In higher education, Form 990 is a critical test

“Because these institutions are consistently under public scrutiny, the public’s impression of the disclosures is as important as filing complete and accurate returns with the IRS.”

Erin Couture

Grant Thornton Not-for-Profit and Higher Education Tax Managing Director

The purpose of the form has always been to enable the IRS and the public to evaluate whether tax-exempt colleges and universities are complying with the requirements to maintain their exempt status. All tax-exempt higher education institutions are required to file Form 990 to provide an overview of their activities, including, but not limited to, their program information, financial activities, compensation to key executives, and qualifications as a tax-exempt school. “Because these institutions are consistently under public scrutiny, the public’s impression of the disclosures is as important as filing complete and accurate returns with the IRS,” said Grant Thornton Not-for-Profit and Higher Education Tax Managing Director Erin Couture.

The Form 990 contains a dense amount of detailed information covering many topics, so reviewing it can be time-consuming and overwhelming. While reviewing each line item might not be practical, it is important to carefully review some of the most sensitive sections of the form, especially since the information can be easily accessed by the public and the media.

There are three major hotspots in the form that warrant this special focus and scrutiny: Schedule J (executive compensation); Schedule L (conflicts of interest); and the presentation of financial information (core form). Let’s explore these three sections in greater detail.

“Bonuses are highly visible on the Form 990, so boards should be mindful that alumni and the press will be looking at those figures with great interest.”

Mary Torretta

Grant Thornton Not-for-Profit and Higher Education Tax Principal

• Certain non-cash benefits: The Form 990 includes certain required disclosures around items such as housing, first-class travel, and personal services. As many institutions require the President to live on campus, this is a typical disclosure, but take care with the valuation of the housing and its disclosure on the form.
• Severances: For individuals that trigger a form disclosure, institutions must disclose severance payments made upon a person’s involuntary or voluntary separation from service. Sometimes, this involves substantial payments (for example, more than two years of compensation continuation) that are outlined as part of their original employment contract or as part of a negotiated departure from the institution. In these cases, additional disclosures, including the individual’s name, terms and conditions of the arrangement, and payment amounts, are required. “This can get tricky because of the potential for legal repercussions, the sensitivity of the information, and confidentiality issues,” Couture said. “It is always our advice to pay special attention to severance agreements and severance clauses in employment contacts as they are drafted, as well as when they are reported on the 990.” 
• Deferred compensation: Scenarios in which compensation payments are made long after an individual has left the institution can create headaches. Because deferred compensation must be reported both in the year earned and the year paid, the way in which such accruals present on the Form 990 can often create the perception that an individual’s compensation is greater than it actually was. Sometimes the cash payments are reported on the Form 990 after the individual has stopped working for the institution, which creates questions for the reader. “The timing can be very important and can present an optics issue,” Couture said. “So, it’s important to be aware of those deferred compensation plans in place for key executives, and how they appear when they are accrued for and ultimately paid out.” 
• Bonuses: Institutions are required to report bonus and incentive compensation paid. “We know that institutions face stiff competition to attract and retain top talent, and sometimes creative and lucrative bonus arrangements are the way colleges and universities attract sought-after administrators, endowment professionals, and athletic coaches. Those bonuses are highly visible on the Form 990, so boards should be mindful that alumni and the press will be looking at those figures with great interest,” said Grant Thornton Not-for-Profit and Higher Education Tax Principal Mary Torretta.

Higher education institutions often tend to be large “employers,” including W-2 employees and independent contractors, and the count on the Form 990 can be compared to IRS internal records with discrepancies noted. Double-check the counts you present on Part V and inquire whether your institution had any complications during the period (such as filing amended payroll tax returns).