25th Annual Health Sciences Tax Conference non-qualified benefit plans, and executive compensation December 7, 2015
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Presenters Helen Morrison Ernst & Young, LLP Washington, DC helen.morrison@ey.com +1 202 327 7016 Katherine Kurtzman Ernst & Young, LLP Chicago, IL katherine.kurtzman@ey.com +1 312 879 2183 Page 3
Agenda Focus on executive compensation Executive compensation issues for tax-exempt health care providers Section 4958 Form 990, Part VIII and Schedule J Miscellaneous compensation and benefits issues Page 4
Focus on executive compensation Page 5
General focus on executive compensation Public companies US Securities and Exchange Commission (SEC) disclosure requirements Compensation Discussion and Analysis (CD&A) Tabular disclosures Dodd-Frank increased disclosure SEC proposed rules on clawbacks and pay ratio disclosures Troubled Asset Relief Program (TARP) provisions aimed at financial institutions Private businesses Regulatory focus on limited partnerships and self-employment income Proposed regulations on investment managers management fee Tax legislation Limitation on the amount and timing of the deduction Page 6
Focus on health care Spotlight on the level and form of compensation paid to executives of state and federal nonprofit health care businesses Regulated industry Federal and state objective to bring down the cost of health care Recent federal legislation Targets health insurance issuers management compensation levels medical loss ratio (MLR) rules; Section 162(m)(6) State enforcement of health insurance issuers Page 7
Executive compensation issues for taxexempt health care providers Page 8
Excess compensation vs. intermediate sanctions Section 501(c)(3) and (4) requirement Prohibition on private inurement for the benefit of shareholders and other insiders Inurement can be any financial transaction, including excessive compensation, that benefits an insider Section 4958 Imposes on a disqualified person a 25% excise tax on excess benefit transactions Compensation must be reasonable; rebuttable presumption Coordination of Sections 501(c) and 4958 Assessing tax-exempt status, Internal Revenue Service (IRS) will look to the compensation of similar individuals having similar responsibilities Compliance with Section 4958 rebuttable presumption is helpful Page 9
Section 4958 Page 10
Section 4958 Review of intermediate sanctions requirements An excess benefit transaction is any transaction in which an economic benefit is provided directly (or indirectly) to a disqualified person (including compensation for services) if the value of the benefit exceeds the value of the services. A disqualified person is any person who, during the prior five years, was in a position to exercise substantial influence over the organization (includes family members and 35% shareholders). Chief executive officer, president, chief financial officer, treasurer and chief operating officer deemed disqualified Compensation is reasonable if it is an amount ordinarily paid for like services by a like enterprise that is taxable or tax exempt. Page 11
Section 4958 Review of intermediate sanctions requirements Compensation includes all economic benefits (with limited exceptions). Cash and non-cash including salary, bonuses, severance, deferred compensation Liability insurance premiums, payment of expenses, or gross-up of the tax, penalty or correction under Section 4958 Payments to welfare benefit plans (e.g., medical, dental, life insurance and disability) Payments for expense allowances (other than under an accountable plan) An organization must substantiate that compensation is for services (i.e., Forms W-2, 1099, 990) to avoid an automatic excess benefit. Page 12
Section 4958 Rebuttable presumption Compensation is presumed reasonable if: Compensation is approved by board or committee that is composed entirely of individuals with no conflict of interest Board or committee approval is based on appropriate comparable data Board or committee must provide adequate documentation for its determination and should be completed before next meeting or 60 days following the action of the board or committee Appropriate comparable data includes: Current compensation surveys compiled by independent firms showing compensation levels by similar organizations (taxable and non-taxable) for comparable functions Written offers from similar organizations competing for services Page 13
Update on elements of compensation Non-qualified executive compensation Non-qualified deferred compensation Status of Section 457(f) and (e)(11) proposed regulations IRS and Treasury repeatedly comment that regulations are imminent Key issues include what constitutes bona fide severance and what constitutes a substantial risk of forfeiture Coordination with Section 409A Income inclusion under Section 457(f) constitutes a payment and should satisfy Section 409A short-term deferral exception Earnings on unpaid Section 457(f) balance would be deferred compensation and must comply with Section 409A distribution rules Defined benefit State Earnings Related Pension Schemes (SERPs) may raise disclosure issues Split-dollar life insurance Increased prevalence Consider whether treated as a loan or deferred compensation Consider tax compliance and disclosure Page 14
Update on elements of compensation Qualified retirement plans Determination letters: Announcement 2015-19 describes important changes to the determination letter program for individually designed tax-qualified plans Eliminates five-year cycle for remedial amendments Limits program to initial plan qualification, plan termination and other limited circumstances Does not affect prototype plans Impact on 403(b) plans? Employee Plans Compliance Resolution System (EPCRS): Revenue Procedures 2015-27 and 2015-28 modify voluntary compliance program Safe harbor correction for missed elective deferrals for employees subject to 401(k) or 403(b) automatic contributions Safe harbor for elective deferral failures for limited duration Page 15
Update on elements of compensation Health and welfare plans Affordable Care Act (ACA) compliance checklist to avoid Section 4980D excise tax Status of non-discrimination rules ACA information reporting on Forms 1095-C and 1094-C and Forms 1095-B and 1094-B Request for extension of February 1, 2016, due date to furnish employee statements Request for extension of March 31, 2016, due date to file with IRS Increased penalties for late filings $250 per form, up to $3 million Section 4980H (employer mandate) assessment Page 16
Form 990, Part VII and Schedule J Page 17
Overview: Form 990 Part VII and Schedule J Form 990 disclosure is the result of the IRS executive compensation initiative of 2004 Tracks public company disclosure Review of tax-exempt organizations compensation practices Identify tax administration concerns and potential areas of abuse Particular areas of concern: Unreported excessive salary and incentive compensation Payments of fringe benefits such as vacation homes, personal legal fees or personal automobiles Payments for meals and gifts to others Payments to an officer s for-profit corporation in excess of the value of services provided by the corporation Page 18
Penalties Penalty for failure to accurately report (Section 6652(c)(1)(A) Intermediate sanctions $20 penalty per day until such error is corrected, not to exceed the lesser of $10,000 or 5% of the organization's gross receipts for an organization having less than $1,000,000 of gross receipts $100 per day, not to exceed $50,000 for organizations having gross receipts greater than $1,000,000 Page 19
Part VII: Compensation disclosures To whom to report What to report When to report Page 20
Schedule J: Compensation information Part II Page 21
Schedule J: Compensation information reported Base salary Life insurance gross-up Perk allowances Country club personal use Bonus Life insurance (imputed and surrendered value) Personal use of an organization s space Spousal travel Disability gross-up Paid medical expenses Housing and relocation costs Severance payments (including future payments earned but not yet paid) Health and dental plan payments Long-term disability payments 401(k), 403(b) and 457 match, and social security excess Deferred compensation bonus plans Page 22
Schedule J reporting considerations Defined benefit (DB) plan/serp versus defined contribution (DC) plan/serp (column (C) reporting) DB plan and SERP report increase or decrease in actuarial value DC plan and SERP report current deferrals, but do not report earnings or losses accrued on the balance Note that reporting and tax rules may differ Life insurance policy If a loan, not reported on Schedule J, but reported on Schedule L If deferred compensation, reported on Schedule J Automatic excess benefit considerations for supporting organizations Performance-based compensation Consider consequences if paid or accrued based on net earnings Page 23
Schedule J other pitfalls Issues identified recently: Failure to report compensation provided under a deferred compensation plan Failure to report severance benefits Failure to report fringe benefits such as air travel, entertainment Failure to report compensation from related organizations in Part VII and/or Schedule J Input compensation in the wrong years Page 24
Miscellaneous compensation and benefits issues Page 25
Other updates Affordable Care Act issues Transitional reinsurance program fee exemption for self-insured, self-administered employer-sponsored plans Section 4980I Cadillac tax effective 2018, employers beginning now to assess impact Windsor and Obergefell Supreme Court decisions taxation of same-gender spousal benefits in wake of US Supreme Court ruling Page 26
Questions? Page 27
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