Situation

Saltwater Christian College (SCC), a private college that is exempt under I.R.C. section 501(c)(3), has historically over-reported officers, directors, trustees, and key employees on Form 990, Part VII, Section A.  We point out to them that Sarah – who has be listed as a “key employee” in past years – should not be so listed.  However, she could be a “highest compensated employee”.  Sarah chairs a small academic department in the College of Arts and Sciences of SCC.  As department chair, Sarah supervises faculty in the department, approves the course curriculum, and oversees the operating budget for the department. The department represents less than 10% of the university’s activities, assets, income, expenses, capital expenditures, operating budget, and employee compensation. Under these facts and circumstances, Sarah does not meet the Responsibility Test and is not a key employee of SCC.

One issue with “over-reporting” on Form 990, Part VII, Section A is that the persons reported there are “listed persons” and may require reporting for a s many as five years after they leave your employee or change jobs within your school.

Rules

From Form 990, Part VII instructions:

Key employee. For purposes of Form 990, a current key employee is an employee of the organization (other than an officer, director, or trustee) who meets all three of the following tests, applied in the following order:

$150,000 Test: Receives reportable compensation from the organization and all related organizations in excess of $150,000 for the calendar year ending with or within the organization’s tax year.

Responsibility Test: At any time during the calendar year ending with or within the organization’s tax year:

  1. Has responsibilities, powers, or influence over the organization as a whole that is similar to those of officers, directors, or trustees;
  2. Manages a discrete segment or activity of the organization that represents 10% or more of the activities, assets, income, or expenses of the organization, as compared to the organization as a whole; or
  3. Has or shares authority to control or determine 10% or more of the organization’s capital expenditures, operating budget, or compensation for employees.

Top 20 Test: Is one of the 20 employees other than officers, directors, and trustees who satisfy the $150,000 Test and Responsibility Test with the highest reportable compensation from the organization and related organizations for the calendar year ending with or within the organization’s tax year.

Bottom Line

You should review your Form 990, Part VII, Section A reporting very carefully. Do not “over-report”! Always consult with a tax professional and carefully examine the Form 990 instructions. He or she can walk you through the regulations and help you determine the course of action that is most beneficial to your organization — and help ensure you’re complying with the spirit of the law.

Specific questions? Email Dave Moja

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.