Recently, the Internal Revenue Service ("IRS") announced an initiative to monitor tax-exempt health care organizations to ensure compliance with section 4958 of the Internal Revenue Code of 1986, as amended, regarding excess benefit transactions. Specifically, the IRS is looking at compensatory arrangements between a tax-exempt health care organization and a disqualified person to determine if an excess benefit transaction has occurred. A disqualified person includes any person in a position to exercise substantial influence over the affairs of the tax-exempt organization in question, together with statutory affiliates. An excess benefit transaction occurs when the economic benefits received by a disqualified person from a tax-exempt organization exceed the value of the consideration the disqualified person provides to the organization. IRS agents will broaden their review beyond Forms 990, 1040, and W-2 in their search for excess benefit transactions and will additionally turn to agreements between a disqualified person and a tax-exempt health care entity (including employment agreements, deferred compensation agreements, bonus agreements, severance agreements, retirement agreements, and agreements for the purchase and sale of any goods or services), loans between a tax-exempt health care organization and a disqualified person, and expense reimbursements incurred by a disqualified person that are reimbursed by a tax-exempt health care organization. This heightened IRS interest in the compensation of executives of tax-exempt health care organizations should cause such entities to scrutinize their executive compensation arrangements to ensure that excess benefit transactions have not occurred. Excess benefit transactions, if discovered by the IRS, must be corrected, and may result in monetary penalties to a disqualified person and organization managers who knowingly participate in the transaction and, possibly, revocation of an organization's tax-exempt status.
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