For calendar year not-for-profit organizations, the new Form 990 is due May 15, 2009. As such, the new era for tax-exempt organizations which focuses on enhancing transparency and promoting tax compliance has stepped into the limelight. The IRS has clearly expressed that it believes that good governance and accountability practices provide safeguards to ensuring that not-for-profit assets are used consistently with exempt purposes and not to provide excess benefits, private inurement or any other private benefit. The redesigned Form 990 specifically asks organizations to comment on whether it has certain policies in place, including, but not limited to:
- Conflicts of interest policy
- Whistle-blower policy
- Document retention and destruction policy
- Policies to ensure consistency in operations across affiliates and branches
- Policies regarding reimbursement of business, travel and entertainment expenses
- Compensation policies (for both directors and key staff)
As such, health systems should have appropriate and effective policies to satisfy these spotlighted governance practices. For example, a conflict of interest policy should emphasize the tax-exempt director’s or officer’s duty of loyalty, which requires every director or officer to act in the best interest of the organization, rather than in the personal interest of the director or officer (or some other person). Additionally, it should provide a course of action if a conflict of interest is identified.
A document retention and destruction policy should establish standards for document integrity, retention and destruction as well as including guidelines for handling electronic files and should cover backup procedures, archiving of documents and regular system reliability checkups.
A policy regarding reimbursement of business, travel and entertainment expenses should establish terms for payment and reimbursement of ordinary and necessary expenses incurred while carrying out the organization’s activities and should be consistent with IRS guidance on accountable plans.
Compensation policies should ensure that no more than reasonable compensation is paid for services rendered. It is always recommended to meet the rebuttable presumption of reasonableness under Code Section 4958. Compensation programs must be approved by the Board or a committee comprised entirely of individuals who do not have a conflict with respect to the relevant compensation program. Additionally, the Board or committee must obtain and rely on data in giving its approval that is comparable to that organization, it must conduct due diligence on the comparability data (e.g., compensation levels paid by similarly situated organizations (for profit and not-forprofit) – data for organizations with similar revenues as well as independent compensation surveys compiled from independent firms), and it must adequately document that basis for its determination that the program is reasonable – within 60 days or the next meeting, whichever is later.
The IRS has clearly stated in Form 990 that the governance policies addressed are not required by the Internal Revenue Code. While many of these are considered “best practice” in today’s legal environment, not all professionals believe that these policies are necessary in all not-for-profit organizations. Notwithstanding this, the majority of these policies are applicable to healthcare entities based on their size and scope of their services.
These policies should be reviewed and re-evaluated annually, at least for the next few years. Additionally, by conducting annual reviews, the policies get spotlighted and greatly assist Boards into transitioning into this greater oversight role.