Executive Compensation in Tax Exempt Organizations: Nonprofit Quick Guide to Navigating Intermediate Sanctions CBIZ Compensation Webcast Series

2 Intermediate Sanctions Overview What is Intermediate Sanctions and why should I care? How can I protect the organization and board?

What is Intermediate Sanctions and why should I care?

4 Intermediate Sanctions – What is it? Non-profit organizations must pay “Fair Market Value” to disqualified person(s) Burden of Proof is on Non-profit If engaged in an excess benefit transaction, disqualified persons may have to pay a two-tiered excise tax, and organizational managers may have to pay a tax also: –Board Members –Executives –Founding Members –Large Contributors Intermediate Sanctions provides for targeted sanctions short of revoking organization’s tax-exempt status

5 Why should I care? – Penalties 25% penalty imposed on “disqualified person,” which may be increased to 200% if not corrected 10% penalty imposed on “organizational managers,” capped at $20,000 per transaction Penalty applied to the amount of “excess benefit” Joint and several liability for all penalties Risk of losing tax exempt status

6 Why should I care? IRS is focusing on compensation issues –IRS is staffing offices and adding personnel to question excessive compensation –State Attorneys General beginning to review as well –Proposals in Congress to further clamp down on executive compensation Violations (even inadvertent) can mean embarrassment for nonprofits and affect ability to raise funds Form 990 changes

7 Why should I care? – Form 990 Disclosures The Form 990 now includes questions pertaining to whether or not the organization has made efforts follow the process outlined in this presentation

How can I protect the organization and board?

9 Rebuttable Presumption Compensation will be presumed to be reasonable if the organization has followed the rebuttable presumption procedures, shifting the burden of proof to the IRS Requirements: 1.Compensation arrangement is approved in advance by an independent authorized body without conflicts of interest 2.Authorized body obtained and relied upon appropriate data prior to making determination (i.e. compensation consultant’s data) 3.Authorized body concurrently and adequately documented the basis for making determination of compensation

10 Reasonable Compensation Reasonable compensation is based on: –Nature of duties –Size of organization –Economic conditions in general and locally –The amount paid by similarly situated organizations to those performing similar services –Time devoted –Background and experience

11 Appropriate Data Compensation paid by similar organizations, tax exempt and taxable –Base Salary –Bonus –Perquisites –Long-Term Incentives Current compensation surveys Written offers to disqualified person Initial contract exclusion

12 Appropriate Data – Sample Analysis

13 Summary – Protect the Organization Rely on professionals to alleviate Board members’ risk via the “Rebuttable Presumption” Have the Board approve, in advance, any contract for a suspected disqualified person, relying on appropriate data with documentation of conclusion Make sure to disclose any and all compensation on 990. Otherwise it may be an automatic excess benefit transaction

See more CBIZ Compensation Webcasts at: Edward R. Rataj, CCP Managing Director CBIZ Human Capital Services or