Not-For-Profit/Exempt Organizations Blog : Non-Profit Lawyers & Attorneys : Proskauer Rose Law Firm : Tax & Corporate Law for 501(c), 501(3) Organizations

Here are some take-away points from each presentation:

Best Practices for Board Members.  Bob Kaufman, Partner, described how increased outside scrutiny of tax-exempt organizations requires increased attention by boards, particularly with respect to governance questions now asked on IRS Form 990.  Critical responsibilities of all board members are the selection, evaluation, and, if necessary, replacement of the CEO, but also support, encouragement, and assistance to the CEO.  Good practices include how replacement directors are selected, compensation practices and audit committees, and being able to answer "yes" to the Form 990 questions of whether the organization has certain key policies.

The Effects of Health Care Reform.  Elizabeth Mills, Senior Counsel, described highlights of this year’s health care reform act relating to tax-exempt organizations both as employers and as charitable organizations.  Health plans maintained by exempt organizations for their employees are subject to the same new rules as those of taxable employers, many of which are effective beginning January 1, 2011 or even sooner.  Depending on whether the plan is "grandfathered," these rules may include coverage of preventive services, limitations on waiting periods to obtain coverage, prohibition of preexisting condition limitations, and application of nondiscrimination rules to insured plans.  Tax-exempt hospitals are also subject to specific new requirements that are effective now.  Finally, the health reform legislation includes many funding opportunities for education and innovative care arrangements, some of which require partial funding from private sources.  More information can be found at Proskauer's Health Care Reform Task Force web page.

Executive Compensation Developments.  Lisa A. Berkowitz Herrnson, Senior Counsel, described how nonqualified deferred compensation for executives of tax-exempt employers is governed by the rules of Code Section 457.  If a plan does not satisfy the requirements to be an "eligible deferred compensation plan" under Code Section 457(b), it will be considered to be an "ineligible deferred compensation plan" under Code Section 457(f) and will then need to ensure that it also complies with the rules under Code Section 409A.  The IRS has announced its intention to issue additional guidance concerning certain aspects affecting "ineligible deferred compensation plans" in the near future.

Ethics Issues Facing In-House Counsel.  A. Nicole Spooner, Associate General Counsel at the Open Society Institute, described the New York Rules of Professional Conduct  and how those rules can apply to in-house counsel.  Specifically, in-house counsel should be aware of the level of protection and confidentiality afforded business and legal services that they provide and should determine the extent of their attorney-client relationships.  Moreover, in-house counsel should be aware of how their practice can be limited across state and international jurisdictions, including limitations on privilege and what information can be kept confidential.  Finally, in-house investigations should be conducted with these principles in mind and in-house counsel that are not the primary counsel in an organization should still realize that they have responsibilities under the Rules of Professional Conduct and can also be in violation of the Rules.

A replay of the seminar is available by following the instructions below:

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2. Transparency - Not only does the IRS want to make sure that your organization is doing the right thing, but it wants to know exactly how you are doing it.  Moreover, the IRS not only cares that you tell it about your processes, but it wants to make sure that the public is also aware of what your organization is doing behind closed doors.  Even on its Form 990, the IRS asks whether the organization makes not only the Form 990 available, which is required by law, but whether the organization also makes its Conflict of Interest Policy and financial statements available to the public, even though it is not legally required to make these documents available.  The IRS does not want to guess at how you accomplished something, it wants enough information about the process behind the result to feel as though its agents were beside you when you made the decisions leading up to the result.  If you are not already, you need to conduct your organization as though all eyes are watching...because in many ways, they are.

3. Compensation - This area is one of the most active areas for the IRS.  As seen by the compensation surveys that the IRS has sent to hospitals and colleges/universities, the IRS is certainly interested in the kinds of salaries that the management of exempt organizations is receiving.  Moreover, in this difficult economy, the public has focused in on the amount of compensation that top executives in not-for-profit organizations are receiving.  So, if your organization had a "good year," you should still determine whether or not the executive's compensation for his strong performance is reasonable under IRS standards.  Just because a CEO performed well in one year is no defense for paying him or her compensation that is so high that it is unreasonable.  Using Boards to help determine compensation should be measured against the organization's sector, location, the job's responsibilities, the individual's skills and experience, and the size of the organization.  Importantly, each exempt organization should document the executive compensation decisions of its management and other highly compensated or key employees.  Increases in salary should be measured against both the organization's performance and the employee's.  Finally, if you do not have one already, you should put in place a compensation policy, which details your organization's compensation philosophy, compensation plan design, and how compensation decisions are generally made.  If necessary and practical, an organization should enlist the help of a compensation consultant.

4. Joint Ventures - The IRS is paying attention to exempt organizations' participation in joint ventures.  Specifically, the IRS is inquiring on the Form 990 about the revenues, expenses, assets, and liabilities that the venture generates for the organization.  Joint ventures are often structured so that the exempt organization does not recognize any unrelated business taxable income ("UBTI") or even lose its exempt status.  To that end, joint ventures should be structured so that they have adequate protections in place to ensure that the venture is operated for exempt purposes, including using binding charitable purpose provisions, preferred governance rights, and certain dissolution rights to the participating exempt organization.  This sort of partnership has arisen quite frequently in the health care field, where hospitals are often members of these types of ventures.  With the new Code Section 501(r) created by the Patient Protection and Affordable Care Act, tax-exempt hospitals will have to comply with additional requirements to maintain their tax exemption.  Accordingly, when hospitals enter into joint ventures, it is important that not only that the Section 501(c)(3) requirements are kept in mind, but that the requirements of Section 501(r) are also considered.

5. Endowments/Investments - With the economic downturn, nearly every exempt organization has looked at its endowment or investment policy and tried to determine what it could do better or differently in order to increase or maintain the funds that it currently has.  On a state level, there has been statutory development around UPMIFA, which updates UMIFA, a statute that provides uniform and fundamental rules for the investment of funds held by charitable institutions and the expenditure of endowments to those institutions.  UPMIFA establishes a more clear and precise set of rules for investing funds in a prudent manner and also eliminates the idea of "historic dollar value," which under UMIFA, is the threshold for what a charity can prudently spend an endowment down to.  Accordingly, investment officers at charities should be clear on these rules if they apply in their state.  Investment policies should reflect any change in state law and the investment committee's adherence to such policies.  Failure to adhere to appropriate state standards and manage your institution's funds under these standards will certainly draw the attention of the IRS.  Note: New York is one of a handful of states that have not yet enacted UPMIFA.  Please visit our blog for a more in depth discussion on fiduciary obligations and the prudence standard for endowments in New York.

For more information on current developments in the law of tax-exempt organizations, please visit Bruce R. Hopkins's Nonprofit Law Center.