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Saving the Insurance Dollar Through Health Reimbursement Accounts (HRAs)

by Patrick Malayter, BKD, LLP

The Pension Protection Act of 2006 (PPA), signed into law August 17, contains many
significant incentives for charitable giving, as well as reform provisions inspired by
recommendations of the Panel on the Non-profit Sector (the Panel).

In its June 2005 final report, the Panel “recommended more than 120 separate actions—
by the charitable community, by Congress, and by the IRS—to strengthen the accountability and governance of charitable organizations.”

PPA contains some of the Panel’s suggested safeguards, including those intended to deter the use of charitable organizations for personal benefit and to ensure donations are used for charitable purposes. It also balances the gravity of these safeguards with a series of incentives for charitable giving that are designed to help raise the resources necessary to support and invigorate not-for-profit organizations.

Certain PPA provisions may have an immediate impact on your organization. Following
is a summary of the areas that will feel the first effects.

IRA charitable rollovers - For 2006 and 2007, PPA will allow owners of individual retirement accounts (IRAs) who are age 70½ or older to directly transfer up to $100,000 per year to a qualified charitable organization.

Under this provision, taxpayers may exclude the income from the IRA withdrawal from
their taxable income, but only if the funds are transferred directly from the IRA custodian to the charity.

The charity that receives the funds must be a “qualified charitable organization,” which
PPA defines as an organization described in §170(b)(1)(A) with the exception of a §509(a)(3) supporting organization or a donor-advised fund described in §4966(d)(2). A rollover to a private foundation would not qualify for this exclusion.

Form 990 filing requirement - Organizations with average annual gross receipts of less than $25,000 per year have been exempt from filing a Form 990; however, beginning with annual periods beginning after 2006, they will be required to file a notice with the Internal Revenue Service (IRS) that contains basic and financial information.

Public disclosure - Though Form 990 has been open to public disclosure for several years, a new PPA provision now requires Form 990-T to also be made available to the public for returns filed after August 17, 2006, by 501(c)(3) organizations.

Donor-advised funds - Many PPA provisions relate to donor-advised funds and their operations and reporting requirements. The IRS is directed to conduct a study on these organizations. In addition to these increased reporting requirements, donors may no longer deduct contributions made to certain sponsoring organizations for maintenance in a donor-advised fund.

Recapture tax benefit - Another PPA provision recaptures donor tax benefits that are received for contributing personal property intended for use by a charity (for exempt purposes). This provision applies to donations made after September 1, 2006.

Under PPA, when a charity disposes of a donated item that it has not used for exempt
purposes within three years of receipt, the donor must report an adjustment on his/her income tax return to recapture the tax benefit.

PPA also denies deductions for donated clothing or household items that are either of
minimal value or in poor used condition.

Receipt of life insurance contracts - PPA includes a temporary two-year reporting requirement for charities to report the receipt of life insurance contracts. PPA directs the Secretary of the Treasury to issue a report examining whether the acquisition of insurance contracts is consistent with the tax-exempt purpose of charitable organizations.

Increased penalties - Two PPA provisions govern increased authority for assessing penalties: Civil penalties may not be assessed against appraisers where the appraisal results in a substantial or gross valuation misstatement.

PPA doubles the excise taxes payable by charities and exempt organization managers for certain activities, including excess benefit transactions between disqualified persons and charitable organizations and self-dealing activities between disqualified persons and private foundations.

The Independent Sector, a “leadership forum for charities, foundations and corporate
giving programs,” and founder of the Panel, says it will work with Congress and the Treasury Department to resolve compliance and implementation issues related to PPA provisions. More information is available at the Independent Sector’s web site:
http://www.independentsector.org/.

Other PPA provisions may be of interest to exempt organizations. The complete PPA
text is available on the BKD Not-for-Profit & Government Group web page:
http://www.bkd.com/industry/Not-for-Profit&Government/. Also available at the above link is a PDF of the Detailed Summary of Charitable Provisions from the Committee on Ways and Means.

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Patrick M. Malayter, partner, is a 28-year tax professional with BKD where he oversees the firm’s nationally-recognized engineering-based real estate cost segregation practice and assists BKD’s tax director in developing select technical issues and services. Patrick has experience in merger and acquisition issues; crafting innovative situational tax planning strategies; proactive IRS representation and appeals and obtaining cutting-edge state and Federal ruling requests. Contact the author at pmalayter@bkd.com.

About BKD
BKD, LLP (www.bkd.com) is the CPA and advisory firm of choice for growing companies and high net-worth individuals. As one of the 10 largest CPA and advisory firms in the country, we help clients go beyond their numbers by applying our technical expertise, unmatched client service and disciplined delivery of solutions to their management and financial needs. BKD’s more than 1,600 personnel, including approximately 220 partners, are based in 27 offices within 11 states in the central United States. BKD serves clients worldwide as the largest member firm of Moores Rowland International (MRI), an association of independent accounting firms. BKD Not-for-Profit & Government Group works with more than 1,500 not-for-profit organizations and governmental entities to achieve their missions and maintain transparent financial accountability to their donors, members, clients, fund sources and other constituencies.