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

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

3. Executive Compensation for the Not-for-Profit Entity, BNKJ, September 2005 3 Intermediate Sanctions Rules Added as IRC §4958 in 1996 Added as IRC §4958 in 1996 Final Regulations issued January 2002 Final Regulations issued January 2002 Concept – provide a monetary penalty short of revocation of exempt status for abusive dealings 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) Applies to all §501(c)(3) and §501(c)(4) organizations (except Private Foundations)

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

5. 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 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. 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. “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. Executive Compensation for the Not-for-Profit Entity, BNKJ, September 2005 7 Intermediate Sanctions Rules “Excess Benefit Transaction” Examples (not all-inclusive): Examples (not all-inclusive): Excess Compensation Excess Compensation Lease arrangements Lease arrangements Revenue sharing incentive comp Revenue sharing incentive comp Insurance coverage Insurance coverage Minimum Income guarantees Minimum Income guarantees Loans Loans Non-FMV rents, services, sales Non-FMV rents, services, sales Spousal travel Spousal travel

8. 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 Tier 1 Tier 2 Disqualified Person 25%200% Management10%

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

10. 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 Was composed entirely of individuals unrelated to the disqualified person involved, and Obtained and relied upon appropriate comparability data, and Obtained and relied upon appropriate comparability data, and Adequately documented the basis for determination Adequately documented the basis for determination

11. 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) Compensation levels paid by similar organizations (both taxable and tax-exempt) Availability of similar services in the geographic area Availability of similar services in the geographic area Independent compensation surveys and appraisals prepared by independent firms Independent compensation surveys and appraisals prepared by independent firms Actual written offers from similar institutions competing for the services Actual written offers from similar institutions competing for the services

12. 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 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 debate and those who voted governing body members present during debate and those who voted Comparability data obtained and relied upon Comparability data obtained and relied upon Basis for determination of compensation outside range of comparability data Basis for determination of compensation outside range of comparability data Actions of members with conflict of interest Actions of members with conflict of interest

13. 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 Must be prepared by later of Next meeting of body approving the transaction Next meeting of body approving the transaction 60 days after final approval of the arrangement or transfer 60 days after final approval of the arrangement or transfer

14. 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: 1. DOCUMENTATION 2. DOCUMENTATION 3. DOCUMENTATION

15. Executive Compensation for the Not-for-Profit Entity, BNKJ, September 2005 15 Intermediate Sanctions Rules IRS Proposed Regulations Issued 9/8/2005 Issued 9/8/2005 Comment period open until 12/8/2005 Comment period open until 12/8/2005 Regs under §501(c)(3) – examples of operating for private vs public interest Regs under §501(c)(3) – examples of operating for private vs public interest Regs under §4958 – when revocation of exempt status warranted Regs under §4958 – when revocation of exempt status warranted

16. Executive Compensation for the Not-for-Profit Entity, BNKJ, September 2005 16 Intermediate Sanctions Rules Proposed Regulations Revocation of exempt status Revocation of exempt status Facts & Circumstances Test Facts & Circumstances Test Size & scope of regular exempt activities Size & scope of regular exempt activities Size & scope of excess benefit transactions Size & scope of excess benefit transactions If organization has repeated EBTs If organization has repeated EBTs If organization has implemented safeguards to prevent future violations If organization has implemented safeguards to prevent future violations If EBTs have been corrected If EBTs have been corrected

17. 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 Cash and noncash compensation including severance paid Deferred compensation earned Deferred compensation earned Premiums paid for liability or other insurance, Premiums paid for liability or other insurance, Indemnification payments, Indemnification payments, Payments to welfare benefit plans Payments to welfare benefit plans Taxable and nontaxable fringes Taxable and nontaxable fringes Benefit provided directly or indirectly by affiliated entity Benefit provided directly or indirectly by affiliated entity

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

19. Executive Compensation for the Not-for-Profit Entity, BNKJ, September 2005 19 Form 990 Reporting Compensation Disclosures Compensation (Column C) Compensation (Column C) Salary, fees, bonuses, and severance payments paid Salary, fees, bonuses, and severance payments paid Include current year payments of amount reported as deferred in prior years Include current year payments of amount reported as deferred in prior years

20. Executive Compensation for the Not-for-Profit Entity, BNKJ, September 2005 20 Form 990 Reporting Compensation Disclosures Contributions to benefit plans (Column D) Contributions to benefit plans (Column D) All forms of deferred compensation and future severance payments All forms of deferred compensation and future severance payments Include elective deferrals to 403(b)/401(k) Include elective deferrals to 403(b)/401(k) Include payments to welfare benefit plans on behalf of the officers Include payments to welfare benefit plans on behalf of the officers Report salaries and other compensation earned during the year but not yet paid Report salaries and other compensation earned during the year but not yet paid

21. Executive Compensation for the Not-for-Profit Entity, BNKJ, September 2005 21 Form 990 Reporting Compensation Disclosures Expense Allowances (Column E) Expense Allowances (Column E) Include both taxable and nontaxable fringe benefits Include both taxable and nontaxable fringe benefits Such as club dues, spousal travel Such as club dues, spousal travel Include expense account allowance Include expense account allowance Housing, auto, cell phone, etc. Housing, auto, cell phone, etc.

22. Executive Compensation for the Not-for-Profit Entity, BNKJ, September 2005 22 Form 990 Reporting Compensation Disclosures From related organizations From related organizations Officer, director, trustee, or key employee Officer, director, trustee, or key employee more than $10,000 from related organizations more than $10,000 from related organizations total compensation exceeds $100,000 total compensation exceeds $100,000 “Related organization” – any entity that the filing organization owns or controls, or that owns or controls the filing organization “Related organization” – any entity that the filing organization owns or controls, or that owns or controls the filing organization

23. Executive Compensation for the Not-for-Profit Entity, BNKJ, September 2005 23 Form 990 Reporting Compensation Disclosures Related organizations Related organizations Owns means holding 50% or more of voting rights, voting stock, profits or beneficial interest Owns means holding 50% or more of voting rights, voting stock, profits or beneficial interest Control means 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 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 50% or more of officers, directors, trustees, or key employees are appointed by second organization

24. Executive Compensation for the Not-for-Profit Entity, BNKJ, September 2005 24 Form 990 Reporting Compensation Disclosures Compensation from related organizations Compensation from related organizations Control means (cont.) Control means (cont.) Organization appoints 50% or more of officers, directors, trustees, or key employees of second organization 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 Supporting organizations are considered related for purposes of these rules Information disclosure is same as in Part V Information disclosure is same as in Part V Must also list the organization paying the compensation Must also list the organization paying the compensation

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

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

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

28. Executive Compensation for the Not-for-Profit Entity, BNKJ, September 2005 28 New Developments Panel on Nonprofit Sector Report Panel on Nonprofit Sector Report Board Compensation Board Compensation Discouraged paying board members for service – serve on volunteer basis Discouraged paying board members for service – serve on volunteer basis If do pay, disclosures on full amount and reasons for compensation including how determined If do pay, disclosures on full amount and reasons for compensation including how determined Increase the penalties for approving excess benefit transactions Increase the penalties for approving excess benefit transactions

29. Executive Compensation for the Not-for-Profit Entity, BNKJ, September 2005 29 New Developments Panel on Nonprofit Sector Report Panel on Nonprofit Sector Report Executive Compensation Executive Compensation Expand the disclosures required for compensation Expand the disclosures required for compensation Distinguish between base salary, benefits, bonuses, incentive compensation, etc. (similar to SEC reporting on proxy statements) 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 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 Increase the penalties for approving excess benefit transactions

30. Executive Compensation for the Not-for-Profit Entity, BNKJ, September 2005 30 New Developments Panel on Nonprofit Sector Report Panel on Nonprofit Sector Report Executive Compensation Executive Compensation Not pay or reimburse for spousal or dependent travel Not pay or reimburse for spousal or dependent travel Adopt, enforce, and disclose adoption of a conflict of interest policy Adopt, enforce, and disclose adoption of a conflict of interest policy

31. Executive Compensation for the Not-for-Profit Entity, BNKJ, September 2005 31 New Developments IRS EO Compensation Project IRS EO Compensation Project Letters send to more than 2,000 charities Letters send to more than 2,000 charities Contact does not imply improper activity Contact 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 developed compensation programs that meet guidelines (Rebuttable Presumption) 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 If no program, nonprofit asked to provide documentation supporting FMV of compensation

32. Executive Compensation for the Not-for-Profit Entity, BNKJ, September 2005 32 New Developments IRS EO Compensation Project IRS EO Compensation Project Specific Questions Specific Questions Focus on those listed on 990 in Part V or as five highest paid Focus on those listed on 990 in Part V or as five highest paid How compensation was established How compensation was established What are its component parts What are its component parts What are duties of individual What are duties of individual Did organization meet rebuttable presumption, and if not, what documentation exists to support compensation Did organization meet rebuttable presumption, and if not, what documentation exists to support compensation If compensation was included on W-2 or 1099 If compensation was included on W-2 or 1099

33. Executive Compensation for the Not-for-Profit Entity, BNKJ, September 2005 33 New Developments IRS EO Compensation Project IRS EO Compensation Project Broader Questions Broader Questions Focus on “Best Practice” issues Focus on “Best Practice” issues Does the organization have a conflicts of interest policy Does the organization have a conflicts of interest policy Did insiders participate in compensation process Did insiders participate in compensation process What kind of comparable data was relied on What kind of comparable data was relied on If “side contracts” with insiders exist If “side contracts” with insiders exist Did the organization make any loans to insiders Did the organization make any loans to insiders

34. Executive Compensation for the Not-for-Profit Entity, BNKJ, September 2005 34Recommendations If you haven’t developed compensation review program – do so. If you haven’t developed compensation review program – do so. Review existing compensation arrangements Review existing compensation arrangements Employment agreements Employment agreements Severance Packages Severance Packages Loans, income guarantees Loans, income guarantees Disclose all aspects of compensation as required on Form 990 Disclose all aspects of compensation as required on Form 990

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

36. 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