprietors, partnerships, or self-employed individuals to create a VEBA.  The individuals must be employees and share an “employment-related bond.”  For example, employees of one or more employers engaged in the same line of business in the same geographic locale have an employment-related bond.  Because a VEBA must be voluntary, organizations that provide for membership automatically with employment to a specific employer do not qualify, nor do organizations that arise out of collective bargaining agreements that mandate participation. 

The Right Kind of Benefits

Benefits permitted under c(9) may not be just any kind of benefits.  Rather, VEBAs may only provide employees with benefits similar to a life, sickness, or accident benefit.  Here is one real-life example: Some time ago, a group of policemen in Canton, Ohio formed a VEBA under section 501(c)(9) to provide benefits to policemen in that city.  The association’s main purposes were “to promote a fraternal spirit among its members, and to extend moral and material aid to them (and to their dependents) upon their death or retirement from the police force.”[1]  To fulfill that mission, the association paid a “dividend” to police officers who retired after twenty years of service, or to their families if the police officer died while working for the department.  The average payment was around $4,500.  Collectively, annual payments for this benefit amounted to about 85% of the association’s expenses. 

Despite the commendable intentions of the association, the IRS revoked the association’s exemption under Section 501(c)(9).  The IRS argued that section 501(c)(9) provides tax exemption only for “voluntary employees' beneficiary associations providing for the payment of life, sick, accident, or other benefits to the members of such association or their dependents.”  According to the IRS, the dividends paid by the police organization to retiring or deceased officers were not in line with descriptions contemplated by 501(c)(9).  The Sixth Circuit of the United States Court of Appeals agreed.  In particular, the court noted that the Treasury Regulations define qualifying benefits as follows:  “A benefit is similar to a life, sick, or accident benefit,” if:

(a)      the benefit “is intended to safeguard or improve the health of a member or a member's dependents,” or
(b)      the benefit “protects against a contingency that interrupts or impairs a member's earning power.”

The police organization’s benefits were more like a pension or deferred compensation benefits, which did not qualify under Section 501(c)(9) despite the organization’s noble intentions. 

            The above case illustrates that complying with 501(c)(9) requires careful planning.  The rules governing qualifying and non-qualifying benefits for 501(c)(9) organizations are highly nuanced.  Individuals seeking to form a 501(c)(9) should consult with qualified legal counsel to ensure that benefits being contemplated for the organization are permissible under the regulations.  For further information about 501(c)(9) VEBAs or other tax-exempt organizations, please contact one of our attorneys at 312.626.1600 or info@wagenmakerlaw.com, or visit us on the web at www.wagenmakerlaw.com.

[1] Canton Police Benev. Ass'n of Canton, Ohio v. United States, 844 F.2d 1231, 1232 (6th Cir. 1988). 

Wednesday, April 15, 2015

Listening In: Go Ahead, If It’s Not Private (That Is, Eavesdropping)

            May a person legally record a conversation or other verbal exchange, such as through a cellphone or other video device?  State laws vary on this issue, and a new law in Illinois is now in effect.  A little more than a year ago, the Illinois Eavesdropping Act was struck down as unconstitutional by the Illinois Supreme Court . The new statute, which became effective as of December 30, 2014, once again makes it a crime to “eavesdrop” but under substantially more limited circumstances that essentially focus on privacy considerations.  (720 ILCS 5/14.)

            In Illinois, a person commits the crime of eavesdropping now only if he or she “surreptitiously” uses a device to overhear, transmit, or record a private conversation without consent of all parties to the conversation.  The term “surreptitious” means "obtained or made by stealth or deception, or executed through secrecy or concealment.”   In other words, a person may not hide the fact that he or she records the conversation.  Recording or transmitting conversations in which  “no reasonable expectation of privacy” exists does not constitute criminal eavesdropping.  It is therefore not a crime to openly and obviously listen to another’s conversation or record it. 

How does one know whether a conversation is “private”? Privacy depends, in turn, on whether one or more of the parties “reasonably intended” the communication to be of a private nature, based on all the circumstances.  So if a person expressly stated something like “this discussion is private and may not be recorded,” then any use of a recordation device would be surreptitious and therefore unlawful.  On the other hand, if one person told the other person that the conversation would be recorded, and the other person did note indicate any objection, it likely would be legally permissible. 

            When the individual is not a party to the conversation, the new law makes it unlawful to engage in surreptitious intercepting, recording, or transcribing of a private electronic communication, without the consent of all parties .  Second, it is unlawful to use or disclose information that a person knows (or reasonably should know) was obtained through eavesdropping, without consent of all parties to the conversation.  So consent is critical in such circumstances.

            Remember that the question of whether a person’s expectation of privacy was or was not sufficiently “reasonable” under the circumstances may be subject to a judge’s or jury’s interpretation, as part of a criminal trial.    The consequences for an adverse ruling include a felony conviction for violation of the new eavesdropping law, civil penalties owed for actual damages, and even punitive damages.   So think carefully before using a recording device, recording a conversation, or otherwise using such data.  When in doubt, get express permission - such as through each person’s verbal assent on the recording itself. 

            The statute also lists several exemptions, most of which concern law enforcement personnel.  One particularly important exemption is that an individual may record a conversation in certain circumstances to obtain evidence of a crime.  Where there is reason to believe that evidence of a criminal offense may be obtained by the recording, recording is acceptable if a party to the conversation requests such recording based on a belief that another party to the conversation is committing, is about to commit, or has committed a crime against the requesting party or a member of his/her immediate household.  This statutory development was expressly intended to curb and address alleged police misconduct. 

            Last, keep in mind that other important legal considerations apply for recording communications, including privacy interests, contractual obligations, and ethical responsibilities,  Please see our law firm’s previous blog article, “Who’s Listening?  Illinois Eavesdropping Law Held Unconstitutional,”  for more information.   To read our previous article, click here.  For questions regarding the legal ramifications of recording and publishing communications, please contact one of our attorneys at 312.626.1600 or info@wagenmakerlaw.com, or visit us on the web at www.wagenmakerlaw.com.

Thursday, April 2, 2015

Keeping Track: The importance of HR documentation policies.

Despite their altruistic purposes, nonprofits generally face the same human resources (HR) problems common to for-profit organizations.  For example, sometimes they need to terminate an employee’s position – perhaps for work performance issues or lack of funding.  Many laws, however, protect employees against termination for the wrong reasons, such as age, gender, or racial discrimination.  A claim of employee discrimination can be extremely costly, time-consuming, and otherwise detrimental to any employer.  Consequently, to avoid such problems, it is crucial that nonprofit employers not only establish good employment documentation protocols but also have effective document retention policies.  Failure to observe proper HR document protocols may expose the organization to legal risk when it becomes necessary to terminate an employee. 

Documentation Can Save the Day

Consider the following case, decided this month:  A nonprofit fired an employee for attendance issues, inappropriate behavior, unsatisfactory performance, and insubordination.  The nonprofit asserted that the employee failed to timely complete required paperwork, used his personal computer to process client information in violation of the nonprofit’s policy, arrived at work late, left work early, and logged more absences than the nonprofit’s policy authorized.  The employee sued on the basis of age discrimination.[1]

Under the Age Discrimination in Employment Act of 1967 (ADEA), it is unlawful for an employer to discharge an employee who is at least 40 years old because of the employee's age.[2]  In this particular case, the plaintiff claimed that the nonprofit’s executives were biased against older workers.  He testified he had overheard a conversation between supervisors, during which someone said: “When they get old, they should get out of here.  I don't know why they would stay.  I don't know why they won't retire and just go.  I don't know why they would want to stay.”  The plaintiff contended this conversation occurred at least three times.  These statements, he claimed, were direct evidence of age discrimination, and that the employer’s stated reasons for discharging him were mere pretext for its discriminatory actions.  The plaintiff claimed there was no documented evidence of misconduct or poor performance in the months preceding his discharge.

The court disagreed.  In holding for the nonprofit defendant, the court noted extensive documentation maintained by the nonprofit and produced as part of the litigation.  The concurrently-developed information demonstrated conclusively that the nonprofit employer’s decision to end the plaintiff’s employment was not based on age, but rather on non-discriminatory performance-related deficiencies.  In particular, the defendant produced memoranda and written warnings that documented performance problems, notes from a meeting with the employee in which management expressed their expectations of him, the plaintiff’s supervisor’s daily reports of plaintiff's activities, and an email from his supervisor to management documenting a mistake plaintiff made that the supervisor was required to correct.  Based on this documentation, the court concluded that the plaintiff failed to meet the legal standard for proving unlawful discrimination. 

Nonprofit Best Practices:  Good HR Document Retention Policies

What can nonprofit employers learn? 

First, remember to document all employment supervision and disciplinary measures, including the steps that could (or actually do) lead to employment termination.  Perform annual or other periodic job performance evaluations, and memorialize them in writing.  Have written job descriptions, to serve as benchmarks for job performance expectation.  When employee misconduct occurs, prepare a “memo to file” or other writing that includes a summary of what an employee has (or has not) done warranting a warning or other adverse employment action taken.  In other words, keep track!

Second, and correspondingly, develop a document retention policy that includes such employment considerations and otherwise complies with federal and state law.  In the event of litigation, such protocols may protect the organization’s interests, and they are otherwise in accordance with best practices standards.  (Such a policy is also expected, as part of a nonprofit’s IRS Form 990 reporting.)  Good HR retention protocols include instructions on the nonprofit’s creation, handling, and retention of the following documents:

·      Federal forms such as W-2, W-4, and I-9;
·      Compensation, job history, and time-keeping records;
·      Paid and unpaid leave records;
·      Performance evaluations;
·      Disciplinary action notes and records;
·      Benefits records;
·      Disputed issues; and
·      Workers’ compensation records.

The above list is not exhaustive, and a nonprofit should consult with qualified legal counsel to ensure that the retention policy for each of the above documents meets the nonprofit’s obligations under state and federal law. 

Third, a nonprofit’s board of directors should work with the organization’s executives and HR personnel to confirm that the Board’s document retention protocols are properly observed in practice.  Specific individuals should be assigned with the responsibility of taking custody of HR documents, according to their job descriptions.  The organization that takes steps to sufficiently plan for HR document retention, and to educate its responsible personnel, will protect itself when difficult employment-related circumstances arise. 

            For further information on legal aspects of employment supervision and discipline or of document retention policies, please contact one of our attorneys at info@wagenmakerlaw.com, or 312.626.1600.  Visit us on the web at www.wagenmakerlaw.com for further resources.

[1] Sloban v. Mahoning Youngstown Cmty. Action P'ship, No. 14-3619, 2015 WL 1020100, at *1 (6th Cir. Mar. 9, 2015).
[2] 29 U.S.C. §§ 623(a)(1). 

Friday, March 27, 2015

Tax Time: Top Tips for Reporting Charitable Deductions

            With April 15 fast approaching, now is the time to make the most of charitable tax deductions.  Many people give significant amounts to charities, schools, religious institutions, and other nonprofit organizations, with an accompanying expectation of tax deductibility.  Through such giving, donors not only help worthy causes but also can reduce their personal tax liability through itemized deductions.  Here are some top tips for maximizing the charitable tax deduction.

1)         Use the right tax forms.

            To take advantage of the charitable deduction, taxpayers must use IRS Form 1040 along with its Schedule A for itemized deduction.  Schedule A effectively reduces the total amount of income subject to taxation, but it is not available for use with IRS Form 1040-EZ.  Itemized deductions often allow for greater tax benefits than the otherwise applicable standard deduction.  For example, filers with large mortgage payments and/or extensive charitable giving may be able to deduct more by itemizing their deductions than they would by simply taking the standard deduction.  The 2014 standard deduction is only $6,200 if single or married filing separately, $12,400 if married filing jointly, or $9,100 if filing as a head of household.  If itemizing deductions results in higher tax savings than the standard deduction, make sure to use the Form 1040 and accompanying Schedule A.

2)         Get (and keep) proper contribution documentation.

            Various written substantiation requirements apply for charitable contributions, depending on the amount and type of donation.  For example, a taxpayer will need records of all “cash” contributions (including payments made by check, credit card, or other funds transfer method).  Any single contribution of more than $250 must also be evidenced by a written acknowledgment (a receipt) from the organization that meets specific IRS requirements. 

            Accordingly, charitable organizations should ensure that their donors receive accurate and tax-compliant charitable receipts. Receipts need to include the following information:  the donee’s name; the total amount contributed; the contribution date(s); and whether the organization provided the donor with any goods or services as a result of their contribution (other than token items).  If any goods or services were provided, then the receipt should include a brief description and good faith estimate of their value. 

3)         Deductions are available for some volunteer expenses.

            Volunteers often incur out-of-pocket expenses while performing volunteer work for nonprofit organizations.  Certain expenses, such as those for transportation, lodging, meals, or the purchase of tangible materials for the organization, may be deducted if they are directly related to performing volunteer services, are unreimbursed, and are otherwise reasonable.  Expenses incurred for personal reasons are not deductible, however, such as a trip primarily for personal pleasure or for a spouse traveling with a nonprofit leader (unless the spouse has official work responsibilities).  For mileage that is tracked and documented, the “charity” rate of 14 cents will apply, which is substantially lower than the business rate applicable for paid staff.  Notably, no deduction is available for a person’s time spent volunteering for the organization. 

            The tax substantiation rules likewise apply for volunteer expenses, so nonprofits and volunteers should maintain reliable written records.  Donee organizations need to provide charitable receipts for any unreimbursed expense of more than $250.

4)         Non-cash contributions are subject to special rules.

            Special rules apply to certain contributions of property, such as donations of clothing or household items, vehicles, property subject to debt, inventory from a business, and patents.  Note that special receipting, tax reporting, and other restrictions apply to vehicle donations.  In addition, appraisals are required for certain types of donations over a specified dollar amount.  Overall, it is the donee organization’s responsibility only to provide a good faith estimate of a donated item’s value, and it is the donor’s legal responsibility to comply with applicable legal requirements for more accurately reporting donation values.  Check IRS Publication 526 for more information, or contact an attorney for specific guidance.

5)         Contributions must be made to qualified organizations.

            A contribution is tax-deductible only if made to a qualified recipient organization.  Qualified donees include US religious, charitable, and educational organizations (Section 501(c)(3) organizations), veterans’ organizations, certain fraternal societies, the federal government, and others.  Deductions may also be available for contributions to charities in other countries to a very limited extent, such as Canada, Mexico, and Israel.  Notably, donations to Section 501(c)(4) lobbying and advocacy organizations and to PACs are not tax-deductible. 

6)         Membership dues may be deducted in some cases.

            Membership dues to 501(c)(3) organizations may be deducted as charitable contributions in some cases.  Special rules apply depending on the benefits each member receives in exchange for his or her contribution.   Alternatively, to the extent that a business may pay for its employees’ membership dues, they may be deducted as a business expense on its corporate return without the 10% limitation for corporate donations.  For more information, see our firm’s separate article on membership dues.

7)         Note financial limits for deductibility.

            Two key limits apply to the availability of charitable deductions, as follows.    
            First, the maximum amount of one’s adjusted gross income that can be deducted is generally 50%, regardless of the actual amount of charitable contributions.    Contributions only to organizations described in section 170(b)(1)(a):  religious organizations, schools, hospitals, the government, public charities, and others qualify for this limitation.  Further, the maximum amount is lowered to 30% for contributions to private foundations, veterans’ organizations and qualified fraternal societies. Specific limits also apply for contributions of “capital gain” property.  (One silver lining:  any disallowed charitable contribution amount may be carried forward to future tax years.) 

            Second, and new for 2014 tax filings, the total of all itemized deductions (including the charitable deduction) when added together, may be further limited based on a tax filer’s adjusted gross income.  This limitation applies if adjusted gross income is more than $305,050 if married filing jointly or qualifying widow(er); $279,650 if head of household; $254,200 if single; or $152,525 if married filing separately.  Such individuals will need to complete an itemized deductions worksheet to determine their limits.

8)         Giving is good!

            The above-listed strategic tax considerations for charitable giving are critical for maximizing the financial benefit of charitable gifts.  But perhaps more importantly, the annual tax exercise of tallying up contributions and completing Schedule A provides donors with a wonderful opportunity to consider how they have meaningfully contributed to improving the world.  In short, taxes may be painful, but reflecting on one’s charitable contributions should feel great.  (And there’s always next year – more opportunities to help others through giving, to feel good, and to keep reducing one’s taxes through itemized deductions!)

            For more information regarding charitable contributions, related tax implications, and other legal issues affecting nonprofit organizations, please contact one of our attorneys at 312.626.1600 or info@wagenmakerlaw.com or visit us on the web at wagenmakerlaw.com.