By Donna Bernardi Paul, SPHR, SHRM-SCP

Are differences in work and communication style in the workplace among the different generations the cause of leadership/supervisory challenges or is it something else?

There have been a plethora of articles, seminars, webinars and discussions around millennials in the workplace and the challenges of managing and working with them due to their different work style.

When we talk about the importance of differences in the workplace, sometimes we forget about one of the most prominent dimensions—age. There are three main generations in our workforce currently, and we are on the brink of adding a fourth. Understanding how to relate to each is critical to successfully keeping them motivated and engaged in their work.

The Baby Boomers: Born between the end of World War II and the early 1960s. Also known as the “Me Generation.” They grew up with television. Mothers were typically home waiting for their children to come home from school, and children were allowed outside of their homes unsupervised. Their relationships with their parents, teachers and others in authority were somewhat contentious.

Boomers came into the workforce in droves. They were the first “workaholics.” Their frame of reference at work was to spend as much time as possible working, sacrificing time with families, so that good things would come to them. Motivating them at work is typically done via the “carrot and stick” approach.

Generation “X”: Born between the early 1960s and the early 1980s. Also known as the “Latchkey Kids” or the “Sandwich Generation” because they are sandwiched between the huge baby boomer and millennial groups. They grew up in an era when more mothers entered the workforce and children came home from school to an empty home. They fended for themselves. They were instructed not to answer the door to anyone they didn’t know. As a result, they became independent and skeptical. They entered the workforce with the frame of reference they needed to have multiple careers so that they didn’t put all their eggs in one basket. They didn’t want to experience the disappointments of prior generations. They tend to be entrepreneurial and individualistic. Managing them at work became more complicated due to their supercilious attitude and resentment towards the boomers and millennials.

Many feel that they do not have career paths because the boomers aren’t leaving and the millennials are leapfrogging over them.

Generation “Y” (millennials): Born between the early 1980s and the early 2000s. Also known as “Echo Boomers.” They represent the largest generation in the workforce and its members generally have high levels of self-esteem. They are highly educated and technologically savvy. Their preferred communication style is text messaging. Their relationships with their parents tend to be that of friends or peers because their parents typically have moved away from the authoritarian style in which they were raised. As a result, they have grown up in an era where their lives are programmed and organized from birth, which doesn’t prepare them to cope with disappointment or help them to make decisions on their own. For example, their nurseries were monitored via the baby monitor. Their parents organized their social activities via “play dates” vs. allowing them to go outside unsupervised. Moreover, parents of millennials have instilled within their children entitlement attitudes vis-à-vis “everyone is right” and “everyone gets a trophy.” Many parents become advocates for their children with schools, their friends and even their workplaces. As a result, this generation has expectations that may not be realistic. They’ve entered the workplace with the expectation that they can work whenever and however works best for them. Managers from prior generations tend to have trouble supervising this group, even though they were probably the same parents who raised them, because this generation’s virtual style of working is very different from what older generations are used to.

Generation “Z”: Born between early 2000s to the present. This generation is extremely technologically savvy. Many had iPads as toddlers. They are now in high school and college.

Perhaps the upshot to all of this is that it doesn’t matter to which generation a person belongs since all workers tend to want the same things:

• Good bosses
• Career paths
• Recognition

If you think back on all the jobs you’ve ever had and all the bosses you’ve ever had, which boss would you choose as your favorite and why? Now, give yourself a rating against your favorite boss in order to determine where you would like to develop your supervisory skills. After all, how do people become bosses? Do they go to school to learn how to be a great boss? Not usually. Typically, they do something well from a technical perspective and then they are promoted out of what they do well and placed into a job (managing others) that they may not be familiar with, and for which they get no training. With proper training of its managers and supervisors, organizations have a better chance to have skilled employees who care and are productive regardless of which generation they fall in because people join companies—they quit bosses.

For more information, contact Donna Bernardi Paul, managing director, Business Services & Outsourcing, at dpaul@bdo.com

By Marc R. Berger, CPA, JD, LLM

The IRS Tax Exempt and Government Entities (TE/GE) division released its Fiscal Year 2019 Program Letter on Oct. 3, 2018. The Program Letter outlines its projects and priorities for fiscal year 2019 for tax-exempt organizations, employee plans, Indian tribal governments, and tax-exempt bonds. This article focuses on those projects and priorities relating to tax‑exempt organizations.

The TE/GE division will continue to refine its compliance strategy approach, which is designed to ensure that its examination programs are focused on the highest priority compliance areas to promote efficient tax administration. In this regard, TE/GE collaborates with its IRS business partners and various other groups and agencies, including the Advisory Committee on Tax Exempt and Government Entities, the U.S. Department of Labor, the Municipal Securities Rulemaking Board, and the Securities and Exchange Commission. TE/GE will continue to use advance data and data analytics to drive decisions about identifying and addressing high-risk areas of noncompliance.

The Tax Cuts and Jobs Act (TCJA) will remain a priority in fiscal year 2019. TE/GE has completed numerous form revisions, as well as guidance and training, and it anticipates more developments in these areas going forward. It plans on initiating additional education efforts in FY 2019 along with TCJA-related compliance strategies.

For the first time this decade, TE/GE is onboarding a significant number of new hires, and is cross-training employees to allow flexibility in directing resources to shifting needs. The increase in employees signals a potential increase in examination and enforcement action.

The bulk of the Program Letter focuses on six areas of its compliance program in an effort to become more effective and efficient. These six areas are:

Compliance Strategies

Compliance strategies are issues approved by TE/GE’s Compliance Governance Board (Board) to identify, prioritize and allocate resources within the TE/GE taxpayer base. Using a web-based portal, TE/GE employees submit suggestions for consideration by the Board. Once approved, these issues are considered priority work. Strategies approved to date include:

• Tax-exempt social clubs under Internal Revenue Code (IRC) Section 501(c)(7) – The focus will be on investment income, non-member income, and non-filers of Form 990-T, Exempt Organization Business Income Tax Return.
• Non-Exempt Charitable Trusts under IRC Section
  4947(a)(1) – The focus will be on organizations under-reporting income and over-reporting charitable contributions.
• Tax-exempt organizations that were previously for-profit – The focus will be on organizations formerly operated as for-profit entities prior to their conversion to IRC Section 501(c)(3) organizations.
• Self-dealing by private foundations – The focus will be on organizations with loans to disqualified persons.
• Early retirement incentive plans – Determining whether federal, state or local governmental entities that provide cash (and other) options to employees as an incentive for early retirement have applied proper tax treatment to these benefits.
• Forms W-2/1099 matches – Comparing payments reported on Form 1099-Misc., Miscellaneous Income, with wages reported on Form W-2.
• Notice CP 2100 (backup withholding) – Determining whether mismatched and/or missing taxpayer identification numbers on Form 1099 indicate a failure to comply with backup withholding requirements.
• Worker classification – Determining whether misclassified workers result in incorrectly treating employees as independent contractors.

Data-Driven Approaches

Data-driven approaches use data, models and queries to select work based on quantitative criteria, which allows TE/GE to allocate resources that focus on issues that have the greatest impact. TE/GE integrates data into its processes and procedures, using return data and historical information to identify the highest risk areas of noncompliance.

With respect to models, this includes continuing to improve compliance models based on Forms 990, 990-EZ, and 990-PF, as well as testing the newly developed model for Form 5227 (Split Interest Trust Information return). In addition, identifying returns containing the highest risk of employment tax noncompliance will be a priority.

Referrals, Claims and Other Casework

Referrals allege noncompliance by a TE/GE entity and are received from internal and external sources. The public can submit a specialized exempt organization referral on Form 13909 (Tax-Exempt Organization Complaint). With respect to referrals, TE/GE will continue to pursue referrals received from all sources alleging noncompliance.

Claims are requests for refunds or credits of overpayments of amounts already assessed and paid, and can include tax, penalties and interest. TE/GE will continue to address claims requests, including high-dollar complex employment tax claims filed by federal, state and local governments.

Other casework includes examining entities that filed and received exemption using Form 1023-EZ, focusing on (1) filers who are ineligible to file Form 1023-EZ, (2) filers who donate to (or pay expenses for) individuals, and (3) filers operating bingo and other gaming activities.

Compliance Contacts

Compliance units are employed to address potential noncompliance, primarily using correspondence contacts known as “compliance checks” and “soft letters”.

A compliance check is correspondence with organizations to inquire about an item on a filed return; to determine if specific reporting requirements have been met; or to determine whether an organization’s activities are consistent with its stated tax-exempt purpose. A compliance check is not an examination.

A soft letter is correspondence with organizations that provides notification of changes in tax-exempt law or compliance issues. A response to these letters is generally not expected.

TE/GE will continue to inform taxpayers via compliance checks and soft letters, in particular in the area of adhering to recordkeeping and information reporting requirements, including:

• Combined Annual Wage Reporting – Focusing on tax-exempt employers that had discrepancies between Form W-2 and either Form 941 or Form 944.
• Financial Assistance Policy – Whether tax-exempt hospitals are complying with IRC Section 501(r)(4).
• Form 990-T Non-filers – Looking for IRC Section 501(c)(7) organizations that reported investment income on Form 990 but did not file Form 990-T.
• Supporting Organizations – Entities that state that they are supporting organizations but have filed Form 990-N, which is not allowed.

Determinations

TE/GE expects a continued increase in determination applications and will concentrate on identifying new strategies for reducing a filing burden and case processing time. The exempt organizations group expects to hire 40 new revenue agents to process determination applications to help offset application increases and workforce attrition.

Voluntary Compliance and Other Technical Programs

This area is focused primarily in the employee plans group of TE/GE, and enables a plan sponsor, at any time before audit, to pay a fee and receive IRS approval for correction of plan failures.

Management of exempt organizations should evaluate the potential implications of the areas identified in the Program Letter on their organizations and consult with their tax advisors.

For more information, contact Marc Berger, national director, Nonprofit Tax Services at mberger@bdo.com

By Katherine Gauntt

Sales tax is imposed upon retail sales of tangible personal property and taxable services in 45 states and the District of Columbia. Each state determines the circumstances under which a sales tax is imposed on the purchaser.

Purchases by nonprofit organizations are exempt in most of the states, if the tangible personal property or taxable services are used or consumed exclusively for the purposes for which the organization was established. The states usually require each legal entity to register as a nonprofit entity with the state to receive state tax-exempt status. Upon state authorization, the entity can provide a state-approved exemption certificate to its vendors in order to purchase goods and services without paying sales tax.

While nonprofit organizations can make purchases free of sales tax, their sales of goods and taxable services are usually taxable. One could argue that these sales ultimately benefit the organizations’ nonprofit activities but most states do not extend the nonprofit exemption. Many organizations selling promotional goods on their websites are registered in their home state but rarely are registered in multiple states to collect sales tax. Usually they have no “physical presence” in states beyond their home state and did not have to collect the sales tax. However, everything changed on June 21, 2018 when the U.S. Supreme Court held in South Dakota v. Wayfair[1] that states can require a retailer to collect and remit sales tax even if the retailer lacks an in-state physical presence.

History of the Wayfair Case

Effective May 1, 2016, South Dakota passed a law requiring remote sellers to remit sales tax on all taxable sales if the seller’s gross revenue from the sale of products or taxable services delivered into South Dakota exceeded $100,000 or 200 or more separate transactions. Wayfair, Inc., Overstock.com, Inc. and Newegg Inc. refused to comply on the basis that they had no physical presence in South Dakota and, therefore, were not obligated to collect the sales tax. South Dakota filed a declaratory judgment action in state court. The case was fast-tracked through the South Dakota lower courts. Ultimately, the South Dakota Supreme Court, compelled by the 1992 U.S. Supreme Court decision in Quill,[2] found in favor of the Wayfair, Inc. et al. The U.S. Supreme Court in Quill affirmed that “substantial nexus” under the U.S. Constitution’s Commerce Clause required a business to have a physical presence within a state before the state could impose tax or a tax collection obligation.

Nonetheless, the ultimate goal was a U.S. Supreme Court challenge to overturn Quill. On Jan. 12, 2018, the U.S. Supreme Court granted South Dakota’s petition for a Writ of Certiorari with respect to the Wayfair case. Oral argument was heard on April 17, 2018. And on June 21, 2018 the U.S. Supreme Court overruled Quill and the physical presence standard.[3] The Court then ruled that South Dakota’s sales tax economic nexus statute was constitutional and “substantial nexus” under the Commerce Clause. In anticipation of the ruling, many states already had laws on the books which were designed to go into effect if the ruling was favorable. As of Oct. 15, 2018, 35 states have passed some form of economic nexus standard for sales tax purposes.

Wayfair Impact and Action Items for Nonprofits

All industries are likely to see an impact from the Wayfair decision, but industries selling goods and taxable services remotely over the internet at retail have the greatest exposure. Nonprofits carry the same burdens as for-profit e-commerce sellers for taxable goods and services, if their sales reach the economic thresholds established by the states. (For the latest information on thresholds by state go to: https://www.bdo.com/wayfair.) When it comes to Wayfair, it’s also important to keep in mind that all states aren’t equal. The following are areas that nonprofit organizations should review to mitigate their risk of overpaying or under-collecting the sales tax.

Administration

Most states require nonprofits to register with the state departments of revenue if they are eligible for a sales tax exemption on purchases. In addition, once the economic thresholds are reached, the nonprofit must register as a vendor with the state since its sales will likely be treated the same as for-profit vendors. Again, each state is different regarding its nonprofit tax registration requirements.

Purchases

As a result of Wayfair, more sellers will be required to collect sales tax. Many of these sellers either “assume” everything they sell to nonprofits is exempt from tax or default all sales to taxable without consideration for nonprofit status. Either way, nonprofits must be proactive in informing their vendors when to charge them sales tax or they could end up overpaying sales tax on purchases or underpaying and creating a use tax assessment if they are audited. Each vendor’s sales should be reviewed to ensure that, if no sales tax is charged, the sale qualifies for the nonprofit exemption (i.e., the purchase benefits the organization’s nonprofit activities). It is important to establish an exemption certificate policy to ensure that only those vendors selling qualified goods and services are given an exemption certificate. Providing an exemption certificate to a vendor shifts the liability for the tax to the nonprofit even if it is provided in error. Areas where sales to nonprofits are generally taxable include sales of food, lodging, certain types of software and supplies such as uniforms, furniture and fixtures or any other type of sale unrelated to the purpose for which nonprofit status was granted by the state.

Sales

Nonprofits should examine their sales volumes in each state and compare it to the economic nexus thresholds established by each state. In general, measurement should be done at a legal entity level if there is more than one legal entity doing business in the state (although some states may combine sales of affiliated legal entities.) For tangible products, the state where sales occur is determined by the delivery address. However certain nonprofits, especially in healthcare, sell tangible goods, digital products (e.g., e-books) and services. In addition, some are part of an organization of affiliated companies consisting of nonprofit and for-profit entities. Nonprofits should consider the following when developing an action plan for determining nexus and potentially charging sales tax:

1. Where are the tangible goods, digital products and services sold?
2. Do the sales reach the threshold for economic nexus?
3. If yes, what are the necessary actions needed for complying?

• Registration – Nonprofits should register as a vendor in each tax jurisdiction.
• Taxability of Products Sold – A determination of the tax status of each product sold should be made.
• Exemption Certificate Procedures – If products are sold to other nonprofits, a process to collect exemption certificates should be established.
• Billing Sales Tax – A process must be established to charge the correct sales tax on an invoice. To do so, the nonprofit must utilize the most current sales tax rates to charge its customers.
• Reporting – Depending on volumes, sales tax reporting can be in-house or outsourced through third parties. Most states have portals where tax returns can be filed by keying in the data manually if the nonprofit has established economic nexus in only a few states.

4. In addition, nonprofits should consider their internal operational capabilities:

• Accounting – Do you have Sales Tax Liability Accounts set up that can undergo reconciliation and audits?
• Technology – Do you have the functionality in your billing system to charge the correct tax on taxable sales?
• Resources – Do you have enough resources in-house to administer exemption certificates and tax reporting?
• Document Retention – Most states require retention of all invoices, work papers, tax returns and other supporting documentation to support the taxes reported.

Conclusion

Wayfair has impacted every organization in the country in one form or another. Not all nonprofits sell goods and services, but they may see an uptick in the costs of the things they buy as a result. Those that do sell, must perform their own due diligence and incur the costs of compliance just like any other company dealing with the complexities of 46 different state tax jurisdictions with 46 different sets of rules. The rules are still evolving but one thing is certain: Unless Congress acts to change the economic nexus standards established by the Wayfair case, every entity, including nonprofit entities, that buys or sells will incur extra costs in its attempt to comply with current law.

For more information, contact Katherine Gauntt, Specialized Tax Services – SALT Southeast Region, senior manager at
kgauntt@bdo.com.

^[1]    South Dakota v. Wayfair, Inc. 585 U.S.__(2018)

^[2]    Quill Corp. v. North Dakota, 504 U.S. 298 (1992)

^[3]    In addition to Quill, National Bellas Hess v. Department of Revenue, 386 U.S. 753, 87 S.Ct. 1389 (1967), was also overruled.

By Laurie De Armond, CPA, and Adam Cole, CPA

Nonprofit organizations are uniquely shaped by their mission, history, size, program goals and community.

But leaders of these organizations—whether a CFO at a global health services charity, a CIO of an education endowment or the executive director at a museum—share a common goal of advancing their organization’s mission. To drive forward progress, it’s essential that leaders understand where their organization sits in relation to its peers on objective measures of performance.

The BDO Institute for Nonprofit Excellence’s 2018 benchmarking survey, Nonprofit Standards, surveyed leaders at midrange organizations (those with less than $25 million in annual revenue), upper-midrange organizations ($25-$75 million in annual revenue), and large nonprofits (above $75 million in revenue) to reveal insights nonprofits can leverage to strengthen their organization. Across the spectrum, the report finds that upper-midrange organizations face more significant challenges than their smaller and larger peers.

Funding Challenges Amid Rising Costs

While 56 percent of upper-midrange nonprofits saw their revenues grow over the past year, this was dwarfed by the 69 percent of large nonprofits and 70 percent of midrange nonprofits that also saw some revenue growth. At the same time, nearly half (49 percent) say declining revenue and funding is at least a moderate challenge, compared to 45 percent of midrange and large organizations. Perhaps as a result of this challenge, 49 percent of organizations at this scale maintain six months or less of operating reserves, and one third cite maintaining adequate liquidity as a moderate or significant challenge—indicating a potential gap in the fiscal safety net for these organizations.

Some of the funding challenges upper-midrange nonprofits face may be attributable to the types of funding sources these organizations rely upon, including individual contributions (15 percent), government grants (12.6 percent), fundraising/special events (11.4 percent), and corporate contributions (7.8 percent)—all of which can be either cyclical in nature or impacted by regulatory changes, such as tax reform.

Nevertheless, amid these challenges in securing funding, upper-midrange nonprofits face the same challenges as all other organization sizes in addressing rising overhead costs: 58 percent of upper-midrange nonprofits and nonprofits overall say rising costs is at least a moderate challenge.

Program Growth Emphasizes Importance of Communicating Impact

Despite challenges in securing funding, upper-midrange nonprofits are working to expand their program offerings and deliver on their core mission. Organizations in the upper-midrange devote 80 percent of their total expenditures to program-related activities—compared to 78 percent for large nonprofits and 68 percent for midrange nonprofits. Forty-two percent of upper-midrange nonprofits also say the inability to meet demand for their services is a high or moderate challenge, and 58 percent are responding by planning to introduce new programs in the next year without eliminating others.

This program expansion makes demonstrating impact to stakeholders more important than ever. When it comes to making an impact, nearly all nonprofits surveyed (93 percent) communicate their impact outside of the organization; meanwhile, 72 percent of upper-midrange nonprofits say some portion of their donors have demanded more information about outcomes and impact than before.

But as nonprofit leaders know all too well, reporting impact to donors and other stakeholders is no easy task. Organizations in the upper-midrange are more likely than midrange or large nonprofits to say they face moderate or significant challenges in reporting impact, including having no consistent framework for measuring and reporting (66 percent vs. 56 and 53 percent, respectively), lacking clear program objectives and/or key performance indicators (55 percent vs. 43 and 41 percent, respectively), and inadequate financial resources devoted to reporting (55 percent vs. 31 and 33 percent, respectively).

Recruitment and Retention Challenge Upper-Midrange Organizations

Nonprofits derive their strength from dedicated and driven employees, yet recruitment and retention remain a high or moderate challenge for 6 in 10 nonprofit leaders. Upper-midrange nonprofits are the most concerned, with 70 percent citing recruitment and retention as a high or moderate challenge, compared to 61 percent of large organizations and only 35 percent of midrange organizations.

Key factors in keeping employees engaged and growing employee satisfaction levels for all organizations include having competitive compensation levels (59 percent), up-to-date technology (58 percent), internal communications (54 percent), and management-employee relations (51 percent). These challenges were all most pronounced among upper-midsized organizations. While 7 in 10 midrange nonprofits were able to provide at least a 3 percent increase in employee compensation levels within the last year, only 44 percent of upper-midrange and large nonprofits were able to do the same.

Overcoming Key Challenges: Planning Ahead

Do the data show that upper-midrange nonprofits are doomed? Not at all. Instead, this year’s Nonprofit Standards highlights the success of many nonprofits that were able to overcome these classic scaling challenges to grow successfully and expand their programs.

While not comprehensive, below are some best practices for organizations looking to overcome these challenges.

Fundraising Effectiveness: Nonprofits looking to increase their fundraising effectiveness should:

• Match their donor behavior. Nonprofits should consider what influences their donors to donate in general—and to their organization specifically—and tailor their messaging accordingly.
• Reduce their giving barriers. It’s critical that organizations regularly update and modernize their donation channels (including online and mobile giving platforms) to keep pace with changing consumer behavior.
• Leverage data analytics. Nonprofits should dig into their own data to understand the demographics of their core contributors and to identify new prospects. (See the article on page 10 entitled, How Predictive Analytics is Transforming NPO Fundraising.)

Donor Communications & Impact Reporting: To ensure smoother donor communications and reporting, nonprofits should:

• Start with the end in mind. Organizations should identify the story they want to tell their stakeholders and paint a vision of what the world could look like if their mission were achieved.
• Make reporting an ongoing process. Nonprofits should gather and report data on a quarterly or monthly basis to keep stakeholders in the loop and make year-end reports less daunting.
• Remain transparent. Nonprofit reports offer an unparalleled opportunity to contextualize an organization’s metrics and finances.
• Share their report widely. Organizations should distribute their report via multiple channels so both existing and prospective donors have a chance to see it.

Staffing and Recruiting: To maintain and attract top talent, nonprofits should:

• Stay competitive in their local market. Nonprofits should ensure their policies make their organization an attractive place for potential employees.
• Capitalize on flexible work options. Remote work arrangements can be both beneficial to employees and cost-effective for organizations.
• Remain proactive about succession planning. With 4 million baby boomers retiring each year, the need for a succession plan is a “when” rather than an “if” scenario.

The more upper-midrange nonprofits—and those of all sizes—can learn from benchmarking against their peers, the better prepared they will be to advance their mission and support continued growth. Gaining intelligence is vital to staying afloat.

Adapted from article originally published in NC State University’s Philanthropy Journal News.

By Michael Conover

I have previously discussed the inevitable transition of numerous baby boomers holding leadership posts in nonprofit organizations. The topic has been well-covered in a variety of publications for nearly a decade.

However, I believe the seismic shift that some have predicted has failed to materialize on a scale that was predicted. I attribute this to a variety of factors, including: delayed retirements out of financial need or resistance to change; belief that age 75 is the new 65; or just procrastination.

The slowdown in the rate of change will not soften its impact. It may intensify it. The delay on the part of these baby boomer executives and the boards to whom they report could increase the likelihood of an unexpected and disruptive leadership crisis. The problems can range from a noticeable decline in performance to an abrupt departure caused by sickness or death. Leadership changes under the best of circumstances are not 100 percent successful; thus, in crisis mode, the odds of success are much slimmer.

The other obstacle I allude to in my title is executive retirement arrangements (or lack of same). As organizations finally confront the departure of a long-tenured and critically important executive, the details of the retirement arrangements come to the forefront. This is the point at which many organizations and executives discover the price that will be paid for failing to address this important issue well in advance. Proper advance planning can not only minimize financial uncertainties for the executive and the organization that may interfere with retirement planning, but can prevent other potential and very expensive obstacles as well.

Many compensation committees have failed to proactively raise the subject of retirement plans and acknowledge the impact that they will have on an orderly retirement / leadership transition. There are a variety of reasons including: financial costs; reluctance to broach the subject of leadership change; mistaken assumptions that arrangements made many years ago will address the needs; embarrassment that arrangements are inadequate or have not been made; etc. Committee members must realize that time is not on their side for addressing retirement-related arrangements. Delaying can create many negative impacts for both the executive and the organization.

I would like to describe a few different scenarios that illustrate the types of situations we have discovered in “11th hour” reviews of retirement arrangements:

Plan Document Failures: Plan documents (e.g., employment contracts, deferred compensation arrangements, life insurance plans, etc.) developed many years ago and / or those that have been drafted without the benefit of needed expertise to ensure compliance with current requirements pose potential problems to the unwary.

The inclusion of what appear to be ordinary terms in the arrangements, or the failure to include critical details, can prove disastrous in terms of potential tax liability and penalties for the executive as well as the employer. Language included to ensure that retirement resources are secure may produce inadvertent vesting of a benefit and tax liability long before it is actually available. Similarly, incorrectly structuring payments can result in an unforeseen tax liability and punitive excise tax penalties.

If these issues are identified proactively or within a time period that corrective actions can be taken, the problems can be minimized. There is, however, a point at which it is simply too late.

Plan Administration Failures: In some instances, well-drafted plan documents are not adhered to from an administrative standpoint. Contributions, excess contributions, payment amounts and / or payment terms are made that fail to follow plan requirements. The failure to ensure compliance may result in adverse tax consequences to the executive and the organization.

Failure to properly recognize and report details of retirement arrangements are also common. The executive’s W-2 form, personal tax return and the organization’s Form 990 may all need to include information related to the plan arrangements as well as timely recognition of income when vesting occurs. Discovering these issues after the fact can necessitate amending prior year returns and also involve adverse tax consequences to the executive and the organization.

Improbable Catch Up: A compensation committee’s failure to establish a specific position on retirement benefits for the executive, as well as a specific objective for the level of benefits to be provided well in advance of the probable retirement event, drastically diminishes the likelihood of providing any level of benefit beyond that provided to all employees. Waiting until just a year or two prior to retirement will likely place an unreasonable financial burden on the organization to fund a benefit that might have been spread over many years of employment. Similarly, large contributions / payments toward the very end of employment may trigger an excess benefit situation, or the appearance of same, that may create adverse consequences for the executive and the organization.

The Wake-Up Call

Most compensation committees spend most of their time on decisions about current cash compensation (i.e., salary, bonus and incentive) matters for executives. Clearly, these are important matters and ones that require the committee’s attention in light of the disclosure of this information to external stakeholders and the public. I am not suggesting the committee members spend any less time on them.

I am however suggesting that compensation committees incorporate an immediate and recurring review of the organization’s retirement program to ensure that all documentation, administration and funding are in accordance with the organization’s policy, on track to meet stated objectives and fully compliant with pertinent regulatory and reporting requirements. Regular checkups may also be beneficial in helping the organization to be more attentive and proactive on succession / transition needs. As we have pointed out, delay on these matters is the enemy of effective solutions.

Executive management also has a role to play in this wake up call. Steps should be taken to ensure that the compensation committee has access to all internal and external information and advice that will assist them in their efforts to ensure that all steps have been taken to ensure that the retirement arrangements pose no obstacles to the inevitable retirement and leadership succession that every organization faces.