reimbursement for expenses incurred to fulfill their board duties. A charitable organization that provides compensation to its board members should use appropriate comparability data to determine the amount to be paid, document the decision and provide full disclosure to anyone, upon request, of the amount and rationale for the compensation.
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Introduction
Although some charitable organizations reimburse expenses related to board work, the vast majority of board members serve without compensation. In fact, board members of public charities often donate both time and funds to the organization, a practice that supports the sector’s spirit of giving and volunteering.
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When organizations find it appropriate to compensate board members due to the nature, time or professional competencies involved in the work, they must be prepared to provide detailed documentation of the amount of and reasons for such compensation, including the responsibilities of board members and the services they provide. Any compensation provided to board members must be reasonable and necessary to support the performance of the organization in its exempt function. Compensation paid to board members for services in the capacity of staff of the organization should be clearly differentiated from any compensation
paid for board service.Board members of charitable organizations are responsible for ascertaining that any compensation they receive does not exceed to a significant degree the compensation provided for positions in comparable organizations with similar responsibilities and qualifications. Some organizations hire compensation consultants to identify comparable compensation levels, some rely on data available through national and regional associations or forprofit firms, and some conduct their own surveys of compensation paid by similar organizations. When they establish their own compensation, board members generally cannot be considered independent authorizing bodies and therefore generally cannot avail themselves of the legal protections accorded to such bodies.
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Core Concepts
- Some nonprofits reimburse their board members for expenses, but it is less common to receive compensation for board service.
- When individuals are compensated for board service, the rationale and amount paid must be reasonable and should be fully documented.
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Legal and Compliance Issues
- Compensation paid for board service must be differentiated from services done in the capacity of staff.
- Board members are not independent with respect to their own compensation and cannot qualify for the presumption of reasonableness under the IRS Intermediate Sanctions rules.
- In IRS Form 990, the organization needs to list current board members who are compensated as well as former board members who received more than $10,000 of reportable compensation.
- In IRS Form 990-PF, all compensation for board members must be reported.
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Legal Background
Charities and foundations are permitted under current law to pay reasonable compensation for
services provided by board members. Reasonable compensation is defined as the amount that would ordinarily be paid for like services by like enterprises (whether tax-exempt or taxable) under like circumstances.1 Federal tax laws prohibit excessive compensation and transactions that provide excessive economic benefit to board members and other disqualified persons.2 The rules and penalties regarding excessive compensation of board members are the same as those applied to the compensation of the chief executive officer or other disqualified persons (see Principle #13).Charitable organizations, with some exceptions,3 are required to report on their Form 990
or 990-PF the name, title, and average hours of service per week of every board member, officer, and key employee. In addition, the organizations must report the compensation, contributions to employee benefit plans and deferred compensation, expense account, and other allowances paid to any board member by the organization and its affiliated entities. Public charities must also provide this information for former employees and board members who received any compensation or benefit during the reporting year. The instructions to the Forms specify that all types of compensation must be reported, including both taxable and nontaxable fringe benefits except for de minimis fringe benefits (for example, property or services provided to the individual of such a small value as to make accounting for it impractical). 4(From The Principles for Good Governance and Ethical Practice: Reference Edition,
Published in 2007)1 Treas. Reg. § 53.4958-4(b)(1)(ii).
2 IRC §§ 4941, 4958.
3 Excluded from this requirement are organizations, other than private foundations and supporting organizations, with annual gross receipts of $25,000 or less, houses of worship
and specific related institutions, specified governmental instrumentalities and other organizations relieved of this requirement by authority of the IRS. IRC § 6033(a)(2).
4 IRC § 132(e). -
Discussion Points
These questions – from the Principles Workbook (PDF) – are intended to prompt discussion about the principle, assess the polices and practices of your organization, and encourage your organization to take steps to identify where improvements should be made.
- If we have chosen to compensate board members for board service, have we adequately documented the amount of compensation and reasons for doing so?
- Compensation for board service must be reasonable and in line with what is paid by comparable organizations. What steps have we taken to meet this requirement?
- If we decide to compensate board members, have we considered the legal implications and the potential conflicts of interest this would create?
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Resources for Principle #20
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Related Principles
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Supplemental Materials
