What Are Intermediate Sanctions?
Internal Revenue Code Section 4958 establishes excise-tax consequences for certain excess benefit transactions between an applicable tax-exempt organization and a disqualified person. Executive compensation can create an excess benefit when the value provided exceeds the value of the services or other consideration received.
The rules may apply to transactions involving certain Section 501(c)(3) and 501(c)(4) organizations. Review total economic benefits—including salary, incentives, benefits, deferred compensation, severance, perquisites, loans, and other arrangements—rather than base pay alone. Organization-specific coverage and tax conclusions require qualified legal or tax advice.
Who May Be a Disqualified Person?
A disqualified person is generally someone who was in a position to exercise substantial influence over the organization’s affairs during the applicable lookback period. The determination is fact-specific.
- Certain senior leaders, voting governing-body members, and others with substantial authority may be treated as having substantial influence. Titles alone do not resolve every case; actual authority, responsibilities, and relationships matter.
- The review should identify current and former insiders, compensation decision-makers, and related parties before evaluating the transaction.
- Family members and certain entities connected to a disqualified person may also be covered. Legal or tax advisers should confirm the applicable definitions and exceptions.
Intermediate Sanctions Review Services for Nonprofits
Collaborate with Board of Directors or Compensation Committee to confirm decision authority, conflicts procedures, current compensation strategy, transaction timing, and open governance questions.
Determine special skills, abilities, and unique qualifications by documenting role scope, responsibilities, organization size, complexity, labor market, experience, and other facts relevant to comparability.
Conduct an in-depth compensation analysis using appropriate comparability evidence and total-compensation data, with assumptions, limitations, and matters requiring legal or tax review clearly identified.
Review salary, incentives, benefits, deferred compensation, severance, perquisites, loans, and other economic benefits, including whether compensation intent is documented appropriately.
Provide guidance to the Board or Compensation Committee on independent approval, comparability evidence, conflicts, decision records, and implementation, coordinated with qualified legal or tax advisers.
Intermediate Sanctions Review Process
The review is designed to give the authorized body clear evidence, assumptions, and documentation for its decision. Typical work includes:
- Conducting interviews with executives and relevant board or staff members to document actual responsibilities, authority, organization context, special qualifications, and compensation arrangements.
- Reviewing executive compensation disclosures and other reliable sources using documented peer-selection criteria, job matching, organization characteristics, data dates, and limitations.
- Conducting a total compensation analysis covering all identified economic benefits and comparing the arrangement with the relevant market evidence and organization-specific facts.
- Preparing a report outlining the methodology, findings, and recommendations, including peer criteria, data sources, assumptions, limitations, total-compensation findings, governance steps, and recommendations for board consideration.
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Review executive compensation before it creates unnecessary compliance risk.
- Each engagement begins with a structured review of current executive compensation practices, governance processes, comparability data, and supporting documentation before recommendations are made.
- Our consultants support nonprofit boards and compensation committees with independent executive compensation analysis and documentation.
- We provide clear analysis, written documentation, and implementation guidance to support consistent compensation governance.
- No long-term contracts required. Engage for a single plan audit and redesign or build an ongoing advisory relationship for annual plan reviews and adjustments.
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