WebThe duty of care entails a duty of reasonable inquiry. IRS Penalties for Failure to Set Reasonable Compensation. If all of those steps are followed, organizations should not worry about paying directors for their work. Moreover: Directors are often busy people with distinguished careers being asked to devote precious time to an organization, Some may expect to be compensated for that time, and. To Compensate or Not to Compensate Nonprofit Board Members You may subscribe to multiple newsletters and alerts using this form. Most states do not prohibit Board compensation outright, but some states restrict certain forms of compensation to Board members (such as loans), have provisions addressing the process for approving Board member compensation, and/or require that at least a majority of nonprofit Board members be unpaid volunteers (California is an example of the latter). Conduct a rebuttable presumption test to determine whether the amount of compensation of directors, officers, and key employees is reasonable (i.e. The directors were charging fees for their work. Two issues stand out here: 1. 96-649, the Illinois legislature increased the amount of annual compensation a director may earn from $5,000 to $25,000. Are we permitted to compensate certain Board members for normal Board duties such as attending meetings? It is important for non-profit organizations to ensure that they have the tools, information and processes needed to successfully attract, retain and motivate their executive talent with a program that is appropriate and defendable to the organization's stakeholders. Remind directors of their fiduciary duties. Webevaluate the position taken by any other Board member, the associations senior management and staff, or any outside expert. Nonprofit Board Members WebWhat is "reasonable" compensation according to the IRS? Board members may inspect for reasonable purposes and at reasonable intervals the associations books and records and may request that financial data be compiled regularly for presentation to the Board. This article is provided for general information and educational purposes. Atlanta, GA 30339 WebReasonable compensation is the value that would ordinarily be paid for like services by like organizations under like circumstances. CBMs subsidiary MBI (May Barnhard Investments), LLC, is a fee-only financial advisory firm that offers comprehensive financial planning and investment management services. Should Board Members of Nonprofit Organizations Be An excess benefit transaction must be corrected within 90 days. Reg. Exempt Organizations: Compensation of Officers An exempt organization Nor will it constitute private inurement as the contractor is not an organization insider. It is important to note that these rules are an additional layer added on top of the original private inurement rules. SUBSCRIBE | Click Here to subscribe to THE NONPROFIT QUARTERLY for just $49. Two issues stand out here: Youll want to provide reasonable compensation based on the commitment required, and The IRS may challenge amounts it considers unreasonable. 805 ILCS 105/108.70(b-5). [1]EXEMPTION REQUIREMENTS: To exempt a board from liability under this section, several prerequisites must be met: first, the directors must serve without compensation; second, the corporation must be organized under this Act; third, the corporation must be exempt from or qualify for exemption from taxation under federal law. Once we have determined what is included in the DQPs compensation package, we can then seek to determine whether it is reasonable. Such data should look to their job responsibilities and level of supervision, prior experience and education, the location of the organization and the availability of specialty in the area. In a nutshell, per federal laws and IRS guidelines for 501(c)(3) nonprofit organizations, compensation of directors (among other compensated individuals or entities) must be reasonable. There are guidelines concerning what is reasonable, which we will summarize below. Pursuant to Section 108.05(c) of the Act: Unless otherwise provided in the articles of incorporation or bylaws, the board of directors, by the affirmative vote of a majority of the directors then in office, shall have authority to establish reasonable compensation of all directors for services to the corporation as directors, officers or otherwise, notwithstanding the provisions of Section 108.60 of this Act. Current law imposes restrictions on the amount of compensation a nonprofit organization may pay its employees. make sense of changing conditions and improve infra-structure in their organizations. Some consider it a badge of honor. They got more of their revenue from the sale of things ($11.5 billion), for example, than they did from straightforward donations.. What is Reasonable Compensation for a Non-Profit [4] Robinson on Behalf of Estate of Robinson v. LaCasa Grande Condominium Assn, 562 N.E.2d 678, 682 (4th Dist. 2020-2023 Sustainability Education 4 Nonprofits. In that case, the IRS guidance is to try to implement as many steps as possible, in whole or in part, in order to substantiate the reasonableness of benefits as timely and as well as possible and the IRS will evaluate the facts and circumstances to determine whether compensation is reasonable. What is Reasonable Compensation for a Non-Profit Executive? f. 770.980.4489, Copyright 2023 - Mauldin & Jenkins. Certainly, younger people who arent as wealthy as many older board members might be willing to commit time if theyre paid. (In New York, this is permitted only if the organizations by-laws permit it.). 1990) (Note: This case was decided prior to P.A. My position in giving advice to non-profit clients has always been that no members of any non-profit board can be compensated in any way, other than for expenses. There are some appellate level cases in this jurisdiction, but these merely list the requirements. for Nonprofits document.getElementById( "ak_js_2" ).setAttribute( "value", ( new Date() ).getTime() ); Get CBM's newsletters and alerts delivered straight to you.Click here , 7910 Woodmont Avenue Laws applicable to other types of nonprofit corporations, such as religious Represent diverse cultures, classes and ages. Third, the board must document the basis for its determination. The matter of board compensation grows more complex as management becomes stockholders and grants or options are created. 805 ILCS 105/108.70(a). Who is an insider? Heres an overview of board compensation in the corporate and nonprofit Like private inurement, the only sanction is the ultimate sanction, revocation of the organizations exempt status, but unlike private inurement, will only kick in if the violation was substantial (though, as mentioned, in practice, neither of them are generally enforced unless extreme). NPQ is the leading journal in the nonprofit sector written by social change experts. E-mail addresses for specific attorneys and paralegals/educational advocates can also be found on our website at http://whittedtakifflaw.com/attorneys-staff/. Laws applicable to other types of nonprofit corporations, such as religious corporations, are not discussed here. In the event that an organization does engage in an excess benefit transaction, then such a transaction needs to be corrected within 90 days and reported on the IRS Form 990 Schedule L. The person receiving the excess benefit compensation may be required to pay a tax. There may be some people who fall within a gray area and so advice should be sought to identify whether one is a DQP. He received his B.A. However, we still do not recommend that any board members of Illinois nonprofits be compensated in any way. in taxation from New York University School of Law. In extreme cases, an organizations compensation practices may result in the revocation of its federal tax exemption. The law firm of Whitted + Takiff serves clients in Northbrook and throughout northern Illinois, in communities such as Chicago, Arlington Heights, Schaumburg, Waukegan, Woodstock, Belvidere, Geneva, Wheaton, Yorkville, Joliet, Skokie, Glenview, Highland Park, Buffalo Grove, and Evanston. The exact requirements for meeting the comparable data condition is determined by organization size. I did not join that board of directors, but have since heard that the inquiry caused a lengthy discussion about the issue of compensated directors, and some significant changes in policy. from Brooklyn Law School and LL.M. In any case, nonprofits may only pay reasonable compensation that is documented as such with proper substantiation. To find out more, please visit our Privacy Policy. All Rights Reserved. The extra tax is to be paid to the IRS and the organization must file IRS Form 4720, Schedule I (see instructions to the form for details regarding how and when to file). We have already seen that an outside contractor will generally not be a DQP (either because it does not have decision-making authority or because it qualifies for the initial contract exception), so this will not be an EBT. The IRS recommends that charitable nonprofits follow its three-step process to determine that compensation is reasonable and not excessive. Support independent journalism and knowledge creation for civil society. Excessive compensation paid to nonprofit directors is the most common violation of this prohibition and it can cause the IRS to levy hefty penalties on the persons involved. Critics say that compensating board members may smack of hypocrisy and a double standard. All Rights Reserved, v1.theglobeandmail.com/servlet/story/LAC.20090812.RREYNOLDS12ART1936/TPStory/TPBusiness/, Use the structure of a voluntary advisory committee as the first form of governance, Ensure you include qualified, independent people along with the key executive. These IRS regulations are intermediate because while penalties are imposed on the benefit recipient (at a minimum), the sanctions fall short of revoking the organizations tax-exempt status and are not imposed on the organization itself. First,it can look bad. Much detail has been omitted, thus, specific legal advice should be obtained prior to implementation. Double-check the compensation amount to ensure its within professional standards. While many of the guidelines for establishing governance apply alike to both profit and non-profit ventures, the subject of compensation differs between those who seek to create profit and wealth and those who seek to assist or improve some element of society. The place to begin is with what is often referred to as private inurement. This phrase comes from the Internal Revenue Code, which requires from all 501(c)(3) tax-exempt organizations that no part of net earnings of which inures to the benefit of any private shareholder or individual. An organization violates the restriction on private inurement when it gives any benefit to an organization insider other than in the form of reasonable compensation. Generally, directors of a non-profit corporation have limited liability. Should you need assistance during this time, please feel free to contact the firm by phone at (847) 564-8662, through our confidential web contact portal (http://www.whittedtakifflaw.com/contact-us/), or via fax at (847) 564-8419. What is Reasonable Nonprofit Compensation? A Guide to Could receive generous compensation from for-profit organizations for serving on their boards. This leaves us with two questions: what is reasonableand what is compensation? Revocation is, thus, still a possibility and will be imposed in the more extreme cases. The safe harbor first requires the terms of the compensation package to be approved in advance by a disinterested board of trustees/directors (where no more than 20 percent of the board are comprised of organization employees). Strictly Necessary Cookie should be enabled at all times so that we can save your preferences for cookie settings. The answer is reasonable compensation. Most boards do not provide regular compensation for their members. There is no case law on this, but we maintain that it is a good argument and the reason why, to keep my client boards absolutely safe, I recommend that there be no compensation of any kind for any nonprofit board member. Although churches need not formally apply for 501(c)(3) status from the IRS, they are deemed to be 501(c)(3) organizations without formally filing. This means that every time you visit this website you will need to enable or disable cookies again. IRS Defines Reasonable Compensation for Board Members Neither its distribution to any party nor any statement or information it contains is intended to or shall be construed as establishing an attorney-client relationship or to constitute legal advice. 301.986.0600, 1200 G Street, NW It is important to note that an organization can still comply with IRS rules even if it can't check all the boxes for a rebuttable presumption test. In addition, I believe there is an argument that if even one member of a board is compensated, as in the situation where a salaried executive director is allowed to serve as a voting member of the board, then it is possible that the presence of one compensated member could defeat the immunity for that member and possibly for each and every remaining member of the board. The Importance of a Good Governance Framework. As mentioned, the federal tax laws governing tax-exempt nonprofit organizations (such as 501(c)(3), 501(c)(4), and 501(c)(6) organizations) do not prohibit compensating Board members for their Board service, so long as the compensation is not more than reasonable for the services provided. When considering whether to impose penalties under the Intermediate Sanctions, even where a non-profit has failed to establish a rebuttable presumption of reasonableness, the IRS will look favorably upon a Boards reliance on a written determination of reasonableness. The penalties under the Intermediate Sanctions are imposed on the non-profit executive who received the excessive benefit, and in some cases, the organizational manager(s) (typically Board members) who participated in approving the excessive benefit. Comparable data should be compensation paid to individuals holding. 2. WebThe average Board Member salary in the United States is $75,118 as of May 25, 2023, but the salary range typically falls between $57,910 and $92,767. The Rebuttable Presumption Test and Determining Reasonable Compensation. Given that facts and circumstances are iffy and people appreciate reassurance and certainty (or as close to certainty as they can get), there is a safe harbor that is provided, wherein if the organization jumps through certain hoops, the compensation will be presumed to be reasonable (but the IRS would then have the burden to rebut the presumption in order to find it not reasonable). is a staff counsel at Agudath Israel of America. Compensating Nonprofit Board Members Nonprofit Law Blog Each organization must do its own due diligence and determine whether board members should be compensated. This phrase comes from the Internal Revenue Code, which requires from all Without a subpoena, voluntary compliance on the part of your Internet Service Provider, or additional records from a third party, information stored or retrieved for this purpose alone cannot usually be used to identify you. If a board decides to allow compensation for its members, it needs to proceed carefully in order not to betray the public trust. That body should review comparable salary and benefits data, such as data available from salary and benefit surveys, to learn what nonprofit employers with similar missions, and of a similar budget size in the same, or a similar geographic region, pay their leaders. b) Canadian Provinces have divergent opinions regarding compensation of directors. If a director/CEOs salary exceeds the limit, he or she will not enjoy the strong immunity granted to uncompensated directors. Can board members be paid? | National Council of Nonprofits If an organization complies with all the requirements above, then it meets the rebuttable presumption test. In our effort to safeguard the community during the unprecedented COVID-19 global health crisis, we are eliminating all non-essential in-person meetings and consultations. Should the organization delay or fail to file and pay this tax, penalties and interest will be imposed. Another study found that 96% of not-for-profit boards are voluntary. Cook County Lake County DuPage County Will County Kane County McHenry County Kendall County Boone County DeKalb County, 2018 Whitted + Takiff, LLC | Site maintained by, they lose their statutorily granted immunity, When compensation of board members is made permissible under the articles of incorporation and bylaws, No director or officer serving without compensation, no volunteer board member serving without compensation, http://www.whittedtakifflaw.com/contact-us/, http://whittedtakifflaw.com/attorneys-staff/. In recent years, the Act has been amended to allow for some limited compensation. The Globe and Mails Report on Business (August 12, 2009) commented that Canada has 84,771 registered charities that together reported donations of $10 billion for the previous twelve-month period for which statistics were available. This website is designed for general educational and information purposes only. Compensating nonprofit board members - Mauldin & Jenkins But titles are not important so long as the person is (or was within the prior five years) in a position to exercise substantial influence over the organization, the person is a DQP. }); Note: Articles published before January 1, 2017 may be out of date. The documentation should demonstrate that the board took the comparable data into consideration when it approved the compensation. Charity Navigator Accordingly, it may be useful to take a look at the articles of incorporation and bylaws of the organization in question to determine if compensation is allowed in the first place, or to draft the articles of incorporation and bylaws based on the organizations preference for or against compensated board members. Whether Board members should be compensated for Board service is a difficult question that raises issues concerning public perception, independence of Board decision-making, ethics, the dynamics paid and unpaid Board members working together, and organizational culture. 'share' : { He received his B.A. Should your construction business invest in custom software? There is also no exemption for religious organizations. The IRS states that payments are presumed to be reasonable if an organization meets the following three requirements: 1. It then may be considered reasonable to broaden the scope of comparison to other regions. Survey results and anecdotal experience indicate that compensating directors is more common among private foundations, professional and trade associations and educational and cultural institutions. Individual & Business Tax Planning & Compliance, Department of Housing and Urban Development Audits, Financial Statement Compilation & Preparation Engagements, System & Organization Controls (SOC) Reporting, Financial Institution Compliance Services, Financial Institution Credit Review Services. Suite 500 Suite 1700 What are the Risks of Having a Compensated Director On a Non-Profit Board? Reasonableness is a fact specific determination based on all of the specific facts and circumstances. Paying directors also calls into question how a not-for-profit uses its funds. Principle: Governance and Leadership Reasonableness is determined based on all the facts and circumstances. 3. WebOne of the most important responsibilities for many boards is to hire and set the compensation of a talented CEO/executive director to run the day-to-day management activities of the organization, and then to provide supervision and evaluation of the CEO. This independent review helps to ensure there are proper checks and balances and mitigates the negative perception that the public, the IRS, and others may have regarding the impartiality of compensated Board members on these matters. (Emphasis added. To protect executives and board members from penalties and stakeholder scrutiny, many non-profit organizations have focused on improving their governance practices regarding executive compensation to ensure the compensation and benefits provided to senior executives are reasonable. The regulations state: It is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals, the creator or his family, shareholders of the organization, or persons controlled, directly or indirectly, by such private interests. This would include any individual who has a special relationship to the organization, people that have influence or control over the organization, and people with check writing ability and financial control. Should you compensate your board members? It is also important to consult the organizations tax preparer about the potential reporting consequences, since Board member compensation must generally be reported on Part VIII and Schedule J of the Form 990 and can in some cases impact the number of directors who are considered independent for Form 990 purposes. By establishing policies and procedures that allow Boards to systematically review compensation decisions, non-profits are able to operate with greater efficiency and predictability and are more likely to protect against the imposition of IRS penalties. Laws applicable to other types of nonprofit corporations, such as religious corporations, are not discussed here. This website uses cookies so that we can provide you with the best user experience possible. Board Question: I am on the Board of a nonprofit organization that wants to have more Board members who are representative of the community we serve. Payments (and most economic benefits) coming from the organization constitute compensation so long as they are classified as such on the books of the organization and for tax purposes to the employee. Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices inBethesda, MDandWashington, DC. Note that it is permissible to look at compensation rates of similar jobs in the private sector (or government sector), especially if these jobs require similar credentials, entail similar responsibilities, and/or are located in the same region. document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); This field is for validation purposes and should be left unchanged. Further, there are legal and IRS implications. Home CBM Communicator To Compensate or Not to Compensate Not-for-Profit Board Members, by Holly Caporale, CPA on October 4, 2021 in Not-for-Profits. There is some overlap with the rules for private inurement but the rules differ in many respects and, in general, the rules of EBTs are much more detailed and deliberate (as you will soon come to realize).