Q&A #56 – Who should fill out an organization’s annual conflict of interest disclosure statement?

Question: I am the Board Chair of a small 501(c)(3) public charity that will be expanding its staff over the next year. We currently have only an Executive Director, but will soon be hiring a program manager and a director of development. In the past, we have asked all Board members as well as the Executive Director to fill out and return our annual conflict of interest disclosure statement. Going forward, should the conflict of interest disclosure statement be sent to all staff members?

Answer: Processes for applying and monitoring conflict of interest policies vary widely for different nonprofits, but the Form 990 is a good starting point for basic guidance. As a practical matter, you want to ensure that the annual conflict of interest disclosure statement is at least filled out by all directors, officers, and “key employees,” as these terms are defined for purposes of Part VI, Line 12b on the Form 990. As a technical matter, all employees and volunteer leaders who are (or could be) “disqualified persons” as defined in Treas. Reg. § 53.4958-3 should also be required to disclose conflicts of interest, so it is prudent to err on the side of distributing the annual conflict of interest disclosure statement more widely.

For purposes of the Form 990, “key employees” include employees who satisfy: (1) the $150,000 test; (2) the Responsibility test; and (3) the Top 20 test.

The $150,000 test generally includes employees who receive compensation from the organization (and all related organizations) in excess of $150,000 for the calendar year ending with or within the organization's tax year.

The Responsibility test generally includes employees who:

• Have responsibilities, powers, or influence over the organization as a whole that are similar to those of directors or officers;

• Manage a discrete segment or activity of the organization that represents 10% or more of the activities, assets, income, or expenses of the organization; or

• Have or share authority to control or determine 10% or more of the organization's capital expenditures, operating budget, or compensation for employees.

The Top 20 test generally includes the 20 highest compensated employees (other than directors and officers) who satisfy the $150,000 test and Responsibility test.

The definition of “disqualified persons” under Treas. Reg. § 53.4958-3 (which sets forth guidance for applying the “excess benefit transaction” rules) largely overlaps with the definition of “key employees,” but is potentially a bit broader.

For example, any person who serves on a committee that exercises Board-delegated powers is a disqualified person. As is any person, regardless of title, who has ultimate responsibility for implementing the decisions of the Board or supervising the management, administration, or operation of the organization (such as a chief executive officer or chief operating officer) or has ultimate responsibility for managing the finances of the organization (such as a chief financial officer).

Staff members who don’t have the above-mentioned powers are not considered disqualified persons if their compensation is less than the amount specified for “highly compensated persons” under certain provisions of the tax code (currently $130,000, subject to periodic adjustment for inflation).

For everyone else, the question of whether someone is a “disqualified person” involves weighing facts and circumstances to determine whether the person has substantial influence over the organization, although employees below the manager or supervisor level are usually safely excluded, barring special circumstances.

Planning Tip – Work with your organization’s attorney and/or CPA to maintain a list of the organization’s disqualified persons that is updated annually. Maintain these records for at least 5 years, consistent with the 5-year “lookback period” set forth in the excess benefit transaction rules. This list will be very helpful in figuring out who should receive the annual conflict of interest disclosure statement and properly handling conflicts of interest, should they arise.

These rules are complicated to navigate, so it is best to err on the side of distributing the conflict of interest disclosure statement widely. Consistent application of your organization’s conflict of interest policy is critical to the transparency and good governance practices expected of nonprofit organizations, and this cannot be achieved unless your organization receives timely and complete disclosures of actual and potential conflicts.  In your case it appears that all three employees will have substantial responsibility, so it is probably best to distribute the form to all staff members.

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