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Archives
September 2001
Risky Business: What Event Planners Should Know About Liability
Picture this: Your organization is sponsoring a 5k Run to raise money for the fight against world hunger. Hundreds of participants have turned out to support your cause, and you are convinced that your event will be a success. Suddenly, one of the runners trips over a pothole in the road, causing her to fall and break her ankle. Claiming that she was not provided with a proper warning about the road condition, she has decided to sue your organization for the cost of her medical bills. Are you responsible for these costs?
Accidents do happen, but there are ways to limit an organization's liability for injury or possible damages related to a sponsored event. Organizations planning conferences and travel packages for members, or those considering public fundraising events need to be aware that disclaimers and releases offer ways to limit their potential liability.
A release of liability states that a participant will not hold an organization responsible for any injury or damage suffered that may be associated with the event. These written agreements are often given to the participant before the event, such as a conference or member travel. They make participants aware of the general risk involved in undertaking the planned activity and allow the participants to assume the risks associated with it. Disclaimers are often included in the agreement, stating that the organization lacks specific knowledge of conditions or potential risks associated with the activity. Once these agreements have been signed by the participant, they can significantly limit the liability associated with an event.
Still, organizations need to be aware that having participants sign a release will not eliminate all of their liability. If an organization is found to be negligent in the performance of its duties to the participant, a court may find the organization liable for injury regardless of the signed release. Case in point, a Florida Court of Appeals judge found that signing a waiver did not force a mechanical bull rider at a local nightclub to assume the risk of the ride operator's negligent or intentional misconduct, therefore it did not release the nightclub from liability for the rider's injuries. In order for a waiver or release to be effective as a means of limiting liability, the waiver must show an intent to relieve the other party of liability. Organizations must also practice reasonable care in planning and carrying out their events.
Organizations planning to use a disclaimer and release have several factors to consider when preparing the document. They must first decide whether the release will seek to extend liability protection to the officers of the organization and those operating the event. The organization must decide what specific liability protection they want in the release and what they want to inform the participants about regarding the event. More complete disclosure will increase the likelihood of the release being valid. Finally, organizations preparing disclaimers and releases must format the documents according to the nature of the participants, changing the form so that it applies to members or the general public.
State laws may also have certain requirements for releases and waivers to be binding agreements. An organization may have a standard form that it uses for its events, but it should always make sure that the language in the agreement complies with the laws of the state where the event is being held. Organizations should not assume that the same release form may be used from state to state.
The amount of liability associated with an activity is often related to the amount of involvement the organization has with planning operating the event. By reducing its involvement in a cosponsored conference or fundraising event, an organization can gain added liability protection. Organizations may choose to further protect themselves by obtaining insurance coverage for the activity. Whether they use disclaimers, releases, insurance or any combination of these, organizations planning active participation in an event must take time to prepare a risk management strategy, regardless of how little potential risk may be involved.
By Anne Cornelison
Mini-COBRAs Strike Again: The State Laws Regarding Extended Insurance Coverage
Many nonprofit organizations that sponsor employee health insurance programs are aware of the federal law called COBRA. COBRA requires that when employees terminate their employment, they and their dependents must be given the option of continuing their group health benefits at their own expense for up to 18 months. COBRA's requirements extend only to employers with 20 or more employees. Many organizations, however, are not aware of additional state laws that provide coverage rights to employees. In particular, organizations located in Maryland, Virginia, and the District of Columbia should familiarize themselves with the provisions of such laws.
Health Insurance: Continuation and Conversion
In Maryland, employers who terminate employees for any reason other than for cause must offer the former employee 18 months of continuation coverage with the group policy at the employee's expense. Employees terminated for cause are entitled to receive 6 months of continuation coverage. Both rules apply only to those employees who have been covered under the group contract and have been employed for at least 3 months.
All employers in Maryland who offer group health insurance are required to offer conversion coverage to their employees. Conversion coverage allows employees to switch from group coverage to individual coverage upon the termination of participation in the group without providing evidence of insurability. However, this is not as useful a benefit to the employee because there are no limits on the amount their insurer can charge for individual coverage. The individual coverage may also provide very limited benefits.
A provision in Maryland law requires employers to continue providing coverage to totally disabled employees even if the initial extension period of 18 months has ended. At the time coverage would otherwise terminate, employees who are totally disabled, confined to a hospital, or are in the process of filing a claim for disability with their insurer have a right to extended coverage for up to an additional 12 months in some circumstances. Employers are also required under Maryland law to continue coverage for employees regardless of health if they switch plans under the same insurer. If an employee has satisfied the initial waiting period for the previous plan, the waiting period for coverage of pre-existing conditions is waived.
In Virginia, the employer can choose between offering 90 days of continuation coverage under the current group policy rate or conversion to an individual policy. In both Maryland and Virginia, continuation coverage will be at the current group rate with the employee covering the full costs of coverage. District of Columbia law does not require employers to provide continuation or conversion coverage.
Disability and Life Insurance
Under Maryland, Virginia, and the D.C. law, at the termination of employment, employees may convert coverage under a group life insurance policy to an individual life insurance contract. In Maryland and the District, employees are entitled to notification of their right to convert, although the burden is on the employee to submit the application and make the first premium payment within the required timeframe. Maryland, Virginia, and District require that employees who have been continuously insured for at least 5 years prior to the end of their employment are entitled to conversion if the group policy is cancelled, amended or terminated.
Maryland law requires that group disability policies issued by organizations, such as trade associations or unions, to their members include a right to convert. However, group policies that are issued by employers are not required to convert. Neither Virginia or the District place any conversion requirements on group disability policies.
Employers should be aware of their insurance obligations to terminated employees under state as well as federal laws. However, even if continuation or conversion plans are not required by law, it is important to check for these clauses within the individual provider contracts.
By Anne Cornelison
Pick a Number: Using the Intermediate Sanctions Safe Harbor for Small Organizations
If your 501(c)(4) or 501(c)(3) organization is in the process of setting compensation for your executive director or other executive-level employees, you probably know that the IRC imposes a tax on excess benefit transactions, but that IRS intermediate sanctions regulations provide protective procedures [NN 2/01 and 6/01]. Compensation will be presumed reasonable if the compensation is voted on by an independent board of directors that has consulted comparable compensation data and documented its decision-making process.
While following these procedures can be expensive for large organizations that may feel compelled to obtain advice from compensation consultants, small organizations can take advantage of a safe harbor for compensation data. Organizations with annual gross receipts of less than $1 million may rely on the compensation data from three comparable organizations in the same or similar communities. Any organization can use alternative sources of compensation data, but using the safe harbor should be simplest and least expensive approach for most organizations that are eligible.
One readily available source of compensation data is the Forms 990 of other organizations. Organizations must report the salary information for directors, officers and other highly compensated employees, and these forms must be made available to the public. You can request copies of the 990s of similar organizations in your area and use these as sources for your comparable compensation data. Alternatively, the 990s of thousands of charities are posted on Guidestar.org and these are searchable by the organization's location, purpose and annual revenue. For example, a quick search of Guidestar turned up eight public charities based in the District of Columbia that focus on conservation and environmental education and have budgets between $250,000 and $500,000. Six of these entries included complete 990s showing annual compensation for full or part-time executive directors and presidents ranging from $0 to $73,000. Three of the organizations gave executive director or president's salaries between $60,000 and $73,000. The board of directors for a comparable nonprofit organization could rely on the data from these three highest paying organizations and disregard data from the other organizations. Moreover, because the regulations do not require an organization to peg executive compensation within the range indicated by the comparable data, the decision-making board could rely on the data and still approve a salary above the indicated range.
In such a situation, the board should remember that the regulations only provide a way to establish a presumption-one that the IRS could still attempt to rebut. A board that decides to establish a compensation level at or above the upper range of comparable compensation data should be prepared to justify the compensation level based on special skills possessed by the executive or other special circumstances.
One possible drawback to using the compensation data provided by Forms 990 is that the information may be somewhat dated. Many organizations do not file their 990s until eight months after the close of their tax year. Although the 990s must generally be made available from the date they are filed, there is an additional lag before the forms are posted on Guidestar. For many of the organizations listed on Guidestar, 1998 or 1999 is the most recent year for which financial data is available. While a board may rely on non-current information as long as it has no information indicating that relevant market conditions have changed, newer data may, in many cases, yield a higher range of salaries. A board that wants to establish executive compensation above the range of the comparable compensation data because the data came from previous years should document the fact that it considered additional information, such as data showing a cost of living increase.
Organizations that pay moderate salaries can take advantage of another protection. The compensation of members of an organization's board of directors, its executive director, and its treasurer (or persons with different titles but having analogous authority) will always be subject to the intermediate sanctions rules; however, the compensation of other employees is not subject to the intermediate sanctions rules if they receive less than $85,000 per year (for FY 2001) and are not substantial contributors to the organization. Therefore, organizations need not concern themselves with the intermediate sanctions regulations when determining compensation for vice presidents, assistant directors, program directors and the like, as long as their annual compensation packages are worth less than $85,000.
For employees whose compensation is subject to the intermediate sanctions regulations, whatever the actual level of compensation your board of directors approves, the key to compliance is for the board to obtain data from appropriate sources and adequately document the basis for its determination.
By Paul J. Tanis
Temporary Intermediate Sanctions Regs Criticized at Public Hearing
On July 31, witnesses from the exempt organization community presented comments to an IRS panel on the Service's temporary intermediate sanctions regulations [NN 2/01 and 6/01]. This was the third-and hopefully final-hearing regarding these regulations, and the comments addressed a number of issues that nonprofits will want to check on once the IRS finalizes the regulations.
In his testimony, Professor Darryll K. Jones of the University of Pittsburgh School of Law challenged the initial contract, or "first-bite" rule, which came out of the 7th Circuit United Cancer Council case [NN 3/99] and is the most significant change from the 1998 proposed regulations. The first-bite rule stipulates that the regulations' excess benefit prohibitions will not apply to fixed payments made under an initial contract between an exempt organization and an individual who becomes a "disqualified person" as a result of that first contract. Professor Jones argued that this rule would allow the impermissible distribution of profits to insiders and urged the IRS panel to eliminate it from the final regulations.
Mr. Paul Streckfus, editor of Paul Streckfus' Exempt Organization Tax Journal, took issue with the temporary regulations' expanded version of the "advice of counsel" provision. This section says that managers cannot be held to have knowingly participated in an excess benefit transaction if they relied on a "reasoned opinion" of legal counsel, CPAs and accounting firms with experience in the area, or independent valuation experts in setting compensation. Mr. Streckfus argued that expanding the provision to include accountants and valuation experts as well as legal counsel aggravated an already inexcusable loophole, and claimed that the reasoned opinions of appraisers and accountants are "inherently unreliable."
Michael Clark, of the Chicago law firm Sidley & Austin, encouraged the IRS panel to add back into the final regulations a list of factors the IRS considers when deciding whether to revoke a charity's exemption for excess benefit transactions. The list appeared in the preamble to the original proposed regulations and includes the following factors: whether the organization has been involved in repeated excess benefit transactions; the size and scope of the excess benefit transaction; whether a charity, after concluding that it has been party to an excess benefit transaction, has implemented safeguards to prevent future recurrences; and whether the charity complied with other applicable laws.
Mr. Clark also suggested that charities should be allowed to require a disqualified person who inappropriately received property at less than fair market value to return the property in question, rather than simply allowing charities to press the disqualified person for monetary damages. This would take into account the fact that certain types of property (i.e., a valuable painting from an art gallery sold to the gallery's executive director) appreciate in value.
The commentators' suggestions make for interesting reading, but there is still no word from the IRS on when it plans to issue finalized section 4958 regulations. If not replaced by a new version, the temporary regulations will expire January 9, 2004.
By Mark Sawchuk
IRS Releases Revised Publication 557
The IRS has released a new version of Publication 557, "Tax Exempt Status for Your Organization," revised to July, 2001. The publication explains how to complete and file an application for recognition of tax-exempt status and summarizes important provisions of the Internal Revenue Code for almost all section 501 organizations. Publication 557 is an extremely handy reference guide for nonprofits. To download the 60 page booklet in PDF format, go to the Publications and Notices section of the IRS's web site at www.irs.gov/forms_pubs/pubs.html.
By Mark Sawchuk
IRS Request Comments on Charitable Contribution Regs
The IRS is soliciting comments on a set of final regulations (T.D. 8690) that govern charitable contribution deductions, substantiation notices for charitable contributions of $250 and over, and the disclosure requirements for quid pro quo contributions that exceed $75. Comments should address ways to minimize the recordkeeping burden of the substantiation and disclosure requirements and improve the accuracy of the estimates of the burden created.
You may send your comments to Garrick R. Shear, Internal Revenue Sevice, room 5244, 1111 Constitution Avenue NW, Washington, DC 20224. Comments must be received by October 9, 2001. The regulations are available on the Federal Register at 61 F.R. 65946 to 65955, which can be accessed at the Government Printing Office's web site at www.access.gpo.gov/su_docs/index.html. Copies of the regulations and additional information can also be requested from Larnice Mack at (202) 622-3179 or at the above address.
By Mark Sawchuk
This publication is designed to provide accurate and authoritative information about the subject matter covered. It is not distributed with the intent to render legal, accounting, or other professional advice. The services of a competent professional should be sought if legal advice or other expert assistance is required.
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