It’s Time for Your Small Business to Think About Year-end Tax Planning

With Labor Day in the rearview mirror, it’s time to take proactive steps that may help lower your small business’s taxes for this year and next. The strategy of deferring income and accelerating deductions to minimize taxes can be effective for most businesses, as is the approach of bunching deductible expenses into this year or next to maximize their tax value.

Do you expect to be in a higher tax bracket next year? If so, then opposite strategies may produce better results. For example, you could pull income into 2024 to be taxed at lower rates, and defer deductible expenses until 2025, when they can be claimed to offset higher-taxed income.

Here are some other ideas that may help you save tax dollars if you act soon.

Estimated taxes

Make sure you make the last two estimated tax payments to avoid penalties. The third quarter payment for 2024 is due on September 16, 2024, and the fourth quarter payment is due on January 15, 2025.

QBI deduction

Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income (QBI). For 2024, if taxable income exceeds $383,900 for married couples filing jointly (half that amount for other taxpayers), the deduction may be limited based on whether the taxpayer is engaged in a service-type business (such as law, health or consulting), the amount of W-2 wages paid by the business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the business. The limitations are phased in.

Taxpayers may be able to salvage some or all of the QBI deduction (or be subject to a smaller deduction phaseout) by deferring income or accelerating deductions to keep income under the dollar thresholds. You also may be able increase the deduction by increasing W-2 wages before year end. The rules are complex, so consult us before acting.

Cash vs. accrual accounting

More small businesses are able to use the cash (rather than the accrual) method of accounting for federal tax purposes than were allowed to do so in previous years. To qualify as a small business under current law, a taxpayer must (among other requirements) satisfy a gross receipts test. For 2024, it’s satisfied if, during the three prior tax years, average annual gross receipts don’t exceed $30 million. Cash method taxpayers may find it easier to defer income by holding off on billing until next year, paying bills early or making certain prepayments.

Section 179 deduction

Consider making expenditures that qualify for the Section 179 expensing option. For 2024, the expensing limit is $1.22 million, and the investment ceiling limit is $3.05 million. Expensing is generally available for most depreciable property (other than buildings) including equipment, off-the-shelf computer software, interior improvements to a building, HVAC and security systems.

The high dollar ceilings mean that many small and midsize businesses will be able to currently deduct most or all of their outlays for machinery and equipment. What’s more, the deduction isn’t prorated for the time an asset is in service during the year. Even if you place eligible property in service by the last days of 2024, you can claim a full deduction for the year.

Bonus depreciation

For 2024, businesses also can generally claim a 60% bonus first-year depreciation deduction for qualified improvement property and machinery and equipment bought new or used, if purchased and placed in service this year. As with the Sec. 179 deduction, the write-off is available even if qualifying assets are only in service for a few days in 2024.

Upcoming tax law changes

These are just some year-end strategies that may help you save taxes. Contact us to customize a plan that works for you. In addition, it’s important to stay informed about any changes that could affect your business’s taxes. In the next couple years, tax laws will be changing. Many tax breaks, including the QBI deduction, are scheduled to expire at the end of 2025. Plus, the outcome of the presidential and congressional elections could result in new or repealed tax breaks.

Your business probably has a disaster plan — or a set of procedures for dealing with a fire, natural disaster, terrorist attack or other emergency that could disrupt operations and threaten lives. Although a fraud contingency plan probably isn’t as critical, it’s still important for most companies to have one. Here’s how to draft and put a fraud contingency plan in place.

Where are your weaknesses?

Start by meeting with your senior management team and financial advisors to devise as many fraud scenarios as you can dream up. Consider how your internal controls could be breached — whether the perpetrator is a relatively new hire, an experienced department manager, a high-ranking executive or an outside party.

Next, decide which scenarios are most likely to occur given such factors as your industry and size. For example, retailers are particularly vulnerable to skimming and construction companies are prone to employee/vendor collusion in bid rigging. Small businesses without adequate segregation of duties may be at greater risk for theft in accounts payable.

Also identify the schemes that would be most damaging to your business. Consider them from financial, employee morale and public relations standpoints.

Who will be responsible for what?

As you write your plan, assign responsibilities to specific individuals. When fraud is suspected, one person should lead the investigation and coordinate with staff and any third-party investigators. Put other employees to work where they can be most effective. For example, your IT manager may be tasked with preventing loss of electronic records and your HR head may be responsible for maintaining employee morale.

You’ll also want to define the objectives of any fraud investigation. Some companies want only to fire the person responsible, mitigate the damage and keep news of the incident from leaking. Others may want to seek prosecution of offenders as examples to others or to recover stolen funds. Your fraud contingency plan should include information on who will work with law enforcement and how they’ll do so.

How should you communicate incidents?

Employee communications are particularly important during a fraud investigation. Staff members who don’t know what’s going on will speculate. Although you should consult legal and financial advisors before releasing any information, you probably want to be as honest with your employees as you can. It’s equally important to make your response visible so that employees know you take fraud seriously.

Also designate someone to manage external communications. This person should be prepared to deflect criticism and defend your company’s stability, as well as control the flow of information to the outside world.

Strong internal controls

A fraud contingency plan shouldn’t be your only effort to combat theft and other crimes within your organization. After all, this plan is intended to help you after fraud has occurred. So be sure to establish strong internal controls that can reduce fraud risk. Contact us for help.

Is your company planning to hire a new CFO? A recent survey found that hiring managers look for more than financial acumen when vetting CFO candidates. In fact, only 38.5% of CFOs at Fortune 500 and S&P 500 companies were licensed CPAs in 2023, according to executive recruiting firm Crist Kolder. What other skills may be needed to fill these shoes?

Financial know-how opens doors

The Pennsylvania Institute of Certified Public Accountants recently surveyed over 320 hiring executives about what skills matter most for the CFO role. Not surprisingly, “2024 Corporate Finance Report: CPAs in the C-Suite” found that the top must-have for CFO candidates is the ability to manage the company’s finances effectively.

The top 10 financial skills identified in the survey include:

Capital management and strategy,
Financial forecasting,
Operations and financial reporting,
Critical thinking,
Financial reporting compliance,
Strategy creation,
Industry/product forecast and outlook,
Tax compliance,
Accounts receivable, and
Networking and industry relationships.

The survey draws two key findings. First, CPAs who aspire to become CFOs will need to expand their skill sets beyond traditional accounting to include strategic planning, risk management and technology oversight. Second, today’s CFOs must “strategize for growth and stability, not just report past results.”

Nonfinancial skills seal the deal

Today’s hiring managers are looking for more than finance and accounting skills when filling CFO positions. They prefer candidates with the following general competencies, listed in order of importance:

Leadership/strategic aptitude to develop high-performing teams and strategic goals,
Compliance and regulatory expertise to ensure organizational adherence to laws, regulations and internal policies,
Technology and analytical proficiency to make data-driven decisions and use cutting-edge tools,
Industry-specific knowledge to understand market conditions and how they influence the organization, and
Communication skills to build effective relationships with internal and external stakeholders to maintain alignment with corporate strategy.

In addition, respondents emphasized the need for CFO candidates to possess “general business acumen” and “emotional intelligence.” However, the survey cautions that most hiring managers assume candidates who apply for executive positions have already mastered these general skills.

What’s the right fit for your executive team?

Finding the right person to head up your company’s finance and accounting department can be challenging in today’s tight labor market. The CFO’s main responsibility is to provide timely, relevant financial data to other departments — including information technology, operations, sales and supply chain logistics — to help improve how the business operates. He or she also must be able to drum up cross-departmental support for major initiatives. So, it’s important that you choose a candidate who’s a team player. You might even want to outsource the position to a skilled professional. Contact us for help evaluating CFO candidates to find the right mix of skills and experience for your company’s finance and accounting department.

While America was celebrating Labor Day this year, another auspicious occasion was taking place that probably flew under most people’s radar: The Employee Retirement Income Security Act (ERISA) turned 50.

For employers, ERISA is a constant regulatory presence when choosing, launching and administering employee benefit plans. If you’ve been dealing with it for years, you might not recall or even know why the law came about or how it’s evolved. Let’s take a look.

Brief history

The seeds of ERISA can be found in the Revenue Acts of 1921, 1926 and 1942. These laws addressed the growing trend of employer-sponsored pensions, also known as defined benefit plans.

The Revenue Acts established increasingly strict requirements — such as minimum employee coverage, employer contribution requirements and mandated disclosures — for the first qualified plans. Employers that met the qualifications for such plans could deduct pension contributions, while participants could accumulate tax-free savings and defer income taxes until taking distributions. The IRS was primarily tasked with enforcing the Revenue Acts.

In 1959, the federal government escalated its regulation of retirement plans with the Welfare and Pension Plans Disclosure Act, which was amended in 1962. It introduced the requirement that employers must file plan descriptions and annual reports. With this law, the U.S. Department of Labor (DOL) became the chief enforcer.

Yet, despite the passage of these laws, labor advocacy groups continued to decry the instability of pensions and the risks they posed to workers — many of whom depended on those funds for retirement only to see them vanish. And so, throughout the 1960s and early 1970s, the regulatory ideas that would eventually form the provisions of ERISA were developed. The law itself was finalized during the Ford administration and signed into law on Labor Day, 1974.

Purpose, titles and more

According to the DOL’s website, “The goal of Title I of ERISA is to protect the interests of participants and their beneficiaries in employee benefit plans.” You may note the phrase “employee benefit plans,” not “employee pension plans,” in that sentence. Indeed, over time, ERISA has expanded to include both major types of retirement plans: defined benefit plans and defined contribution plans, such as 401(k)s, which are now much more widely sponsored than pensions. ERISA also covers certain health and welfare benefit plans.

In addition, you may note the reference to Title I. In fact, the law has four Titles:

Title I, which generally includes the rules regarding plan reporting and disclosures, participation, vesting, accrual of benefits and funding,
Title II, which covers the tax treatment of plans,
Title III, which addresses jurisdiction, administration and enforcement, primarily assigning these responsibilities to the DOL and the U.S. Department of the Treasury, and
Title IV, which established and sets forth the powers and rules of the Pension Benefit Guaranty Corporation, essentially a government insurer of pension plans.

Over the years, many of the most powerful and well-known laws related to employee benefits have been enacted under or in relation to ERISA. These include the Consolidated Omnibus Budget Reconciliation Act (popularly known as “COBRA”), the Health Insurance Portability and Accountability Act and the Affordable Care Act.

One important recent development is multistate employers’ concern about the erosion of ERISA’s “preemption.” ERISA has always preempted state and local laws related to employee benefit plans, and it continues to do so. But some states have been quietly challenging this long-standing legal principle. It’s something to keep an eye on if your organization could be adversely affected.

Fundamental mandate

Ultimately, ERISA’s fundamental mandate is fiduciary responsibility — that is, plan sponsors must always act in the best interests of participants when administrating plans and managing their assets. For questions about compliance, contact your attorney. And for help identifying and managing the costs and tax impact of your organization’s benefit plans, contact us.

Every business needs a budget, but not every budget looks the same. Some companies have intricately detailed ones, others rely on simple templates generated with off-the shelf software, and still others forego formal budgets in favor of a “fly by the seat of your pants” approach. (That last option isn’t recommended.)

Because budgeting is such an essential part of running a business, it’s easy to take for granted. You may fall into a routine that, over time, doesn’t keep up with your company’s evolving needs. To identify areas of improvement, here are six key elements of a business budget and some best practices to consider:

1. Current overview. You may think you’ve created a sound budget, but its usefulness will be limited if it’s based on what your business looked like and how it operated five years ago. Compose an up-to-date description of your business. This should include its strategic goals, sales targets, the state of your industry and market, and impactful economic factors.

2. Budget rationale. Explain in clear language how the budget supports your company’s mission, vision, values, goals and objectives. To be included in the budget, every line item (see below) must support all five of those factors. If one doesn’t, question its merit.

3. Detailed line items. Naturally, the “meat” of every budget is its line items. These typically include:

Revenue, such as sales income and interest income,
Expenses, such as salaries and wages, rent, and utilities,
Capital expenditures, such as equipment purchases and property improvements, and
Contingency funds, such as a cash reserve.

An important question to ask is: Are we including everything the business spends money on? Although maintaining a detailed budget can be tedious, it’s imperative to managing cash flow.

4. Selected performance metrics. Among the primary purposes of a budget is to compare projected spending to actual spending — making adjustments as necessary. As part of the budgeting process, establish precisely which metrics you’ll use to determine whether you’re making, breaking or beating the budget.

5. Supporting appendices. Discuss with your leadership team whether your budget would be more useful with additional information. Commonly attached supporting appendices include historical budget and results analyses, department spending summaries, tables and graphs depicting market and cost trends, organizational charts, and glossaries of terminology.

6. Executive summary. This brief written snapshot, which usually appears at the very top of the budget report, is intended to provide a concise overview of the chief objectives and major sections of the budget. If you’re not already using one, consider it. For you and other internal users, an executive summary can serve as a quick reference and help you set your expectations. Perhaps more important, it can make your budget easier to understand for outside parties such as lenders and investors.

Your current budget may not include all six of these elements — and that’s OK. As mentioned, companies are free to create budgets in whatever format suits their size and needs. But you should approach budgeting with an eye on continuous improvement. And to that end, please contact us. We can assess your budgeting process from start to finish and suggest ways to perform this critical business function more efficiently and effectively.

The average cost of a data breach has reached $4.88 million, up 10% from last year, according to a recent report. As businesses increasingly rely on technology, cyberattacks are becoming more sophisticated and aggressive, and risks are increasing. What can your organization do to protect its profits and assets from cyberthreats?

Recent report

In August 2024, IBM published “Cost of a Data Breach Report 2024.” The research, conducted independently by Ponemon Institute, covers 604 organizations that experienced data breaches between March 2023 and February 2024. It found that, of the 16 countries studied, the United States had the highest average data breach cost ($9.36 million).

The report breaks down the global average cost per breach ($4.88 million) into the following four components:

$1.47 million for lost business (for example, revenue loss due to system downtime and costs related to lost customers, reputation damage and diminished goodwill),
$1.63 million for detection and escalation (such as forensic and investigative activities, assessment and audit services, crisis management, and communications to executives and boards),
$1.35 million for post-breach response (including product discounts, regulatory fines, legal fees, and costs related to setting up call centers and credit monitoring / identity protection services for breach victims), and
$430,000 for notifying regulators, as well as individuals and organizations affected by the breach.

A silver lining from the report is that the average time to identify and contain a breach has fallen to 258 days from 277 days in the 2023 report, reaching a seven-year low. One key reason for faster detection and recovery is that organizations are giving more attention to cybersecurity measures.

Implementing cybersecurity protocols

Cybersecurity is a process where internal controls are designed and implemented to:

Identify potential threats,
Protect systems and information from security events, and
Detect and respond to potential breaches.

The increasing number of employees working from home exposes their employers to greater cybersecurity risk. Many companies now have sensitive data stored in more places than ever before — including laptops, firm networks, cloud-based storage, email, portals, mobile devices and flash drives — providing many potential areas for unauthorized access.

Targeted data

When establishing new cybersecurity protocols and reviewing existing ones, it’s important to identify potential vulnerabilities. This starts by inventorying the types of employee and customer data that hackers might want to steal. This sensitive material may include:

Personally identifiable information, such as phone numbers, physical and email addresses and Social Security numbers,
Protected health information, such as test results and medical histories, and
Payment card data.

Companies need to have effective controls over this data to comply with their obligations under federal and state laws and industry standards.

Hackers may also try to access a company’s network to steal valuable intellectual property, such as customer lists, proprietary software, formulas, strategic business plans and financial data. These intangible assets may be sold or used by competitors to gain market share or competitive advantage.

Auditing cyber risks

No organization, large or small, is immune to cyberattacks. As the frequency and severity of data breaches continue to increase, cybersecurity has become a critical part of the audit risk assessment.

Audit firms provide varying levels of guidance, both when assessing risk at the start of the engagement and when uncovering a breach that happened during the period under audit or during audit fieldwork.

We can help

Contact us to discuss your organization’s vulnerabilities and the effectiveness of its existing controls over sensitive data. Additionally, if your company’s data is hacked, we can help you understand what happened and fortify your defenses going forward.

Yeo & Yeo is pleased to announce that Rebecca Millsap, CPA, and Steven Treece, CPA, have earned the Personal Financial Specialist (PFS) designation from the American Institute of Certified Public Accountants.

The PFS credential is awarded to CPAs with extensive training and experience in financial planning. This knowledge enables Millsap and Treece to provide more informed and strategic advice, particularly in tax planning, estate planning, risk management, and investment strategies.

Millsap, who has been with Yeo & Yeo since 1994, is the Managing Principal of the Flint office. She leads the firm’s Estate and Trust Group and finds joy in helping clients plan for their futures and protect their legacies. Her knowledge spans taxation, financial reporting, business consulting, and strategic planning. Beyond her professional role, Millsap is dedicated to her community, serving as treasurer of the Flint Rotary Club and on the Finance Committee for both the Grand Blanc Chamber of Commerce and Holy Family Catholic Church in Grand Blanc.

Reflecting on earning this credential, Millsap shared, “Estate planning and financial planning often go hand in hand. When I help clients plan for the future, I look at the full picture, including their goals and potential tax burden. Earning this credential has given me even more insight to help my clients succeed.”

Steven Treece joined Yeo & Yeo in 2013 after receiving his bachelor’s degree in accounting from the University of Michigan. Treece is a senior manager and member of the firm’s Agribusiness Services Group and Estate and Trust Services Group. He enjoys guiding clients through the complexities of taxation and providing thoughtful advice. He is a mentor within the firm, hosting internal podcasts to help his colleagues enhance their client service skills. Active in the community, Treece is a board member and past president of the Rotary Club of Burton. He supports the Old Newsboys of Flint and volunteers with the Food Bank of Eastern Michigan and Genesee County Habitat for Humanity.

“Delivering five-star client service has consistently been my priority,” Treece said. “Earning this credential reflects my dedication to best supporting my clients, ensuring they can confidently navigate complex financial landscapes.”

About Yeo & Yeo Wealth Management
Yeo & Yeo Wealth Management (www.yeoandyeo.com) helps businesses and individuals with their wealth management and investment strategies. Working closely with Avantax®, a national wealth management company, Yeo & Yeo Wealth Management delivers a holistic approach that connects financial planning, tax strategies, and insurance solutions. Wealth management services are offered in Yeo & Yeo’s offices throughout Michigan.

Avantax WM Holdings^SM is the holding company for the group of companies providing financial services under the Avantax® name. Investment advisory services are offered through Avantax Planning Partners^SM. Commission-based securities products are offered through Avantax Investment Services^SM, Member FINRA, SIPC. Insurance services offered through licensed agents of Avantax Planning Partners. 3200 Olympus Blvd., Suite 100, Dallas, TX 75019. The Avantax entities are independent of and unrelated to Yeo & Yeo Wealth Management. Although Avantax does not provide or supervise tax or accounting services, our Financial Professionals may offer these services through their independent outside business. Not all Financial Professionals are licensed to offer all products or services. Financial planning and investment advisory services require separate licenses.

Artificial intelligence (AI) has become a cornerstone of technological advancement, offering transformative potential across various industries. However, this powerful tool is also being exploited by cybercriminals, amplifying the threat landscape and necessitating a heightened awareness of cybersecurity among individuals and businesses.

How AI is Empowering Cybercriminals

Automated Attacks: AI enables cybercriminals to automate and scale their attacks. Phishing schemes, malware distribution, and ransomware campaigns can now be conducted on a much larger scale with minimal human intervention.
Enhanced Phishing Tactics: Traditional phishing attacks often rely on generic messages that are easy to spot. With AI, cybercriminals can analyze large datasets, including social media profiles and publicly available information, to craft highly targeted and convincing phishing messages. This approach, known as spear phishing, makes it more challenging for individuals to distinguish between legitimate and malicious communications.
Sophisticated Malware: AI can be used to develop more sophisticated malware that adapts and evolves to bypass traditional security measures. For instance, AI-powered malware can analyze a target’s system in real-time, identifying vulnerabilities and adjusting its behavior to avoid detection by antivirus software.
Deepfake Technology: Deepfake technology, powered by AI, allows cybercriminals to create highly realistic fake videos and audio recordings. These can be used to impersonate individuals, spread misinformation, or manipulate social engineering attacks. The increasing quality of deepfakes makes it difficult for individuals to verify the authenticity of digital content, posing significant security risks.
Password Cracking: AI-driven algorithms can accelerate the process of cracking passwords by analyzing patterns and using machine learning to predict likely password combinations. This capability enables cybercriminals to breach accounts and access sensitive information more efficiently.

The Need for Heightened Cybersecurity Awareness

The rise of AI-driven cybercrime underscores the urgent need for organizations to adopt robust cybersecurity practices. Here are some critical steps to enhance cybersecurity awareness:

Educate Yourself: Stay informed about the latest cybersecurity threats and trends. Understanding how cybercriminals use AI can help you recognize and respond to potential threats more effectively.
Strengthen Passwords: Use complex, unique passwords for different accounts and enable multi-factor authentication (MFA) wherever possible. Consider using a password manager to keep track of your credentials securely.
Verify Communications: Avoid unsolicited emails, messages, and phone calls, especially those requesting personal information or urgent actions. Verify the sender’s authenticity before responding or clicking on links.
Update Software Regularly: Keep your operating system, software, and antivirus programs current. Regular updates often include security patches that address vulnerabilities exploited by cybercriminals.
Use Security Tools: To protect your devices, use reputable antivirus and anti-malware software. Firewalls and virtual private networks (VPNs) can also enhance your security by safeguarding your internet connection and data.
Be Skeptical of Digital Content: Question the authenticity of digital content, particularly videos and audio recordings. Look for signs of manipulation and use tools designed to detect deepfakes.
Report Suspicious Activity: If you encounter suspicious activity or believe you have been targeted by a cyberattack, report it to the appropriate authorities. Prompt reporting can help mitigate the impact of an attack and prevent further incidents.

As AI continues to evolve, so too does its potential to empower both positive advancements and malicious activities. The increasing sophistication of AI-driven cybercrime highlights the critical need for heightened cybersecurity awareness among individuals. By staying informed, adopting robust security practices, and remaining vigilant, we can better protect ourselves against the growing threats posed by AI-enhanced cybercriminals.

In April 2024, the Federal Trade Commission (FTC) approved a final rule prohibiting most noncompete agreements with employees. The ban was scheduled to take effect on September 4, 2024, but ran into multiple court challenges. Now the court in one of those cases has knocked down the rule, leaving its future uncertain.

The FTC ban

The FTC’s rule would have prohibited noncompetes nationwide. In addition, existing noncompetes for most workers would no longer be enforceable after it became effective. The rule was expected to affect 30 million workers.

The rule includes an exception for existing noncompete agreements with “senior executives,” defined as workers earning more than $151,164 annually who are in policy-making positions. Policy-making positions include:

A company’s president,
A chief executive officer or equivalent,
Any other officer who has policy-making authority, and
Any other natural person who has policy-making authority similar to an officer with such authority.

Employers couldn’t enter new noncompetes with senior executives under the new rule.

Unlike an earlier proposed rule issued for public comment in January 2023, the final rule didn’t require employers to legally modify existing noncompetes by formally rescinding them. Instead, they were required only to provide notice to workers bound by an existing agreement — other than senior executives — that they wouldn’t enforce such agreements against the workers.

Legal challenges

On the day the FTC announced the new rule, a Texas tax services firm filed a lawsuit challenging the rule in the Northern District of Texas (Ryan, LLC v. Federal Trade Commission). The U.S. Chamber of Commerce and similar industry groups joined the suit in support of the plaintiff. Additional lawsuits were filed in the Eastern District of Pennsylvania (ATS Tree Services, LLC v. Federal Trade Commission) and the Middle District of Florida (Properties of the Villages, Inc. v. Federal Trade Commission).

The Ryan case is the first to reach judgment. On August 20, 2024, the U.S. District Court for the Northern District of Texas held that the FTC exceeded its authority in implementing the rule and that the rule was arbitrary and capricious. It further held that the FTC cannot enforce the ban, a ruling that applies on a nationwide basis.

Notably, in July 2024, the U.S. District Court for the Eastern District of Pennsylvania denied the plaintiff’s request for a preliminary injunction and stay of the rule’s effective date. It found the plaintiff didn’t establish that it was reasonably likely to succeed in its argument against the ban. By contrast, on August 14, 2024, the U.S. District Court for the Middle District of Florida granted the plaintiff a preliminary injunction and stay. That plaintiff requested relief only for itself, though, not nationwide. But the Ryan ruling means the FTC can’t enforce the ban at all unless it prevails on appeal.

An appeal would be before the conservative U.S. Court of Appeals for the Fifth Circuit, which has become a favorite destination for challenges to President Biden’s policies. Although the court often sides with the challengers, it’s also regularly been reversed by the U.S. Supreme Court.

An FTC appeal could face an uphill battle regardless, though, in light of a recent Supreme Court ruling that reversed the longstanding doctrine of “Chevron deference.” Under that precedent, courts gave deference to federal agencies’ interpretations of the laws they administer. According to the new ruling, however, it’s now up to courts to decide “whether the law means what the agency says.”

The bottom line

For now, the FTC’s noncompete ban remains in limbo and won’t take effect on September 4, 2024. But that doesn’t mean noncompetes aren’t still vulnerable to attack. For example, some private parties are using anti-trust laws to challenge such agreements. And an FTC spokesperson has indicated that the Ryan ruling won’t deter the agency “from addressing noncompetes through case-by-case enforcement actions.”

Understanding payroll accounting is crucial for maintaining financial integrity and ensuring compliance with legal and tax obligations. Payroll accounting involves tracking and recording all payroll-related transactions, including employee paychecks, taxes, deductions, and employer contributions. Accurate payroll accounting ensures timely and correct employee payments and maintains an organization’s financial health. Let’s dive into the key components of payroll accounting and how to avoid common pitfalls.

Setting Up the Chart of Accounts

Before you can begin recording payroll, setting up the appropriate accounts in the chart of accounts is essential. These typically include:

Expense accounts: For wages, employer-paid benefits, and the employer’s portion of taxes.
Liability accounts: For amounts deducted from employee paychecks and temporarily held before remittance.

Account Mapping

Once the chart of accounts is set up, the next crucial step is mapping the pay items to the correct accounts. This process ensures that each specific pay item is recorded accurately within the chart of accounts, whether you’re processing payroll within accounting software or entering payroll journal entries manually.

Gathering Essential Reports

To create accurate payroll journal entries, you’ll need to collect key documents:

Payroll Register: This comprehensive report details all payroll transactions during the pay period, including employee names, pay dates, and payment amounts. It may also include quarter-to-date and year-to-date totals.
Payroll Tax Liability Report: This report provides a breakdown of taxes owed by the business and taxes withheld from employee paychecks.
Deductions Register: This document outlines employee deductions from gross wages that must be paid to third parties, such as taxes, health insurance premiums, retirement account deferrals, child support, or garnishments.

Journal Entries

Payroll journal entries typically involve debiting gross wage expenses and crediting various liabilities. Remember, employer contributions and taxes should be recorded as both expenses and liabilities until paid.

Here is a simple example:

Payroll Table

Avoiding Common Payroll Accounting Errors

To maintain accurate records and ensure compliance, be vigilant about these common errors:

Over or underpayment of payroll taxes
Failing to record employer benefit contributions as expenses
Incorrectly applying benefit payments entirely to expense accounts
Misconfigured payroll account mapping in software systems

Conduct monthly reviews of the balance sheet to ensure liability accounts are zeroing out appropriately and payments are applied to the correct accounts. Perform quarterly reviews of payroll activities to identify and address potential issues promptly. Compare monthly payroll expenses and verify that tax expense accounts align with payroll reports.

Mastering payroll accounting is essential for a business’s financial health. By understanding the key components, avoiding common errors, and implementing best practices, you can ensure accurate financial reporting and compliance with tax obligations. At Yeo & Yeo, we’re committed to helping businesses navigate the complexities of payroll accounting. For personalized guidance on optimizing your payroll processes, contact our team.

The IRS announced a second Voluntary Disclosure Program for employers to resolve erroneous claims for credit or refund involving the COVID-19 Employee Retention Credit (ERC). The program is designed to help businesses with questionable claims to self-correct and repay the credits they received after filing erroneous ERC claims, many of which were driven by unscrupulous marketing promoters.

The first ERC Voluntary Disclosure Program was announced in late December 2023 and ended on March 22, 2024. Over 2,600 taxpayers applied to the first program to resolve their improper ERC claims and avoid civil penalties and unnecessary litigation.
The second ERC Voluntary Disclosure Program is limited to ERC claims filed for the 2021 tax period. It allows businesses to repay 85% of the credit amount they received, effectively offering a 15% discount on the repayment.

Procedures for the Second Voluntary Disclosure Program

To apply, employers must file Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program, and submit it through the IRS Document Upload Tool. Employers must provide the IRS with the names, addresses, telephone numbers and details about the services provided by any advisors or tax preparers who advised or assisted them with their claims.

Employers are expected to repay their full ERC claimed, minus the 15% reduction allowed through the Voluntary Disclosure Program.

Eligible employers must apply by 11:59 p.m. local time on November 22, 2024.

For more information, see the IRS’s Employee Retention Credit – Voluntary Disclosure Program or contact Yeo & Yeo.

Partnerships are often used for business and investment activities. So are multi-member LLCs that are treated as partnerships for tax purposes. A major reason is that these entities offer federal income tax advantages, the most important of which is pass-through taxation. They also must follow some special and sometimes complicated federal income tax rules.

Governing documents

A partnership is governed by a partnership agreement, which specifies the rights and obligations of the entity and its partners. Similarly, an LLC is governed by an operating agreement, which specifies the rights and obligations of the entity and its members. These governing documents should address certain tax-related issues. Here are some key points when creating partnership and LLC governing documents.

Partnership tax basics

The tax numbers of a partnership are allocated to the partners. The entity issues an annual Schedule K-1 to each partner to report his or her share of the partnership’s tax numbers for the year. The partnership itself doesn’t pay federal income tax. This arrangement is called pass-through taxation, because the tax numbers from the partnership’s operations are passed through to the partners who then take them into account on their own tax returns (Form 1040 for individual partners).

Partners can deduct partnership losses passed through to them, subject to various federal income tax limitations such as the passive loss rules.

Special tax allocations

Partnerships are allowed to make special tax allocations. This is an allocation of partnership loss, deduction, income or gain among the partners that’s disproportionate to the partners’ overall ownership interests. The best measure of a partner’s overall ownership interest is the partner’s stated interest in the entity’s distributions and capital, as specified in the partnership agreement. An example of a special tax allocation is when a 50% high-tax-bracket partner is allocated 80% of the partnership’s depreciation deductions while the 50% low-tax-bracket partner is allocated only 20% of the depreciation deductions.

Any special tax allocations should be set forth in the partnership agreement. However, to make valid special tax allocations, you must comply with complicated rules in IRS regulations.

Distributions to pay partnership-related tax bills

Partners must recognize taxable income for their allocations of partnership income and gains — whether those income and gains are distributed as cash to the partners or not. Therefore, a common partnership agreement provision is one that calls for the partnership to make cash distributions to help partners cover their partnership-related tax liabilities. Of course, those liabilities will vary, depending on the partners’ specific tax circumstances. The partnership agreement should specify the protocols that will be used to calculate distributions intended to help cover partnership-related tax bills.

For instance, the protocol for long-term capital gains might call for distributions equal to 15% or 20% of each partner’s allocation of the gains.

Such distributions may be paid out in early April of each year to help cover partners’ tax liabilities from their allocations of income and gains from the previous year.

Contact us for assistance

When putting together a partnership or LLC deal, tax issues should be addressed in the agreement. Contact us to be involved in the process.

Workers’ compensation insurance can provide medical care and financial assistance to employees who are injured or incapacitated at work. However, this important benefit is also subject to fraud perpetrated by dishonest workers. The Coalition Against Insurance Fraud says that 16% of workers’ comp claims are fraudulent, adding up to $9 billion in annual losses. Such losses hurt businesses, insurers and states. But you can help reduce the possibility that a scheme will be perpetrated in your organization.

Common employee and employer schemes

Employees violate workers’ comp rules if they file claims for injuries they didn’t experience or injuries or illnesses they did experience, but not at work. Workers’ comp fraudsters also might exaggerate the severity of their injuries or illnesses, or falsely state that they can’t work in any capacity while receiving benefits. For example, an employee who breaks a finger with a hammer in his home workshop might file a workers’ comp claim that says he broke the finger on his company’s production line. Or he may claim that not just his finger, but his arm, too, is broken and that he can’t work at all until his breaks heal — even though these are lies.

Employers are responsible for contributing to workers’ compensation funds for all of their employees. And it’s important to acknowledge that some employers engage in workers’ comp fraud. They might, for instance, misclassify employees as independent contractors (for whom they don’t have to pay insurance) or understate the number of people on their payrolls. Or they might “forget” to buy workers’ comp insurance altogether. So, to protect employees and avoid serious legal trouble, make sure your business complies with all your state’s labor rules and requirements.

Prevention tips

As for preventing employee-perpetrated workers’ comp fraud, you should craft comprehensive policies and procedures. Your employees need to know what to do if there’s an accident. They also need to understand the difference between legitimate claims and fraud — and the ramifications of making false claims (such as termination or legal action).

Mitigating fraud threats starts before you hire workers. As part of the background check process, look for records that indicate prospective employees have committed workers’ comp fraud at previous jobs. Then, during new employee training, explain your process for validating the authenticity of claims and disclose that your insurance company may assign its own investigators to scrutinize them.

If employees file workers’ comp claims, trust that the paperwork is legitimate but verify the claims anyway. If possible, secure witness testimony from coworkers, customers and other witnesses, and gather any supporting evidence such as surveillance footage and timecards. Increasingly, workers’ comp fraudsters get caught in lies based on their social media posts. So if an employee says she must rest in bed for six weeks but you see recent photos on her Facebook page of her partying with friends, be sure to collect the evidence.

Exercise care

Fraudulent workers’ comp claims cost businesses, insurance companies and states billions of dollars every year. As with other types of fraud, preventing workers’ comp fraud, including questioning employee claims, can be complicated. For this reason, you should consider engaging an attorney who specializes in labor issues. Your legal counsel can help prevent the inadvertent violation of workers’ rights as you work to get to the bottom of suspicious claims. And contact us if you need help investigating potential occupational fraud.

Bookkeeping fundamentals are essential to accurate financial reporting. Using software solutions — such as QuickBooks®, NetSuite® or Xero™ — can simplify double-entry accounting. However, knowing how the process works can provide reassurance that your business is properly tracking its financial transactions.

Debit and credits

Assets are items of value that your business owns, such as accounts receivable, inventory and equipment. Liabilities are debts that your business owes, including accounts payable, credit lines and commercial loans. The difference is referred to as owner’s equity. Alternatively, this relationship can be expressed with the following equation:

Assets = Liabilities + Owner’s Equity

Bookkeepers use T-accounts to record transactions. Assets are on the left side of the T, and everything else goes on the right side. An increase in an asset is recorded as a “debit,” which simply means an increase in the left side of the equation. An increase in an item on the right side of the equation is called a “credit.” The reverse also holds true. That is, decreases in assets are reported as credits, and decreases in items on the right side are recorded as debits. When recording transactions, debits and credits must always balance.

Here’s where things get murkier: Revenue (sales to customers) and expenses flow into owner’s equity. When your business earns revenue, it’s reported as a credit, because it increases owner’s equity on the right side of the equation. The expenses your business incurs are recorded as debits.

Simple example

Here’s a hypothetical example to illustrate how debits and credits work. An appliance repair company fixes a washing machine for $500, and the customer pays with cash. This transaction would be recorded by debiting cash (an asset) for $500 and crediting the revenue account for $500.

Continuing with this example, let’s assume the repair person is a contractor (rather than an employee) who charges $100 for labor, and the customer already had replacement parts on hand. The expenses related to this job would be recorded as a $100 debit to the contractor fees expense account, and a $100 credit to accounts payable. When the repair company pays the contractor at the end of the week, the bookkeeper would debit accounts payable for $100 and credit cash for $100.

In the real world, recording transactions is often more complicated. For example, if the contractor had been an employee, accounting for direct labor costs would have required complex recordkeeping for payroll-related expenses. Likewise, if the repair required parts from the company’s warehouse, the journal entries for those expenses would have involved the inventory account.

Generating financial reports

Bookkeeping tracks financial transactions during the accounting period. At the end of the period, these records are used to generate a company’s financial statements.

The balance sheet looks like the equation presented above. Assets go on the left side, and liabilities and owner’s equity are reported on the right side. The balances for these items are carried forward to the next accounting period.

The income (or profit and loss) statement shows revenue and expenses. Instead of being carried forward to the following year, revenue and expense accounts flow through to owner’s equity and are reset to zero at the start of the next accounting period.

The statement of cash flows is another important report. It shows how much cash is going in and out of the company for operating, investing and financing activities. It’s based on changes in items reported on the balance sheet from one period to the next.

Double-check your double-entry accounting

Bookkeeping is a critical skill for most business owners to learn. While many transactions require straightforward accounting entries in your ledger, some require more work, especially if you use accrual accounting instead of cash-basis accounting.

Correcting bookkeeping errors and omissions can be time consuming and frustrating. Contact us for help getting your company’s bookkeeping on track. From selecting user-friendly accounting software and establishing a comprehensive chart of accounts to generating timely financial reports, we can help you get it right.

More than a century ago, Yeo & Yeo’s founders laid the groundwork for a culture of community service. Today, their legacy continues to thrive through the efforts of our people, including the Yeo Young Professionals (YYP) group. Each year, the YYPs lead a firm-wide service project, uniting the firm to raise funds and volunteer for community causes. By taking the lead in organizing events and rallying support, these emerging leaders demonstrate that service is a powerful avenue for personal and professional growth.

This year, our YYP service project supported Habitat for Humanity, with more than 40 of our professionals across our Yeo & Yeo companies and offices participating in build projects across our communities in July. Through the Yeo & Yeo Foundation and FUNdraising initiatives spearheaded by our YYPs that included a water balloon bonanza and March Madness, a total of $10,698 was also proudly donated to Habitat for Humanity.

Michael Wilson II, Manager and Yeo Young Professionals leader, shared his perspective: “When the YYP group brainstormed ideas for this year’s project, the common theme was that we wanted to do something specific for our local communities and make a lasting impact. Helping facilitate this project and bringing everyone together to give back was incredibly meaningful.”

The impact of these builds extends far beyond the construction site. As our team worked side by side with Habitat for Humanity staff and volunteers, we helped create safe, affordable housing for families who might otherwise struggle to achieve homeownership or maintain their existing homes.

The Saginaw team worked together to paint a house and garage, helping to spruce up a home in a local neighborhood.

“Being a part of this initiative gave me a sense of purpose and the opportunity to make a tangible difference in the lives of others. It reminded us of the impact we can have when we come together for a greater good.” – Adam Seitz, Software Consultant (Yeo & Yeo Technology)

“Community involvement has always been a personal goal of mine, and this project provided a great opportunity to give back and connect with others.” – Christina Stoutenburg, Collections Representative (Yeo & Yeo Medical Billing & Consulting)

Saginaw YYP Service Project

The Flint team took on framing and building walls and trusses for a new home. This hands-on experience gave the team insight into how much effort goes into building a house.

“The best part of the project, besides using power tools, was engaging with the Habitat staff and learning about the housing program. Homeownership is a significant milestone that is out of reach for many, and that’s where Habitat plays a crucial role in making it possible.” – Holly Blood, Senior Accountant (Flint office)

FLINT - YYP Service Project

The Auburn Hills and Ann Arbor teams focused on cleaning a home’s exterior, including washing the siding, mowing the lawn, and taking care of the flower beds.

“Participating in the building project was really an opportunity to care for the people around me. No one in the community should feel left out or hopeless regardless of what they are going through.” – Gage Gorenchan, Staff Accountant (Ann Arbor office)

AA AH - YYP Service Project

The Kalamazoo team is planning a build project later this year in collaboration with the Battle Creek Habitat for Humanity.

Yeo & Yeo’s dedication to giving back is more than a tradition—it is a defining part of our company’s culture and identity. Established in 2018, the Yeo & Yeo Foundation is an employee-run organization dedicated to supporting charitable causes throughout Michigan. Since its inception, the Foundation has allocated funds to support the YYP service project, benefiting organizations such as the American Cancer Society and Special Olympics Michigan. The spirit of giving back remains central to our mission, reinforcing the belief that every act of kindness helps build a stronger, more connected community.

It’s been a running joke for years that employees often look at their pay stubs and wonder, “What the heck is FUTA?” If your organization has been up and running for a while, you’re no doubt familiar with this payroll tax obligation — so familiar that you may not expend much thought on what it is or why it exists.

But whether in the context of explaining FUTA to curious staff members or managing your organization’s liability, it’s important to keep certain fundamental facts in mind.

Funding mechanism

First things first, FUTA stands for the Federal Unemployment Tax Act. Under this law, the FUTA tax was created to fund a program that helps individual states pay unemployment benefits for eligible individuals who have been terminated from their jobs without “just cause” — but not those who have voluntarily quit.

On the federal level, the program funds benefits to employees who have been terminated or laid off through no fault of their own, including because of illness or disability. Currently, benefits may be paid out for up to 26 weeks or until former employees find new jobs or become self-sufficient. Traditionally, extensions have been allowed under special circumstances, such as during the pandemic.

Employers that pay wages of $1,500 or more in any calendar quarter of the preceding or current tax year must pay FUTA annually. While FUTA is administered and collected by the IRS, state unemployment tax is a separate obligation paid to the applicable state authority.

Each state operates under its own unemployment tax laws to determine the amounts that should go toward state unemployment insurance. Eligibility for unemployment benefits also generally differs by state. Thus, along with managing their FUTA obligations, employers need to keep tabs on their respective state unemployment tax rules.

Claiming the credit

FUTA tax rates and thresholds have remained the same for decades. In 2024, FUTA is applied at a 6% rate to the first $7,000 of wages an employee earns. Therefore, the maximum tax is $420 per employee (6% of $7,000). If, for example, an organization employs 50 workers, the FUTA tax would max out at $21,000 (50 × $420).

However, perhaps the most important FUTA fundamental of all is most employers qualify for a credit of up to 5.4% — so long as they pay into their state unemployment insurance fund. In other words, the effective tax rate for employers in most states is only 0.6%. This can make a substantial difference in the amount of FUTA owed.

Returning to the previous example, if an employer has 50 employees earning $7,000 or more for the year, the beginning FUTA tax liability is $21,000. But assuming the 5.4% credit is available, the employer’s rate is reduced to 0.6% or $42 per worker. In this case, the employer’s total FUTA liability is only $2,100 (50 × $42), or $18,900 less ($21,000 – $2,100) than it would owe without the credit.

Note: States are allowed to take federal Unemployment Trust Fund loans from the federal government if they lack funds to pay unemployment benefits. If your state fails to repay a federal unemployment loan within two years, your organization’s credit is reduced by 0.3% each year until the state’s loan is repaid. Therefore, employers in “credit reduction” states must pay more FUTA. According to the U.S. Department of Labor, as of January 1, 2024, California, Connecticut and New York were subject to credit reduction.

Addressing your challenges

Once you’ve explained FUTA to an employee, a common follow-up question is, “OK, now what’s FICA?” But that’s a subject for another article. We can help you develop strategies to address your organization’s distinctive payroll tax challenges.

On the one hand, you want your estate plan to achieve certain “technical” objectives. These may include minimizing gift and estate taxes, and protecting your assets from creditors’ claims or frivolous lawsuits.

On the other hand, you also want your plan to achieve “aspirational” goals. These may include preparing your children or grandchildren to manage wealth responsibly, promoting shared family values or encouraging charitable giving. One trust to consider including in your estate plan is a family advancement sustainability trust (FAST).

FAST funding options

If you’re interested in the goals described above, it’s a good idea to establish a FAST during your lifetime. Doing so helps ensure that the trust achieves your objectives and allows you to educate your advisors and family members on the trust’s purpose and guiding principles.

A FAST generally requires little funding when created, with the bulk of the funding provided on your death. Although funding can come from the estate, a better approach is to fund a FAST with life insurance or a properly structured irrevocable life insurance trust (ILIT). Using life insurance allows you to achieve the FAST’s objectives without depleting the assets otherwise available for the benefit of your family.

4 decision-making entities

Typically, FASTs are created in states that 1) allow perpetual, or “dynasty,” trusts that benefit many generations to come, and 2) have directed trust statutes, which make it possible to appoint an advisor or committee to direct the trustee regarding certain matters. A directed trust statute makes it possible for both family members and trusted advisors with specialized skills to participate in governance and management of the trust.

A common governance structure for a FAST includes four decision-making entities:

An administrative trustee — often a corporate trustee — that deals with administrative matters but doesn’t handle investment or distribution decisions,
An investment committee — consisting of family members and an independent, professional investment advisor — to manage investment of the trust’s assets,
A distribution committee — consisting of family members and an outside advisor — which helps ensure that trust funds are spent in a manner that benefits the family and promotes the trust’s objectives, and
A trust protector committee — typically composed of one or more trusted advisors — which stands in the shoes of the grantor after his or her death and makes decisions on matters such as appointment or removal of trustees or committee members and amendment of the trust document for tax planning or other purposes.

Bridging the leadership gap

In some families, it’s not unusual for the death of the older generation to create a leadership gap. A FAST can help fill this gap by establishing a leadership structure and providing resources to fund educational and personal development activities for younger family members. Contact your estate planning advisor for additional details.

Let’s say you own real estate that has been held for more than one year and is sold for a taxable gain. Perhaps this gain comes from indirect ownership of real estate via a pass-through entity such as an LLC, partnership or S corporation. You may expect to pay Uncle Sam the standard 15% or 20% federal income tax rate that usually applies to long-term capital gains from assets held for more than one year.

However, some real estate gains can be taxed at higher rates due to depreciation deductions. Here’s a rundown of the federal income tax issues that might be involved in real estate gains.

Vacant land

The current maximum federal long-term capital gain tax rate for a sale of vacant land is 20%. The 20% rate only hits those with high incomes. Specifically, if you’re a single filer in 2024, the 20% rate kicks in when your taxable income, including any land sale gain and any other long-term capital gains, exceeds $518,900. For a married joint-filing couple, the 20% rate kicks in when taxable income exceeds $583,750. For a head of household, the 20% rate kicks when your taxable income exceeds $551,350. If your income is below the applicable threshold, you won’t owe more than 15% federal tax on a land sale gain. However, you may also owe the 3.8% net investment income tax (NIIT) on some or all of the gain.

Gains from depreciation

Gain attributable to real estate depreciation calculated using the applicable straight-line method is called unrecaptured Section 1250 gain. This category of gain generally is taxed at a flat 25% federal rate, unless the gain would be taxed at a lower rate if it was simply included in your taxable income with no special treatment. You may also owe the 3.8% NIIT on some or all of the unrecaptured Section 1250 gain.

Gains from depreciable qualified improvement property

Qualified improvement property (QIP) generally means any improvement to an interior portion of a nonresidential building that’s placed in service after the date the building is placed in service. However, QIP does not include expenditures for the enlargement of the building, elevators, escalators or the building’s internal structural framework.

You can claim first-year Section 179 deductions or first-year bonus depreciation for QIP. When you sell QIP for which first-year Section 179 deductions have been claimed, gain up to the amount of the Section 179 deductions will be high-taxed Section 1245 ordinary income recapture. In other words, the gain will be taxed at your regular rate rather than at lower long-term gain rates. You may also owe the 3.8% NIIT on some or all of the Section 1245 recapture gain.

What if you sell QIP for which first-year bonus depreciation has been claimed? In this case, gain up to the excess of the bonus depreciation deduction over depreciation calculated using the applicable straight-line method will be high-taxed Section 1250 ordinary income recapture. Once again, the gain will be taxed at your regular rate rather than at lower long-term gain rates, and you may also owe the 3.8% NIIT on some or all of the recapture gain.

Tax planning point: If you opt for straight-line depreciation for real property, including QIP (in other words, you don’t claim first-year Section 179 or first-year bonus depreciation deductions), there won’t be any Section 1245 ordinary income recapture. There also won’t be any Section 1250 ordinary income recapture. Instead, you’ll only have unrecaptured Section 1250 gain from the depreciation, and that gain will be taxed at a federal rate of no more than 25%. However, you may also owe the 3.8% NIIT on all or part of the gain.

Plenty to consider

As you can see, the federal income tax rules for gains from sales of real estate may be more complicated than you thought. Different tax rates can apply to different categories of gain. And you may also owe the 3.8% NIIT and possibly state income tax, too. We will handle the details when we prepare your tax return. Contact us with questions about your situation.

Many businesses have established employee assistance programs (EAPs) to help their workforces deal with the mental health, substance abuse and financial challenges that have become so widely recognized in modern society.

EAPs are voluntary and confidential work-based intervention programs designed to help employees and their dependents deal with issues that may be affecting their mental health and job performance. These may include workplace stress, grief, depression, marriage/family problems, psychological disorders, financial troubles, and alcohol and drug dependency.

Whether your company is considering an EAP or already offers one, among the most important factors to keep in mind is compliance.

Start with ERISA

Several different federal laws may come into play with EAPs. A good place to start when studying your compliance risks is the Employee Retirement Income Security Act (ERISA). The law’s provisions address critical compliance matters such as creating a plan document and Summary Plan Description, performing fiduciary duties, following claims procedures, and filing IRS Form 5500, “Annual Return/Report of Employee Benefit Plan.”

Although most people associate ERISA with qualified health care and retirement plans, the law can be applicable to EAPs depending on how a particular program is structured and what benefits it provides. Generally, a fringe benefit is considered an ERISA welfare benefit plan if it’s a plan, fund or program established or maintained by an employer to provide ERISA-listed benefits, which include medical services.

The category of ERISA-listed benefits most likely to be provided by an EAP is medical care or benefits. Mental health counseling — whether for substance abuse, stress or other issues — is considered medical care. Accordingly, an EAP providing mental health counseling will probably be subject to ERISA. On the other hand, an EAP that provides only referrals and general information, and isn’t staffed by trained counselors, likely isn’t an ERISA plan.

Bear in mind that EAPs that primarily use referrals could still be considered to provide medical benefits if the individuals handling initial phone consultations and making the referrals are trained in an applicable field, such as psychology or social work. If an EAP provides any benefit subject to ERISA, then the entire program must comply with the law — even if it also provides non-ERISA benefits.

Check up on other laws

EAPs considered to be group health plans are also typically subject to the Consolidated Omnibus Budget Reconciliation Act (commonly known as “COBRA”) and certain other group health plan mandates, including mental health parity.

Also, keep in mind that EAPs that receive medical information from participants — even if the programs only make referrals and don’t provide medical care — must comply with privacy and security rules under the Health Insurance Portability and Accountability Act (HIPAA).

In addition, EAPs providing medical care or treatment could trigger certain provisions of the Affordable Care Act (ACA). EAPs meeting specified criteria, however, can be defined as an “excepted benefit” not subject to HIPAA portability or certain ACA requirements.

Cover all bases

Given the rising awareness and acceptance of mental health care alone, EAPs could become as common as health insurance and retirement plans in many companies’ employee benefit packages.

Whether you’re thinking about one or already have an EAP up and running, it’s a good idea to consult an attorney regarding your company’s compliance risks. Meanwhile, please contact us for help identifying and tracking the costs involved, as well as understanding the tax impact.

A tax law change in 2019 essentially ended “stretch IRAs” by requiring most beneficiaries of inherited IRAs (other than a spouse) to withdraw all of the funds within 10 years. Since then, there’s been confusion surrounding inherited IRAs and the so called “10-year rule” for required minimum distributions (RMDs).

That is, until now. The IRS has issued final regulations relevant to taxpayers who are subject to the “10-year rule” for RMDs from inherited IRAs or defined contribution plans, such as 401(k) plans. In a nutshell, the final regs largely adopt proposed regs issued in 2022.

2022 proposed regs sowed confusion

Under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, signed into law in 2019, most heirs other than surviving spouses must withdraw the entire balance of an inherited IRA or defined contribution plan within 10 years of the original account owner’s death. In February 2022, the IRS issued proposed regs that came with an unwelcome surprise for many affected heirs. Under the proposed regs, if the account owner dies on or after the required beginning date (RBD), designated beneficiaries must take their taxable RMDs in Year 1 through Year 9 after that death (based on their life expectancies), receiving the balance in the 10th year.

In other words, beneficiaries aren’t permitted to wait until the end of 10 years to take a lump-sum distribution. This annual RMD requirement gives beneficiaries much less tax planning flexibility and, depending on their situations, could push them into higher tax brackets during those years.

The IRS soon began to receive feedback from confused taxpayers who had recently inherited IRAs or defined contribution plans and were unclear about when they were required to start taking RMDs on the accounts. The uncertainty put both beneficiaries and defined contribution plans at risk. The reason? Beneficiaries could have been assessed a tax penalty on the amounts that should have been distributed but weren’t. And the plans could have been disqualified for failure to make RMDs.

In response, only six months after the proposed regs were published, the IRS waived enforcement against taxpayers subject to the 10-year rule who missed 2021 and 2022 RMDs if the plan participant died in 2020 on or after the RBD. The tax agency also excused missed 2022 RMDs if the participant died in 2021 on or after the RBD.

The waiver guidance indicated that the IRS would issue final regs that would apply no earlier than 2023. But then 2023 rolled around — and the IRS extended the waiver relief to excuse 2023 missed RMDs if the participant died in 2020, 2021 or 2022 on or after the RBD.

In April 2024, the IRS again extended the relief, this time for RMDs in 2024 from an IRA or defined contribution plan when the owner passed away between 2020 and 2023, on or after the RBD. If certain requirements are met, beneficiaries won’t be assessed a penalty on missed RMDs for these years, and plans won’t be disqualified based solely on such missed RMDs.

2024 final regs provide clarification

The final regs require certain beneficiaries to take annual RMDs in the 10 years following the account owner’s death. The regs take effect in 2025. If the deceased hadn’t begun taking his or her RMDs though, the 10-year rule is somewhat different. While the account has to be fully emptied under the same timeline, no annual distributions are required. That gives beneficiaries more opportunity for tax planning.

Here’s an example: Ken inherited an IRA in 2021 from his father, who had begun to take RMDs. Under the IRS-issued waivers, Ken needn’t take RMDs for 2022 through 2024. However, under the final regs, he must take annual RMDs for 2025 through 2030, with the account fully distributed by the end of 2031.

Had Ken’s father not started taking RMDs, Ken would have had the flexibility to not take distributions in 2025 through 2030. So long as the account was fully liquidated by the end of 2031, Ken would be in compliance with the rules.

Contact us with questions

If you’ve inherited an IRA or defined contribution plan in 2020 or later, it’s understandable if you have questions about the RMD rules. Please don’t hesitate to reach out. We’d be please to explain the IRS’s regulations and suggest strategies that might save you taxes and avoid penalties.