In my article, "Navigating the New Form 990," from the March 2008 issue of Dollars & Cents, I gave you an overview of the form and schedules. In this article, I'll focus on a couple of key definitions and list some steps you can take now to get ready for next year.
With the August release of the new form's final instructions, we now have guidance on two particularly troublesome terms: "independent voting member of the governing body," and "key employee." Both terms understandably caused some consternation in the association world. Member organizations were apprehensive over how membership status might affect board independence; and the potential expansion of the term "key employee" had larger organizations worried about the number of executives they'd have to report in Part VII, the compensation disclosure section.
To member organizations' great relief, the final "independent voting member" definition granted considerable latitude in terms of the relationship between membership benefits and a board member's independent status. The Internal Revenue Service will consider a board member to be independent if he or she:
· Was not compensated as an officer or employee (including by related organizations);
· Did not receive more than $10,000 during the year (not including reasonable expense reimbursements or reasonable board-service compensation) for services performed as an independent contractor (including for related organizations); and
· Did not participate in any transaction with the organization (or any related organization) that would be reportable in Schedule L, "Transactions with Interested Persons." (This also extends to the member's family.)
Furthermore, a board member does not lack independence merely because he or she was a donor to the organization or received financial benefits solely in the capacity of an organization member.
On the other hand, the final Part VII "key employee" definition went further than many observers had anticipated. While there is now a $150,000 floor on key employee compensation, as well as a 20-person key employee limit, the definition is otherwise comprehensive in scope, extending to employees responsible for only a small slice of an organization's activities. Per the final IRS instructions, a key employee is a person who:
· Has responsibilities, powers, or influence over the organization as a whole that is similar to those of officers, directors, or trustees;
· Manages a discrete segment or activity of the organization that represents 10 percent or more of the activities, assets, income, or expenses of the organization, as compared to the organization as a whole; or
· Has or shares authority to control or determine 10 percent or more of the organization's capital expenditures, operating budget, or compensation for employees.
Furthermore, an organization's top management official (CEO, executive director) and top financial official (CFO, Director of Finance) are now, for Form 990 purposes, considered to be officers rather than key employees, and so are reported on Part VII, regardless of how much they are paid. As a result, neither will count toward fulfillment of the up-to-20 key employee listing for Part VII.
Regarding definitions, one helpful tool that has come out of the Form 990 revision is a glossary that defines most key terms used in the new 990 and its schedules. The "independent voting member" and "key employee" definitions are there, along with more than a hundred others.
Now, because the year is fast drawing to a close, I'd like to direct your attention toward one important fact: many of the questions in the Part VI "governance" section may be answered "yes" only if the policy or procedure referred to is in place as of the end of the reporting year. So, if you are a calendar year organization, this means by December 31, 2008. For that reason, you may wish to review Part VI carefully (as well as the rest of the form), and decide which items may require Board of Directors action by year's end. Bear in mind that the answer "no" to a governance question is not necessarily a bad thing; just make sure that your explanation reasonably reflects good governance practices.
Finally, here is a short "to do" list that will help you get ready for next year. It is by no means comprehensive, but it will help point you in the right direction:
- Estimate the total number of volunteers for Part I.
- Identify non-independent voting members of your governing board for Parts I and VI.
- For Part VI (as noted previously), review and evaluate your governance policies and procedures, in light of the questions in that section.
- Discuss whether to publicly disclose governing documents, policies, and financial statements for Part VI reporting.
- Put procedures in place to coordinate the reporting of political campaign and lobbying financial activity for Schedule C.
- Examine tax positions for possible FIN 48 issues for Schedule D.
- Gather information on foreign activities for Schedule F.
- Identify fundraising and gaming activities for Schedule G.
- Review executive compensation contracts to ensure that inurement provisions are not being violated for Schedule J.
- Track "perks" provided to executives and board members, as well as policies covering such fringes for Schedule J.
- Gather information on reportable business relationships amongst officers, board members, and so forth for Schedule L.
- Gather information on related organizations for Schedule R.
Yes, you have a big job ahead of you. But the more you do now, the less you'll have to do next year.
Deborah G. Kosnett is a Tax principal with Tate & Tryon. E-mail: email@example.com.
Reprinted with permission, copyright 2009, ASAE & The Center for Association Leadership, Washington, DC.