GORENZ DISTRICT NEWSLINE A newsletter of audit significance from Gorenz and Associates, Ltd., Peoria, IL      December 2007  Could you defend your Tort Expenditures? In case you haven’t heard, there have been multiple lawsuits occurring around the state with regard to the use of the Tort immunity tax levy.  Most of the cases involve the use of salaries as “risk management” expenditures.  In differing decisions, salaries have been disallowed primarily due to some defect in the court’s interpretation of the district’s “Risk Management Plan” or in the implementation of those plans.   The Illinois State Board of Education (ISBE) has posted a summary of what they believe to be allowable expenditures on their website at http://www.isbe.net/finance/pdf/tort_summary.pdf .  At a minimum, districts should have a risk management plan in place.  The plan should be reviewed at least annually by the administration, legal counsel and the board of education.  Please contact your district’s legal counsel with specific questions on can, or can’t, be charged against your tort immunity tax levy.  IRS has issued new tougher deferred compensation rules for 2008– Yes, they probably do apply to your employees! The new rules are aimed at teachers who perform their work over nine or ten months and have the ability to be paid over twelve months.  These rules could cause a teacher to be taxed on some compensation before the pay is received.  However under the regulations issued, teachers (and other ten month employees paid over twelve months) can easily avoid the problem.  Individuals who continually receive part of their compensation in a subsequent year simply need to notify their employer in writing of their election to defer that compensation and the deferral cannot extend beyond the thirteenth month from the beginning of the contract pay period.   For example, a teacher who earns compensation from the first of September in one year through the beginning of June of the next year could elect to defer compensation earned during that period, but only if no amount is deferred beyond Oct. 31 of the next year.  No particular form is necessary for the election and it does not have to be made each year if the election provides that it will remain in effect until the employee changes it.  While the IRS had not provided a specific form for the election, there are required elements that must be present.  The following conditions must be met for the deferral election to be valid: ·         The teacher (or similarly situated employee) must notify the employer in writing that he is electing to spread the coming school year’s compensation over 12 months. ·         The election must be made before the beginning of the work period (e.g., before the first day of the school year for which the teacher is paid, which should be before the first students arrive for class). ·         The election must be irrevocable (i.e., it cannot be changed in the middle of the school year), and must state how the compensation is going to be paid (e.g., ratably over 12 months starting with the first pay period of the school year).  While this election is NOT required to be filed with the IRS, the employer is responsible for keeping these elections on file.  The regulations do not require a formal plan document, so other rules such as the inability to change the election and the deadlines for filing the election can be carried in any other applicable document, such as an employee handbook or school board policies and procedures.  While the actual regulations were issued in August 2007 and became immediately effective, the IRS’s FAQs state that for now school districts will not have to make any changes in the way teachers are paid.  Specifically, the IRS will not impose any additional taxes or failure to comply penalties until school years beginning after January 1, 2008.          What about when there is no choice? If teachers (or similarly situated employees) are covered by a collectively bargained contract that requires they be paid over 12 months, then no election is required.  New 403(b) regulations have been issued and ALL schools need to comply! On July 23, 2007, the IRS issued final regulations for 403(b) plans completing the process for formalizing guidance.  The first effective date under the new portion of the regulations has already passed.  As of September 24, 2007 ALL contract exchanges (employee moving money from on vendor to another) must be approved by the employer, unless the employer has approved a vendor to be able to accept transfers previous to that date in an open ended agreement.  Employers do have the right to limit vendors offered under the 403(b) plan and should be careful in signing agreements with vendors that may contain language giving them future rights in dealing with your staff and accepting transfers without additional approval.  The new regulations had several areas of clarification regarding the temporary rules, but most of the temporary regulations were unchanged.  Probably the biggest clarification in the rules was regarding the “Universal Availability Rules”.  You must notify all employees if they are eligible to participate in the salary deferral plan in writing at least once a year.  You may exclude – non-resident aliens, students providing services described in Code Section 3121(b)(10), and employees who normally work fewer than 20 hours per week if and only if – ·         The employer reasonably expects the employee will work less than 1000 hours for the 12 month period; and ·         For each plan year following the initial 12 month period, the employee actually has less than 1000 hours of service.  You CANNOT exclude a class of employees, such as substitute teachers, or food service employees.  Our recommendation would be to establish a policy allowing ALL employees to participate and provide an annual notice to employees when they are hired, or when contracts are renewed.  The notification should include the time period during which the election can be made and any other relevant provisions of the plan.  A formal plan document MUST be adopted no later than December 31, 2008.  ALL vendors need to be approved by the district and attached to the plan document.  Approved vendors include those who you have current service agreements (current contributions) and old vendors who you obtain an “Information Sharing Agreement” with, which entitles them to continue to hold plan funds even though you are not sending current contributions to them.  Funds left with unapproved vendors (not transferred to approved vendors) will become taxable to the account holder.  Please be aware that the district is responsible for ALL current and former employees accounts, even those that have previously been frozen.  Proper notification of the plan changes, including approved vendors is the employer’s responsibility.  The IRS has now provided model plan language in Revenue Procedure 2007-71.  You can obtain a copy of that document on the IRS website at www.irs.gov .  2008 Federal Mileage Rate  The IRS announced that the optional mileage allowance for owned or leased autos is 50.5¢ for business travel after 2007 under accountable plans. That's 2¢ more than the 48.5¢ allowance for 2007 business travel. This increase is due to higher prices for fuel.   Reminder:  Mileage reimbursements under a non-accountable plan (i.e. a flat reimbursement of $200 per month) need to be added to the employee’s W-2 at the end of each calendar year as taxable wages.   Gorenz and Associates, Ltd. Certified Public Accountants                                                    3010 N. Sterling Ave.                                     Visit us at -                                                               Peoria, IL 61604                                  www.gorenzcpa.com (309) 685-7621 This publication is distributed for general information. It is not intended to address specific matters or render legal opinion.