Personnel Committees Need More Involvement in Compensation Decisions

Posted on October 22, 2009 by  
Filed under Board Governance · Tagged: , , ,

Today, I attended an informative seminar here in Charlottesville put on by two McGuireWoods, LLP  partners: Jeffrey Capwell (Charlotte, NC) and Michele McKinnon (Richmond, VA) .  The seminar was excellent and I highly recommend nonprofit executives and board members attend these seminars if they possibly can.

During one portion of today’s session, they discussed the background for changes to the IRS Form 990 and the form’s new questions about the determination of compensation for nonprofit staff executives.    Because of these new questions on the IRS Form 990, your Personnel Committee may want to adjust its staff compensation decision-making and approval process.  Here’s some background:

1. The IRS thinks that a well-governed organization is more likely to be a tax-compliant organization.  Increasingly, the IRS is asking more governance-oriented questions in not only the IRS Form 990 but the IRS Form 1023 (application for tax exempt status).

2. There seems to be a trickle-down effect from the private sector.  The fall-out from situations like Enron, WorldCom, and Madoff in the private sector will eventually result in increased regulation in the nonprofit sector. 

3. Expect to see more enforcement and expectation of disclosure and transparency for executive compensation for tax exempt organizations.

In brief, the Personnel Committee should review the compensation of all newly-hired executives as well as revisit these executive salaries on an annual basis.  Specifically, the IRS is expecting nonprofits to be able to do the following:

1. Show the compensation you’re paying your executives is comparable to similar jobs in your market.  A salary survey of nonprofits that are of a similar size in your local geography is a good starting point.  Be sure that you have included all compensation:  both salary and benefits, current and deferred salary, pensions, severance, housing allowances, club memeberships, etc.

2. Justify the amount you pay executives is equal to the value you receive.  

3. Provide documentation showing your Personnel Committee has  discussed staff compensation.  The Personnel Committee  minutes should include the compensation survey that you have used, a discussion of the value you will be or are receiving from each executive, and any concerns or dissentions in the determination of the final compensation. 

4. Show that the Personnel Committee’s decisions have been reviewed by the entire board, have been discussed and understood, and have been entered into the minutes of the entire board.   Is is essential that this review with the entire board includes a description of the total compensation paid to your executives – so that all board members understand the total compensation package and contracts for current and future payouts with their executives.

5. Be sure no one in a position to hire or determine salary for an executive is related to that executive.

In summary - be sure that your Personnel Committee is doing a thorough job of reviewing the compensation of new and continuing executives, that they have documented their discussions and decisions along the way, and that they are reporting these details to the rest of your board.

Lastly, McGuireWoods offers a free e-mail news service that follows legislation and regulation on a variety of topics.  I highly recommend the “Nonprofit & Charitable Advisory” which you can sign up for at http://www.mcguirewoods.com/news-resources/email/

IRS Form 990 Changes – How do they affect you?

Posted on October 22, 2009 by  
Filed under Board Governance · Tagged: ,

Recent and projected changes to the IRS Form 990 will decrease the minimum size of nonprofit organization that must use the form and will require answers to questions that directly focus on board governance.  Below is a summary of the projected changes in reporting requirements over the next few years and the areas of board governance that will be included on the new form.

IRS FORM 990

The chart below shows who needs to file an IRS Form 990 in the next three years :

Tax Year

Filing Year

 Gross Receipts     (OR)    Total Assets

2008

2009

> $1 million

> $2.5 million

2009

2010

> $500 K

> $1.25 million

2010

2011

> $200 K

> $500 K

 

In Form 990, Part VI, you will be reporting about the following good governance issues:

  1. Number of Voting Board members and Number of Independent Board Members
  2. Do you record minutes for board and committee meetings?
  3. Describe how the board reviewed the Form 990 before it was filed.
  4. Do you have a written conflict of interest statement?  (How do you comply?)
  5. Do you have a written whistleblower statement?
  6. Do you have a written document retention and destruction policy?
  7. Does your CEO compensation have external substantiation?
  8. Are you in a joint venture?  If yes, do you have a written policy to evaluate the joint venture agreement to ensure you’re complying with Federal tax law?
  9. Describe how you make your Form 1023 (original nonprofit application to the Fed government), Articles of Incorporation, By-laws, Conflict of Interest Policy, and Financial Statements available to the public.

In Form 990, Part VII – Show compensation for current board members, top 5 employees, former board members and employees (over $100K).  Show independent contractors (payments over $100K).

IRS FORM 990-EZ

This chart shows who can file Form 990-EZ over the next three years :

Tax Year

Filing Year

   Gross Receipts    (OR)   Total Assets

2008

2009

< $1 million

< $2.5 million

2009

2010

< $500 K

< $1.25 million

2010

2011

< $200 K

< $500 K

 

In Form 990-EZ, Part IV, list Board Members and Key Employees (show compensation, if any).

In Form 990-EZ, Part VI – List 5 highest paid independent contractors.

IRS Form 990-N

File Form 990-N if your Gross Receipts are < $25K. 

Starting in Tax Year 2010, you can file Form 990-N if your Gross Receipts are < $50 K.

RESOURCES

Here is the IRS web site for additional details on these new forms:  www.irs.gov/eo

 DISCLAIMER:  This write-up is meant to be for general information only.  Please continue to consult your CPA for accounting, tax and Form 990 filing advice.