The above is a summary of an article titled “Nearly 30% of Nonprofit Leaders Took a Pay Cut This Year; Pay in 2008 Grew Quickly” from The Chronicle of Philanthropy authored by Noelle Barton and Ben Gose, which can be found at the following website: http://philanthropy.com/free/articles/v21/i22/22000107.htm.

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.

The IRS enforces this scrutiny by requiring non-profits to annually disclose the compensation of officers, directors, trustees, key employees and 5 highest compensated employees (those receiving > $100,000). In Part VII (page 7) of the Form 990, organizations are required to list the individual’s name/title, average hours worked per week, position, compensation(W-2/1099-Misc) from the organization, reportable compensation from related organizations and other estimated amounts of compensation (deferred and certain nontaxable benefits).

What defines a key employee? This individual is not an officer (O), director (D) or trustee (T), who meets the following 3 criteria:
1. Receives $150,000 or more of compensation from the organization and related organizations.
2. Has responsibilities, powers or influence over the organization (similar to O,D,T), or manages a discrete segment that represents 10% or more of operations;
3. Included in the top 20 of highest paid employees.

Remember Form 990 is a public document and “the public” will be able to review the organization’s compensation policies, practices and disclosure of selected positions.

What types of benefits are on the IRS’ radar? See my next post.