Intermediate Sanctions Compliance

Background
Findley Davies was contacted by a nationally known, not-for-profit organization with 100 employees. The organization had shown tremendous growth over the past 10 years. The organization is overseen by a large Board of Directors, which is composed of many of the area's prominent business leaders.

Challenge
A not-for-profit organization is given tax-exempt status via the IRS under the condition that it meets and maintains certain requirements. Part of the process for maintaining its not-for-profit status typically involves an IRC §4958 "Intermediate Sanctions" analysis for any person who has "substantial influence" over the organization. Because of the organization's growth under the existing CEO, the Board, in an attempt to retain the CEO, approved a supplemental retirement plan beyond the 403(b) plan covering all employees' additional benefits and perquisites. Findley Davies was initially contacted to evaluate the organization's CEO's compensation package and review all the additions that had been made over time. Upon reviewing the CEO's compensation package, Findley Davies determined that there were indications of compensation beyond the spirit of IRC §4958 and that an in-depth analysis should be done. At the same time, the media was informed and published information on the CEO's total compensation, causing a public outcry over what was deemed to be an excessive compensation package for the CEO of a not-for-profit organization.

Solution
Upon determining that the CEO's compensation could be in violation of the IRS's regulations for excessive compensation for not-for-profits, Findley Davies suggested, and the Board approved, an Intermediate Sanctions analysis to be done for all employees who had a "substantial influence" over the organization. To help the organization mitigate their risk exposure, Findley Davies reviewed the top five executives of the organization and analyzed their compensation packages (including benefits) over a three year period. Findley Davies evaluated the executives' compensation from three different angles:

  • Compared to other locations around the country of this specific not-for-profit, using the client's demographics as a starting point to build a database.
  • Compared to survey market data for all not-for-profits with comparable donations.
  • Compared to survey market data for all businesses possessing a similar "income" stream.

Findley Davies was able to conclude that four of the five executives were not in violation of the IRS's regulations, but that one executive, the CEO, could be.

Results
The Board of Directors took Findley Davies' analysis into consideration and revised their compensation philosophy from the cash, benefits, and perquisites perspectives so that they are well within the norms for an organization of their size. In doing so, the organization has been able to avoid losing its not-for-profit status and having to pay fines for IRC §4958 violations.

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