Compensation Planning

Building the Basic Foundation - Part 2

Building off the first four blocks of compensation planning discussed in my post of February 4, 2019, we continue our discussion with a look at the last four basic blocks in compensation planning.  

Building Block #5 – Identify What Is or Can Be Provided

Many nonprofit organizations do not take the time to inventory benefits provided to employees or benefits that may easily be provided.  Compensation is more than just an employee's paycheck.  An organization must think broader than just the amounts in the paycheck. Often there are noncash benefits provided or that can be provided.  For example, dependent care provided through a nonprofit's daycare operation is a noncash benefit.  Other benefit opportunities are available through the establishment of benefits plans, such as an educational assistance plans to provide for employees’ extended education and training, or through benefit plans available offered by national organizations, such as church denominational programs. The benefits provided or considered should assist an organization in meeting its goals defined in building block #4.

Building Block #6 – Valuation of What is Provided to Employees

Since compensation is often related to the paycheck, it is easy for nonprofit organizations to forget to value other aspects of the compensation package.  This oversight may cause organizations to run afoul of the reasonable compensation amounts determined in building block # 3.  Organizations may determine an amount of reasonable compensation, but then only compare it to the regular cash salary paid.  Reasonable compensation encompasses all of what is provided to employees and not just cash salary.  Therefore, value the benefits provided, both the cash and noncash benefit programs.  After the valuation has been accomplished, then it's total can be compared to the amount determined as reasonable compensation in building block #3.

Building Block #7 – Write It Down

Failing to document processes, procedures and decisions, is one of the greatest weaknesses in the compensation process performed by nonprofit organizations.  One of the first documents requested in an IRS examination are the board minutes for the organization to verify the documentation to the executives’ compensation packages.  For religious organizations, a minister’s housing allowance must be documented in writing prior to its being paid to the minister.  Documentation of compensation decisions provides authorization for the compensation, including benefits, to be provided to employees. Without documentation, it may be asserted that the compensation was not authorized.  Unauthorized compensation may create inurement of benefit, potentially threatening an organization’s exempt status, or creating excess benefit transactions, potentially resulting in excise taxes.

Building Block #8 – Set Up the Payroll Correctly

A few years ago, the IRS instituted a payroll tax compliance initiative and audited 6000 for-profit and nonprofit organizations.  The initiative resulted from the IRS’ frustrations that  Forms W-2 only reflect the amounts paid through the regular paycheck functions of organizations omitting other taxable benefits provided to employees.  When nonprofit organizations are examined by the IRS, significant time and attention is spent reviewing operations for unreported taxable benefits provided to employees.  Once building blocks #5 and #6 are a part of the compensation planning process, evaluate the taxation of each element of the compensation package and then appropriately adjust the payroll system to properly report taxable compensation.  Taxation of benefits depends on many factors.  Great care should be taken to address all the factors regarding the taxation of any specific benefit including any requirements for written plan documents or nondiscrimination requirements.

Summary

Compensation planning can be complicated.  Organizations should, at a minimum, address the eight factors discussed in these two blog discussions creating policies and procedures to embody the concepts and objectives. There are many excellent resources for compensation planning, and nonprofit organizations have access to more resources than ever before.  However, even with available resources, organizations may still struggle getting a compensation structure in place properly.  Two resources associated with this author are PPC's Nonprofit Tax and Governance Guide:  Helping Organizations Comply available at https://store.tax.thomsonreuters.com/accounting/Audit-and-Accounting/PPCs-Nonprofit-Tax-and-Governance-Guide-Helping-Organizations-Comply/p/100201592 and Christianity Today's Church Compensation: From Strategic Plan to Compliance available at https://store.churchlawandtax.com/church-compensation-from-strategic-plan-to-compliance/.  

Compensation Planning

Building the Basic Foundation - Part 1

Virtually all organizations face a lot of moving parts and pieces in establishing compensation plans for employees, but nonprofit organizations face even more considerations in the planning process.  In 2012, this blog presented a series of posts related to compensation planning and covered many of the planning considerations.  This presentation summarizes some of the most important aspects of creating a strong foundation for handling compensation processes in organizations of all sizes. 

There are eight basic blocks to building a nonprofit organization's foundation for compensation planing.  Four of the blocks are presented in this post with the other four presented in a future blog:

Building Block #1 – Define the Decision Makers

Approval of compensation plans is critical for many positions in nonprofit organizations.  Therefore, all organizations should know who makes decisions on compensation plans and who approves any changes or unusual transactions during the year.

It isn’t enough to define the decision makers.  Consider any potential conflicts of interest that may exist in the decision-making process.  For individuals defined as “disqualified persons” under IRC Section 4958, it is critical that the decision makers are independent of the person being compensated.

Building Block #2 – Define the Position

No one enjoys the tasks of creating job descriptions, but a strong job description is a valuable building block in the foundation for compensation planning.  Job descriptions should describe the duties to be performed and the criteria and qualifications required of the person holding the position.  It is also a good place to define the position for wage and hour rules.  For religious organizations, clarify if the position qualifies under the DOL’s ministerial exception or as a minister under the IRS rules and regulations.  The job description is the first document requested by either of these regulatory agencies to support these positions.  If the position should qualify as ministerial for the IRS, the job description should require ministerial credentials as a part of the position's qualifications.

Building Block #3 – Know the Compensation Limits for a Position

While all organizations should not pay more than “reasonable” compensation, this requirement is even more important in compensation planning for nonprofit organizations.  The payment of unreasonable compensation can be cause for the revocation of an organization’s tax-exempt status and/or the assessment of excise taxes against individuals.   Reasonable compensation can be determined through salary surveys, comparison with other similar organizations and/or using an outside compensation expert.

Building Block #4 – Determine the Goals of the Compensation Package

Funds in nonprofit organizations are often stretched thin.  The result is compensation packages may be below market value for the position and fringe benefit plans may be limited.  However, it is important that nonprofit organizations see compensation planning as more than just the paycheck.  A nonprofit organization should acknowledge the varied needs of its employees and determine what is important for the organization to provide.  Organizations should consider if they desire or intend to provide for benefits such as health benefits, retirement needs, educational programs or dependent care programs. 

Summary

There are many excellent resources for compensation planning.  Nonprofit organizations of all types have access to more resources than ever before.  However, even with all of the resources, organizations still struggle getting a compensation structure in place properly.  Two publications associated with this author are PPC's Nonprofit Tax and Governance Guide:  Helping Organizations Comply available at https://store.tax.thomsonreuters.com/accounting/Audit-and-Accounting/PPCs-Nonprofit-Tax-and-Governance-Guide-Helping-Organizations-Comply/p/100201592 and Christianity Today's Church Compensation: From Strategic Plan to Compliance available at https://store.churchlawandtax.com/church-compensation-from-strategic-plan-to-compliance/.  

For the final four building blocks in building a solid foundation for an organization's compensation process see next week's blog.