Redesigned Form 990 will affect many health care organizations’ 2008 returns

by Brian Todd,

On August 19, the Internal Revenue Service (IRS) released final form instructions for the redesigned Form 990 and 16 related schedules. This concluded a redesign process that began June 14, 2007, when the IRS released an initial draft for public comment. The final form instructions include general and line-by-line instructions, a glossary, and many helpful tables and examples. The complete redesigned forms and instructions can be found at http://www.irs.gov/charities/article/0,,id=185561,00.html.

Redesigned 990 in general

The redesigned Form 990 will first be required for 2008 returns.  For calendar year-end organizations, the redesigned forms will be required for the calendar year ended December 31, 2008.  For fiscal year-end organizations, the redesigned forms will be required for the fiscal year ending in 2009.

Transition relief is available for two of the more involved schedules, Schedule H (Hospitals) and Schedule K (Tax Exempt Bonds).  Only Part V (Facility Information) of Schedule H will be required for the first year.  Many organizations are using 2008 as a “dry run” for this schedule.  Only Part I (Bond Issues) of Schedule K will be required for the first year.  This section contains basic information on the bond issue and is required only for bonds issued after December 31, 2002.  All schedules will be required for the second and subsequent returns.

Changes to draft form instructions

Numerous changes were made to the April draft of instructions for the 2008 Form 990 as a result of 120 public comments the IRS received on those instructions.  An IRS Background Paper detailing the changes can be found at http://www.irs.gov/pub/irs-tege/changes_to_april_draft_instructions.pdf.  The IRS cleared up many uncertainties with additional examples, revised definitions and greater clarity on some specific reporting requirements.  Some areas that have been affected the most are governance, compensation, Schedule H (Hospitals) and Schedule L (Transactions with Interested Persons).

Governance

The final instructions add a reasonable effort provision for obtaining information required from interested persons or third parties.  This provision applies to determining the number of voting members of the governing body who are independent and determining whether an officer, director, trustee or key employee had a family relationship or a business relationship with any other officer, director, trustee or key employee.  It also applies to determining compensation paid to insiders by related organizations and determining if the organization conducted transactions with interested persons.

The definition of independent voting member of the governing body has been revised.  The final form instructions replace the “material financial benefit” prong of the independence test with a Schedule L reportable transaction prong.

The IRS received numerous comments on question 10 of Part VI (Governance, Management, and Disclosure).  This question asks if the organization provided a copy of the Form 990 to its governing body before it was filed.  The final instructions have an example showing this question may be answered with a yes if the organization emails a copy of the final version of the Form 990 to each board member before it is filed.  This is true even if no board member actually reviews the return.

The policies and procedures in the governance section must be in place by the end of the reporting year to answer these questions with a yes.  Please review the governance section of the new Form 990 closely to determine if any new policies should be implemented before year-end.

Compensation

Possibly the most significant change to the core form is the change in the definition of a “key employee” for purposes of reporting executive compensation in Part VII (Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, and Independent Contractors) and other schedules.  In general, a “key employee” will include only those employees, other than officers, directors and trustees who:

• Had reportable compensation exceeding $150,000 for the year (the “$150,000 Test”)
• Had or shared organization-wide control or influence similar to that of an officer, director, or trustee, or managed or had authority or control over at least 10 percent of the organization’s activities (the “Responsibility Test”); and were among the organization’s top 20 highest paid employees for the year
• Satisfied both the $150,000 Test and the Responsibility Test

The final instructions clarify the definitions for “reportable compensation” and “other compensation.”  A comprehensive table, which lists most common types of compensation and where to report it on the redesigned Form 990, is provided beginning on page 12 of the instructions for Part VII of the Core Form.

The final instructions indicate the top management official and top financial official are considered officers.  The organization must disclose compensation for these officials regardless of amount.

Schedule J (Compensation Information) will be required to be completed for officers, directors, trustees and key employees that receive more than $150,000 in compensation, as well as certain former officers, directors, trustees or key employees receiving compensation.  Schedule J contains several executive compensation governance questions.  Please review these questions closely if you anticipate your organization will be required to file this schedule.

Schedule H

The final instructions clarify an organization is required to complete Schedule H if it operates at least one facility that is, or is required to be, licensed, registered or similarly recognized by a state as a “hospital.”

The definition of “facility” for Part V (Facility Information) reporting is to include each hospital or other facility that is licensed, registered or similarly recognized by a state as a “health care facility,” including facilities other than hospitals.

The final instructions also clarify the generally applicable rules regarding subsidized health services apply to physician clinics and skilled nursing facilities.

Schedule L

The final instructions simplify the definition of substantial contributor for purposes of Part III to mean a person who contributed at least $5,000 to the organization during the tax year and who is required to be reported by name in Schedule B.

The thresholds for Part IV (Business Transactions Involving Interested Persons) were revised to include an interested person if:

• All payments during the tax year from a single transaction between the organization and the interested person exceeded the greater of $10,000 or 1 percent of the filing organization’s total revenues
• All payments during the tax year between the organization and interested person exceeded $100,000; or
• The organization paid compensation greater than $10,000 during the tax year to a family member of certain interested persons

Important Considerations

Expect preparation time for the Form 990 to significantly increase.  It will be important to be well informed of the changes and begin gathering information early.

As advised in our April article, review the new form in detail, if you have not yet done so, and be sure you have methods in place to capture and report all newly required information.

Evaluate your Form 990 review process

Review the governance section closely to determine whether any new policies should be implemented

Review compensation practices and policies closely

Remember the Form 990 is a public document; consider the public perception of your policies and compensation practices

You may contact your BKD advisor for more details on how the new Form 990 will specifically affect your organization.