The IRS has announced National Tax Forums to be held in 5 cities starting in July.  (Information here.)  Key topics for professionals at nonprofits and those who advise nonprofits will be SEP and SIMPLE IRA plans, and the Exempt Organization Workshop on the Form 990, Return of Organization Exempt from Income Tax, including pitfalls and how to avoid them.  The cities are:

• National Harbor, Maryland (DC) July 7-9
• Denver, Colorado July 28-30
• San Diego, California August 11-13
• Atlanta, Georgia August 25-27
• Orlando, Florida September 1-3

The Independent Sector (www.independentsector.org), a coalition of nonprofits, foundations and corporate giving programs, has issued its revised Principles for Good Governance and Ethical Practices.  Importantly, Principle 13 calls for “the full board to evaluate and thoroughly understand (beyond just approving) the compensation of the CEO annually.”  A recent article at Give.org notes the importance of adequate pay for talent, while at the same time noting the adverse press coverage that can be generated by compensation for those involved in nonprofit work and the utility of compensation surveys for supporting decisions on compensation.  The Give.org articles notes the TED talk by Dan Pallotta about the need for adequate compensation which has generated millions of views.

For continuing updates on this and other important nonprofit compensation news, see our news feed at our web site at http://www.lawrenceassociates.com/NewsFeed.html.

Today’s Boston Globe carried a front page article about the impending retirement of a number of leaders of prominent local non-profits, and pointed out that finding new leadership will be a critical issue in the near future as baby boomers with long years of service in nonprofits retire.  In this connection, a recent article in the Non-Profit Quarterly (here) notes the recurring problem of organizations that have to deal with retirement pay for a CEO very close to the retirement date, or even after, where large lump sums can generate resentment on the part of other employees, and run up against IRS limits on pay for services not currently being performed.

For continuing updates on this and other important nonprofit compensation news, see our news feed at our web site at http://www.lawrenceassociates.com/NewsFeed.html.

The Financial Accounting Standards Board (FASB) has issued proposed updates to its standards for financial reports by not-for-profit organizations.  These updates have the potential for extensively revising the presentation – and usefulness for stakeholders – of financial reports by NFPs.  The revisions are open for comment until August 20, 2015 and a link to the proposed updates is here.

The Government Accountability Office has released a report (linked here) recommending that Congress take action to require more extensive e-filing of tax returns by charities.  The report noted that in 2013, an extensive review of tax-exempt organization returns was conducted by the Exempt Organizations division of the IRS, covering, among others, about 1/2 of 501(c)(3) charities.  While the IRS can only examine a small portion of such organizations, apparently due to staffing limitations, the GAO noted that increased e-filing, coupled with the additional data provided by the Form 990 as revised in 2008, enables the EO to take advantage of data-mining to more effectively spot issues on returns, thus, at least to some degree, offsetting the decrease in EO staff.

The IRS’ helpful list is here.

Executive Order 38 was issued by NY Governor Cuomo in 2011, requiring state agencies to adopt regulations capping executive compensation (and administrative expense) by state-funded organizations.  Philanthropy Daily has a very detailed article on the operation of these regulations but it’s important to note that, depending on a particular organization’s fiscal year, the regulations may have taken effect as early as January 1, 2014.

Of particular note for non-profit organizations are the following:

– The rules apply to entities receiving at least $500,000 in state support, and for the purpose of these regulations, the full Medicaid payment received by the entity, not just the state share, is counted.

– If the state funding exceeds 30% of the organization’s total, compensation is capped at $199,000 unless either the compensation is below the 75th percentile according to surveys approved by the state and the compensation committee reviewed and approved the compensation in compliance with the law’s requirements, or a waiver is obtained.

As of the beginning of this year, we are seeing an upsurge in inquiries about the law and its effects, particularly around the 75th percentile requirement.

Please note that this blog post is a compressed summary of very detailed laws and regulations; a professional advisor should be consulted to ensure compliance.

Massachusetts legislator Peter Durant and others have introduced a bill that sets maximum “compensation” for CEOs and other named officers of Massachusetts nonprofits based on the size of the organization’s annual budget, with further increases limited to the percent increase in the Consumer Price Index.  “Compensation” is defined in the bill as “salary, bonus and incentive pay, deferred compensation and nontaxable level benefits.” For example, the cap for a CEO’s compensation for organizations with budgets in excess of $25M (the highest category in the bill) is $213,165.

The Public Charities division of the Massachusetts Attorney General’s office has issued a report (found here) on its review of nonprofit CEO compensation.  25 of the largest public charities in the state were asked to complete a prototype of a new form for reporting CEO compensation data, and the AG stated that it intends to include a version of this new form (to be called Schedule EC), in the Form PC annual report required for certain Massachusetts public charities.

The AG report states that the AG found that the organizations set the CEO compensation “with care and attention” to the IRS’s standards for creating a presumption that the compensation is reasonable.  However, the report expresses concern that the process does not restrain CEO compensation or its growth, and indicates that the AG’s hope is that by requiring the reporting of additional information about CEO compensation, and on a more timely manner than the IRS’s processes, the rates of increase in CEO compensation may be reduced, the disparity between CEO pay and that of the rest of the workforce may be reduced, and factors other than peer comparison will be utilized.

The report suggests, for example, that in setting CEO compensation, charities consider (a) having the compensation committee evaluate the reasonableness of compensation of workers other than executives, (b) include an analysis of the “relative magnitude” of the CEO’s total compensation in relation to the non-executive workfors, and (c) consider other public benefits the charity receives such as exemption from property taxes.

The draft Schedule EC does a “deep dive” that appears to go well beyond the IRS Form 990 questions on executive pay.  Among many factors, the AG asks for detailed information on all forms of contingent compensation, information about the CEO’s compensation from organizations that are not part of the charity (e.g. for service on corporate boards), and even detailed information about any negotiations around the CEO’s compensation.  The form asks for the organization’s “compensation philosophy,” the qualifications for the CEO position, and if there was a need to retain the CEO “in response to a competing offer.”

The AG report and the draft Schedule EC appear to thoroughly cover most of the “hot topics” around CEO compensation today, in the for-profit as well as the non-profit sector.  Whether more disclosure, and on a more timely basis, will acheive such goals of the AG as moderating increases in compensation and reducing inequality between executive and non-executive compensation remains to be seen.  Meanwhile, see our following posts about Massachusetts and New York legislative actions.

The following explanation was provided by Arthur Meyers, a partner at the law firm of Choate, Hall & Stewart LLP.

Many employers are not aware that they (and in some cases their executives) risk incurring huge taxes for providing subsidized health coverage to former highly-compensated employees as part of a separation or severance agreement.

For many years section 105(h) of the Tax Code has prohibited this practice for self-insured plans unless the employer imputes the amount of the health insurance “premium” as taxable income to the former highly-compensated employee. If the employer does not do so then the former executive has income equal to the value of the health care provider and hospital services reimbursed by the plan (e.g. the value of the heart by-pass surgery). Some employers avoided imputing taxable income by adopting so-called insurance carve-out plans to provide the same health benefits as the self-insured plan but on a fully insured basis thus allowing executives to avoid taxation of the coverage. That strategy no longer works due to the recent health care reform law discussed below.

If a group health plan is insured, then section 2716 of the Affordable Care Act imposes an excise tax on the employer for providing discriminatory coverage to former highly-compensated employees of up to $500,000 per year.  (The tax is $100 per day for each non-highly compensated person not receiving the company-subsidized post-termination coverage.) The IRS issued a moratorium in 2011 on collecting the excise tax but that reprieve is expected to be lifted perhaps as early as 2014.

Although there is an exception under section 2716 for “retirees” that might be available under certain circumstances, employers are moving toward providing cash payments to former highly-compensated employees instead. Those payments must be made in compliance with section 409A of the Tax Code. It is not clear what will happen to employers who have already promised such coverage in a binding agreement.

Bottom line: It doesn’t make sense for an employer to enter into any new agreements that require it to provide subsidized health insurance after termination of employment.

Additional information:  http://www.irs.gov/irb/2011-02_IRB/ar10.html;  http://www.irs.gov/pub/irs-drop/n-10-63.pdf;  http://www.irs.gov/pub/irs-drop/n-11-01.pdf;  https://www.aetna.com/health-reform-connection/questions-answers/non-discrimination.html