The Internal Revenue Service (IRS) has issued the final version of the newly revised Form 990. All tax-exempt entities, including 501(c)(7) private clubs, must file this form as part of their annual tax filing starting in 2009 for the taxable year of 2008.
Before finalizing this new Form, the IRS consented to accept public comments on the proposed instructions to the 990’s new rules. One definition in these instructions was of particular concern to NCA – the definition of “Key Employee.”
As it was first proposed, “Key Employee” included any individual who made $150,000 or more and managed or controlled 5% or more of a club’s activities, assets, income, expenses, capital expenditures, operating budget or compensation for employees. Naturally, this definition increased the number of club staffers who would be included on the 990 and NCA found this to be an unnecessary and intrusive invasion of our members’ staffs’ privacy.
In response, NCA submitted comments to the IRS expressing our displeasure with this expanded definition of “Key Employee.” Today, we are pleased to announce that the IRS agreed with some of our concerns and made revisions to that definition. While this change does not resolve all of our issues, it is a step in the right direction and will help maintain the privacy of some of our clubs’ employees.
Specifically, the IRS has now established that to be a “Key Employee,” an individual must meet all three of the following tests:
- $150,000 Test – That the employee receives reportable 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.
- Responsibility Test – That the employee has (a) responsibilities, powers or influence over the organization as a whole that are similar to those of the officers, directors or trustees; (b) manages a discrete segment or activity of the organization that represents 10% or more of the activities, assets, income or expenses of the organization, as compared to the organization as a whole; or (c) has or shares authority to control or determine 10% or more of the organization’s capital expenditures, operating budget or compensation for employees.
- Top 20 Test – That the employee is one of the 20 employees (that satisfy the $150,000 Test and the Responsibility Test) with the highest reportable compensation from the organization and related organizations for the calendar year ending with or within the organization’s tax year.
By increasing the management or control threshold from 5% to 10% and adding the Top 20 Test, the IRS has acknowledged that its originally proposed definition of “Key Employee” would have included too many employees whose income information should not be publicly disclosed.
Without doubt, NCA, and many other trade associations that submitted comments, made a compelling case to change this definition. And, we want to thank all of you who sent us your thoughts on this topic. Your perspectives helped immeasurably as we crafted our comments to the IRS.
While we can take credit for helping to alter the definition of “Key Employee,” the IRS did not accept our recommendation to remove the other new disclosure responsibility – the requirement to list the names and salaries of the top five highest paid employees who are not officers, directors, trustees or key employees and who receive more than $100,000 in annual compensation.
NCA opposes this new salary reporting requirement because it serves no valid oversight purpose as it relates to a private club’s tax-exempt status. However, unless and until Congress removes this provision, it is now mandatory for all 990 filers.
To ensure all member clubs are prepared for these new requirements, NCA recommends that you discuss these changes with your club’s accountant as soon as possible.