Form 990: Compensation Information, Part 7June 17, 2016
Publicly disclosing officers, directors, key employees and other highly compensated employees.
Compensation of officers, directors, key employees and other highly compensated employees is a subject receiving much attention in the not-for-profit world. Although most people believe their compensation information is confidential, that is not the case for not-for-profit executives. Part VII of the publicly available 990 form is where compensation information is disclosed for all to see.
Who are officers, directors, key employees and highly compensated employees? “Officers” are the Chairperson, President, Treasurer, etc. Normally these people are also board members (or what the IRS refers to as “directors”), but since it is possible to have a corporate officer who is not a director, the IRS lists both.
A “key employee” is defined as a person who is not an officer or director but has annual compensation of $150,000 or more, meets the responsibility test and is one of the top 20 highest paid employees. The responsibility test is met if the individual has influence over the organization as a whole similar to that of an officer or director, or manages a segment of the organization that represents 10% of the organization’s activities, assets, revenue or expenses or has the authority to control 10% or more of the organization’s capital expenditures, operating budget or compensation for employees. “Highly compensated employees” are the five highest compensated employees earning over $100,000 who have not already been listed as an officer, director or key employee.
All officers and directors must be listed in Part VII if they served in such capacity at any time during the reporting period. The amount of compensation reported for all individuals is the amount of compensation that appears on their W-2 and/or 1099 form for the calendar year-end that occurs during the fiscal year being reported on. Therefore, if your organization is completing its form 990 for the fiscal year ended June 30, 2015, it will report compensation figures obtained from the December 31, 2014 W-2 or 1099 forms. This concession to report compensation figures from the year-end forms is meant by the IRS to lessen the burden of reporting this information under the assumption that the W-2 information is more readily available than the compensation paid over the 12-month period ended June 30th. Please note, however, that certain state forms, such as the MA form, require similar compensation information, but require the compensation amounts for the specific fiscal year.
The individuals you are reporting should be listed in the following order: directors, officers, key employees and highest compensated employees. Although an individual may satisfy more than one criterion, they are listed in the above order. This means that if an officer has compensation above $100,000, that individual is listed as an officer and later on in the list, the organization still must list the 5 highest employees earning over $100,000. The fact that the officer is also a highly compensated individual does not reduce the number of highly compensated employees who must be listed.
The form also asks the average hours per week that the individual devotes to the organization during the year. An actual number of hours should be listed here and statements such as “as needed” or “as required” should not be used. Thus, if directors attend a monthly board meeting that requires 4 hours, than they should spend an hour or so preparing for the meeting. This would average out to be about 1.25 hours per week and should be reflected on the form. For employees, the number of hours worked should be accurate and exact, for example, one should not give an estimate of 40+ hours.
For each individual, you will need to indicate the compensation from the organization completing the form 990 and (in column E) the compensation from any related organizations. There is a long definition of what constitutes a related organization, but since the majority of organizations are not related to another organization, further discussion is needed (feel free to contact us to discuss this in more detail).
Column F asks for the amount of “other compensation” which generally includes any compensation that is not included on the W-2 form. Below are the primary items included in other compensation:
• Deferred compensation
• Employer contributions into a defined contribution retirement plan
• Increases in the actuarial value of defined benefit plan amounts
• Employer paid health benefits
• Employee health benefits paid with pre-tax dollars
• Nonqualified deferred compensation
At the end of this statistical compensation information, the form asks a few questions. One question asks for the total number of individuals whose compensation is more than $100,000. In addition, for those individuals whose compensation is greater than $150,000, additional information is required in Schedule J of the form.
Given the number of times that the form asks about individuals whose compensation is greater than $100,000, it is easy to get the impression that $100,000 is some sort of compensation benchmark. While there are people who consider compensation above $100,000 in a not-for-profit organization troublesome, there are just as many who believe that qualified, talented individuals should be adequately compensated so that they will work in the not-for-profit sector. We encourage you to not be defensive about your compensation levels. Rather, understand the complexity of the work and the talent needed to complete that work and be able to defend your compensation levels with pride and conviction.
Section B of Part VII asks to list the five highest compensated independent contractors that received more than $100,000 of compensation. If there are none, you should write “none” in the space provided. In general, you should never leave a question or section blank just because you have nothing to report. Complete each section with a positive response even if that response is “none” or “zero”.
In this section, if you have a contractor who received a significantly large amount of compensation from you during the year, do not hesitate to explain the circumstances. For example, you may say “ABC Contractor worked on seven different projects - $175,600.” Indicating “multiple projects” lends some perspective that is not evident if only the total compensation is disclosed.
Reporting compensation amounts can be a daunting task. However, it is one of the areas of the form 990 that receives a great deal of attention. Be sure you are completing this section properly.
Read the rest of our series on Understanding the Importance of your Form 990