The IRS recently announced that fringe benefits top the list of violations of the so-called “excess benefit transaction” rules. A violation of these rules results in the imposition of an excise tax on the charity executive that received the fringe benefit and potentially an excise tax on charity board members who approved the compensation.
Many fringe benefits must be included in wages, such as an executive’s personal use of an employer provided vehicle. Other benefits are included in wages if the charity and executive do not follow the “accountable plan” rules; for example, the reimbursement of an executive’s travel expenses must be included in wages if the executive fails to follow the accountable plan rules (including to properly document and account for the expenses). Finally, lavish or extravagant reimbursements must also be included in taxable compensation. Failure to include any taxable benefits in compensation (including inadvertent or unintentional failures) may result in an “automatic” excess benefit transaction.
Therefore, it is important that a charity follows the accountable plan rules. To qualify as an accountable plan: (1) the expenses covered by the plan must be reasonable business expenses, deductible under I.R.C. § 162; (2) the officer or employee must adequately account to the charity for such expenses within a reasonable time; and (3) the officer or employee must return any amount of excess allowance or reimbursement within a reasonable time. It is imperative that the charity’s and executives understand these rules and follow these rules closely.