A non-profit employer enjoys the privilege of being tax-exempt – but every privilege brings obligations, of course.  For example, the Internal Revenue Code has very stringent and vigorously enforced prohibitions against the higher echelon employees of non-profits (Foundations, Churches, Colleges – about 6% of US GNP and 10% of the national workforce) receiving compensation beyond marketplace norms.

This prohibition against “excess benefits” and “private inurement” extends to all forms of compensation, including salary, benefits and severance pay.  It applies to “disqualified persons” and can result in “intermediate sanctions” against the “ non-profit managers.”  But don’t worry, if you do certain things, you can obtain the protection of the “rebuttable presumption of reasonableness”!

Behind this legalese is the basic concept that an employee in a position to influence a non-profit should not receive a benefit from a tax-exempt entity beyond the market value of his or her services.  The IRS and the Minnesota Department of Revenue require that non-profit employers use specific legal procedures to demonstrate that senior executives have their compensation set based on market data and without personal influence. Otherwise, substantial penalties can ensue.

Takeaway:  Following these procedures to determine the compensation limits for higher echelon non-profit employees can be somewhat complex.  Non-profit employers should proceed with awareness of these prohibitions and obtain counsel to assist in determining if the prohibition applies to a particular executive compensation question.  If so, the non-profit should set up the processes necessary to make sure that compensation determinations are consistent with the privileges of non-profit status.