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IRC Section 4958: Excess Benefit

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Cass Brewer

on 18 August 2014

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Transcript of IRC Section 4958: Excess Benefit

IRC Section 4958: Excess Benefit
"Disqualified Person"
Reg. Sec. 53.4958-3.
Anyone in position to exercise "substantial influence" over org., which per se includes directors, officers, and high $ contributors, and which may include others based upon facts and circumstances analysis. Referred to as "DQP." See Reg. Sec. 53.4958-3(a) & (c) & (e).

Plus "family" of DQP. See Reg. Sec. 53.4958-3(b)(1).

Plus 35% "controlled entities" of DQPs. See Reg. Sec. 53.4958-3(b)(2).

But if not "highly compensated employee," then generally not DQP. Reg. Sec. 53.4958-3(d).
"Applicable Exempt Organization"
Reg. Sec. 53.4958-2
IRC Sec. 501(c)(3) Organizations? GENERALLY, YES.

Churches too? YES. See Reg. Sec. 53.4958-2(a)(3)(ii).

Private Foundations? NO. See Reg. Sec. 53.4958-2(a)(2)(i).

Public Schools Like GSU? NO. See Reg. Sec. 53.4958-2(a)(2)(ii).

Private Schools Like Emory? YES. See Reg. Sec. 53.4958-2(a)(3)(i).
Two Critical Exceptions
Reg. Sec. 53.4958-4(a)(3) & -6
"Initial Contract Exception"--See Reg. Sec. 53.4958-4(a)(3).
1. Must be "fixed payment" with no discretionary aspect.
2. Must be "initial contract," meaning it is a binding written contract with person who was not a DQP prior to entering into the contract.

"Rebuttable Presumption" Safe Harbor--See Reg. Sec. 53.4958-6.
1. Approved by authorized body or org. with no conflict of interest.
2. Authorized body obtained and relied upon reliable comparability data.
3. Authorized body adequately documents basis for decision concurrently with making the decision (i.e., no ratification).
"Excess Benefit"
Reg. Sec. 53.4958-4 & -5
"Excess Benefit" is simply the excess amount the organization paid over the value of what it received.

So, reasonable (i.e., arm's length) compensation (or rent or commissions or fees or other expenses) paid to DQP are fine. No clear answer yet about revenue sharing arrangements.

BUT, one "gotcha" is that the organization must substantiate in writing in advance what is "compensation." Otherwise, any benefits (other than nontaxable benefits) provided (e.g., paying for employee's country club dues) are considered an "automatic excess benefit."
Three Key Definitions and Two Critical Exceptions to Master
"Applicable Exempt Organization"--See Reg. Sec. 53.4958-2.

"Disqualified Person"--See Reg. Sec. 53.4958-3.

"Excess Benefit"--See Reg. Sec. 53.4958-4.

"Initial Contract Exception"--See Reg. Sec. 53.4958-4(a)(3).

"Rebuttable Presumption" Safe Harbor--See Reg. Sec. 53.4958-6.
A Helpful Checklist You Can Find On TWEN
Full transcript