Intermediate Sanctions

EMPLOYEE COMPENSATION

Many types of situations could fall under excess benefit transactions. However, two areas cover most cases:

• property transfers
• employee compensation

Employee compensation is the most common situation (as well as the subject matter for this course).

For purposes of excess benefit transactions, the term compensation is broadly defined as:

1. All forms of cash and non-cash compensation, including salary, fees, bonuses, severance payments, and deferred and non-cash compensation at the time it vests or is not subject to substantial forfeiture. With qualified pension or profit sharing, the transaction occurs on the date the benefit vests. With a transaction involving substantial risk of forfeiture, the compensation is effectuated on the date there is no longer any substantial risk of forfeiture.

2. Unless it's excludable as a de minimis fringe benefit, payment of liability insurance premiums or a reimbursement by the organization will be included in compensation if the payment or reimbursement is:
   • a penalty, tax, or expense of correction owed as a result of an excess benefit payment
   • an unreasonable expense incurred in a civil judicial or civil administrative proceeding arising out of the person's performance of services on behalf of the exempt organization
   • an expense resulting from the person's willful and unreasonable act, or failure to act: (Reg. § 53.4958-4(b)(1)(ii)(B)(2))
     
     

3. All other benefits, whether or not included in gross income for income tax purposes, including but not necessarily limited to medical insurance, dental insurance, life insurance, severance pay, disability benefits, fringe benefits (except as excluded under IRC Section 132), expense allowances or reimbursements (unless pursuant to an accountable plan – a plan for reimbursing employees for business expenses), and the economic benefit of a below-market loan. A determination of whether an item is included in gross income is made without regard to whether the item must be taken into account in determining reasonableness of compensation for purposes of intermediate sanctions.

Q: What is treated as compensation?

A: Any benefit received by a disqualified person must be in exchange for some type of service or other benefit provided to the organization by the disqualified person, and the organization must treat it as such. This total figure is used to determine reasonable compensation.

Except for nontaxable benefits, the organization must clearly indicate its intent for the benefit to be considered a part of total compensation. This intent must have written substantiation (such as a W-2 or a 1099 or a 1040 by the disqualified person) at the time the disqualified person receives the benefit.

If, upon examination, a benefit is uncovered that has NOT been included, it will be considered an excess benefit regardless of the reasonableness of the total compensation package. Further, any benefit received by the disqualified person by theft or fraud may not be considered compensation and will automatically be considered an excess benefit.