Q: I have spent the bulk of my career committed to working as executive director of an organization that until recently operated on a shoestring budget. I am facing retirement and, frankly, it’s scary. I never made enough money to put away for my retirement and the organization never had the money to fund a pension plan. I’m wondering if there is something the organization can do at this point in time to provide compensation in lieu of a pension that can take me through, or at least ease, my “Golden Years.” I can’t be the only one in this boat.
A: To answer your question I consulted four preeminent nonprofit attorneys. Unfortunately, the general consensus is that while you might want to hire the best labor attorney around, your chances of being compensated at this late date are limited. There are several reasons for this.
First, warns Stephen Nill, J.D., Founder, and CEO of CharityChannel, is the concern that this will appear to be a case of private inurement, where you as a result of your position gain a benefit not available to others – in this case, the rest of the staff. Of similar concern, the situation could trigger a claim of excess benefit. Excess benefit, as you may know, is what is paid – or provided as a benefit to – an employee or board member that is considered to be above the norm for the size and type of organization, a person’s position, the community, etc. In either case, under the Intermediate Sanctions Rules the IRS can charge you, the organization and each board member personally an excise tax up to 200% over the amount that is considered “excess.” Given the risk, a lot of board members are not going to want to stick their neck out for you on this matter, and I’m not sure anyone would blame them.
Since you worked for years at the low salary you did, Elaine Leichter of Jeffer, Mangels, Butler & Marmaro LLP in Los Angeles said the presumption is likely to be that you were paid a fair wage. And, unless meeting minutes throughout the years reflect that the board recognized that similar organizations paid pensions, wanted to pay you a pension and hoped to make it up to you in the future but at the times the issue came up there were always insufficient funds, anything that was paid at this point could be considered to be above the norm and subject to the excise tax.
Each of the attorneys spoke to the fact that issues of compensation planning for nonprofit charitable organizations are extremely complex. And, Frank Sommerville of Weycer, Kaplan, Pulaski & Zuber, P.C. out of Texas warned that new Section 409A of the Internal Revenue Service Code will make things even tougher. Designed to prevent abuses, Section 409A says that any deferred compensation – even one-time bonuses or where such compensation was based on employee agreements – could be subject to accelerated taxation and a 20% excise tax.
You want to be sure you don’t misjudge how to approach this topic. The December 17, 2007, edition of the NonProfit Times Online led with an article that stated, “Executive compensation compliance will continue to be in the crosshairs in 2008 for the Internal Revenue Service’s Exempt Organization Division (IRS-EO) after compliance checks this year turned up significant errors and omissions.”
The impact of State and local laws should also be of concern. Barnaby Zall, of Counsel at Weinberg & Jacobs, LLP in Rockville, Maryland was afraid the various taxes could eat up your entire benefit.
Zall suggested you might consider asking for a severance package, but again that is regulated compensation and also subject to excess benefit. As such, any severance package would have to be offered to all the other employees in a similar circumstance and it would have to be based on some objective criteria. Need or lack of previous fairness probably wouldn’t count. Zall warned that severance packages usually are NOT brought up at the time of retirement, but rather at the time of contract. He did think there was a possibility this approach might fly if structured properly and the amount was minimal. But that may not help you sufficiently.
The long and short of it is, you will need truly competent help if you decide to move forward. Since you probably don’t want to spend the money to hire such help, Zall suggested approaching a law or accounting school or a bank or insurance company that might be willing to donate services to your organization. But, even if you have to pay it would be worth it.As Zall told me, any cost will be less than if you do the wrong thing and have to pay penalties!
It goes without saying that I am not a lawyer and even the lawyers that responded to my question were careful to say they were not providing legal advice. I wish to note that while the four generously gave me points to consider, I took great liberty in expanding on their points and any mistakes in interpretation of the issues and laws to which I refer are mine alone. Despite these disclaimers, though, I hope this column gives you an idea of what you are up against. I’m sorry the answer was not more in line with what you would have liked to hear.