Resources/News
New Jersey Pay Equity Law On April 24, 2018, the New Jersey Governor signed into law the Diane B. Allen Equal Pay Act , which amends the New Jersey Law Against Discrimination (NJLAD) by significantly expanding existing pay equity protections for New Jersey employees, imposing difficult defense burdens on New Jersey employers, and creating a six-year statute of limitations for pay equity claims under the NJLAD. The Act takes effect on July 1, 2018, is similar to the Massachusetts law, but covers all protected classes.
Massachusetts Equal Pay Act (MEPA) On July 1, 2018, an updated equal pay law will go into effect in Massachusetts. The Attorney General's Office issued guidance and resources on March 1, 2018 to assist employers in complying with the law. The Guidance includes an Overview and Frequently Asked Questions and a Pay Calculation Tool.
Tax Law Changes to Executive Compensation
Carol Calhoun of Venable LLP describes how “The recently passed tax bill imposes a 21% excise tax on excess compensation and excess severance benefits of certain executives of nonprofit and governmental employers. The provision has a substantial impact on the compensation and benefits that such organizations can provide for their executives. Moreover, the determination of which employers, and which executives, are covered includes several traps for the unwary”.
Of note, deferred compensation payouts from 457(b) and 457(f) may be swept into consideration under the $1M excess pay. Calhoun says, “In general, all compensation reported on the Form W-2 is counted, both in determining whether someone is a covered employee and in determining whether the $1 million cap has been exceeded.” Triggering the latter rule by even $1 can result in the excise tax. Areas to watch include payments for historical under-compensation, anticipated consulting arrangements, impending substantial retirement payouts under Section 457(b) and 457(f), and severance payouts. She notes that “In the case of a nonprofit, the rule applies when the compensation becomes vested. This typically means that deferring compensation will not help, because the compensation deferred will have to be paid out while the individual is still receiving compensation as an employee (or at least a consultant) to the same organization.” We reiterate the need to consult expert advice regarding the interaction of Code Sections 457, 409A and now the new tax law.
Executive Compensation Disability Provisions
Beginning April 1, 2018, new disability claim regulations may apply to some executive compensation arrangements. Given this regulatory deadline, employers need to analyze which of their executive compensation arrangements may be subject to the enhanced requirements for disability claims review.
The authors recommend that “Employers should review whether any of the following executive compensation arrangements are subject to the ERISA claims procedure rules and have disability payment triggers. Then, employers should identify who ultimately controls the disability determination:
- Employment Agreements
- Annual Incentive Plans (potentially subject to exemption)
- Long-Term Incentive Plans
- Nonqualified Deferred Compensation Plans and Supplemental Retirement Plans Equity Compensation Arrangements (potentially subject to exemption)
To the extent a disability determination under these arrangements is not made by a third party (such as the SSA or the employer’s long-term disability insurance carrier), the employer should evaluate whether to (1) amend the executive compensation arrangement to be exempt from the Final Rule or (2) review and modify its procedures for making disability determinations to comply with the Final Rule.
Tax Law Changes to Fringe Benefits
The following table developed by Dori Eggett, CPA, EKS&H, covers the basic changes to fringe benefits.
Section 457
On June 22, 2016, the IRS and Treasury issued proposed rulemaking on Deferred Compensation Plans of State and Local Governments and Tax-Exempt Entities (Code Section 457). Proskauer Rose LLP analyzes the regulations, and notes “Generally, the Proposed Regulations apply to compensation deferred under a plan for calendar years beginning after the date of publication of the rules as final regulations, including deferred amounts to which the legally binding right arose during the prior calendar years that were not previously included in income during one or more prior calendar years. The Proposed Regulations, however, may be relied on immediately.” As of this report, the regulations have not been finalized. Such plans should be reviewed for the impact of these regulations and also their interaction with Code Section 409A and 2017-2018 tax law changes.
https://ogletree.com/shared-content/content/blog/2018/april/new-jersey-enacts-expansive-equal-pay-law
https://benefitsattorney.com/nonprofits-and-governments-face-compensation-and-benefits-issues-under-the-new-tax-law/
Focus On...
Colleges and Universities
Colleges and Universities: On April 25, 2013, the IRS completed and released the findings from its Colleges and Universities Compliance Project. This report is of interest because of its focus on executive compensation. As the IRS notes "The multi-year project, begun in 2008, included a questionnaire sent to 400 colleges and universities and subsequent audits of 34 selected academic institutions. The final report focuses on the results of these examinations, especially in the areas of unrelated business income and executive compensation." (In January 2010, the IRS announced it would audit 40 of the colleges and universities, with a particular emphasis on executive compensation. On May 7, 2010, the IRS released the “Interim Report on Nonprofit Colleges and Universities Compliance Project.”)
IRS Colleges and Universities Compliance Project https://www.irs.gov/pub/irs-tege/CUCP_FinalRpt_050213.pdf
Healthcare
AG Coakley Determines That Compensation of Board Members at Non-Profit Health Insurers is Not Justified: Report, Press Release and Audio. AG will publish annual public report detailing board compensation levels and rationales and file legislation that would allow AG's Office to prohibit charities from compensating directors.
Massachusetts Attorney General Office Announces Major New Initiatives on NonProfit Healthcare Executive Compensation. Read our blog post.
U.S. Senator Charles Grassley Targets Nonprofit Hospitals on Charity Care; Proposed Legislation would put limits on Executive Compensation. (Wall Street Journal Dec. 18, 2008):
Grassley Targets Nonnprofit Hospitals on Charity Care
Stinson Morrison Hecker LLP, Self Assessment Guide for Tax-Exempt Hospitals, August 6, 2008
Physician Compensation
Physician Incentive Compensation - Lawrence M. Brauer and Charles F. Kaiser III
Associations
FTC Announcement of NAMM consent order demonstrates need for associations to carefully control exchange of competitive information among members at meetings and elsewhere.
Foundations
Foundation Chief Agrees to Repay Over $4M. Other foundation told "no issues to pursue".
Recommended Best Practices in Determining Reasonable Executive Compensation, Council on Foundations, December 6, 2002
Determining Reasonable Compensation for Foundation Directors and Trustees, Council on Foundations, December 6, 2002
Indicators of Effectiveness: Understanding and Improving Foundation Performance, The Center for Effective Philanthropy, Research Initiatives
Other Industry Sectors
Grassley Releases Review of Tax Issues Raised by Media-based Ministries, January 6, 2011
IRS Expands Scope of Nonprofit Examination to Associations: In its FY 2011 Annual Report and Workplan, the IRS states, “In recent years, our examination program has concentrated on section 501(c)(3) organizations. Beginning in FY 2011, we are increasing our focus on section 501(c)(4), (5) and (6) organizations. With the additional information available on the new Form 990, we will look at issues including political activity, inurement and the extent of compliance with the requirements for tax exemption by organizations that self-identified themselves as a section 501(c)(4), (5) or (6) organization.
- IRS Actions Regarding Tax Exempt Organizations
- Governance/Sarbanes-Oxley Act of 2002 Implications for Tax-exempt/Non-profit Organizations
- Intermediate Sanctions for Tax Exempt / Non Profit Organizations
- Attorneys General
- Deferred Compensation
- DOJ and FTC Antitrust Guidelines for Conduct of Surveys
IRS Actions Regarding Tax Exempt Organizations
Chronicle of Higher Education Salary Survey for Public Universities attracts attention of Wall Street Journal:
http://online.wsj.com/article/SB122689192825032735.html
IRS Issues Training Tools for Completing New 2008 Form 990: In a very forward-thinking move, the IRS has issued a set of training materials for completing the new Form 990, including a case study and a series of videos.
IRS Exempt Organizations Annual Report and 2009 Work Plan: The IRS notes a new initiative focusing on governance (P. 20) as well as discussing the College and University Compliance project.
The IRS issues EO Update, periodic newsletter with information for tax-exempt organizations and tax practitioners - attorneys, accountants, and others - who represent them. On-line subscriptions can be obtained here at the IRS's web site.
The IRS is issuing a series of filing tips/answers to FAQs for the new Form 990. The latest deals with governance. Archives of prior filing tips (currently a Preparation Checklist and Reporting Executive Compensation) are available.
Governance: IRS brings back "Commensurate Test" http://www.nonprofitlawblog.com/home/2008/07/re-embracing-th.html
Executive Compensation - Fringe Benefits Audit Techniques Guide (02-2005)
January 13, 2000-- Private Foundation Disclosure Rules, Final Regulations
IRS - Update: The Final Regulations on the Disclosure Requirements for Annual Information Returns and Applications for Exemption
Effective June 8, 1999-- Final Regulations on Public Disclosure of Material Relating to Tax-Exempt Organizations
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Governance/Sarbanes-Oxley Act of 2002 Implications for Tax-exempt/Non-profit Organizations
Chronicle of Philanthropy February 6, 2009, Opinion: Why Charity Leaders Should Pay Close Attention to Obama's Pay Guidelines, by Ralph De Jong and Michael Peregrine
Panel on the Nonprofit Sector Releases Final Report to Senate Finance Committee, June 22, 2005 Panel on the Nonprofit Sector Report to Senate Finance Committee
Sarbanes-Oxley, Corporate Responsibility and Colleges and Universities, National Association of College and University Attorneys (NACUA)
IRS Model Conflict of Interest Policy Revised 1999
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Intermediate Sanctions for Tax Exempt/Non Profit Organizations
Intermediate Sanctions applies to certain "applicable" section 501(c)(3) and 501(c)(4) organizations, excluding private foundations. See regulations for details.
Lawrence Associates offers audits and certifies that we meet the requirements of Treas. Reg. § 53.4958-1, paragraphs (d)(4)(iii)(C)(1) through (3). Lawrence Associates holds itself out to the public as compensation consultants. The Firm performs the relevant valuations on a regular basis, and is qualified to make valuations of the type of property or services involved. This certification is supported by the professional profiles of Lawrence Associates' consultants, by marketing materials and the web site at www.lawrenceassociates.com and by our client base and projects. Please contact us for an audit.
IRS Regulations on revocation of 501(c)(3) status for engaging in an excess benefit transaction These regulations amended the existing regulations under section 501(c)(3) and added several examples to illustrate the requirement that an organization serve a public rather than a private interest. These regulations also provide guidance on factors the IRS will consider in determining whether a 501(c)(3) organization that engages in one or more excess benefit transactions described in section 4958 will continue to be recognized as exempt under section 501(c)(3).
New Intermediate Sanctions Training Article
Intermediate Sanctions (IRC 4958) Update by Lawrence M. Brauer and Leonard J. Henzke, IRS, Exempt Organizations-Technical Instruction Program for FY 2003. This article discusses key issues in the Intermediate Sanctions regulations, including various IRS rulings: PLR 200335037 6/2/03, PLR 200332018 5/13/03, Information Letter 2002-14 12/23/03, PLR 200247055 11/22/02, TAM 200243057, 7/2/02, TAM 200244028, 6/21/02
Reasonable Compensation by Jean Wright and Jay H. Rotz, IRS, Exempt Organizations
Easier Compliance is Goal of New Intermediate Sanction Regulations , Steven T. Miller, Director of Exempt Organizations, IRS Washington, DC
Compliance Checklist: Rebuttable Presumption Procedure is Key to Easy Intermediate Sanctions Compliance, Steven T. Miller, Director of Exempt Organizations, IRS Washington, DC
Effective January 23, 2002 Intermediate Sanctions final regulations, Final Regulations on Excise Taxes on Excess Benefit Transactions
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Attorneys General
AG Coakley Determines That Compensation of Board Members at Non-Profit Health Insurers is Not Justified Report, Press Release and Audio. AG will publish annual public report detailing board compensation levels and rationales and file legislation that would allow AG's Office to prohibit charities from compensating directors. New Hampshire AG Reviews Hospital CEO Pay
New York Attorney General, Responsibilities of Directors and Officers of Not-for-Profit Corporations
Massachusetts Attorney General Files "An Act to Promote the Financial Integrity of Public Charities"
Massachusetts Attorney General, 10 Practical Tips for Non-Profit Hospital Boards, October 2004
1994-Current -- Massachusetts Attorney General's Office: "The Attorney General's Guide for Board Members of Charitable Organizations"
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Deferred Compensation
On June 22, 2016, the IRS and Treasury Department issued proposed rulemaking on Deferred Compensation Plans of State and Local Governments and Tax-Exempt Entities (Code section 457 457(b) and 457(f)). “These proposed regulations, which the IRS notes can be relied on immediately when making decisions on current plans, now specify in greater detail when amounts deferred under these plans are includible in income, the amounts that are includible, and the types of plans that are excluded. Before the new regulations become final, the IRS is holding a public comment period that closes September 20, and a public hearing on October 18. Thereafter, based on feedback, the IRS may or may not make further adjustments to the proposed regulations, and will then issue final regulations. The regulations could become effective as early as January 1, 2017, if final regulations are published by year-end 2016. If the IRS misses the January 1, 2017 date, the next possible effective date would not be until January 1, 2018.”
Important! See Washington Report 08-109, "Funding" Rabbi Trusts -- Impact of the Financial Crisis. A Washington Report synopsis:
Section 409A(b)(3) of the Internal Revenue Code, added by the Pension Protection Act of 2006 (see our Bulletin No. 06-99), imposes restrictions on "funding" rabbi trusts that provide deferred compensation benefits when the employer has a qualified defined benefit pension plan that is considered to be "at-risk." With the tremendous drop in asset values in recent months, many employers with defined benefit pension plans that were not previously at-risk are now facing the possibility that their plans may fall into that category. In addition to the numerous problems that this creates for the pension plan, it may also trigger a freeze on funding the nonqualified deferred compensation plan. Given this possibility, this Bulletin addresses whether employers should consider transferring assets to their rabbi trusts before the end of this year.
IRS final regulations on 457 plans: Compensation Deferred Under Eligible Deferred Compensation Plans
IRS Notice 2003-20: Eligible Deferred Compensation Plans under Section 457 This notice provides guidance on 457 plan withholding and reporting.
IRS Proposed regulations on Compensation Deferred Under Eligible Deferred Compensation Plans (Section 457(b))
The Treasury Department and IRS issued Final Regulations on split dollar (Treasury Decision 9092). Split-Dollar Life Insurance Arrangements - Final Regulations
The Treasury Department issued Revised Ruling 2003-105 in September 2003 stating the Final Regulations apply to any split-dollar life insurance arrangement that " is entered into after September 17, 2003 and to any split-dollar life insurance arrangement entered into on or before September 17, 2003 that is materially modified after September 17, 2003."
In May 2003, Treasury Department and IRS issued a supplement to Notice 2002-8. This document provides guidance on the valuation of economic benefits. Notice 2002-8 provides interim guidance on the treatment of split-dollar life insurance arrangements. This Notice revokes the earlier Notice 2001-10.
DOJ and FTC Antitrust Guidelines for Conduct of Surveys
August 28, 1996-- Revised Department of Justice and Federal Trade Commission Antitrust Guidelines for Conducting Compensation Surveys in Health Care See Statement 6 or FTC website: https://www.justice.gov/atr/statements-antitrust-enforcement-policy-health-care#CONTNUM_49
See 2002 ruling on Washington State Medical Association Survey
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Blogs increasingly provide up-to-date information on important areas.
First, check out Lawrence Associates' blog where we also link to other relevant blogs.
Others of interest: