[ Thursday, January 08, 2004 ]


Non-Profit corporations and excess benefits: This is off the HIPAA topic, but is big news for big nonprofit healthcare corporations. The IRS has issued guidance to its field/auditing staff in the Exempt Organizations arena outlining what the IRS thinks are automatically excess benefit transactions. If you deal with nonprofits much, you know that if a nonprofit pays an excess benefit to an insider (for example, it pays its CEO an overinflated salary), it is "private inurement" and an "excess benefit." In the old days, the IRS' only option was to yank the tax-exempt status of the nonprofit. About 10 years ago, the IRS initiated the concept of the "intermediate sanction" for excess benefit transactions, where both the organization paying the benefit and the recipient of the benefit were taxed on the excessive portion of the benefit at such a level that would basically confiscate it. Instead of the "death penalty" for the tax-exempt organization, it was a confiscatory tax on the recipient of the excess benefit.

The problem with excess benefit transactions (as well as with private inurement and "private benefit" -- transactions that would be inurement but the recipient is not an "insider" with the nonprofit organization -- and other types of improper uses of funds) is that a compensation arrangement that may look outrageous when compared to one analog might look rational compared with another. Take, for instance, the money paid to Richard Grasso of the NYSE. While compared to the money paid to the CEOs of the AMEX and the NASDAQ, he was highly overpaid, but compared to the compensation of the heads of the Dow Industrial companies, he was a little underpaid. How does the IRS make a determination whether the money paid to a nonprofit's executive is too much? Basically, it's left to the field agents who audit the nonprofits to make the initial call, but how do they decide if it's money wasted (we're talking about nonprofit organizations here; executives shouldn't expect to make a lot of money working for a nonprofit) or money well spent (you have to pay competitive salaries to the private sector to get in the big names, and the big names will run the organization better and get bigger contributors as well)?

The IRS has now provided guidance to its auditors to use as a guideline for the auditors to determine what is an excess benefit transaction. The IRS usually provides this type of written guidance for two reasons: to keep its auditors all on the same page and consistent in their reviews, and to give the affected industries a "heads-up" on what the IRS is thinking and how it will review things, so the industries can make sure their ducks are in a row.

The guidance here is pretty useful if you're a nonprofit with highly-compensated officers and/or directors. Even if you don't think the compensation is particularly high, it would be a good idea to check out this guidance and make sure you've got a paper trail to justify what you're spending (cash, wages, compensation, etc.) and making available (gifts, benefits, perks, etc.) to your officers, directors, physicians, benefactors, etc.

Now, back to your regularly scheduled HIPAA junk.

Jeff [10:38 AM]

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