Nonprofit Compensation: What is too much? …and who decides?

Are you tired of hearing, "That nonprofit pays its employees too much!" If every nonprofit board followed IRS guidance on setting the compensation of its key staff leaders, perhaps we wouldn’t hear that refrain as often. So board members, please do your part by embracing your role as defenders of the nonprofit sector’s right to pay its employees reasonably and fairly. Help us change the conversation from, "What compensation is excessive?" to "What compensation levels will help our organization build its capacity by hiring and retaining terrific staff?"

First, know the process for reviewing the annual compensation of the executive director. Second, be aware of the downside of NOT engaging in an annual compensation review. (Bad press, lack of donor confidence, and potentially IRS penalties….need we say more?)

Background: Under federal law, a charity may not pay more than "reasonable" compensation for services rendered. Although the Internal Revenue Code does not require charities to follow a particular process for determining the appropriate level of salary and benefits, it is clear that compensation for board members, officers, key employees (and others in a position to exercise substantial influence over the affairs of the nonprofit) should be determined by persons who are informed about what comparable nonprofits pay their employees, and who have no financial interest themselves in approving the compensation. (Source: IRS, Governance and Related Topics - 501(c)(3) Organizations 3-4 (2008)). These are the general guidelines offered by the IRS – but the IRS Form 990 offers specifics.

The IRS Form 990 asks nonprofits about the three-step process used to approve the compensation of the executive director/CEO (and certain other key employees): Did the process for determining compensation of the following persons include a (1) review and approval by independent persons, (2) comparability data, and (3) contemporaneous substantiation of the deliberation and decision?(See Section VI, Part B, line 15, of the Form 990.) Nonprofits that follow this three-step process are generally able to take advantage of what the IRS refers to as a "rebuttable presumption" that the compensation is reasonable, thereby protecting the nonprofit and the board members from sanctions that can be imposed by the IRS if it finds that the compensation was not reasonable.

Visit the National Council’s website for more information on how to measure comparability of compensation, and visit the IRS website for background on what can happen if a board fails to demonstrate it followed this 3-step rebuttable presumption process [hint: intermediate sanctions].

Demonstrating that your nonprofit has approved the compensation of the executive director/CEO in a thoughtful, deliberative process is a basic fiduciary responsibility of every nonprofit board. Here are some pointers:

• The process of reviewing executive compensation should recur whenever there is an adjustment to the executive director/CEO’s compensation.

• Having a written policy can help keep the process on track. ( See sample policy).

• The "executive compensation review" should be conducted by persons who are "independent" (not paid by the nonprofit). Many nonprofits use a sub-committee, such as a "compensation committee" made up of board members and volunteers, or the executive committee, to conduct the initial review and then make a recommendation to the full board.

• Having the full board approve the compensation of the executive director/CEO is consistent with being a transparent and accountable organization.

• Documentation of what the board’s decision was based on (such as comparability data) and of the fact that the board carefully deliberated and approved the CEO’s compensation is critical. Minutes of the meeting should include enough details so that if the board’s decision is questioned, the process the board used to determine that compensation is "reasonable" will be clear.

• "Compensation" means both salary and benefits, so if an executive director receives a salary but also other fringe benefits such as insurance, or a car or housing allowance, all those elements must be totaled together to determine the annual compensation.

There are many more resources on the National Council’s website, including a sample Policy for Review of Executive Compensation and a link to a virtual seminar on this topic presented at a symposium at Columbia Law School for state charity regulators by legal experts on executive compensation for tax-exempt organizations.

Read about additional governance policies that your nonprofit’s board should be aware of.

Fiscal Sponsorship = Sharing Tax-Exempt Status

How can a nonprofit raise money if it is not tax-exempt?

An organization that is not tax-exempt (either because it has not yet been recognized as tax-exempt by the IRS or has had its exemption revoked) can arrange with another organization that is tax-exempt to serve as its "fiscal sponsor." The role of the fiscal sponsor typically includes handling the administrative responsibilities of receiving and administering charitable contributions on behalf of the sponsored organization. (The fiscal sponsor may be paid a reasonable fee for this administrative service.)

In essence, fiscal sponsorship is a relationship in which the tax-exempt status of one organization is effectively shared with a sponsored organization/program. The sponsored organization benefits because contributions are made to the fiscal sponsor (which is tax-exempt). This allows donors to receive a deduction for their contribution, which generally smooths the way for financial support.

• Because of the administrative responsibilities involved, it is best to memorialize fiscal sponsorship arrangements in a formal written agreement.
• There are other reasons to consider a fiscal sponsorship relationship in addition to fundraising. Many organizations rely on their fiscal sponsor for other functions, such as bookkeeping, human resources, and various administrative roles.

Did you know?
The IRS will soon release a list of nonprofits that have had their tax-exempt status automatically revoked for failure to file 990s with the IRS for three consecutive years. If a nonprofit loses its tax-exempt status but still wants to fund its operations on a temporary basis while it reapplies for tax-exempt status with the IRS, it will need a way to continue to attract deductible contributions in order to deliver its mission in the community. Fiscal sponsorship may be one answer.

Read all about fiscal sponsorships from the Resources section on the National Council’s website: what they are, why an organization might consider using a fiscal sponsor, and what risks and advantages they provide to the nonprofit serving as a fiscal sponsor.

• Looking for a fiscal sponsor or willing to serve as one? Search or sign up using the Fiscal Sponsor Directory. Local community foundations and State Associations may also be helpful resources for finding fiscal sponsors. Some organizations that serve as incubators/fiscal sponsors are listed on our website.
• Stay out of trouble with this post by NonprofitLaw Blog author Gene Tagaki, Esq., that offers advice about what to avoid when engaging in fiscal sponsor relationships: Fiscal Sponsorship – Six Ways to Do it Wrong.
• If your organization is considering becoming a fiscal sponsor, or using one, read about recommended best practices for fiscal sponsors developed by the National Network of Fiscal Sponsors.
• Put it in writing! Suggestions for what to include in a written agreement or memorandum of understanding between a fiscal sponsor and the sponsored organization are set forth on page 5 of this monograph: On Comprehensive Fiscal Sponsorship, by Joshua Sattely, Third Sector New England (2009).
• Debunk the myths and learn about the untapped potential of fiscal sponsorships from this report, More than Money- Fiscal Sponsorship’s Unrealized Potential, BTW Consultants, (May 2007).
• Before you take the plunge, learn from others: The experiences of 200 fiscal sponsors are described in the Fiscal Sponsorship Field Scan, a report based on the first-ever survey of fiscal sponsors conducted by the Tides Foundation (2006).
• More fiscal sponsorship resources from CompassPoint.

How could a nonprofit lose its tax-exempt status?

A nonprofit could lose its tax-exempt status in a number of ways.

• Read about risky activities that – when engaged in by a nonprofit – could jeopardize tax-exemption.
• Most tax-exempt organizations, other than churches, must file an annual return (Form 990) with the IRS – if they do not, they face automatic revocation if they fail to file annual reports for three consecutive years.
• Check the at-risk list. The IRS website provides a state-by-state list of organizations at-risk of losing their tax-exempt status. In some states there are over 12,000 organizations (just in that state) listed!

Guidance for donors to section 501(c)(3) organizations: You may rely on the organization’s determination letter or listing in Publication 78 to deduct contributions until the IRS publishes a notice on IRS.gov that the organization’s 501(c)(3) exempt status has been automatically revoked.

Executive Director Job Tomkins County

The Alcohol & Drug Council of Tompkins County (ADCTC), a private non-profit 501(c)3 substance abuse outpatient counseling center, invites resumes for the position of Executive Director. Interested applicants should hold a graduate degree in Business Management, Healthcare Administration, or a related field, along with a history of successful not-for-profit leadership and organizational development.

This position reports directly to the Board of Directors and is responsible for formulating and implementing organizational goals to further the philosophy and mission of ADCTC. The Executive Director will also spearhead the organization’s development, fundraising, and community outreach functions. Knowledge of the substance abuse field is a plus.

ADCTC is an equal opportunity employer committed to fostering a diverse and inclusive workplace. We offer a competitive compensation package commensurate with the candidate’s qualifications and experience, plus comprehensive benefits.

Please send resumes to: E.D. Search Committee, Alcohol & Drug Council of Tompkins County, 201 E. Green St., Fifth floor, Ithaca, N.Y. 14850.

2011 IHS Conference

The Institute for Human Services (IHS) is pleased to present the IHS Annual Conference entitled, “Creating Opportunities” on Wednesday, March 16, 2011 from 8:00am until 12:00pm at the Hotel Radisson Corning, Corning NY.

This conference is designed for nonprofit and human service professionals, throughout the Southern Tier. Registration begins at 8:00 a.m. and includes a full buffet breakfast for all participants. This conference provides three concurrent workshop tracks that address current trends and techniques that nonprofits can take back to their organization to improve their work environment and organizational potential.

Track one, “Health & Wellness for You & Your Nonprofit,” led by Kelli Mannon, Director of the Steuben Rural Health Network at IHS, will address different ways to improve the overall well-being of your work place. The session will help organizations to implement no cost-low cost workplace wellness programs.

“Census Data, Data Application and Data mapping,” presented by Arthur Bakis, of the US Census Bureau, Boston, MA will explain what data is available from the 2010 Census and the expansion on data available. Justin Grigg, GIS Specialist at Alfred University, will demonstrate how this data can then be developed into a visual map or graph. Bill Caudill and Kevin Williams of IHS will present how this information can be used for strategic planning and grant applications.

“Financial Strategies for Nonprofits: From Goal Setting to Performance Dashboards”, is designed for executives, senior management and board members. Presenters include Michael O’Brian and Alan Adams of Wells Fargo Advisors presenting on how organizations can establish goals and use data driven short and long term planning to help financially manage their nonprofit. This track also features development of organizational “Dashboards” presented by Bernie Burns, Executive Director of The Arc of Steuben and Patrick Rogers, Executive Director of IHS.

Patrick Rogers, Executive Director of the IHS said, “Each year IHS provides the annual conference with three tracks of educational programming, tailored to meet the needs of nonprofit frontline and support staff, management professionals and board members. This year’s topics will be especially relevant in light of changes occurring on the state and national level and the evolving needs in our organizations.”

Following the conference from 12:15 to 1:00p.m., all board members and executive and senior management staff are invited to attend the Southern Tier Nonprofit Executive Director (STNED) Networking Session.

There will an additional registration for a buffet lunch and afternoon workshop sponsored by IHS and the Community Foundation featuring “Managing Your Risk & Maximizing Your Investment” which will be held from 1:00 to 3:00p.m. Harry Bucciferro, Marshall and Sterling Insurance and Andrew Marietta, NYCON will present topics that include developing a risk management plan, reducing possible risks and tips to effectively manage your nonprofit volunteers. Attendees will have the opportunity to participate in a case study exercise and will receive volunteer management training from 2-1-1 HELPLINE’S Give Help.

The registration form will be available shortly. Agencies will be able to register online or by mail. Visit IHS for more info.

Spending Cuts, Filing Information, and More from Nonprofit Advocacy Matters

Cuts, Cuts and more Cuts
The National Council of Nonprofits reported in their newsletter, "Nonprofit Advocacy Matters", that Spending cuts were the consistent theme throughout Washington last week as the President, during his State of the Union address Tuesday night, called for a five-year freeze in non-defense discretionary spending. Also on Tuesday, the House adopted a resolution capping spending for the current fiscal year at or below the levels provided in fiscal 2008. This limit is expected to produce budget cuts this year of $55 billion to $60 billion. In addition, the recommendations of the Republican Study Committee to cut $2.5 trillion in spending over the next 10 years were incorporated in the proposed Spending Reduction Act. Among many items, that bill would block spending for the Corporation for Public Broadcasting, the National Endowment for the Arts, National Endowment for the Humanities, and for national service programs. The legislation is not expected to be brought up in the House, but it does provide a roadmap for the areas that are being targeted for reductions in the future.

Federal Regulations and Job Creation
Federal regulations are frequently criticized for frustrating job creation, and the President and House Republicans are taking steps to identify key problem areas. On January 18, President Obama signed an executive order on Improving Regulation and Regulatory Review calling for "a government wide review" of federal rules and regulations to remove those "that stifle job creation and make our economy less competitive." The order was accompanied by an op-ed by the President published in the Wall Street Journal. In the House, Oversight and Government Reform Chairman Darrell Issa (R-CA) has created a website asking employers to identify government regulations and practices that either help or inhibit job creation. The website asks for responses to the questions: "Where does Washington help, and where does it hurt?" The National Council wants to know your ideas about particular rules or regulations that need improving.

Form 1099 Filing Requirements
There is strong momentum for repeal of the new tax-reporting requirement in the health care law that, starting in 2012, will require nonprofits and for-profit businesses to report aggregate payments to vendors in excess of $600 for goods and other property. A bill introduced last week by Sen. Mike Johanns (R-NE), S.18, has bipartisan support and is paid for by rescinding prior appropriations. A second proposal introduced by Finance Committee Chairman Max Baucus (D-MT) and Majority Leader Harry Reid (D-NV), S.72, has no offsets. A House bill, H.R.4, has broad bipartisan support. President Obama expressed support for repeal of the requirement during his State of the Union address.

IHS Presents Annual Conference March 16th and Hosts STNED Meeting

IHS is proud to present its Annual Conference entitled, “Creating Opportunities” on Wednesday, March 16, 2011 at the Corning Radisson, Corning NY.

This conference is designed for nonprofit and human service professional, management and staff from throughout the Southern Tier. The registration will begin at 8:30 a.m. and will include a full buffet breakfast for all participants.

The conference offers participants three concurrent workshop tracks that address current trends and techniques that nonprofits can be to take back to their organization to improve their work environment and organizational potential

The 2011 tracks include “Health & Wellness for You & Your Nonprofit,” “Census Data, Data Application and Data Mapping,” and “Financial Strategies for Nonprofits and Nonprofit Dashboards.” There will also be a Southern Tier Nonprofit Executive Directors (S.T.N.E.D.) networking session and a Volunteer Management workshop.

More information to follow. Stay informed here.

New Study Reports Up to Half in US Affected by Pre-Existing Conditions for Health Insurance

http://www.msnbc.com/ reported on a study that as many 129 million Americans at risk of being rejected for insurance coverage or having to pay more.

As many as 129 million Americans under age 65 have medical problems putting them at risk of being rejected by insurance companies or having to pay more for coverage, according to a U.S. government study reported by the Washington Post on Tuesday.

The Department of Health and Human Services is scheduled to release the study on Tuesday, the Post said, the same day the House of Representatives is expected to begin considering a Republican bill to repeal President Barack Obama's healthcare overall.

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..The report is part of the Obama administration's effort to convince the public of the advantages of the law, which contains insurance protections for people with pre-existing medical conditions.

"Americans living with pre-existing conditions are being freed from discrimination in order to get the health coverage they need," HHS Secretary Kathleen Sebelius said in a statement to be released Tuesday, the Post reported.

The study found that one-fifth to one-half of non-elderly people in the United States have conditions that trigger rejection or higher prices in the individual insurance market, the Post said. They range from cancer to chronic illnesses such as heart disease, asthma and high blood pressure.

A Republican House aide, speaking on condition of anonymity because the report was not yet public, told the Post: "When a new analysis is released on the eve of a vote in Congress, it's hard to view it as anything but politics and public relations."

The repeal vote would fulfil a campaign promise of Republicans who won control of the House in November elections. But the measure will likely die in the Senate, where Democrats held on to their majority.