Amendments to Health Care Reform Bill – introduced by Senator Baucus

The American Society of Association Executives (ASAE) published the following information in a recent alert to members. This should be of high interest to all tax-exempt organizations.

Sen. Chuck Grassley (R-IA), ranking member of the Senate Finance Committee, has filed two amendments to the health care reform bill introduced by Senate Finance Chairman Max Baucus (D-MT) that directly impact tax-exempt organizations. These amendments were filed along with more than 500 others before the end of last week, and are being considered in the markup of the Baucus bill that got underway Sept. 22.

One of Grassley’s amendments would give the IRS statutory authority to require that tax-exempt organizations report governance and management information as part of their annual Form 990 reporting requirements. The IRS revised the Form 990 for the 2008 tax year to include a new section on governance, among other changes. The section asks filing organizations questions about board composition, governing body review of the 990, and whether certain policies are in place for conflicts of interest, whistleblower and document retention, as well as a process for determining executive compensation. In drafting the new section, the IRS acknowledged it lacked explicit statutory authority to scrutinize nonprofit governance practices, but included the section because it believes good governance leads to improved compliance.

Grassley’s amendment would protect the IRS from “wasteful” legal challenges by adding language to specifically mandate that the agency require governance reporting by tax-exempt organizations.

The second amendment proposed by Grassley is a revenue raiser that would remove the safe harbor providing tax-exempt organizations a “rebuttable presumption of reasonableness” in setting the compensation of its officers and directors. In explaining the amendment, Grassley cited studies by the IRS of executive compensation practices at charities and nonprofit hospitals. These studies showed very high salaries and little recourse for the government to challenge the reasonableness of compensation paid by the organizations in question. Many organizations were able to use rebuttable presumption procedures to demonstrate compensation was set comparable to executives in other organizations, even in some instances for-profit organizations.

Grassley’s amendment would adopt a 2005 recommendation by the Joint Committee on Taxation to remove the rebuttable presumption defense and require organizations to disclose in their annual 990 filings a summary of the comparable information used to determine an executive’s compensation. In a report this week, BNA quoted a Grassley spokesperson as saying the changes to existing compensation rules would apply only to Section 501(c)(3) and (c)(4) organizations.

ASAE is attempting to determine the intent of this amendment, and analyze its implications for tax-exempt organizations. Giving the IRS express authority to determine what is reasonable compensation and what are appropriate comparables would be viewed by many as a potentially dangerous extension of authority. ASAE will study this amendment closely, and report its findings.

Christi Stinson is a member of ASAE and Executive Director of the Funding Information Center in Fort Worth. The above was reprinted with permission from ASAE.