1. Financial Management Services 101 An Introduction to Financial Management Services (FMS) for Participant-Direction Programs

2. Mollie Grotpeter FMS Policy Lead National Resource Center for Participant-Directed Services mollie.grotpeter@annkissam.com (617) 401-2480

3. FMS is a Participant Directed Support Participant directed supports assist elders and individuals with disabilities and their representatives in using participant-directed services and also can provide protections and safeguards for both participants/ representatives and program administrative agencies.

4. FMS Duties Regardless of the FMS model utilized, the primary duties of a Financial Management Services Agency (FMSA) are:  Make financial transactions on behalf of participant directing individuals in accordance with spending plans, authorizations and/or program rules This could include paying workers, agencies, or other goods and services vendors  Generate reports for individuals and program administrative agencies showing financial transactions, spending plan data and other information as applicable to the program

5. FMS Duties for Participants who Directly Hire Workers When an individual directly employs a worker, FMS duties often include:  Managing payroll responsibilities on behalf of the participant directing employer including: Withholding Federal, State and Local income taxes Filing and depositing Federal, State and Local employment taxes, such as unemployment, Social Security and Medicare taxes Managing other deductions, such as garnishments, levies or union dues Managing workers’ compensation insurance rules and other requirements that apply when the individual functions as the employer of his/her workers

6. What Determines the FMS Duties? A lot, but an important determinant of FMS duties is the type of authority offered for participants within the program These include: Budget Authority Employer Authority

7. Budget Authority Budget Authority means that a participant has choice and control over what goods and services to purchase within their spending plan The FMSA’s role is to:  Establish and maintain separate accounts for each participant directed budget  Receive, disburse and track funds for payment of participant directed services per agreement with the program administrative agency  Process and pay approved invoices & timesheets in accordance with each participant’s budget  Prepare reports for participants and administrative agencies showing spending plan amounts, spending and amounts remaining

8. Employer Authority Employer Authority means that a participant can directly hire workers of his/her choice and will train, manage, schedule and dismiss workers. The FMSA’s role is to:  Facilitate employment of workers by the participant (or family member or representative) by performing certain employer responsibilities as an agent of the participant employer.  These may include: Processing payroll Withholding and depositing applicable employee Federal, State and Local income taxes Filing and depositing applicable employer Federal, State and Local employment taxes, including unemployment, Social Security and Medicare taxes Filing employer tax returns and issuing year-end wage and earnings statements (e.g. IRS Forms W-2, IRS Forms 1099, State Forms W-2, 1099 or equivalent) Supporting the participant to maintain compliance with applicable workers’ compensation regulations Supporting the participant to review worker authorization information and collect applicable employment forms from workers

9. Independent Contractor vs. Employee Employees usually have taxes withheld by their employers, are subject to unemployment insurance and workers’ compensation regulations. Employers direct the work of their employees. An independent contractor is self-employed. An independent contractor determines the method of performing work, even if the payer directs what the outcome is. An independent contractor does not generally have taxes withheld from pay. The independent contractor is responsible for filing and paying his/her own employment and income taxes.

10. Directly Hired Workers are Generally Employees The IRS has determined, in general, that home-based workers are employees, not independent contractors (See IRS Notice 2003-70 for this determination as it relates directly to participant direction)

11. Types of FMS: Fiscal/Employer Agent Fiscal/Employer Agent (F/EA)  Government F/EA  Vendor F/EA (see handout) Participant (or representative) is the common law employer of home-based workers who are employees. Participant hires, fires, trains and manages workers. The F/EA supports the participant to complete and file appropriate tax forms to become an employer, manages payroll duties on behalf of the employer and withholds, deposits and files applicable taxes on the employer’s behalf. The F/EA may manage applicable workers’ compensation duties. The participant can also work with agencies, vendors and other independent contractors. The participant is NOT the employer of agencies, vendors or other independent contractors. Payments to these entities can be made by the F/EA or another source.

12. F/EAs and Reporting Agents are Different (and the difference matters) An F/EA may be a Vendor Agent, Government Agent or a sub-agent to a Government Agent An F/EA is also called a “Form 2678 Agent” by the IRS An F/EA is different than a Reporting Agent and the difference has important liability implications (we will discuss referencing a handout)

13. Types of FMS: Agency with Choice Agency and participant have a co-employment relationship for workers that provide services to the participant The agency is the primary employer The participant is the managing employer The agency hires the worker and manages all duties related to tax, labor and workers’ compensation rules and regulations The participant may refer a worker to the agency for hire, participate in training the worker and have some control over scheduling and dismissing the worker

14. Types of FMS: Fiscal Conduit Individuals/representatives manage all aspects of their participant directed supports, including managing all aspects of payroll for the workers they hire directly The Fiscal Conduit receives spending plan funds from the administrative entity and disburses such funds to participants via vouchers, cash or some other method A Fiscal Conduit may provide employer/payroll skills training and may monitor participants to ensure fiscal accountability This option can be used with Older Americans Act, state general funds, Medicaid 1115 waivers, or state plan services under 1915(j) of the Deficit Reduction Act (2005)

15. Participants’ Employees are Household or Domestic Workers who are employees of participants and utilize a Fiscal/Employer Agent or Fiscal Conduit are usually considered household or domestic employees by the IRS, Department of Labor and state Departments of Revenue & Departments of Labor (or equivalent).

16. Tax and Labor Rules and Regulations are Different for Household Employees Employers of household employees must comply with tax and labor rules and regulations that are different in some areas than those utilized for businesses, non-profits or government entities. For certain aspects of payroll and tax withholding, depositing and filing, different procedures are required to withhold and remit taxes for household employees than for “regular” employees. For this reason, some payroll companies will not manage payroll for household employers, but this is changing as participant direction grows.

17. FICA, FUTA, SUTA Thresholds Employers of domestic/household employees are responsible for certain employer taxes after meeting certain thresholds Employee and Employer FICA (Social Security and Medicare taxes) must be withheld, calculated and paid for any workers earning $1700 or more in a calendar year Employer Federal Unemployment Tax Act (FUTA) taxes must be calculated and paid once an employer has paid $1000 or more to all employees in a single calendar quarter; FUTA is then due for all quarters in the calendar year State Unemployment Tax Act (SUTA) laws differ by state, but usually mirror FUTA

18. Tax Exemptions Household employees are exempt from FUTA taxes if the employee is the spouse, child or parent of the employer (See IRS Publication 15, Circular E in the section titled “Family Employees” for specific rules on these exemptions.) Household employees are exempt from FICA taxes if the employee is the spouse, child or parent of the employer (See IRS Publication 15, Circular E in the section titled “Family Employees” for specific rules on these exemptions.) In many states, household employees are exempt from SUTA taxes under the same circumstances that employees are exempt from FUTA taxes

19. State Tax Agencies Working with state tax agencies (State Department of Labor, Department of Revenue or equivalent) before implementing a participant directed program is prudent Usually, participant direction programs are different than most employer/employee relationships with which state tax agencies are familiar

20. State Tax Agencies After understanding how the participant direction program functions, State Tax Agencies may direct the F/EA or participants to use processes specific to the participant direction program For example, seek guidance for maintaining compliance with state payment requirements when a participant authorizes a worker to work more hours than covered by the spending plan Connect with state tax agencies early and often

21. Combining Public and Private Funds to Pay for Employee Services We are working aggressively with the IRS to get a clear determination that participants can pay employees with a combination of public and private funds If this is permitted, an F/EA would make payments to workers using both public program funds and funds provided to the F/EA by the participant This would allow participants to privately fund supplemental service, using the same workers as are publicly funded while maintaining tax compliance As of 2/20/2009, the IRS has not yet provided a determination regarding whether this is permitted under prevailing IRS Revenue Procedures for participant direction programs

22. What does FMS Cost? FMS entities can provide a broad range of services With a broad range of services comes a broad range of costs Many factors go into determining the cost of providing FMS

23. Factors that Influence FMS Cost Volume and type of Customer Service provided by FMS to participants, representatives, workers or vendors Volume of different services for which the FMS will pay Volume of different rates permitted for each service  Can participants set different rates for different workers? Size of population served; FMS has high fixed costs, so the cost per participant usually goes down with more participants

24. Factors that Influence FMS Cost Complexity of payment rules that FMSA must enforce Working capital requirements; Will FMSA advance service funds to pay participants’ workers and vendors and invoice the administrative entity after paying workers and vendors? Process to exchange data with the FMSA, including participant, worker, vendor and spending plan information Requirements for FMSA physical presence in the planned service area(s)

25. FMS Resources www.cashandcounseling.org http://www.cashandcounseling.org/resources then select “FMS” under “Topic” in the drop down http://www.cashandcounseling.org/resources  Copies of Requests for Proposals  Examples of FMS Readiness Reviews  Lists of “Tasks to be Performed by” Vendor and Government F/EAs  Examples of purchasing plans from states

26. Questions, Comments, Discussion Thank you!