Key Intermediate Sanctions terms to be aware of include:

Disqualified Person – A disqualified person is “any person who was in a position to exercise substantial influence over the affairs of the applicable tax-exempt organization at any time during a 5-year period ending on the date of the transaction.”  These selected individuals typically include the Chief Executive Officer, the Chief Financial Officer, and voting members of the governing body  but the definition may extend to other members of the executive team and some physicians in a health care organization.  Family members of disqualified persons are also included.  In a healthcare organization, persons with a material financial interest in provider-sponsored organizations may be included.

Excess Benefit Transactions – In these transactions, “an economic benefit is provided by an applicable tax-exempt organization, directly or indirectly, to or for the use of any disqualified person, and the value of the economic benefit provided by the organization exceeds the value of the consideration (including the performance of services) received for providing such benefit.”  The simplest example of this is an overly high salary for a disqualified person who does not seem to warrant such a salary.

Reasonable Compensation – “Reasonable compensation,” as discussed in 3[a] below, is based on an extensive historical body of laws and cases that guide an organization in determining what is reasonable. 

Rebuttable Presumption of Reasonableness – IRS regulations offer a safe harbor process for fulfilling the requirements to avoid the imposition of Intermediate Sanctions.  We’ll discuss this in detail in an upcoming post.  We generally encourage all nonprofit organizations to comply with the “safe harbor” process afforded by these provisions.