Reimagine Your Nonprofit to Keep Crisis Worries Away

Numerous nonprofits have survived many challenges for decades and hopefully will thrive in the face of the Covid-19 pandemic as well. Truth be told, it is not easy to adapt to changes and reposition your organization to keep up with the changing times, especially when it comes to fundraising for nonprofits.

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Main Street Lending Launches Nonprofit Organization Loan Programs

On Friday, July 17th the Federal Reserve updated the Main Street Lending program to provide information related to nonprofit organizations ability to participate in the program as mandated by the CARES Act. The facility now includes 2 separate but similar facilities targeted at Nonprofit Organizations – the Nonprofit Organization New Loan Facility (NONLF) and the Nonprofit Organization Expanded Loan Facility (NOELF).

The terms of both the NONLF and NOELF are substantially similar. The NONLF is for organizations looking for a “new loan,” meaning they do not currently have a debt facility with an existing lender. The NONLF Loans will generally be smaller, with a minimum of $250,000 and a maximum of $35,000,000 (or borrowers’ quarterly revenue). The NOELF is for borrowers with a pre-existing credit relationship originated prior to June 15, 2020 and has an existing maturity of at least 18 months. The NOELF Loans provide an “upsized tranche” to increase the current loan with terms of this loan program. The loans are for a minimum of $10,000,000 and a maximum of $300,000,000 or 2019 average quarterly support. Broadly speaking, these loans are targeted at organizations with strong fiscal health prior to the COVID-19 Pandemic.

In order to be an eligible borrower, a Nonprofit Organization will need to meet the following criteria under either program:

  • 1. Been in continuous operation since January 1, 2015
  • 2. Be exempt under either Section 501(C) (3) or 501(C)(19). The term sheet indicates other organizations may be considered but only at the discretion of the Federal Reserve.
  • 3. The organization must have at least ten employees but less than 15,000 or annual revenue of less than $5,000,000,000 and an endowment of less than $3,000,000,000
  • 4. Total non-donation revenues equal to 60% of expenses for the period of 2017 – 2019.
    • Non-donation revenues are revenues less the following donations
      • a. Proceeds from fundraising events
      • b. Federated campaigns
      • c. Gifts
      • d. Donor Advised Funds
      • e. Funds from similar sources
    • Expenses are total organization expenses less depreciation and amortization.
  • 5. The ratio of earnings before interest, depreciation and amortization (EBIDA) to revenue is greater than 2%
  • 6. Unrestricted Cash & Investments (Liquid Assets) of at least 60 days
  • 7. Ratio of Liquid Assets to existing debt of at least 55%

If a borrower is able to meet the above qualifications to be considered eligible, the terms of the loans are as follows:

  • 1. 5 Year Maturity.
  • 2. Principal deferred for 2 years and interest payments deferred for 1 year.
  • 3. Amortization of 15% at the end of Year 3, 15% at the end of Year 4 and 70% at maturity.
  • 4. The rate is 1 or 3 month LIBOR + 3%. This would be ~3.25% as of July 23rd, 2020.
  • 5. The loan is not subordinated to any other debt and is pari passu for any other debt in the expanded facility.
  • 6. No prepayment penalty.

The loans themselves will have a 1% origination fee charged by the lender as well as a potential 1% facility fee passed on from the lender to the borrower (for a total of 2%). The borrower will have to maintain certain covenants, including refraining from paying any debt (other than mandatory and due) while this loan is outstanding. The borrower also must certify that it has a good basis to believe it has its ability to meet its financial obligations for 90 days and does not expect to file for bankruptcy, along with a commitment to make reasonable efforts to retain employees.

As the Federal Reserve Facility is purchasing the participations in these loans as of the date of these term sheets, these loans should, in theory be available now. Interested borrowers should contact their banking contacts if they are looking to obtain one of these loans. The Federal Reserve facility is scheduled to stop purchasing loans on September 30, 2020; however, the term sheets indicate that this date may (and probably will) be expanded.

To date, much of the interest in the Main Street Lending program has been lukewarm for both private companies and Nonprofit Organizations, and few financial institutions have been pushing out participation in these facilities. Many private organizations either will not meet the underwriting requirements imposed (it would require a minimum EBITDA of $62,500) or do not find the distribution restrictions (limited to amounts needed to cover taxes for owners for the loan term and 12 months after) burdensome. Nonprofit Organizations may face similar hurdles meeting the above underwriting requirements, particularly if they rely heavily on donations, operated at a deficit for 2019, or do not have at least 60 days in cash at the time of loan origination and do not have 2019 annual revenue of at least $1,000,000.

PPP, HHS and other COVID Stimulus Quick Updates

After the initial passing of the CARES Act and subsequent extensions there were daily and sometimes hourly changes to report. In the past 6 weeks it has largely been quiet with few new or major noteworthy updates for organizations and businesses. However, there are a few quick updates to pass along:

HHS Provider Relief Fund Extended – Last Friday, HHS extended the due dates of its Provider Relief Funds. The Second Chance for General Distribution Portal, which is available to Medicare providers that received a first payment in April from the General Distribution and missed the June 3rd deadline for a secondary payment that would bring their funding up to 2% of annual revenues. Starting the week of August 10th, HHS will provide another opportunity for providers to receive the second payment with a deadline of August 28th. In addition, the Medicaid/CHIP funding for providers who did not receive funding as part of the General Distribution was similarly extended through August 28th. This funding is also 2% of annual revenue and is available for providers that bill Medicaid; including OPWDD funded agencies, EI providers, clinics, etc.

PPP Loan Updates – there have been limited updates since the last round of updates in June 2020 related to PPP loans. Many borrowers still have questions, such as with the amount of includable retirement contributions, eligibility of certain insurance benefits (dental and/or vision) and nonprofit unemployment contributions. There have been rumors of a large update coming for over a month now that may or may not potentially address these issues, but nothing new has come out since June 25th, 2020.

PPP Forgiveness Applications – many lenders have begun the process of informing borrowers that at some point in August 2020 they may begin to accept applications for forgiveness on PPP Loans; however, few banks at this point are actually accepting the applications.

Applications for forgiveness are due within 10 months after the end of a borrowers covered period. For nearly all borrowers, this would mean 24 weeks after the date of the loan origination, which for the earliest PPP loan recipients would be sometime in October 2020 when the covered period ends and therefore the application would be due by August 2021 the latest. While some borrowers may still chose to elect 8 weeks (and as a result their covered period would be complete) it is likely more beneficial for most borrowers to use the full 24 weeks in order to maximize your forgiveness potential.

Right now, the earliest “magic” date on the calendar would be August 10th, which is when the SBA has indicated they anticipate their portal being open for banks to submit loan forgiveness. The SBA has indicated that any further changes to the program would delay this further. It is also possible that the SBA may not be ready by this date and it could be pushed back.

For most borrowers, it is likely that time is on their side and there is no need to rush into a forgiveness application. Throughout the PPP process we have seen changes occur fairly frequently and many of them have been in the borrower’s favor and it is likely with more time, the process will become easier for borrowers. While many want to just get the forgiveness done and complete (understandably so) it is likely that patience by borrowers will be rewarded.

Additional Economic Stimulus – Both the Republicans (who debuted a bill last week) and Democrats (HEROES Act from May 2020) have shown interest in a second stimulus package; however, it appears the sides are far apart at this time as to what this package should cover for employers, businesses, nonprofit organizations, and individuals. Until the law is passed by both the House and Senate, these are nothing more than proposals and not law and should not be relied on or anticipated by taxpayers. That said, it is likely and hopeful that any deal will have

a. Expansion of Employer Tax Credits, including ability to claim if an employer obtained a PPP loan

b. Streamlined PPP forgiveness procedures

c. Tax Credits or PPP Eligibility for office personal protective equipment for employers

Interestingly, despite the initial outcry from drafters, neither the House nor Senate bills addressed the ability for PPP Loan Borrowers to deduct the expenses. The IRS ruled in April 2020 after the passage of the bill that since the income from the PPP Loan is tax exempt, the underlying expenses are nondeductible. Any change to this position will likely have to come from Congress.

As we enter the last part of the year and the earliest loans begin to reach the stage where applications for forgiveness are possible and advisable, we will begin to start assisting borrowers with this process. Right now, we have a very valuable asset in time, and using this time to our advantage will be of interest to all organizations.

New Comparability Plan… Is it Right for You?

Pension plans should be an important part of every business’ benefits package. Not only do they let business owners/executives and employees to set aside funds for their retirement, but they provide the added ability for companies to assist in the process and make contributions on behalf of their staff, to help them better position themselves for retirement. There are many different retirement plans available for companies to set-up, but one of the ones that offer businesses some of the most flexibility is the New Comparability Plan (“NCP”).

NCP Background:

A NCP is a profit-sharing plan strategically used by many companies to be able to direct pension contributions to specific individuals, programs, departments, class of workers, etc., within certain limitations. What this means is, if the plan doesn’t run into a non-discrimination issue, an employer can contribute a different percentage of each employee’s salary, providing a tremendous level of flexibility to the plan sponsor. This would allow companies to potentially direct pension contributions to more profitable departments, sales teams, deficit funded programs, etc.

Nondiscrimination Requirements:

NCP’s are “cross-tested” plans that are subject to nondiscrimination rules which requires the contribution on behalf of each plan participant to be actuarily projected, with interest, to retirement age and converted to an annual pension benefit expressed as a percentage of current compensation (the “equivalent benefit accrual rate”). Since the nondiscrimination testing considers resources at retirement age, an NCP plan tends to be more favorable to older individuals (such as company or organizational leadership), making it easier to meet nondiscrimination testing, even with little or no contributions going to certain employees.

In order for an NCP to use cross-testing, the IRS requires it to meet one of 3 requirements: (i) Broadly available allocation rates, (ii) provide a “gradual age or service schedule” or a “uniform target benefit allocation,” or (iii) satisfy a gateway condition. These requirements are very complex and should be discussed with your third-party administrator or plan consultant to ensure that you can meet these requirements.

Applicable Limitations:

As with all profit-sharing plans, the maximum employer contribution is limited to 25% of the eligible compensation paid to participants in the NCP. Eligible compensation levels change on an annual basis, so once again, you should discuss this with your accountant or third-party administrator.

Conclusion:

A NCP may be an attractive option for a company’s pension plan, depending on its employee demographics, spending patterns, and compensation structure. Some of the negative aspects that an employer must consider are:

  • Start-up fees associated with the determination and establishment of an NCP
  • Additional annual fees for cross-testing and top-heavy testing requirements
  • Overall increased annual administrative fees

Even so, if properly designed, an NCP can provide a significant level of benefits and flexibility to a company, including:

  • Flexibility with respect to pension contributions and the ability to target where those contributions go;
  • Flexibility to determine contribution amounts on a year-to-year basis, depending on profits and business objectives
  • A tax deduction for qualified pension contributions;
  • Deferral of taxation of contributions, including earnings, until the funds are ultimately distributed
  • NCP provisions can be added to an existing 401(k) plan

Plan sponsors should consider whether or not an NCP is the right option for them.

Why Testing is Important for Pensions

As auditors, we are always busy performing different types of testing, especially controls and compliance-based test work. While there is a common stigma about auditors and audits in general, and they have a “gotcha” sort of mentality, there is a tremendous benefit that a company can derive from the work they perform. The truth is, our goal is to ensure that companies and organizations are complying with rules and regulations so that they can avoid costly errors, especially when it comes to defined contribution pension plans.

One test that we perform is called the participant test. This is an overall test of plan participants to ensure that eligibility requirements are met per the plan document, contributions are properly calculated and allocated to employees based upon their eligibility and withholding requests, and demographic information transmitted to the plan’s custodian is complete and accurate. While most of these processes are handled electronically, we want to ensure that they are still handled properly and that investment selections and allocations are correct.

Another compliance-based test we perform considers the timely remittance of contributions by the Plan Sponsor to the custodian of the funds. This is important because the Department of Labor (DOL) requires the employer to deposit deferrals to the custodian as soon as the employer can. Deposits can never be later than the 15th business day of the following month, which is a rule set as the maximum deadline. This however, is not a safe harbor. Having the contributions remitted timely ensures that the employer is following DOL regulations while reducing the potential for lost earnings to participants due to a time lag incurred by the employer. If contributions aren’t timely remitted, the employer has to contribute to the Plan the amount that each employee had in lost earnings due to the late remittance.

We also review general compliance test results performed for standard defined contribution plans. These include nondiscrimination tests in elective deferrals, employer contributions, availability of benefits, top-heavy tests, and limits on the maximum elective deferrals allowed by the Internal Revenue Service (IRS) each year. Top-heavy tests ensure that participants who are key employees do not receive a disproportionate amount of benefits compared to non-key employee participants. All of these compliance-based tests provide assurance that the plan is following IRS regulations so that it can remain as a qualified plan for participants.

We perform all of these tests, and more, annually to make sure that employers are in line with guidance and compliance matters as set by authoritative bodies such as the DOL and IRS. After all, if the plan is out of compliance, you would rather hear from us, your auditors, when you can self-correct, as opposed to from a governmental agency.

Governance: It’s Not Rocket Science

At a recent board meeting with a new client, I found myself at the table with a number of brilliant and acclaimed scientists, some of whom had worked for NASA at different points in their careers. The board members’ individual accomplishments aside, this organization’s governance was abysmal.

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