This Health Care Tax News article is Part III in a series addressing recent changes to IRS Form 990 and its Instructions. The previous installments addressed changes to the Core Form and changes to Schedule H.
With the January 21, 2012 release of the 2011 Form 990, the IRS revised Schedule J regarding the reporting of compensation information. These changes clarify some issues and require narratives for some items that were previously unnecessary. Tax-exempt organizations should review these changes in order to be prepared to correctly complete Schedule J and provide the information that the IRS is seeking.
Schedule J is used to report compensation information for certain officers, directors, individual trustees, key employees and highest compensated employees. A reporting organization is required to complete Schedule J if: (i) it lists any former employees in its reporting of compensation in Part VII of the Core Form; (ii) the sum of reportable compensation for any individual listed in Part VII is greater than $150,000; or (iii) a reported individual in Part VII receives compensation from an unrelated organization for services rendered to the reporting organization.
Part I of Schedule J asks about types of compensation a reporting organization provides to these individuals and also what practices the organization utilizes in establishing their compensation. In Part II, the organization reports the amounts of compensation for these individuals, and Part III requires the organization to provide a narrative description for some of the items in Part I and for Part II.
Changes in the 2011 Schedule J
The changes that were made to the 2011 Schedule J are described below:
- Part I, Line 3 of Schedule J requires a reporting organization to check boxes indicating the methods used to establish the compensation of a CEO/Executive Director. The 2011 Schedule J clarifies that a reporting organization should not check boxes for methods used by a related organization to establish the compensation of the CEO/Executive Director.
- The 2011 Schedule J now asks a reporting organization to provide a narrative description for its answers in Part I, Line 3. Some organizations that only complete Schedule J to report the compensation practices of their related organizations might worry that not checking any of the boxes under Line 3 may lead to an inference that they do not adhere to any established compensation practices. Using Part III to provide a narrative description is thus encouraged to demonstrate established compensation practices.
- The 2011 Schedule J now asks a reporting organization to provide a narrative description for Lines 4a and 4b in Part I. Line 4a asks whether a reported individual received a severance or change-of-control payment from the reporting organization or a related organization. Line 4b asks whether a reported individual participated in or received payment from a supplemental nonqualified retirement plan of the reporting organization or a related organization.
- The 2011 Schedule J clarifies that a reporting organization does not need to report the practices of a related organization with respect to Part I, Line 9. Line 9 deals with the rebuttable presumption procedure related to the initial contract exception described in Treasury Regulation §§ 53.4958-4(a)(3) and 53.4958-6(c).
As has been articulated by the previous entries in this series, some changes to the 2011 Form 990 and its Schedules may not appear significant at first glance. Nevertheless, they often provide valuable clarifications and, perhaps more importantly, indicate the areas that may be coming under closer IRS scrutiny. The 2011 version of Schedule J clarifies certain issues and requires new narratives related to the compensation practices of reporting organizations. As with the other areas of the 2011 Form 990, reporting organizations should familiarize themselves with these changes and be prepared to provide the new information that the IRS is seeking with these changes.
Should you need assistance with your organization’s evaluation of the 2011 Schedule J or Form 990 in general, please contact Joshua P. Reading at (317) 977-1486 or email@example.com, Jeffrey L. Carmichael at (317) 977-1443 or firstname.lastname@example.org or your regular Hall Render attorney.