Page 254 - Washington Nonprofit Handbook 2018 Edition

(c) the process used to determine the compensation, and (d) the
decision (for example, via Board resolution).

See https://www.irs.gov/charities-non-profits/charitable-organizations/rebuttable-
presumption-intermediate-sanctions. It should be noted that the executive
compensation package includes the value of employee benefits, deferred
compensation, and fringe benefits as well as salary.

If an executive is deemed to have received an excessive benefit, such as an
unreasonably large compensation package, the IRS can impose sanctions under
section 4958 of the Internal Revenue Code. Such sanctions can include repayment
of the excessive benefit and imposition of an excise taxes on the executive who
receives the excessive benefit and the persons responsible for approving or failing
to prevent the excessive benefit. Those same parties could also face personal
liability for breach of fiduciary duty. Payment of excessive compensation can also
be deemed to constitute prohibited private inurement, a violation for which the IRS

is authorized to revoke an entity’s federal nonprofit status.

An additional hurdle was added by the recent Tax Cuts and Jobs Act, which
imposes an excise tax on annual compensation in excess of $1 million or severance
payments in excess of three times the executive’s average annual compensation for
the previous five years.

In consideration of the duties of the board and significant potential liabilities,
it is recommended that the board of a nonprofit adopt the following best practices
with respect to executive compensation:

• Establish a compensation committee (or other independent body)
authorized to set executive compensation.

• Utilize the IRS’ procedures to establish a rebuttable presumption of
reasonable compensation, utilizing appropriate comparability data
and considering the full range of compensation and benefits.

• Adopt a comprehensive conflicts of interest policy (the IRS requires an
explanation from any nonprofit that does not have such a policy).

• Adopt a written compensation policy, stating the entity’s goal of linking
compensation to performance, strategy, values, and mission, and
referencing comparable peer groups, and target market position with
respect to salary level.

WASHINGTON NONPROFIT HANDBOOK -243- 2018