Fringe Benefit Testing ACUIA Austin, Texas June 15th, 2011

1. Fringe Benefit Testing ACUIA Austin, Texas June 15th, 2011

2. Speaker’s Biography – Greg Schwartz • Greg Schwartz, CPA, CMA, is a principal in the Financial Institution Credit Union Group of LarsonAllen. Greg has been auditing credit unions for 25 years and his areas of expertise include audit and supervisory committee agreed-upon procedure engagements, GAAP and GAAS issues related to credit unions, supervisory committee issues, and review and evaluation of internal audit functions. • Greg has worked with hundreds of credit unions all over the country and is considered an expert on credit union audit and accounting issues. He has made numerous presentations to credit union boards, supervisory committees and management on a variety of accounting and credit union issues. • Greg graduated from Minnesota State University, Mankato, with a Bachelor of Science in Accounting and a minor in Computer Science. He is a CPA and a member of the American Institute of Certified Public Accountants (AICPA) and the AICPA credit union conference planning committee.

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

4. Fringe Benefit Audit - Benefits • Better control over credit union activities • Develop better internal policies • More equitable employee plans • More accurate financial reporting • Minimize tax consequences • Better employee moral

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

6. How to identify • Interview management • Miscellaneous or other expense • Expense reports • Corporate credit cards

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

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

9. Are the tax effects reported • Accountable plan • Must be a business connection • Must be adequate accounting/reasonable period of time • Excess must be returned • Nonaccountable plan • Taxable wages

10. Tax Consequences • Accountable to Nonaccountable • Withholding of social security, medicare and income taxes • Employer matching of social security and medicare

11. Tax Resource • The IRS Taxable Fringe Benefit Guide

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

13. Identification – the List (Cont) • Use of Employee-Owned Vehicle • Employer – Provided Vehicle • Equipment and Allowances • Other types of Compensation • Awards and Prizes • Professional Licenses and Dues • Educational Reimbursments

14. Working Condition Fringe Benefits • Property of services that, if the employee had paid for, he or she could have deducted as a business expense • Uniform

15. De Minimis Fringe Benefit • Small and infrequent • Personal use of photocopier • Group meals • Theater or sporting event tickets • Coffee, donuts, or soft drinks • Flowers for special circumstances • Local phone calls • Birthday or holiday gifts (not cash) with a low FMV • Commuting use of employer’s car < 1 day per month

16. De Minimis Fringe Benefit • Not De Minimus • Cash • Cash equivalent • Transportation passes • Use of employer’s apartment, vacation home, boat • Commuting use of employer’s car > 1 day per month • Membership in a country club or athletic facility

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

18. No Additional Cost Fringe Benefits • A service provided to employees the does not impose any substantial additional cost. • Use of the credit union meeting facilities after hours

19. Qualified Employee Discounts • Excludable if: • Merchandise – less than the employers gross profit percentage time the price charged the member • Services – less than 20% of the price charged the member • Difficult to find • Policy may or may not be clear • Accounting is usually ok

20. Qualified Transportation Fringe Benefits • Commuter transportation in a commuter highway vehicle 2. Transit passes 3. Qualified Parking 4. Qualified bicycle commuting expenses • Difficult to find • Policy may or may not be clear • Accounting is usually ok

21. Moving Expenses • Often buried in “other” • Often no clear policy • Tax effect is often wrong • Time test – 39 weeks full time • New job is +50 miles further from the former home than the old job was from the former home • Moving of household goods and travel costs only • Must actually incur the expenses

22. Use of Employee-Owned Vehicle • Not difficult to find • Policy may or may not be clear • Accounting is usually ok • Taxes – federal standard mileage rate

23. Employer Provided Vehicle • Not difficult to find • Policy may or may not be clear • Accounting is usually ok • Taxes – • If records are provided then personal use is wages to the employee • If records are not provided then all use is wages to the employee

24. Listed Property - Cell phones, Computers • Usually not hard to fine • Usually mentioned in policy • Accounting usually ok • Tax effects- • Business use is not taxable • Personal use is wages • If records are not kept – all personal

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

26. Employee awards • Easy to find • Probably not in policy • Accounting probably ok • Tax effect – • Must be length of service or safety only • Cannot be cash, cash equivalent, vacation, meal, lodging, theater or sports ticket, stocks or bonds. • Other special rules – no more than 10% can receive, etc

27. Employee Awards • Employee of the month, outstanding member service, highest productivity – always taxable • Dollar limitations – Qualified plan vs nonqualified plan

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

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

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

31. Actual situation • Missing receipts • No business purpose documented • Shared cards • Tuition reimbursements to terminated employees not followed up • Spouse travel • Other mysterious expenses

32. Actual Situation • Rolex watches

33. Actual Situation • 1000 Golf balls

34. Actual Situation • A CEO attended a conference in Hawaii - a “Supervisory Committee” conference

35. Actual Situation • Property improvement – moving expenses

36. Actual Situation • No documented compensation package for the CEO

37. Actual Situation • Over 200 corporate credit union cards

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

39. Actual Situation • $10,000 contribution to the University the CEO attended

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

41. Thank You Greg Schwartz, CPA gschwartz@larsonallen.com (612)376-4684 or (972)-644-3167