Publications: Ask The Legal Expert - July 2006

How can I advise my board of directors to best avoid intermediate sanctions from the IRS?

The IRS's intermediate sanctions are financial penalties imposed on tax-exempt organizations and certain executives who pay or receive "excess benefits of any kind."

The first steps you should take are to become educated about these special IRS rules, and to take those actions that are necessary to obtain the "rebuttable presumption of reasonableness" under the IRS's regulations. This shifts the burden to the IRS to demonstrate that a compensation package is clearly excessive and unreasonable.

Organizations must obtain appropriate comparability data that demonstrates the reasonableness of the executives' compensation packages. The organization must usually hire an independent consulting firm with the experience in healthcare compensation matters to obtain market data and analyze the market rate of compensation and benefits for its covered executive positions.

In addition, the covered executive should be excluded from any decision-making that involves him or her. The packages must be approved in advance by an authorized body of the organization, such as the board or its compensation committee, excluding the disqualified person.

Your organization should carefully document the steps taken to: 1) become educated on these rules; 2) implement appropriate board level procedures for reviewing and approving compensation packages; and 3) reach compensation and benefits decisions.

This documentation should include how the board or member reached the decision, the data on which the board or member relied, the terms of the package, the names of those present for the discussions and the names of those who voted.

Reproduced with permission from McKnight's Long-Term Care News

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