Forget Not The Excess Benefit Rules!
Non-Profit employers usually exist in the same employment law “world” as do for-profit employers. However, as to senior executive compensation and staff conflicts of interest, unique rules apply. Forgetting this distinction can lead to serious and costly “intermediate sanctions” fines by the IRS and ultimately to the loss of non-profit status. An earlier Minnesota Employer post discussed the “rebuttable presumption” rules to avoid excess benefit problems.
It would be dangerous to assume that the recent public controversies regarding the IRS’s review of certain political organization’s applications for tax-exempt status have somehow blunted or sidelined the IRS Exempt Organization Enforcement Division. Indeed, Stephen Clarke, Project Manager of the IRS Exempt Organization Division recently spoke at an American Bar Association Seminar about the IRS’s renewed emphasis on making sure that “disqualified persons” (usually non-profit board members, officers and senior employees) receive no excess benefits by virtue of their position (that is, that they receive only the value of their services based on market norms). In a strengthening economy and more competitive job market, excess benefits can very much come to the forefront, especially when there are hires from the for-profit sector. Clarke also emphasized that non-profits must watch out for sloppy, sporadic or in-effective conflicts of interest disclosure forms and processes.
In short, this is the right time for a non-profit employer to make sure that it has the right market data backing up senior employee and board member compensation and other monetary or property transactions and that it has a strong and up-to-date conflict of interest policy. Legal counsel can provide valuable assistance in reviewing the “rebuttable presumption” process in important situations and in updating and making more effective the conflicts of interest disclosure forms and procedures used by non-profit employers. A good discussion of the proper role of conflict of interest policies from the IRS point of view is available here.
Takeaways: A non-profit employer should not forget the important, statutorily-mandated and powerful enforcement duties of the IRS. Conflict of interest forms and senior employee compensation stick out to the IRS when there is any inquiry as to the operations of the non-profit corporation. On these points, vigilance is the price of non-profit liberty!