The three conditions stated precisely, the failure mode behind each, and what a reasonableness review has to contain to hold up.
Section 4958 is the intermediate sanctions regime. It allows the IRS to impose excise taxes on a disqualified person who received an excess benefit — and separately on organisation managers who knowingly approved it.
Against that, there is a rebuttable presumption of reasonableness. The IRS states its three conditions plainly:
Satisfy all three and payments to disqualified persons are presumed reasonable, and property transfers presumed to be at fair market value. Miss any one and the presumption does not apply — the IRS applies a facts-and-circumstances analysis instead, with the burden on the organisation.
Two failure modes. The first is timing: approving compensation that has already been paid, or ratifying an arrangement after the fact, is not advance approval. The second is composition — the executive being compensated cannot participate, and neither can anyone with an economic relationship to them. A board member whose firm does paid work for the organisation is a conflict question, not a formality.
“Appropriate” is the operative word, and it is where most reviews are weakest. A national median for “nonprofit CEO” is not appropriate data for a specific organisation. Comparability turns on sector, budget size, geography, and the actual scope of the role.
For smaller organisations, the regulations provide a safe harbour: organisations with annual gross receipts under $1 million may rely on data from three comparable organisations in the same or similar communities for similar services. Larger organisations need correspondingly more.
“Concurrently” is doing real work in that third condition. The record has to be made at the time of the determination — generally by the later of the next meeting or 60 days after the determination, and reviewed and approved as reasonable, accurate and complete within a reasonable period thereafter.
Minutes reconstructed at audit do not satisfy it. Nor do minutes that record the decision without recording the basis: the terms approved and the date, the members present and voting, the comparability data relied on and how it was obtained, and the documented reason for any member's abstention.
The reasonableness test applies to the entire economic package. In practice that means base salary, bonus and incentive payments, deferred compensation including §457(b) and §457(f) arrangements, retirement contributions, taxable fringe benefits, and the value of anything else provided in exchange for services.
Organisations that benchmark base salary and stop have not run the test the statute describes. Deferred compensation is a particularly common gap, because the accrual and the payment fall in different years and the benchmarking exercise tends to follow one or the other rather than both.
Form 990 Part VII and Schedule J exist precisely because this information is public. That cuts both ways: it is why defensible benchmarking data is available at all, and why a board should assume its decisions will be read by donors, journalists, and peer organisations.
A routine annual determination with a stable executive and a functioning board process often needs comparability data and a board-ready report, and nothing more. That is what CauseComp is for — 990-sourced executive benchmarks tuned by sector, budget size and metro, with documentation structured for §4958 review.
A full advisory engagement earns its keep where the situation is harder: a founder transition, a merger, a deferred compensation arrangement, an executive whose pay has drifted well outside the range, an organisation that has already received questions, or a board where the conflict analysis is not straightforward.
Market-specific detail sits on our metro pages.
Advance approval by an authorized body composed of individuals without a conflict of interest; reliance on appropriate comparability data obtained before the determination is made; and adequate, timely documentation of the basis for the determination, made concurrently with the determination itself. All three must be satisfied — if any one fails, the presumption does not apply.
Broadly, someone in a position to exercise substantial influence over the organisation's affairs at any time in the five years before the transaction — which typically includes the executive director or CEO, the CFO, voting board members, and certain family members and controlled entities. The definition is functional rather than title-based, so it can reach people who do not appear on an organisation chart.
There is no bright-line rule, but data should reflect the market at the time of the determination. Because Form 990 data is filed and released with a lag, benchmarking that relies on it should account for the interval — either through an ageing adjustment or by documenting the vintage and why it remains appropriate. Documenting the limitation is far better than ignoring it.
The regulations provide a safe harbour: organisations with annual gross receipts under $1 million may rely on data from three comparable organisations in the same or similar communities for similar services. Larger organisations need correspondingly more, and the expectation scales with size and complexity.
That is much of the point. Section 4958 can impose excise taxes on organisation managers who knowingly participate in an excess benefit transaction, as well as on the recipient. A properly constituted process with contemporaneous documentation is the record that demonstrates the approval was not knowing participation in anything improper.
Reasonableness reviews, committee process design, or a CauseComp subscription — tell us where the decision sits.
Tell us what you’re working through and we’ll follow up directly.