fringe benefit testing acuia austin, texas june 15th, 2011

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Fringe Benefit Testing

ACUIAAustin, Texas

June 15th, 2011

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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.

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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.

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Fringe Benefit Audit - Benefits1. Better control over credit union activities2. Develop better internal policies3. More equitable employee plans4. More accurate financial reporting5. Minimize tax consequences6. Better employee moral

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

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How to identify

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

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Are the expenses within policy• Clearly defined policy• Defined business purpose• Documentation requirements• Clearly defined eligibility• Clearly defined terms

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

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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

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Tax Consequences• Accountable to Nonaccountable

1. Withholding of social security, medicare and income taxes

2. Employer matching of social security and medicare

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Tax Resource• The IRS Taxable Fringe Benefit Guide

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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

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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

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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

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De Minimis Fringe Benefit• Small and infrequent

1. 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

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De Minimis Fringe Benefit• Not De Minimus

1. 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

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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.

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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

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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

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Qualified Transportation Fringe Benefits1. 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

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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

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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

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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

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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

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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

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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

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Employee Awards• Employee of the month, outstanding member service,

highest productivity – always taxable• Dollar limitations – Qualified plan vs nonqualified plan

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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

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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

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

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

followed up• Spouse travel• Other mysterious expenses

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Actual Situation• A CEO attended a conference in Hawaii - a “Supervisory

Committee” conference

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Actual Situation• Over a three year period, 9 people left without tuition

reimbursement follow-u.p

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

daily.

fringe benefit testing acuia austin, texas june 15th, 2011

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