nonprofit team taking a selfie
Amanda Rogers

Compensation Guidelines for Nonprofits

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Nonprofit compensation guidelines are different from traditional businesses. 

Why? A not-for-profit or nonprofit organization qualifies for “tax-exempt status by the [Internal Revenue Service (IRS)] because its mission and purpose are to further a social cause and provide a public benefit.”

Therefore, a nonprofit that has been recognized by the IRS as being tax-exempt by virtue of its charitable programs—also known as a registered 501(c)(3)—must reinvest any earned funds back into the organization.

So, how do nonprofits determine compensation? Compensation for nonprofit employees must be agreed upon by nonprofit leaders and staff, which can be tricky. This considered, nonprofit compensation policies are created to avoid conflicts of interest.

Let’s chat more about compensation guidelines for nonprofits and tax-exempt organizations below.

What is a Nonprofit Compensation Policy?

Nonprofit compensation policies summarize how compensation packages are determined for nonprofit staff members. More specifically, these policies summarize how salaries and benefits are decided for executives.

Guidelines on 501(c)(3) Compensation Packages

Below, we’ve listed compensation guidelines—set by the Internal Revenue Service (IRS)—for nonprofits and tax-exempt organizations. These policies require that nonprofit and tax-exempt salaries:

  • Are reasonable, but not excessive: This requirement helps prevent “fraudulent behavior and preserves the integrity of nonprofits.” Some individuals try to take advantage of nonprofits’ tax exemption status, setting up false organizations to earn additional money.
  • Include benefits and bonuses: Compensation must be reported in its entirety (incl. any benefits and/or bonuses provided). Everything must be properly accounted for.
  • Are reported honestly each year: According to the IRS, “a tax-exempt organization must file an annual information return or notice with the IRS,” including a Form 990. “Form 990 is the IRS’ primary tool for gathering information about tax-exempt organizations.” Organizations use Form 990 to share information with the public about their programs, including the salaries of the nonprofit’s five highest-paid employees.

Note: It’s highly recommended that your board of directors actively set compensation packages for executives. These packages should be reviewed annually, and such conversations will help determine salaries for all other employees.

Penalties for Excessive Compensation

Compensation guidelines for nonprofits and tax-exempt organizations are in place to avoid excessive compensation and corruption.

Nonprofit organizations that are found paying their executives excessively are subject to heavy penalties from the IRS. These penalties may include:

  • An official IRS inquiry or a nonprofit audit
  • Investigation from the state, and
  • Heavy fines

Follow the rules and ensure your nonprofit compensation policies are clear to avoid such penalties. Typically nonprofit policies include the following.

What Should You Include in Your Nonprofit Policy?

Although no two policies are the same, a nonprofit compensation policy will typically include the following information:

  • A policy overview
  • What parties are affected by the policy
  • Compensation structure and elements
  • What the compensation approval process looks like
  • Market data (compensation comparison to other nonprofits)
  • Schedule of compensation deliberations

Executive Retention Plan Designs for Nonprofits

Nonprofit organizations, including hospitals, universities, and foundations, are often competing with for-profit companies to attract, reward, and retain top talent.

Since nonprofits cannot offer equity, they often achieve their key person acquisition and retention goals by using supplemental executive retirement plans funded with life insurance.

At Acumen Insurance Solutions, we’ve developed several proprietary executive retirement and retention plan designs for nonprofits to maximize:

  • Tax efficiency
  • Liquidity
  • Flexibility, and
  • Ease of administration

With our plans, the sponsoring organization will not only recover the entire cost of the benefit provided to the executive but will earn a very real rate of return on committed dollars.

We also show organizations how to help pay for these plans by repositioning low-yielding assets into a policy that provides competitive current yields without sacrificing safety or liquidity.

Interested in learning more? Contact us today, then read on for more information on the permanent life insurance options available to you.

A post-it with the words "non profit" on it stuck to a calendar A wooden house, cash & a calculator on next to the post-it.
Amanda Rogers

How Can Your Nonprofit Keep Pace with Rising Costs?

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Charitable organizations are seeing their donations decrease in value due to inflation. In order to keep pace with rising costs, it is important for nonprofit organizations to diversify their assets. This will help protect them from the negative effects of inflation and ensure that they can continue to serve their communities effectively.

In this blog, we will explore how inflation has impacted nonprofits and ways to combat that.

Inflation Is a Problem
Inflation has become a problem for nonprofits because now:

  • They have to spend more money to maintain the same level of services
  • Their funding doesn’t keep pace with inflation
  • It’s harder to attract and retain donors
  • Their overhead costs go up while their funding remains stagnant

Therefore,

  • It can lead to cuts in programs or services
  • It can force nonprofits to make difficult choices about how to allocate their resources
  • It can put pressure on staff and volunteers
  • It can make it difficult to plan for the future

​​Inflation-Proof Your Portfolio
When choosing investments, nonprofit organizations should consider both stocks and bonds. They should also look into assets like life insurance, which can help protect against inflation. By diversifying their portfolios, nonprofit organizations can keep pace with rising costs.

How Insurance Can Help Inflation-Proof Your Portfolio
While stocks and bonds are important investments for nonprofit organizations, insurance can also play a role in protecting against inflation. Insurance is a safe and liquid option that can help to inflation-proof your portfolio.

When choosing an insurance policy, nonprofit organizations should consider both the death benefit and the cash value of the policy. The death benefit will provide protection in the event of the death of a key member of the organization, while the cash value grows at a competitive rate and can be used to cover expenses in times of need.

Nonprofit organizations should consider purchasing an insurance policy with a high death benefit and a cash value that grows over time with a positive correlation to rising interest rates.

Don’t Forget About Other Investments
While stocks and bonds are important investments for nonprofit organizations, it is also important to diversify your portfolio with other assets. These assets could include real estate, art, or even cryptocurrency.

Other Simple Steps to Offset Inflation
1. Understand what inflation is and how it can impact your nonprofit.

2. Look for ways to increase revenue without raising prices.

3. Consider alternative sources of funding.

4. Invest in assets that will appreciate over time.

5. Review your budget regularly and make adjustments as needed.

6. Be prepared to make changes in your operations if necessary.

7. Educate your staff and volunteers about inflation and how it can affect your nonprofit.

8. Keep a close eye on your expenses and look for ways to cut costs.

9. Advocate for policies that help nonprofits offset the impact of inflation.

10. Remain adaptable in the face of change.

Final Thoughts
Nonprofit organizations face many challenges, but by diversifying their portfolios they can keep pace with rising costs and continue to serve their communities effectively. By considering both stocks, bonds, and assets like insurance, nonprofit organizations can protect themselves from inflation and ensure the longevity of their charity.

Have any questions? Contact us to learn more about how you can help protect your nonprofit from rising costs.

Business Owner Looking Over Executive Compensation Packages
Amanda Rogers

How Non Profits Use COLI to Fund Executive Comp Packages

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Non profits are always looking for ways to do more with less. These organizations are accountable to their Boards of Directors, donors, and to government oversight post submission of their form 990.

All things considered, non profits are held to a higher standard and are expected to use their funds in the most efficient way possible.

One way that non profits can use their funds more efficiently is by using corporate-owned life insurance (COLI) to fund executive compensation packages.

Let’s listen below to David Jacobs, Principal at Acumen Insurance Solutions talk about this more.

What is Corporate-Owned Life Insurance?

Corporate-owned life insurance, also known as COLI, is a type of life insurance, owned by a corporation, where the death benefit can be used to help the corporation pay for expenses such as executive compensation packages, employee benefits, and other business costs.

The Benefits of Corporate-Owned Life Insurance

COLI is a safe and liquid investment that can offer many benefits to corporations. It can help them:

  • Keep pace with executive compensation packages
  • Attract and retain the best employees to fulfill their mission, and
  • Earn better yields to better meet the needs of their community beneficiaries

When used correctly, COLI can be a powerful tool for corporations. It can help them save money and provide many other benefits that can help the business succeed.

A Final Word

Using COLI to fund executive compensation packages is a smart way for non profits to use their funds more efficiently and effectively. It is a win-win situation for both the non profit and the executive, and it can help the non profit fulfill its mission in a more impactful way.

Interested in learning how your organization can use COLI? Read on to learn how non profit organizations achieve their key person acquisition and retention goals by using supplemental executive retirement plans funded with life insurance. Then, reach out to our Acumen team today for a free consultation.

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Shay Larby

Liquidity Plus Program

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It is a best practice for nonprofit organizations to keep liquid reserves on their balance sheets for unexpected emergencies and opportunities These reserves are typically held in cash at the bank, or invested in CDs, U.S. Treasurys or short-term bonds.

In today’s low interest rate environment, it is difficult to achieve meaningful yields on these assets without taking additional risk or sacrificing liquidity The Liquidity Plus Program provides a solution by doing the following three things well, rather than one thing poorly:

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Shay Larby

Making the Right Choice: Identifying Key Features of SERP Designs

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Nonprofits frequently use Supplemental Executive Retirement Plans (SERPs) to attract, reward and retain key executives. There is no “one size fits all” SERP design, and selecting the right one can be challenging. The differences between the various SERP designs are important to identify as such differences can significantly impact both the organization and the executive.

The following questions are crafted to help you focus on the most important considerations when comparing plan designs so you can make an informed decision about which SERP design is best for your organization and your key people.

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