The Web this morning was full with reports on the results of the latest survey on compensation for higher education executives, released by the Chronicle of Higher Education.  The press coverage is, shall we say, not positive, with language like “eye-popping” and “big payday” being representative.  Some reports note – but not until after the more sensational language – information needed to put the reports in perspective, such as a quote from Jeffrey J. Selingo, editor of the Chronicle of Higher Education:

“Presidents are giving back some of their pay, or trustees are freezing salaries. Both groups are worried about how the public perceives a high salary at a time when budgets are being slashed and tuition continues to increase.”

Many of the reports note that the survey covers “Fiscal Year 2008” and some note that it covers “2007-2008” but a quick review of the press reports on-line showed few (one being the Wall Street Journal) that emphasized that the survey is reporting numbers dating back to before last Fall’s financial crisis.  As we see with hospitals, most of the press stories concentrate on the highest numbers reported by institutions in the reporting newspaper’s local area.

Check out the NewsFeed section at our website for continuing coverage of compensation in higher education.

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.

Listening to NPR on our drive to work this morning, we heard a report that a study by the Chronicle of Philanthropy showed CEO salaries at nonprofits up 7 last year.  The reporter cited some of the highest earners, notably $2.1M for the head of the New York City Museum of Modern Art. In fairness, NPR’s website notes that the Chronicle itself pointed out that many of the increases came before the economic downturn, and that 1/3 of the reporting organizations stated that their CEOs are getting a pay cut.  But if that was mentioned on the radio report, we missed it while paying attention to the traffic.  Interestingly, the Chronicle’s web site posting leads off with the news about the pay cuts.

See our website for additional information on compensation topics.

The instructions for the new Form 990 contain a detailed matrix (starting on page 25) setting out numerous types of compensation, and showing where on the form each type of compensation is reported.  But the IRS itself acknowledges that not every type of compensation is listed.  The complexity of dealing with this issue is illustrated by a project we recently completed for a client – among other things, we found that the matrix does not list every place in the Form where compensation is reported – so, for example, the matrix doesn’t give any information about completing Schedule J, Part I, line 4 regarding various types of compensation.

 As with most government agencies, the best way to get an answer about the interpretation of regulation is often to track down the person responsible for interpreting or administering the specific regulation.  That’s what we did here – not without some effort – and we thought we’d share the information.  The answers we received from a very knowledgeable person at the IRS also point up that the descriptions of certain types of compensation used in the matrix may require some analysis to determine the specific type or types of plans covered.

 Split Dollar Plans:  These are considered “supplemental nonqualified retirement plans” to be reported under Schedule J, Part I, line 4b.

 457(f) plans:  These should also be reported under Schedule J, Part I, line 4b, in addition to other places on the Form 999 specified in the matrix.  But in addition to the places on the matrix that specifically refer to 457(f) plans, there are two other entries that apply:  “Contributions to nonqualified plans (vested)” and “Contributions to nonqualified plans (nonvested).”  The latter covers 457(f) plans when still subject to a risk of forfeiture.

 457(b) plans:  There are 2 specific entries for these in the matrix (vested and nonvested).  In response to our question, the IRS stated that these entries are intended to include contributions by the employer, as well as by the employee.

 Please note that this information is not necessarily binding on the IRS; furthermore, we are not providing legal or accounting advice and you should review this information with your accountants, attorneys or other professional advisors.

U.S. Senator Chuck Grassley (R- IA) has introduced an amendment to the national healthcare bill put forward by Senator Max Baucus, that could substantially change the risk profile for board members and managers of nonprofits.  The amendment would elminate the protection from personal liability, imposed by the IRS “Intermediate Sanctions” regulations (29 C.F.R. sec. 4958), currently available when a nonprofit organization hires a compensation consultant and takes the steps necessary to qualify for the “rebuttable presumption of reasonableness.

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. We applaud this initiative as there is no such thing as too much information when it comes to dealing with the new form. Recently, we did some research for a client on where to report particular items such as split dollar insurance and 457(f) plan contributions; in doing so, we discovered that even the very extensive matrix in the 990 instructions (see page 25) doesn’t cover everything but we received excellent service from the group at the IRS responsible for the Form 990 instructions. The IRS indicated to us that the instructions are necessarily a work in progress and will be improved and enhanced over time based on user feedback.

Biggest hospitals in Mass. face labor suits: The Boston Globe reported today that a Rochester, NY law firm says it has signed up about 500 hourly employees for a suit against 5 of Massachusetts’ largest hospital chains, alleging that the workers, who are not paid for 30 minute lunch breaks, are being expected to work for at least part of those breaks. The article notes that despite the small amount of time involved on a per-employee per-day basis, the total unpaid compensations claims could be in the tens of millions.

The Massachusetts Attorney General’s office has announced a very significant increase in its oversight of the compensation of executives and directors of healthcare organizations. Read the press release here and the full memo here. Among the important points are:

* The AG will move from annual “after the fact” data collection to “broader, more timely and proactive examination of executive compensation on an organization and industry-wide basis.”

* Echoing concerns recently expressed by certain officials of the IRS (see our earlier posts on this subject), the AG suggests that the focus of the IRS Intermediate Sanctions rules on using “comparables” for setting executive compensation may lead to boards regularly setting their own organization’s executives pay to be above average – i.e. what is “comparable” may not be “reasonable.”

* The AG intends to institute new reporting requirements to create standardization in format, methodology and timing, to facilitate comparison among organizations and between hospitals and health insurance companies, with the goal of being able to analyze the healthcare industry in Massachusetts as a whole.

* The AG noted that 2 major organizations compensate their directors; and referring to Principles for Good Governance of charities issued by the Panel on the Nonprofit Sector, indicated that the AG would be looking into the rationale for this compensation.

The AG is starting its review with Blue Cross, Harvard Pilgrim, Fallon and Tufts, but clearly intends to expand its scope, and the new reporting requirements will apply accross the board. We’ll keep you posted as the AG’s office releases new information.