Executive Compensation for the NotforProfit Entity

1
Executive Compensation for the Not-for-Profit
Entity
Susan Clark, CPA, FHFMA Tax Manager
Babush, Neiman, Kornman Johnson, LLP 5909
Peachtree Dunwoody Road Suite 800 Atlanta, GA
30328 www.bnkj.com [phone]
2
Executive Compensation for the Not-for-Profit
Entity

• Intermediate Sanctions Rules
• Form 990 Reporting and other changes
• IRS Executive Compensation Project

3
Intermediate Sanctions Rules

• Added as IRC 4958 in 1996
• Final Regulations issued January 2002
• Concept provide a monetary penalty short of
  revocation of exempt status for abusive dealings
• Applies to all 501(c)(3) and 501(c)(4)
  organizations (except Private Foundations)

4
Intermediate Sanctions Rules

• Penalty tax imposed on disqualified person who
  participates in excess benefit transaction as
  well on management
• Penalty tax computed based on amount of excess
  benefit received

5
Intermediate Sanctions Rules

• Disqualified Person
• Any person who was, at any time during the 5 year
  period ending on the date of the transaction, in
  a position to exercise substantial influence
  over the organization

6
Intermediate Sanctions Rules

• Excess Benefit Transaction
• Any transaction in which the value of the
  economic benefit provided by an applicable
  tax-exempt organization directly or indirectly to
  or for the use of any disqualified person if FMV
  provided exceeds FMV of consideration received.

7
Intermediate Sanctions Rules

• Excess Benefit Transaction
• Examples (not all-inclusive)
• Excess Compensation
• Lease arrangements
• Revenue sharing incentive comp
• Insurance coverage
• Minimum Income guarantees
• Loans
• Non-FMV rents, services, sales
• Spousal travel

8
Intermediate Sanctions Rules

• Penalties
• Penalties for organization managers limited to
  10,000 per transaction

9
Intermediate Sanctions Rules

• Rebuttable Presumption of Reasonableness
• Establishes a presumption that the transaction
  was reasonable (i.e. not an excess benefit)
• Shifts burden of proof to IRS

10
Intermediate Sanctions Rules

• Rebuttable Presumption of Reasonableness
• Exists if transaction was approved by the board
  of directors or trustees or independent board
  committee that
• Was composed entirely of individuals unrelated to
  the disqualified person involved, and
• Obtained and relied upon appropriate
  comparability data, and
• Adequately documented the basis for determination

11
Intermediate Sanctions Rules

• Rebuttable Presumption of Reasonableness
• Relevant Comparability data
• Compensation levels paid by similar organizations
  (both taxable and tax-exempt)
• Availability of similar services in the
  geographic area
• Independent compensation surveys and appraisals
  prepared by independent firms
• Actual written offers from similar institutions
  competing for the services

12
Intermediate Sanctions Rules

• Rebuttable Presumption of Reasonableness
• Adequate documentation
• Written or electronic record reflecting
• the terms of the transaction,
• date of approval,
• governing body members present during debate and
  those who voted
• Comparability data obtained and relied upon
• Basis for determination of compensation outside
  range of comparability data
• Actions of members with conflict of interest

13
Intermediate Sanctions Rules

• Rebuttable Presumption of Reasonableness
• Adequate documentation
• Must be prepared by later of
• Next meeting of body approving the transaction
• 60 days after final approval of the arrangement
  or transfer

14
Intermediate Sanctions Rules

• Rebuttable Presumption of Reasonableness
• Implement a PROCESS and STICK TO IT!!!
• 3 most important things
• DOCUMENTATION
• DOCUMENTATION
• DOCUMENTATION

15
Intermediate Sanctions Rules

• IRS Proposed Regulations
• Issued 9/8/2005
• Comment period open until 12/8/2005
• Regs under 501(c)(3) examples of operating for
  private vs public interest
• Regs under 4958 when revocation of exempt
  status warranted

16
Intermediate Sanctions Rules

• Proposed Regulations
• Revocation of exempt status
• Facts Circumstances Test
• Size scope of regular exempt activities
• Size scope of excess benefit transactions
• If organization has repeated EBTs
• If organization has implemented safeguards to
  prevent future violations
• If EBTs have been corrected

17
Reasonable Compensation

• What is included in determining -
• Cash and noncash compensation including severance
  paid
• Deferred compensation earned
• Premiums paid for liability or other insurance,
• Indemnification payments,
• Payments to welfare benefit plans
• Taxable and nontaxable fringes
• Benefit provided directly or indirectly by
  affiliated entity

18
Form 990 Reporting

• Compensation Disclosures
• Part V, Question 75, and Schedule A
• Part V Officers, directors, trustees, and key
  employees
• Key employee person having responsibilities
  similar to officers, directors, and trustees.
  CFO, CEO and COO generally included
• Schedule A, Part I Five highest Paid

19
Form 990 Reporting

• Compensation Disclosures
• Compensation (Column C)
• Salary, fees, bonuses, and severance payments
  paid
• Include current year payments of amount reported
  as deferred in prior years

20
Form 990 Reporting

• Compensation Disclosures
• Contributions to benefit plans (Column D)
• All forms of deferred compensation and future
  severance payments
• Include elective deferrals to 403(b)/401(k)
• Include payments to welfare benefit plans on
  behalf of the officers
• Report salaries and other compensation earned
  during the year but not yet paid

21
Form 990 Reporting

• Compensation Disclosures
• Expense Allowances (Column E)
• Include both taxable and nontaxable fringe
  benefits
• Such as club dues, spousal travel
• Include expense account allowance
• Housing, auto, cell phone, etc.

22
Form 990 Reporting

• Compensation Disclosures
• From related organizations
• Officer, director, trustee, or key employee
• more than 10,000 from related organizations
• total compensation exceeds 100,000
• Related organization any entity that the
  filing organization owns or controls, or that
  owns or controls the filing organization

23
Form 990 Reporting

• Compensation Disclosures
• Related organizations
• Owns means holding 50 or more of voting rights,
  voting stock, profits or beneficial interest
• Control means
• 50 or more of officers, directors, trustees, or
  key employees are also officers, directors,
  trustees, or key employees of second organization
• 50 or more of officers, directors, trustees, or
  key employees are appointed by second
  organization

24
Form 990 Reporting

• Compensation Disclosures
• Compensation from related organizations
• Control means (cont.)
• Organization appoints 50 or more of officers,
  directors, trustees, or key employees of second
  organization
• Supporting organizations are considered related
  for purposes of these rules
• Information disclosure is same as in Part V
• Must also list the organization paying the
  compensation

25
Form 990 Reporting

• Schedule A, Part III requires disclosure of all
  transactions between an exempt organization and
  its officers, directors, trustees, key employees,
  members of their families or organizations owned
  or controlled by such individuals
• Applies to both sides of the transaction -
  whether organization is payer/payee,
  buyer/seller, lender/borrower

26
Form 990 Reporting

• Must describe details of transaction.
• Who
• What position
• Type of transaction
• How approved

27
New Developments

• Panel on Nonprofit Sector Report
• Recommendations to Congress, IRS and nonprofits
• Goal greater transparency, governance, and
  accountability of charitable organizations

28
New Developments

• Panel on Nonprofit Sector Report
• Board Compensation
• Discouraged paying board members for service
  serve on volunteer basis
• If do pay, disclosures on full amount and reasons
  for compensation including how determined
• Increase the penalties for approving excess
  benefit transactions

29
New Developments

• Panel on Nonprofit Sector Report
• Executive Compensation
• Expand the disclosures required for compensation
• Distinguish between base salary, benefits,
  bonuses, incentive compensation, etc. (similar to
  SEC reporting on proxy statements)
• Require disclosure of compensation paid to
  employees related to board member or officer if
  paid gt 50,000
• Increase the penalties for approving excess
  benefit transactions

30
New Developments

• Panel on Nonprofit Sector Report
• Executive Compensation
• Not pay or reimburse for spousal or dependent
  travel
• Adopt, enforce, and disclose adoption of a
  conflict of interest policy

31
New Developments

• IRS EO Compensation Project
• Letters send to more than 2,000 charities
• Contact does not imply improper activity
• Selected based on total compensation in Part V
• Ask nonprofits to demonstrate they have developed
  compensation programs that meet guidelines
  (Rebuttable Presumption)
• If no program, nonprofit asked to provide
  documentation supporting FMV of compensation

32
New Developments

• IRS EO Compensation Project
• Specific Questions
• Focus on those listed on 990 in Part V or as five
  highest paid
• How compensation was established
• What are its component parts
• What are duties of individual
• Did organization meet rebuttable presumption, and
  if not, what documentation exists to support
  compensation
• If compensation was included on W-2 or 1099

33
New Developments

• IRS EO Compensation Project
• Broader Questions
• Focus on Best Practice issues
• Does the organization have a conflicts of
  interest policy
• Did insiders participate in compensation process
• What kind of comparable data was relied on
• If side contracts with insiders exist
• Did the organization make any loans to insiders

34
Recommendations

• If you havent developed compensation review
  program do so.
• Review existing compensation arrangements
• Employment agreements
• Severance Packages
• Loans, income guarantees
• Disclose all aspects of compensation as required
  on Form 990

35
Questions??
36
Executive Compensation for the Not-for-Profit
Entity
Susan Clark, CPA, FHFMA Tax Manager
Babush, Neiman, Kornman Johnson, LLP 5909
Peachtree Dunwoody Road Suite 800 Atlanta, GA
30328 www.bnkj.com [phone]