If you serve a nonprofit organization as a senior officer, a Board member, or a member of the Compensation Committee, you’re subject to a set of IRS penalties called “Intermediate Sanctions.”  Essentially, the IRS has issued regulations, with significant penalty taxes for noncompliance, designed to ensure that (a) cash payments, transfers of property, and fringe benefits that flow from a nonprofit to an individual are transferred as compensation, and (b) the value of the compensation is reasonable in relation to the person’s job. 

The penalties fall primarily on the person receiving the excess compensation, with smaller amounts that can be assessed on the members of the board or committee who approved the compensation.  The regulations are called “Intermediate” because they give the IRS a middle ground between doing nothing and revoking the organization’s tax-exempt status – the first option doesn’t accomplish anything, while revoking a tax exemption can hurt the people or organizations being served or funded by the not for profit organization. 

Much of our work involves assisting our clients in complying with the Intermediate Sanctions regulations.  This includes:

Identifying the positions covered by Intermediate Sanctions.

Collecting and valuing all elements of compensation for each person.

Assessing the reasonableness of each person’s compensation.

Ensuring compliance with the documentation and deadlines required by the regulations.

In subsequent posts, we’ll examine the key elements of the regulations and steps for staying in compliance.

We’ve received a report from the Association for Advanced Life Underwriting on 403(b) plan termination.  The AALU says “Section 403(b) plans are facing major changes in 2009.  Not only do these plans have to be restated (or documented) to comply with IRS regulations that were effective January 1, 2009, but section 403(b) plans now have to file full reports (including audits) on Form 5500.  Because of these new requirements and other concerns, many nonprofit organizations that sponsor 403(b) plans are considering terminating those plans.”  The report details important issues about plan termination, noting that the “the IRS’ chief expert . .  has often been quoted as saying in some cases it may not even be possible to terminate a 403(b) plan.”

The Chronicle of Philanthropy reports today that Senator Charles Grassley (R- IA) has decided not to pursue 2 amendments to Sen. Baucus’ health care bill, one of which would have done away with the “safe harbor” from Intermediate Sanctions penalties that is available to nonprofits who utilize well-done compensation studies and take certain other steps.  He did, however, reserve the right to bring them up again.  Intermediate Sanctions are a set of penalty taxes imposed on a nonprofit executive who receives exessive compensation, and on the members of the governing body of the organization (e.g., the board of trustees) that approved the compensation package.  (See our Sept. 26, 2009 post.)

See our website for additional information on compensation topics.