Compensation Rules for Exempt and Nonprofit Organizations: Designing and Maintaining Executive Comp Plans

Description

Compensation packages for executives of tax-exempt nonprofit organizations are subject to private inurement questions, and are also subject to tax regulations governing benefits, including nonqualified deferred compensation, that do not apply to executives at for-profit companies. Tax advisers to nonprofit exempt organizations need to be fully adept at handling the compensation issues specific to exempt organizations, and must continually monitor to ensure the organizations are compliant with IRS rules to avoid potentially disastrous tax and operational consequences.

IRC Section 501(c)(3) allows a corporation, trust or association to qualify for tax exempt status if no part of its net earnings inures to the benefit of any private individual. “Private inurement” can occur when a person of influence (e.g., an executive) receives a benefit or something of value from the organization and does not give fair value in return. This includes compensation packages for executives and directors. This is an area of heightened IRS scrutiny. The Service’s Exempt Organizations (EO) Group has been focusing on executive compensation arrangements at exempt organizations.

IRC Section 457(f) generally restricts the deferral of compensation by or for executives of exempt organizations to only unvested amounts. The requirements that deferred compensation must satisfy to be “nonvested” under Section 457(f) are not clearly defined, however, and pose business challenges. Regulations under IRC Section 457(f) have been under development at the IRS for several years and the publication of proposed regulations is believed to be imminent.

Listen as our experienced panel details and drills down into the rules governing compensation packages for executives at tax exempt organizations, including design, documentation, maintenance and corporate governance requirements of a compensation scheme in compliance with IRC Section 4958 prohibitions of private inurement.