Reasonable Compensation

The IRS, various state regulators (and others) have generally intently focused on the compensatory amounts paid by an exempt organization (particularly a 501(c)(3) charitable organization) to insiders of the exempt organization. Insiders of an exempt organization include any voting member of the Board of Directors, the top management person for the exempt organization, the top financial person, and key employees of the exempt organization and any highly compensated employees of the exempt organization.

The intense focus on an exempt organization’s executive compensatory practices has certainly been present since intermediate sanctions legislation was enacted in Sec. 4958 of the Internal Revenue Code in the mid-1990′s. Accordingly, it is essential that an exempt organization (particularly a 501(c)(3) charitable organization) implement the necessary reasonable compensation documentation procedures in order to best protect against a challenge from the Internal Revenue Service and/or a state Attorney General that an excess benefit transaction has occurred. In the event that an excess benefit transaction is found to have occurred, then the over-compensated executive and the voting members of the Board of Directors can be significantly penalized for the transgression. Additionally, the tax-exemption of the exempt organization is severely jeopardized if an excess benefit transaction has occurred.

In such regard, we provide the following consulting services in the reasonable compensation area:

  • Drafting of written expense reimbursement policies, including provisions addressing the personal usage of organization-provided cell phones and PDAs and best practices to avoid excess benefit transactions from arising in the executive expense reimbursement area or private benefit from arising in the employee expense reimbursement area.
  • Conducting of Reasonable Compensation Studies which are fully compliant from an Internal Revenue Service rebuttable presumption of reasonableness perspective; including the presentation of such to the Board of Directors of the charitable organization.
  • Preparing of memoranda addressing the three requirements of the Sec. 4958 rebuttable presumption of reasonableness in regards to ascertaining whether reasonable compensation has been paid by the organization to an insider of the organization.
  • Preparing of memoranda regarding excess business transactions and how best to avoid such, including the providing of procedures to be undertaken if an excess benefit transaction has occurred.
  • Consulting regarding the reasonable compensation documentation requirements set forth in the Sec. 4958 Regulations.