©20

10 L

arso

nA

llen

LLP

1

Fringe Benefit Testing

ACUIAAustin, Texas

June 15th, 2011

©20

10 L

arso

nA

llen

LLP

2

Speaker’s Biography – Greg Schwartz• Greg Schwartz, CPA, CMA, is a principal in the Financial Institution Credit Union

Group of LarsonAllen. Greg has been auditing credit unions for 25 years and his areas of expertise include audit and supervisory committee agreed-upon procedure engagements, GAAP and GAAS issues related to credit unions, supervisory committee issues, and review and evaluation of internal audit functions.

• Greg has worked with hundreds of credit unions all over the country and is considered an expert on credit union audit and accounting issues. He has made numerous presentations to credit union boards, supervisory committees and management on a variety of accounting and credit union issues.

• Greg graduated from Minnesota State University, Mankato, with a Bachelor of Science in Accounting and a minor in Computer Science. He is a CPA and a member of the American Institute of Certified Public Accountants (AICPA) and the AICPA credit union conference planning committee.

©20

10 L

arso

nA

llen

LLP

33

Fringe Benefit - Definition

• A fringe benefit is a form of pay (including property, services, cash or cash equivalent) in addition to stated pay for performance of services.

©20

10 L

arso

nA

llen

LLP

44

Fringe Benefit Audit - Benefits

1. Better control over credit union activities2. Develop better internal policies3. More equitable employee plans4. More accurate financial reporting5. Minimize tax consequences6. Better employee moral

©20

10 L

arso

nA

llen

LLP

5

Auditing Fringe Benefits

• How to identify• Are the expenses within policy/ Is it clear• Are they recorded correctly• Are the tax effects reported

©20

10 L

arso

nA

llen

LLP

6

How to identify

• Interview management• Miscellaneous or other expense• Expense reports• Corporate credit cards

©20

10 L

arso

nA

llen

LLP

77

Are the expenses within policy

• Clearly defined policy• Defined business purpose• Documentation requirements• Clearly defined eligibility• Clearly defined terms

©20

10 L

arso

nA

llen

LLP

88

Recorded Correctly

• If discovered through policy – probably ok• If discovered from management inquiries – possibly ok• If discovered any other way – probably redo

©20

10 L

arso

nA

llen

LLP

99

Are the tax effects reported

• Accountable plan1. Must be a business connection2. Must be adequate accounting/reasonable period of time3. Excess must be returned

• Nonaccountable plan1. Taxable wages

©20

10 L

arso

nA

llen

LLP

1010

Tax Consequences

• Accountable to Nonaccountable1. Withholding of social security, medicare and

income taxes2. Employer matching of social security and

medicare

©20

10 L

arso

nA

llen

LLP

1111

Tax Resource

• The IRS Taxable Fringe Benefit Guide

©20

10 L

arso

nA

llen

LLP

1212

Identification – the List

• Working Condition Fringe Benefits (slide)• De Minimis Fringe Benefit (slide)• No Additional Cost Fringe Benefits (slide)• Qualified Employee Discounts• Qualified Transportation Fringe Benefits• Health and Medical Benefits• Travel and Transportation Expenses• Moving Expenses • Meals and Lodging

©20

10 L

arso

nA

llen

LLP

1313

Identification – the List (Cont)

• Use of Employee-Owned Vehicle• Employer – Provided Vehicle• Equipment and Allowances• Other types of Compensation• Awards and Prizes• Professional Licenses and Dues• Educational Reimbursments

©20

10 L

arso

nA

llen

LLP

1414

Working Condition Fringe Benefits

• Property of services that, if the employee had paid for, he or she could have deducted as a business expense

• Uniform

©20

10 L

arso

nA

llen

LLP

1515

De Minimis Fringe Benefit

• Small and infrequent1. Personal use of photocopier2. Group meals3. Theater or sporting event tickets4. Coffee, donuts, or soft drinks5. Flowers for special circumstances6. Local phone calls7. Birthday or holiday gifts (not cash) with a low FMV8. Commuting use of employer’s car < 1 day per month

©20

10 L

arso

nA

llen

LLP

1616

De Minimis Fringe Benefit

• Not De Minimus1. Cash2. Cash equivalent3. Transportation passes4. Use of employer’s apartment, vacation home, boat5. Commuting use of employer’s car > 1 day per month6. Membership in a country club or athletic facility

©20

10 L

arso

nA

llen

LLP

1717

De Minimis Fringe Benefit

• An employer gives employees snacks each day valued at 75 cents. Even though small in amount, the benefit is provided on a regular basis and is, therefore, taxable as wages.

©20

10 L

arso

nA

llen

LLP

1818

No Additional Cost Fringe Benefits

• A service provided to employees the does not impose any substantial additional cost.

• Use of the credit union meeting facilities after hours

©20

10 L

arso

nA

llen

LLP

1919

Qualified Employee Discounts

• Excludable if:

– Merchandise – less than the employers gross profit percentage time the price charged the member

– Services – less than 20% of the price charged the member

• Difficult to find• Policy may or may not be clear• Accounting is usually ok

©20

10 L

arso

nA

llen

LLP

2020

Qualified Transportation Fringe Benefits

1. Commuter transportation in a commuter highway vehicle2. Transit passes3. Qualified Parking4. Qualified bicycle commuting expenses

• Difficult to find• Policy may or may not be clear• Accounting is usually ok

©20

10 L

arso

nA

llen

LLP

2121

Moving Expenses

• Often buried in “other”• Often no clear policy• Tax effect is often wrong1. Time test – 39 weeks full time2. New job is +50 miles further from the former home than

the old job was from the former home3. Moving of household goods and travel costs only4. Must actually incur the expenses

©20

10 L

arso

nA

llen

LLP

2222

Use of Employee-Owned Vehicle

• Not difficult to find• Policy may or may not be clear• Accounting is usually ok• Taxes – federal standard mileage rate

©20

10 L

arso

nA

llen

LLP

2323

Employer Provided Vehicle

• Not difficult to find• Policy may or may not be clear• Accounting is usually ok• Taxes –1. If records are provided then personal use is wages to the

employee2. If records are not provided then all use is wages to the

employee

©20

10 L

arso

nA

llen

LLP

2424

Listed Property - Cell phones, Computers

• Usually not hard to fine• Usually mentioned in policy• Accounting usually ok• Tax effects-1. Business use is not taxable2. Personal use is wages3. If records are not kept – all personal

©20

10 L

arso

nA

llen

LLP

2525

Other Types of Compensation

• Performance bonuses• Signing, recruiting or relocation bonuses• Awards for outstanding service or performance• Back Pay• Severance pay• Administrative pay• Legal settlements/damages related to performance• Grossed-up wages to pay for taxes

©20

10 L

arso

nA

llen

LLP

2626

Employee awards

• Easy to find• Probably not in policy• Accounting probably ok• Tax effect – 1. Must be length of service or safety only2. Cannot be cash, cash equivalent, vacation, meal, lodging,

theater or sports ticket, stocks or bonds.3. Other special rules – no more than 10% can receive, etc

©20

10 L

arso

nA

llen

LLP

2727

Employee Awards

• Employee of the month, outstanding member service, highest productivity – always taxable

• Dollar limitations – Qualified plan vs nonqualified plan

©20

10 L

arso

nA

llen

LLP

2828

Club Membership

• Can be difficult to find• Policy may not be clear• Probably recorded in “other”• Tax effect – 1. Taxable to the employee2. Employee may deduct business use

©20

10 L

arso

nA

llen

LLP

2929

Education Reimbursements

• Not hard to find• Policy probably fairly clear• Accounting probably ok• Tax effect – 1. Must not be minimum requirements of current job2. Must not qualify employee for a new job3. Subject to verification requirements

©20

10 L

arso

nA

llen

LLP

3030

Corporate Credit Cards

• Hard to find• Policy not clear• Accounting usually wrong• Tax effect – can be a problem

©20

10 L

arso

nA

llen

LLP

3131

Actual situation

• Missing receipts• No business purpose documented• Shared cards• Tuition reimbursements to terminated employees not

followed up• Spouse travel• Other mysterious expenses

©20

10 L

arso

nA

llen

LLP

3232

Actual Situation

• Rolex watches

©20

10 L

arso

nA

llen

LLP

3333

Actual Situation

• 1000 Golf balls

©20

10 L

arso

nA

llen

LLP

3434

Actual Situation

• A CEO attended a conference in Hawaii - a “Supervisory Committee” conference

©20

10 L

arso

nA

llen

LLP

3535

Actual Situation

• Property improvement – moving expenses

©20

10 L

arso

nA

llen

LLP

3636

Actual Situation

• No documented compensation package for the CEO

©20

10 L

arso

nA

llen

LLP

3737

Actual Situation

• Over 200 corporate credit union cards

©20

10 L

arso

nA

llen

LLP

3838

Actual Situation

• Over a three year period, 9 people left without tuition reimbursement follow-u.p

©20

10 L

arso

nA

llen

LLP

3939

Actual Situation

• $10,000 contribution to the University the CEO attended

©20

10 L

arso

nA

llen

LLP

4040

Actual Situation

• CEO used a golf club 3 times in one year. Family used it daily.

©20

10 L

arso

nA

llen

LLP

41

Thank You

Greg Schwartz, CPAgschwartz@larsonallen.com (612)376-4684 or (972)-644-3167