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Archives for August 2022

Employers: How “affordable” will your health benefits be in 2023?

In Revenue Procedure 2022-34, the IRS recently announced an important indexing adjustment related to the Affordable Care Act (ACA). That makes now a good time to review whether your organization is an applicable large employer (ALE) under the ACA and, if so, whether the health care coverage you offer employees will still be considered “affordable” next year.

Affordability and minimum value

An employer’s size, for ACA purposes, is determined in any given year by its number of employees in the previous year. Generally, if your organization had 50 or more full-time or full-time equivalent employees on average during the previous year, you’ll be considered an ALE for the current calendar year. A full-time employee is an individual who provides, on average, at least 30 hours of service per week.

Under the ACA, what happens if an ALE doesn’t offer minimum essential coverage that’s affordable and provides minimum value to its full-time employees and their dependents? The employer may be subject to a penalty if at least one of its full-time employees receives a premium tax credit for buying individual coverage through a Health Insurance Marketplace (commonly referred to as an “exchange”).

Latest adjustments

For plan years beginning in 2023, the required contribution percentage used to determine whether employer-sponsored health coverage is affordable for purposes of the ACA’s employer shared responsibility provision has been adjusted from the 9.5% baseline to 9.12%. This is a decrease from the 2022 amount of 9.61%.

Some important and late-breaking changes have come to the premium tax credit. That is, the newly signed Inflation Reduction Act (IRA) extends — through 2025 — the favorable premium tax credit rules adopted under the American Rescue Plan Act (ARPA).

The ACA limits the premium tax credit to taxpayers with household incomes between 100% and 400% of the federal poverty line who buy insurance through a Health Insurance Marketplace. However, the ARPA eliminated the upper income limit for eligibility. It also increased the amount of the premium tax credit by decreasing, across all income bands, the percentage of household income that eligible individuals must contribute toward the cost of coverage bought from a Health Insurance Marketplace.

The 2023 percentages had been indexed to 1.92% to 9.12%. But a provision of the IRA supersedes these previously released indexing adjustments, so they’ll remain at zero to 8.5% through 2025.

Compliance is critical

Careful compliance with health care insurance mandates and requirements remains critical for employers. We can answer any questions you may have about your obligations under the ACA or about how to manage the costs of the health coverage you offer employees.

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Are your risk-management practices keeping up with the times?

Risks abound in today’s uncertain marketplace. Nearly two-thirds of senior finance leaders said that the volume and complexity of corporate risks have changed “mostly” or “extensively” in the past five years, according to a new report published by the American Institute of Certified Public Accountants (AICPA) and North Carolina State University.

Surprisingly, this report, 2022 State of Risk Oversight: An Overview of Enterprise Risk Management Practices, found that only one-third of respondents have complete enterprise risk management (ERM) processes in place. Unmitigated exposure to risk can disrupt your operations and even cause bankruptcy. That’s why it’s important for your organization to develop a comprehensive risk-management strategy — and for auditors to assess your ERM practices.

COSO framework

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) was formed in July 1985 to combat fraudulent financial reporting. The panel is a joint initiative of the AICPA, Financial Executives International, Institute of Internal Auditors, American Accounting Association and Institute of Management Accountants.

COSO first published its Enterprise Risk Management — Integrated Framework in 2004. Companies aren’t generally required by law or regulations to apply an ERM framework. But they often choose to use COSO’s ERM framework to enhance their ability to manage uncertainty, consider how much risk to accept and improve understanding of opportunities as they strive to increase and preserve stakeholder value.

Broad scope

Many people are unclear what the term “ERM” means. ERM encompasses more than taking an inventory of risks — it’s an enterprise-wide process. Internal control is just one small part of ERM — it also may include, for example, strategy setting, governance, communicating with stakeholders and measuring performance.

These principles apply at all business levels, across all functions and to organizations of any size. They apply to not-for-profits, as well as for-profit entities.

Key components

Through periodic updates, COSO aims to capture today’s best practices and help management attain better value from their ERM programs. The ERM framework addresses questions about how risk management should be incorporated with an organization’s management of its strategy. It includes these five components:

  1. Governance and culture,
  2. Strategy and objective setting,
  3. Performance,
  4. Review and revision, and
  5. Information, communication and reporting.

In addition, COSO’s Guidance for Applying ERM to Environmental, Social and Governance (ESG)-related Risks highlights ESG risks. This guide also identifies opportunities to enhance resiliency as organizations confront new and developing risks, such as extreme weather events or product safety recalls.

In 2019, COSO published another guide, Managing Cyber Risk in a Digital Age. It addresses how companies can apply COSO’s framework to protect against cyberattacks. These attacks have been on the rise, in part, because people became increasingly reliant on the internet for working, learning and interacting during the pandemic. And home networks tend to be more vulnerable to cyberattacks than in-office networks.

Sign of the times

In 2022, market conditions — including the risks of cyberattacks, severe weather, rising inflation, supply chain disruptions and the shortage of qualified workers — continue to be volatile. And more uncertainty lies ahead. Our accounting professionals can help you identify and manage the risks. Contact us to discuss cost-effective ERM practices to make your organization more resilient and responsive in the future.

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An “innocent spouse” may be able to escape tax liability

When a married couple files a joint tax return, each spouse is “jointly and severally” liable for the full amount of tax on the couple’s combined income. Therefore, the IRS can come after either spouse to collect the entire tax — not just the part that’s attributed to one spouse or the other. This includes any tax deficiency that the IRS assesses after an audit, as well as any penalties and interest. (However, the civil fraud penalty can be imposed only on spouses who’ve actually committed fraud.)

Innocent spouse relief

In some cases, spouses are eligible for “innocent spouse relief.” This generally involves individuals who were unaware of a tax understatement that was attributable to the other spouse.

To qualify, you must show not only that you didn’t know about the understatement, but that there was nothing that should have made you suspicious. In addition, the circumstances must make it inequitable to hold you liable for the tax. This relief is available even if you’re still married and living with your spouse.

In addition, spouses may be able to limit liability for any tax deficiency on a joint return if they’re widowed, divorced, legally separated or have lived apart for at least one year.

Election to limit liability

If you make this election, the tax items that gave rise to the deficiency will be allocated between you and your spouse as if you’d filed separate returns. For example, you’d generally be liable for the tax on any unreported wage income only to the extent that you earned the wages.

The election won’t provide relief from your spouse’s tax items if the IRS proves that you knew about the items when you signed the return — unless you can show that you signed the return under duress. Also, the limitation on your liability is increased by the value of any assets that your spouse transferred to you in order to avoid the tax.

An “injured” spouse

In addition to innocent spouse relief, there’s also relief for “injured” spouses. What’s the difference? An injured spouse claim asks the IRS to allocate part of a joint refund to one spouse. In these cases, an injured spouse has all or part of a refund from a joint return applied against past-due federal tax, state tax, child or spousal support, or a federal nontax debt (such as a student loan) owed by the other spouse. If you’re an injured spouse, you may be entitled to recoup your share of the refund.

Whether, and to what extent, you can take advantage of the above relief depends on the facts of your situation. If you’re interested in trying to obtain relief, there’s paperwork that must be filed and deadlines that must be met. We can assist you with the details.

Also, keep “joint and several liability” in mind when filing future tax returns. Even if a joint return results in less tax, you may choose to file a separate return if you want to be certain of being responsible only for your own tax. Contact us with any questions or concerns.

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Why an LLC might be the best choice of entity for your business

Paper with LLC on chart with calculator,pen and magnifier

The business entity you choose can affect your taxes, your personal liability and other issues. A limited liability company (LLC) is somewhat of a hybrid entity in that it can be structured to resemble a corporation for owner liability purposes and a partnership for federal tax purposes. This duality may provide you with the best of both worlds.

Like the shareholders of a corporation, the owners of an LLC (called “members” rather than shareholders or partners) generally aren’t liable for business debts except to the extent of their investment. Thus, they can operate the business with the security of knowing that their personal assets are protected from the entity’s creditors. This protection is far greater than that afforded by partnerships. In a partnership, the general partners are personally liable for the debts of the business. Even limited partners, if they actively participate in managing the business, can have personal liability.

Check-the-box rules

LLC owners can elect under the check-the-box rules to have the entity treated as a partnership for federal tax purposes. This can provide a number of important benefits to them. For example, partnership earnings aren’t subject to an entity-level tax. Instead, they “flow through” to the owners, in proportion to the owners’ respective interests in profits, and are reported on the owners’ individual returns and are taxed only once. To the extent the income passed through to you is qualified business income, you’ll be eligible to take the Section 199A pass-through deduction, subject to various limitations.

In addition, since you’re actively managing the business, you can deduct on your individual tax return your ratable shares of any losses the business generates. This, in effect, allows you to shelter other income that you (and your spouse, if you’re married) may have.

An LLC that’s taxable as a partnership can provide special allocations of tax benefits to specific partners. This can be an important reason for using an LLC over an S corporation (a form of business that provides tax treatment that’s similar to a partnership). Another reason for using an LLC over an S corporation is that LLCs aren’t subject to the restrictions the federal tax code imposes on S corporations regarding the number of owners and the types of ownership interests that may be issued.

Explore the options

In summary, an LLC would give you corporate-like protection from creditors while providing you with the benefits of taxation as a partnership. Be aware that the LLC structure is allowed by state statute and states may use different regulations. Contact us to discuss in more detail how use of an LLC might benefit you and the other owners.

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Addressing the daunting threat of workplace violence

It’s a subject that most people don’t like to think about, but every employer must address. Workplace violence is an enormous threat to the physical, mental and psychological well-being of your employees. And just one incident can drastically lower the morale and productivity of an organization for a long time.

A costly problem

Finding exact data on the financial impact of workplace violence is difficult because many crimes other than homicides go unreported. A 2022 analysis by career information provider Zippia estimated that U.S. businesses lose an average of $250 billion to $330 billion annually to violent incidents. These costs arise from:

  • Lost work time and wages,
  • Reduced productivity and turnover,
  • Higher health care costs,
  • Workers’ compensation and disability insurance premiums, and
  • Legal and security expenses.

As you’re no doubt aware, the federal Occupational Safety and Health Act requires employers to provide a workplace free from hazards that could cause harm or death — including violence. Some states and localities have related laws.

Threat assessment

The first step toward managing the risk is a threat assessment. Leadership needs to recognize the types of threats most likely to affect your workplace.

Sometimes, perpetrators have no direct relationship to the organization. Instead, violence occurs in conjunction with another criminal act, such as theft or vandalism. Other times, crimes are perpetrated by someone related to your company — typically current or former employees, contractors, or customers.

Violent behavior can also be directed toward one of your workers by someone unassociated with your organization but whom they know, such as an angry spouse, current or former romantic partner, or friend.

Specific steps

Many employers lack the internal resources to assess threats and minimize risks. If this applies to your organization, explore the costs and benefits of engaging a security consultant. A qualified advisor can conduct a formal threat assessment and work with you to identify and undertake specific steps to minimize situations that can lead to violence.

For instance, you might need to upgrade physical security systems by installing locks and fences, deploying guards, and implementing ID badges to limit access points for thieves, disgruntled former employees and contractors, or others intent on doing harm. In addition, if you haven’t already, you could install closed-circuit cameras and let everyone on your premises know that their actions won’t go unobserved or unrecorded.

Whether you work with an outside advisor or not, implement a workplace violence prevention policy that includes employee training and ways to report toxic behavior and potentially violent situations. The policy should prohibit weapons in the workplace and clarify that you reserve the right to search lockers or other areas.

Just as important are pre-employment processes to better ensure a nonhostile work environment. Start by screening all prospective employees and running background checks to identify those with histories of violence or criminal activity. (Work with your attorney to ensure background checks and employment verifications comply with applicable laws.)

Forewarned, forearmed

As the saying goes, “forewarned is forearmed.” We can help you measure productivity and evaluate the costs of better securing your workplace against likely threats.

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Cyber risks: A critical part of your auditor’s risk assessment

As businesses and not-for-profit entities increasingly rely on technology, cyberthreats are becoming more sophisticated and aggressive. Auditors must factor these threats into their risk assessments. They can also help you draft cybersecurity disclosures and brainstorm ways to mitigate your risk of an attack.

Increasing risks

How much does a data breach cost? The average has reached an all-time high of $4.35 million, according to the newly released “Cost of a Data Breach Report 2022.” The report, published by independent research group Ponemon Institute, also found that 83% of respondents have experienced more than one data breach.

Another key finding is that the average cost of a data breach increased by roughly 13% during the pandemic. Why? One reason is the increase in remote working arrangements. Many organizations now have sensitive data stored in more places than ever before — including laptops, cloud-based storage, email, portals, mobile devices and flash drives — providing many potential areas for unauthorized access.

Ransomware attacks are also on the rise, in part due to geopolitical instability. According to the study, ransomware attacks were up 41% in 2022 compared to the previous year. These attacks cost organizations an average of $4.54 million per incident in 2022, excluding any ransom paid to the perpetrator. Ransomware attacks generally take longer to detect and contain than other types of data breaches.

Targeted data

Hackers may try to steal valuable information about your organization’s employees and customers. Examples include payment card data, protected health data and personal identifiable information, such as phone numbers, addresses and Social Security numbers.

Another target may be 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.

Risk assessment

As the frequency and severity of cyberattacks have increased, data security has become a critical part of the audit risk assessment. In recent years, the Public Company Accounting Oversight Board (PCAOB) has interviewed auditors of companies that have experienced a cybersecurity breach.

These interviews reveal that audit firms provide varying levels of guidance, both when assessing risk at the start of the engagement and when uncovering a cybersecurity incident that occurred during the period under audit or during audit fieldwork. For example, auditors usually ask management what’s being done to understand, detect and prevent computer system breaches.

Another key finding of the PCAOB research is that the costs associated with cybersecurity breaches may not always be apparent. A major cybersecurity breach can cause more than lost profits; it may also result in a loss of customers, reputational damage and even bankruptcy.

We can help

Though PCAOB’s research focuses on public companies, any organization can be the victim of a cyberattack. And the effects may be even more devastating for those with fewer resources to absorb the losses and assign dedicated staff to respond to breaches. Our firm is atop the latest cybersecurity trends. Our auditors can help your organization assess its cyber risks and improve the effectiveness of internal controls over sensitive data. Contact us for more information.

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