Practices
Reasonableness Letter
IRC Section 4958 defines penalties (“intermediate sanctions”) that can be applied if a 501(c)(3) or 501(c)(4) organization pays unreasonable compensation to a disqualified person. It also defines a safe harbor for avoiding these penalties. The IRS has made it clear that the processes establishing a safe harbor are best practices as well.
A reasonableness opinion examines all components of executive compensation for one executive and then compares these to those provided to a peer group of executives at similar organizations. It goes beyond examining the market position of the current compensation package to include a justification of the compensation provided. A reasonableness opinion serves as an extra assurance that the Board is exercising diligence in its stewardship of the executive compensation program. Obtaining a reasonableness opinion is a best practice, especially when any component of compensation is close to or exceeds the 90th percentile, though it may also be appropriate in other circumstances.
Integrated Healthcare Strategies can help boards and their compensation committees to exhibit best practices by explaining the process to be followed, providing the comparability data needed, and helping document the decisions and the process utilized.
We typically complete reasonableness opinions following a total compensation study. Using the comparability data identified in the executive total compensation review, we will compare the total compensation provided by the organization (including salary, incentive compensation, benefits and perquisites) to total compensation comparability data from the peer group.
As a certified independent consulting firm, in accordance with the requirements of Treasury Regulation 53.4958-1T(d)(4)(iii)(C), that holds itself out to the public as a compensation consultant and an authority on executive compensation in the health care industry and in related tax-exempt organizations, we regularly perform valuations of executive compensation for tax-exempt organizations and are qualified to provide compensation studies and opinions.
We will document our findings in writing providing an assessment of reasonableness of the total compensation delivered to the Board or Committee.