Compensation is one of the hottest topics facing non-profit organizations in recent years. The IRS has developed questions for non-profits to answer in order to shine a light on the compensation practices for the top earners of the entity. Again, these are not legally mandated policies, however, there are very specific requirements relating to the entity’s process in order to favorably answer the questions surrounding compensation practices.
The process for determining compensation for the individuals listed in Part VI, questions #15a and 15b must include following three elements:
1. Review and approval by a governing body or compensation committee. The members of the governing body or committee must be free of conflicts of interest surrounding the compensation arrangement under review. A conflict of interest by a member of the committee is deemed to be present if:
a. The member or his or her family member is participating in or economically benefitting from the compensation arrangement.
b. The member is in an employment arrangement subject to the direction or control of any person participating or economically benefitting from the compensation arrangement.
c. The member receives compensation or other payments subject to approval by any person participating or benefitting from the compensation arrangement.
d. The member has a material financial interest affected by the compensation arrangement.
e. The member approves a transaction benefitting the person participating in the compensation arrangement, who then, in turn, has approved or will approve a transaction providing economic benefit to the member.
2. Use of comparability data regarding the compensation arrangement being determined. The data being used must be for similarly qualified persons in functionally comparable positions at similarly situated organizations. Typically, non-profits will review the compensation for officers and key employees, which is disclosed in the 990s of other similar organizations. Form 990s of other organizations can be downloaded from websites such as Guidestar, or in Massachusetts, the Attorney General’s website for public charities.
3. Finally, all of the processes above should be documented in a timely manner with proper records kept as to what data were used, who participated in the process (and if they were free of conflicts of interest), when the discussion occurred, what deliberations transpired and what decisions were made.
If you follow the above process and you answer yes to either #15a or #15b, you must include a description in Schedule O. In that description you are required to identify the positions that were covered in the process to determine compensation above, and the year the process was last performed. If the organization did not compensate its officers, directors, top management official or other key employees, or if any of the above elements were not met, the answer should be “no”. A disclosure of why the answer is no is not required, but is allowed and could be helpful to explain the reason for answering “no”.
Read other articles in our “990 Policy Compliance” series:
Jeanne Pagnozzi is a manager in BlumShapiro’s Accounting and Auditing Department, based in Quincy, Massachusetts, Jeanne oversees attest and tax engagements and is responsible for engagement planning, staff supervision and coordination with client personnel to ensure successful completion of projects.