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Nonprofit News
FEDERAL REGULATIONS GOVERN EXECUTIVE COMPENSATION AT NONPROFIT ORGANIZATIONS
As a qualified compensation consulting firm, Clear Management delivers nonprofit executive compensation studies that include data for comparable organizations accompanied by a reasoned written opinion that fulfills IRS requirements. Our process is designed to comply with IRS regulations and to provide your nonprofit organization and Board with the maximum available protections for your Board’s decisions on executive compensation.
The Intermediate Sanctions legislation signed into law in July 1996 allows the IRS to impose excise taxes on excess benefit transactions involving 501(c)(3) and 501(c)(4) tax-exempt organizations in which “disqualified persons” receive unreasonable compensation or other economic benefits. A “disqualified person” is one who was in a position to exercise substantial influence over the affairs of the organization. Chief executive officers, chief operating officers, chief financial officers and founders are all named as disqualified persons in the regulations; others may be disqualified persons based on a facts and circumstances test.
Clear Management’s process for conducting nonprofit executive compensation studies helps clients avail themselves of a type of safe harbor—a “rebuttable presumption of reasonableness.” Compensation is presumed by the IRS to be reasonable if the following three conditions are met:
- The Board makes executive compensation decisions without any participation by the disqualified persons or their subordinates in order to avoid a conflict of interest. After being retained, normally by organization staff, Clear Management communicates directly with the Board or Committee Chair.
- The Board must obtain and rely upon appropriate comparability data. Data must be collected and analyzed and should be retained as supporting documentation. With years of experience in nonprofit compensation, Clear Management can collect and analyze data on appropriate comparable or peer organizations and help the Board interpret and apply the findings in making decisions on compensation for disqualified persons.
- The Board must adequately document its decision within 60 days or by the next meeting, whichever is later. Documentation should include the terms and date of executive compensation decisions; the names of members present during the debate and how those present voted; a record of actions by any member with a conflict of interest; and completion of the documentation within 60 days or by next meeting, whichever is later. Clear Management’s executive compensation study includes a checklist for Board action.
Links to IRS documents and regulations may be found on our Links page.
NEW FORM 990 IN 2009
The Internal Revenue Service (IRS) completely redesigned Form 990—the annual return filed by most tax-exempt organizations—effective for 2008 tax years (returns filed beginning in 2009). The new Form 990 requires more thorough and more specific reporting of compensation information for officers, directors, key employees, and highest compensation employees. The IRS states that the redesign is intended to enhance transparency, promote compliance and minimize taxpayer burden. In particular, new Schedule J is designed to eliminate confusion and promote uniform and objective reporting of compensation data by drawing upon calendar year (not organization fiscal year) reporting of compensation from Forms W-2 and 1099-MISC.
Your organization’s accountant may provide you with greater detail and guidance about completion of Form 990; only aspects related to compensation are discussed here.
The major changes related to compensation are found in Part VI Governance . . .
- Section A, Question 10 asks if a copy of the Form 990 was provided to the organization’s governing body before it was filed.
- Section B, Question 15 asks if the process for determining compensation of executives and other officers or key employees included a review and approval by independent persons, comparability data, and contemporaneous substantiation of the deliberation and decision (the conditions for a rebuttable presumption of reasonableness).
Although the IRS has no statutory authority to ask about organization governance, their assumption seems to be that a well-governed organization is more likely to be a compliant organization.
. . . and in Part VII Compensation for
- All current officers, directors, trustees and key employees regardless of whether they are compensated;
- Top 20 highest paid key employees. A key employee is one who satisfies all three of the following requirements:
- Had reportable compensation exceeding $150,000 for the calendar year (the “$150,000 Test”);
- Had or shared responsibilities over the entire organization or over at least 10% of the organization’s activities (the “Responsibility Test”); and
- Was one of the 20 employees who satisfied the $150,000 Test and the Responsibility Test with the highest reportable compensation for the calendar year (the “Top 20 Test”).
- Five most highly compensated employees other an officers, directors, trustees or the key employees who received compensation of more than $100,000; and
- Former officers, key employees and five highest compensated employees (using a five-year lookback period).
. . . and on Schedule J Compensation Information includes expanded compensation reporting based on W-2 or 1099-MISC for the calendar year, with compensation reported for these components:
- Base compensation;
- Bonus & incentive compensation;
- Other compensation which includes items not reported on the W-2 or 1099-MISC such as nontaxable fringe benefits including health insurance premiums, medical reimbursement and flexible spending programs, disability life and long-term care insurance;
- Deferred compensation including tax-deferred employer contributions to a qualified retirement plan.
Schedule J also asks about the process steps that were followed by the organization to establish the compensation of the organization’s CEO/Executive Director.
The IRS has stated that it views public disclosure as its greatest enforcement tool. Public disclosure of more specific compensation data is sure to set off a firestorm of nonprofit salary comparisons when new Form 990s are made public.
Links to useful IRS documents may be found on our Links page.
