Executive Compensation for the Not-for-Profit Entity, BNKJ, September 2005 1 Executive Compensation...

Executive Compensation for the Not-for-Profit Entity, BNKJ, September 2005 1

Executive Executive Compensation Compensation

for the Not-for the Not-for-Profit for-Profit

EntityEntity Susan Clark, CPA, FHFMATax Manager

Babush, Neiman, Kornman & Johnson, LLP5909 Peachtree Dunwoody RoadSuite 800Atlanta, GA 30328www.bnkj.com(770) 261-1900


Executive Compensation for Executive Compensation for the Not-for-Profit Entitythe Not-for-Profit Entity

•Intermediate Intermediate Sanctions RulesSanctions Rules

•Form 990 Reporting Form 990 Reporting and other changesand other changes

•IRS Executive IRS Executive Compensation Compensation ProjectProject


Intermediate Sanctions Intermediate Sanctions RulesRules • Added as IRC §4958 in 1996 Added as IRC §4958 in 1996

• Final Regulations issued Final Regulations issued January 2002January 2002

• Concept – provide a Concept – provide a monetary penalty short of monetary penalty short of revocation of exempt status revocation of exempt status for abusive dealingsfor abusive dealings

• Applies to all §501(c)(3) and Applies to all §501(c)(3) and §501(c)(4) organizations §501(c)(4) organizations (except Private Foundations)(except Private Foundations)


Intermediate Sanctions Intermediate Sanctions RulesRules • Penalty tax imposed on Penalty tax imposed on

“disqualified person” who “disqualified person” who participates in “excess participates in “excess benefit transaction” as well benefit transaction” as well on managementon management

• Penalty tax computed Penalty tax computed based on amount of “excess based on amount of “excess benefit” receivedbenefit” received


Intermediate Sanctions Intermediate Sanctions RulesRules ““Disqualified Person”Disqualified Person”

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


Intermediate Sanctions Intermediate Sanctions RulesRules ““Excess Benefit Transaction”Excess Benefit Transaction”

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


Intermediate Sanctions Intermediate Sanctions RulesRules ““Excess Benefit Transaction”Excess Benefit Transaction”

•Examples (not all-inclusive):Examples (not all-inclusive):

•Excess CompensationExcess Compensation

•Lease arrangementsLease arrangements

•Revenue sharing incentive compRevenue sharing incentive comp

•Insurance coverageInsurance coverage

•Minimum Income guaranteesMinimum Income guarantees

•LoansLoans

•Non-FMV rents, services, salesNon-FMV rents, services, sales

•Spousal travelSpousal travel


Intermediate Sanctions Intermediate Sanctions RulesRules PenaltiesPenalties

**Penalties for organization managers **Penalties for organization managers limited to $10,000 per transactionlimited to $10,000 per transaction

Tier 1Tier 1 Tier 2Tier 2

Disqualified Disqualified PersonPerson

25%25% 200%200%

ManagementManagement 10%10%


Intermediate Sanctions Intermediate Sanctions RulesRules Rebuttable Presumption of Rebuttable Presumption of

ReasonablenessReasonableness

•Establishes a presumption Establishes a presumption that the transaction was that the transaction was reasonable (i.e. not an excess reasonable (i.e. not an excess benefit)benefit)

•Shifts burden of proof to IRSShifts burden of proof to IRS


Intermediate Sanctions Intermediate Sanctions RulesRules Rebuttable Presumption of ReasonablenessRebuttable Presumption of Reasonableness

Exists if transaction was approved by the board of Exists if transaction was approved by the board of directors or trustees or independent board directors or trustees or independent board committee that:committee that:

•Was composed entirely of individuals Was composed entirely of individuals unrelated to the disqualified person unrelated to the disqualified person involved, andinvolved, and

•Obtained and relied upon appropriate Obtained and relied upon appropriate comparability data, andcomparability data, and

•Adequately documented the basis for Adequately documented the basis for determinationdetermination



Relevant Comparability data:Relevant Comparability data:

•Compensation levels paid by similar Compensation levels paid by similar organizations (both taxable and tax-organizations (both taxable and tax-exempt)exempt)

•Availability of similar services in the Availability of similar services in the geographic areageographic area

•Independent compensation surveys and Independent compensation surveys and appraisals prepared by independent firmsappraisals prepared by independent firms

•Actual written offers from similar Actual written offers from similar institutions competing for the servicesinstitutions competing for the services



Adequate documentationAdequate documentation• Written or electronic record reflecting Written or electronic record reflecting

•the terms of the transaction, the terms of the transaction,

•date of approval, date of approval,

•governing body members present during governing body members present during debate and those who voteddebate and those who voted

•Comparability data obtained and relied uponComparability data obtained and relied upon

•Basis for determination of compensation Basis for determination of compensation outside range of comparability dataoutside range of comparability data

•Actions of members with conflict of interestActions of members with conflict of interest




Adequate documentationAdequate documentation

•Must be prepared by later ofMust be prepared by later of

•Next meeting of body approving the Next meeting of body approving the transactiontransaction

•60 days after final approval of the 60 days after final approval of the arrangement or transferarrangement or transfer




Implement a PROCESS and STICK TO Implement a PROCESS and STICK TO IT!!!IT!!!

3 most important things:3 most important things:

1.1.DOCUMENTATIONDOCUMENTATION




Intermediate Sanctions Intermediate Sanctions RulesRules IRS Proposed RegulationsIRS Proposed Regulations

• Issued 9/8/2005Issued 9/8/2005

• Comment period open until 12/8/2005Comment period open until 12/8/2005

• Regs under §501(c)(3) – examples of Regs under §501(c)(3) – examples of operating for private vs public operating for private vs public interestinterest

• Regs under §4958 – when revocation Regs under §4958 – when revocation of exempt status warrantedof exempt status warranted


Intermediate Sanctions Intermediate Sanctions RulesRules Proposed RegulationsProposed Regulations

• Revocation of exempt statusRevocation of exempt status

• Facts & Circumstances TestFacts & Circumstances Test

• Size & scope of regular exempt activitiesSize & scope of regular exempt activities

• Size & scope of excess benefit Size & scope of excess benefit transactionstransactions

• If organization has repeated EBTsIf organization has repeated EBTs

• If organization has implemented If organization has implemented safeguards to prevent future violationssafeguards to prevent future violations

• If EBTs have been correctedIf EBTs have been corrected


Reasonable CompensationReasonable Compensation What is included in determining - What is included in determining -

• Cash and noncash compensation including Cash and noncash compensation including severance paidseverance paid

• Deferred compensation earnedDeferred compensation earned

• Premiums paid for liability or other Premiums paid for liability or other insurance, insurance,

• Indemnification payments, Indemnification payments,

• Payments to welfare benefit plansPayments to welfare benefit plans

• Taxable and nontaxable fringesTaxable and nontaxable fringes

• Benefit provided directly or indirectly by Benefit provided directly or indirectly by affiliated entityaffiliated entity


Form 990 ReportingForm 990 Reporting

Compensation DisclosuresCompensation Disclosures

• Part V, Question 75, and Schedule APart V, Question 75, and Schedule A

• Part V – Officers, directors, Part V – Officers, directors, trustees, and key employeestrustees, and key employees

• Key employee – person having Key employee – person having responsibilities similar to officers, responsibilities similar to officers, directors, and trustees. CFO, CEO and directors, and trustees. CFO, CEO and COO generally includedCOO generally included

• Schedule A, Part I – Five highest Schedule A, Part I – Five highest PaidPaid




• Compensation (Column C)Compensation (Column C)

• Salary, fees, bonuses, and Salary, fees, bonuses, and severance payments paidseverance payments paid

• Include current year payments of Include current year payments of amount reported as deferred in amount reported as deferred in prior yearsprior years


Form 990 ReportingForm 990 Reporting Compensation DisclosuresCompensation Disclosures

• Contributions to benefit plans (Column D)Contributions to benefit plans (Column D)

• All forms of deferred compensation and All forms of deferred compensation and future severance paymentsfuture severance payments

• Include elective deferrals to 403(b)/401(k)Include elective deferrals to 403(b)/401(k)

• Include payments to welfare benefit Include payments to welfare benefit plans on behalf of the officersplans on behalf of the officers

• Report salaries and other compensation Report salaries and other compensation earned during the year but not yet paidearned during the year but not yet paid




• Expense Allowances (Column E)Expense Allowances (Column E)

• Include both taxable and Include both taxable and nontaxable fringe benefitsnontaxable fringe benefits

• Such as club dues, spousal travelSuch as club dues, spousal travel

• Include expense account allowanceInclude expense account allowance

• Housing, auto, cell phone, etc.Housing, auto, cell phone, etc.


Form 990 ReportingForm 990 Reporting Compensation DisclosuresCompensation Disclosures

• From related organizationsFrom related organizations

• Officer, director, trustee, or key Officer, director, trustee, or key employeeemployee

• more than $10,000 from related more than $10,000 from related organizations organizations

• total compensation exceeds $100,000total compensation exceeds $100,000

• ““Related organization” – any entity that Related organization” – any entity that the filing organization owns or controls, the filing organization owns or controls, or that owns or controls the filing or that owns or controls the filing organizationorganization



Compensation DisclosuresCompensation Disclosures• Related organizationsRelated organizations

• Owns means holding 50% or more of voting Owns means holding 50% or more of voting rights, voting stock, profits or beneficial rights, voting stock, profits or beneficial interestinterest

• Control means Control means • 50% or more of officers, directors, trustees, 50% or more of officers, directors, trustees,

or key employees are also officers, or key employees are also officers, directors, trustees, or key employees of directors, trustees, or key employees of second organizationsecond organization

• 50% or more of officers, directors, trustees, 50% or more of officers, directors, trustees, or key employees are appointed by second or key employees are appointed by second organizationorganization




• Compensation from related organizationsCompensation from related organizations• Control means (cont.)Control means (cont.)

• Organization appoints 50% or more of Organization appoints 50% or more of officers, directors, trustees, or key officers, directors, trustees, or key employees of second organizationemployees of second organization

• Supporting organizations are considered Supporting organizations are considered related for purposes of these rulesrelated for purposes of these rules

• Information disclosure is same as in Part VInformation disclosure is same as in Part V

• Must also list the organization paying the Must also list the organization paying the compensationcompensation


Form 990 ReportingForm 990 Reporting • Schedule A, Part III requires disclosure of Schedule A, Part III requires disclosure of

all transactions between an exempt all transactions between an exempt organization and its officers, directors, organization and its officers, directors, trustees, key employees, members of trustees, key employees, members of their families or organizations owned or their families or organizations owned or controlled by such individualscontrolled by such individuals

• Applies to both sides of the transaction - Applies to both sides of the transaction - whether organization is payer/payee, whether organization is payer/payee, buyer/seller, lender/borrowerbuyer/seller, lender/borrower


Form 990 ReportingForm 990 Reporting • Must describe details of transaction.Must describe details of transaction.

• WhoWho

• What positionWhat position

• Type of transaction Type of transaction

• How approvedHow approved


New DevelopmentsNew Developments • Panel on Nonprofit Sector ReportPanel on Nonprofit Sector Report

• Recommendations to Congress, IRS and Recommendations to Congress, IRS and nonprofitsnonprofits

• Goal – greater transparency, Goal – greater transparency, governance, and accountability of governance, and accountability of charitable organizationscharitable organizations



• Board Compensation Board Compensation • Discouraged paying board members for Discouraged paying board members for

service – serve on volunteer basisservice – serve on volunteer basis

• If do pay, disclosures on full amount and If do pay, disclosures on full amount and reasons for compensation including how reasons for compensation including how determineddetermined

• Increase the penalties for approving excess Increase the penalties for approving excess benefit transactionsbenefit transactions



• Executive CompensationExecutive Compensation• Expand the disclosures required for Expand the disclosures required for

compensationcompensation• Distinguish between base salary, benefits, Distinguish between base salary, benefits,

bonuses, incentive compensation, etc. bonuses, incentive compensation, etc. (similar to SEC reporting on proxy (similar to SEC reporting on proxy statements)statements)

• Require disclosure of compensation paid to Require disclosure of compensation paid to employees related to board member or employees related to board member or officer if paid > $50,000officer if paid > $50,000

• Increase the penalties for approving excess Increase the penalties for approving excess benefit transactions benefit transactions



• Executive CompensationExecutive Compensation• Not pay or reimburse for spousal or Not pay or reimburse for spousal or

dependent traveldependent travel

• Adopt, enforce, and disclose adoption of a Adopt, enforce, and disclose adoption of a conflict of interest policyconflict of interest policy


New DevelopmentsNew Developments • IRS EO Compensation ProjectIRS EO Compensation Project

• Letters send to more than 2,000 Letters send to more than 2,000 charitiescharities• Contact does not imply improper activityContact does not imply improper activity

• Selected based on total compensation in Part V Selected based on total compensation in Part V

• Ask nonprofits to demonstrate they have Ask nonprofits to demonstrate they have developed compensation programs that developed compensation programs that meet guidelines (Rebuttable Presumption)meet guidelines (Rebuttable Presumption)

• If no program, nonprofit asked to provide If no program, nonprofit asked to provide documentation supporting FMV of documentation supporting FMV of compensationcompensation



• Specific QuestionsSpecific Questions• Focus on those listed on 990 in Part V or as Focus on those listed on 990 in Part V or as

five highest paidfive highest paid• How compensation was establishedHow compensation was established

• What are its component partsWhat are its component parts

• What are duties of individualWhat are duties of individual

• Did organization meet rebuttable presumption, Did organization meet rebuttable presumption, and if not, what documentation exists to support and if not, what documentation exists to support compensationcompensation

• If compensation was included on W-2 or 1099If compensation was included on W-2 or 1099



• Broader QuestionsBroader Questions• Focus on “Best Practice” issuesFocus on “Best Practice” issues

• Does the organization have a conflicts of interest Does the organization have a conflicts of interest policypolicy

• Did insiders participate in compensation processDid insiders participate in compensation process

• What kind of comparable data was relied onWhat kind of comparable data was relied on

• If “side contracts” with insiders existIf “side contracts” with insiders exist

• Did the organization make any loans to insidersDid the organization make any loans to insiders


RecommendationsRecommendations • If you haven’t developed compensation If you haven’t developed compensation

review program – do so.review program – do so.

• Review existing compensation Review existing compensation arrangementsarrangements

• Employment agreementsEmployment agreements

• Severance PackagesSeverance Packages

• Loans, income guaranteesLoans, income guarantees

• Disclose all aspects of compensation as Disclose all aspects of compensation as required on Form 990required on Form 990


Questions??Questions??


Executive Executive Compensation Compensation

for the Not-for the Not-for-Profit for-Profit

EntityEntity Susan Clark, CPA, FHFMATax Manager

Babush, Neiman, Kornman & Johnson, LLP5909 Peachtree Dunwoody RoadSuite 800Atlanta, GA 30328www.bnkj.com(770) 261-1900

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Executive Compensation for the Not-for-Profit Entity, BNKJ, September 2005 1 Executive Compensation...

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