The Risk For Nonprofits From Compensation Of Board Members

Written exclusively for My Community Workplace for Not-For-Profits Organizations

The New York attorney general is suing the board members of a nonprofit cemetery for embezzling thousands of dollars that were earmarked for the cemetery's upkeep.

The lawsuit alleges that seven former and current board members of the nonprofit Lutheran All Faiths Cemetery let the grounds fall into disarray while they charged "millions of dollars in operating costs" to enrich themselves.

The lawsuit alleges that the board members exploited their positions to give themselves exorbitant salaries as well as unauthorized retirement benefits and director fees out of the cemetery's charitable assets.

For example, the board chairman and former president earned a total salary of $5.4 million between 1990 and 2014. In 2014, he retired with $900,000 in retirement pay, but continued to receive a salary from the cemetery as the chairman of the board for another five years. After the chairman's son took over as president, he allegedly embezzled $63,000 in unapproved bonuses. 

The board chairman told the press in 2018 that a "chronic lack of cash" led to "the crumbling graves and lack of proper up-keep" at the cemetery. He said that funds allocated for perpetual care could not be used to maintain unpaid gravesites.

However, the lawsuit alleges that board members spent millions of dollars of funds earmarked for perpetual care for other operating expenses.

The board members also allegedly lent one million dollars in restricted cemetery funds to family members as mortgage "investments" from 2015 to 2017.  

The lawsuit accuses the board members of failing to uphold their fiduciary duty to manage the assets under their control for the benefit of the cemetery. They allegedly ignored an outside auditor's recommendation to curtail their spending.

The lawsuit seeks to remove three current board members, recover lost or stolen charitable assets as well as salaries previously paid to board members, and end future payments to board members. Allie Griffin "Board Members of Non-Profit Cemetery Embezzled Thousands of Dollars" ridgewoodpost.com (Sep. 04, 2019).

Commentary and Checklist

According to a 2011 study conducted by the American Society of Association Executives, only 13 percent of associations compensate their chief elected officer, and even fewer compensate other board members.

Paying salaries, especially large salaries, to your board members could set the stage for embezzlement, as in the above case, and may even violate the law. Some state laws and organizational bylaws prohibit paying any salary to nonprofit board members.

The Internal Revenue Service (IRS) states, "Charities should generally not compensate persons for service on the board of directors except to reimburse direct expenses of such service.... Charities may pay reasonable compensation for services provided by officers and staff. In determining reasonable compensation, a charity may wish to rely on the rebuttable presumption test of section 4958 of the Internal Revenue Code and Treasury Regulation section of 53.4958-6."

Board members may deduct expenses in connection with their volunteer service, including mileage to drive to meetings, on their tax return. Or, your nonprofit may opt to reimburse board members for expenses. If you do, it is important to create a written policy that clearly states what expenses qualify for reimbursement and what paperwork, such as itemized receipts, must be submitted to receive reimbursement.

If your organization decides to pay your board members more than reimbursements for expenses, you must make sure you are not running afoul of any state, local, or federal laws, such as the Federal Volunteer Protection Act of 1997 or the Internal Revenue Code, or your organization's bylaws.

Some states have laws protecting volunteer board members from liability. If your organization does pay a salary to board members, you should know if and how that affects their liability and inform all board members in writing.

For more information on compensating board members, visit the National Council of Nonprofits' website. https://www.councilofnonprofits.org/tools-resources/can-board-members-be-paid

Nonprofits should consider the following when making decisions concerning board member compensation:
 

  • Section 501(c)(6) of the Internal Revenue Code prohibits board members or other individuals from benefitting from any part of net earnings.
  • Section 501(c)(3) prohibits board directors and officers from profiting from their positions with a nonprofit by receiving excessive compensation.
  • If your organization pays board members more than $600 per year, you must issue them an IRS Form 1099 and make sure it is correctly filled out.
  • Allow an independent compensation committee to determine pay, making sure it is comparable to that paid by similar nonprofits and would not be considered "excessive" by the IRS.
  • Paying reasonable fees to board members for services may be legal in some circumstances, but never pay more than the recognized market average.
  • Paying board members an excessive salary can lead to large penalties and losing your organization's tax-exempt status.
  • Paying board members, especially a salary that is excessive, can also trigger an investigation by your state's attorney general.
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