Newsletter-Fall 2013

 

Penflex President Submits Testimony on Service Award Legislation to Congress

Penflex President Ed Holohan, together with the National Volunteer Fire Council (NVFC), submitted testimony to the House Ways and Means Committee concerning the current Internal Revenue Code and the problems it presents for Service Award Programs. The testimony also addressed how pending legislation can help eliminate the problems and thereby encourage local governments and emergency services organizations to establish LOSAPs (Length of Service Award Programs).

The proposed legislation before Congress, VESSRA (S. 506/H.R. 1009), is designed to fix technical problems with how the current tax code affects LOSAPs.

What VESSRA does:

  • Make it clear that these programs are not subject to ERISA, which is the law that applies to IRS Qualified Pension plans (i.e. pension/profit sharing plans). This results in significant savings in administrative costs and avoids some very burdensome, senseless administrative implications.
  • Clarifies the Federal Income Tax treatment of Service Awards paid to volunteers.
  • Allows all sponsors of LOSAPs to elect to have their program treated as an Internal Revenue Code Section 457 Plan which has huge positive implications for all Service Award Programs for the program sponsor as well as for volunteers and their beneficiaries. Most importantly, for the sponsor of a program (usually a state or local government) who elects to have the program considered an IRC Section 457 Plan of Deferred Compensation the program funding will be protected. Under current rules, if the program sponsor becomes insolvent, the funds accumulated to pay the service awards to the volunteers could be lost to creditors of the sponsor. If the sponsor elects to have the Service Award Program be considered an IRC Section 457 Plan that will no longer be true. The funds accumulated in a LOSAP trust fund could not be attacked by creditors of the sponsor. And there are other advantages as well, such as tax-deferred rollovers of lump sum payments to a volunteer from a LOSAP.

It is important to note that this legislation is revenue neutral and presents no new cost to tax-payers. Furthermore, since the overwhelming majority of communities nationwide rely on emergency services volunteers, Penflex views passing legislation that helps recruit and retain volunteers as essential to state and local governments all over the country.

LOSAP Audits

An amendment to Article 11-A in the General Municipal Law required all Service Award Programs to be audited annually beginning in 2008. These audits have proven to be very informative to fire districts, towns and villages. It has been our observation that as a result of these audits commissioners, town board members, volunteer fire company officials and village trustees better understand the funded status of their defined benefit LOSAP. Penflex supports any effort to identify underfunded defined benefit LOSAPs so that the funding deficiency can be corrected before it turns into a funding crisis.

In recent years we have begun to see audits of point record keeping systems. Some have been audited by the Comptroller's office, some by accounting firms and Penflex has also been retained to audit point recordkeeping systems. Some tips for avoiding common problems are below. For our take on these audits see Guidelines for LOSAP Point Systems, written by Ed Holohan, and available on our website under the Resources tab.

  • Each point record keeping system must include at least three components: The formal written point system, activity participation verification sheets (such as meeting attendance sheets and training course certifications) and the system for setting forth and tabulating points for each volunteer within each point system category (can be a simple spreadsheet).
  • Points must be awarded to volunteers under the point recordkeeping system in accordance with the written formal point system adopted by the Board of Fire Commissioners (fire district), the Town Board (fire protection district) or the Village Trustees (Village Fire Department).
  • All point system records must be stored in a safe, secure location like meeting attendance sheets which shouldn't be left on the fire company secretary's desk where any person could easily alter the attendance sheet. Similarly only a limited number (2 or 3) people should be authorized to make modifications to automated point record keeping systems.
  • With a few exceptions, no volunteer should sign an activity attendance sheet for another volunteer.

Are the NYS LOSAP Audit Requirements Too Burdensome?

Ever since the NYS General Municipal Law was amended in 2006 to require annual audits of Service Award Programs there has been an ongoing debate. The debate has generally not been about the need for LOSAP audits. It has been about the need for annual LOSAP audits, especially for sponsors who are not required to annually prepare audited financial statements.

By allowing LOSAP sponsors to attach to their annual audited financial statements a footnote containing specific information about their LOSAP, the NYS Comptroller's Office (OSC) significantly lessened the burden and the cost to LOSAP sponsors of meeting the LOSAP audit requirements each year. For those local government LOSAP sponsors who do not prepare annual audited financial statements, there were then two options for complying with the LOSAP audit requirements:

  • prepare annual audited financial statements and then prepare and attach the OSC approved footnote; or
  • have the LOSAP audited each year as if it was a non- governmental pension plan.

While the merits of annually preparing audited financial statements are arguable, the cost to these LOSAP sponsors (or potential LOSAP sponsors) of complying with the NYS LOSAP audit requirements are disproportionate and actually have in some cases stopped the local government unit from establishing a LOSAP for its volunteer firefighters. This is certainly not consistent with the original intent of our NYS legislators when in 1988 they amended the NYS General Municipal Law to authorize local governments to establish LOSAPs to help them recruit and retain volunteer firefighters.

We propose that the GML be amended to allow LOSAP sponsors who are not required to annually prepare audited financial statements to have their LOSAP audited once every five years if their LOSAP is a defined contribution program and once every three years if their LOSAP is a defined benefit program.

What do you think?