Intermediate Sanctions Compliance for Non-profit Executive Compensation
The Internal Revenue Service has specific rules for compliance under the Intermediate Sanctions ruling (IRC Section 4958) regarding reasonableness of compensation. While the IRS acknowledges that there is broad compliance by tax exempt organizations in meeting the requirements of the ruling, these organizations should periodically review the compensation package for their most senior executives (“disqualified persons” as specified in IRC Section 4958).
- For purposes of determining the reasonableness of compensation of senior executives that have a material impact on the business, the Internal Revenue Service has determined that, in the absence of a formal audit, an organization may achieve a “rebuttable presumption” if it meets three pre-established criteria as follows:
- The organization must have an independent committee of the Board of Directors comprised of “disinterested” individuals approve the actual pay levels of the senior executives;
- The organization must rely on comparability data of compensation applicable to the executives; and
- The organization must document, the results of the comparability study, any inference regarding adjustment of pay for executives and the decision of the Board of Directors to approve an adjustment of the executives’ compensation levels.
- IRC Section 4958 establishes a general approach in the three steps above. It is the responsibility of each organization to determine how best to meet these criteria. One methodology for determining the reasonableness of compensation includes the following:
- An assessment of the role of the tax exempt organization in its industry sector and the community.
- A compilation of data from peer organizations that meet specific criteria including: industry-specific organizations; similarly sized organizations; organizations in the same geographic location; and other entities that compete with the organization for senior executives.
- A review of the role of each disqualified senior executive in the organization including an assessment of the duties and responsibilities of the executive.
- A report on the comparability of the following compensation components that comprise total remuneration:
- Base Salary,
- Incentive pay (short-term and/or long-term),
- Benefits plans, and
- The Board of Directors, through its Compensation Committee, determines the appropriate compensation levels for these positions based on the competitive analysis of the labor market as well as executive performance
- When this procedure is applied, tax exempt organizations can use the comparability report to justify their total remuneration policies and help avoid assertions of excessive compensation and benefits for their senior executives.
- Total Compensation Solutions (TCS) can assist the Board of Directors by completing a comparability study from a totally independent perspective. For more information on the Intermediate Sanctions ruling and how TCS can assist your company, please call Tom Bailey, Senior Compensation Consultant at 914-730-7300 or email at: firstname.lastname@example.org
For more details on Intermediate Sanctions and Rebuttable Presumption from the IRS go to: www.irs.gov/Charities-&-Non-Profit…