Executive Compensation for the Not-for-Profit 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 (770) 261-1900 Executive Compensation for the Not-for-Profit Entity, BNKJ, September 2005

2. Executive Compensation for the Not-for-Profit Entity • Intermediate Sanctions Rules • Form 990 Reporting and other changes • IRS Executive Compensation Project Executive Compensation for the Not-for-Profit Entity, BNKJ, September 2005

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

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

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

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

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

8. Intermediate Sanctions Rules Penalties **Penalties for organization managers limited to $10,000 per transaction Executive Compensation for the Not-for-Profit Entity, BNKJ, September 2005

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

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

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

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

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

14. Intermediate Sanctions Rules Rebuttable Presumption of Reasonableness Implement a PROCESS and STICK TO IT!!! 3 most important things: • DOCUMENTATION • DOCUMENTATION • DOCUMENTATION Executive Compensation for the Not-for-Profit Entity, BNKJ, September 2005

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

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

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

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

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

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

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

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

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

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

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

26. Form 990 Reporting • Must describe details of transaction. • Who • What position • Type of transaction • How approved Executive Compensation for the Not-for-Profit Entity, BNKJ, September 2005

27. New Developments • Panel on Nonprofit Sector Report • Recommendations to Congress, IRS and nonprofits • Goal – greater transparency, governance, and accountability of charitable organizations Executive Compensation for the Not-for-Profit Entity, BNKJ, September 2005

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

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 > $50,000 • Increase the penalties for approving excess benefit transactions Executive Compensation for the Not-for-Profit Entity, BNKJ, September 2005

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

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

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

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

34. Recommendations • If you haven’t 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 Executive Compensation for the Not-for-Profit Entity, BNKJ, September 2005

35. Questions?? Executive Compensation for the Not-for-Profit Entity, BNKJ, September 2005

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 (770) 261-1900 Executive Compensation for the Not-for-Profit Entity, BNKJ, September 2005