Nonprofit Law/Executive Director Severance
I am on the board of a 501(c)3 in New York State. The executive director has served in that role for several decades, but the board is considering a change. When approached about an amicable departure, he has requested a significant severance in consideration of his time in service, as much as 1-2 years of pay.
Barring that, I suspect the separation will not be amicable.
This request is well outside our operating budget, and some board members are considering the request in light of funds in a separate trust fund.
There is no employment agreement in place, the E.D. simply serves until relieved by the board, per the organization's By Laws.
I'm concerned that any significant severance would run afoul of the 501(c)3 guidelines, and going to the trust fund (administered by a separate board) is problematic for both my board and theirs.
Are their any guidelines to follow? We would like to obtain a General Release as part of the severance, but understand that is only valid when provided with some level of "consideration," so some severance amount seems to be in order.
It is against IRS regulations for a 501(c)3 organization to give
"severance pay" or any substantial gift to an outgoing employee
unless it is required by a long-standing employment contract. Such
payments would be a prohibited use of funds as the funds would not
be used for the benefit of the organization or pursuant to the
exempt purposes of the organization and, even worse, may be
considered by the IRS to be a distribution similar to a profit
distribution to an insider. Of course, 501(c)(3) organizations,
right in Internal Revenue Code §501(c)(3) are prohibited from
giving private inurement. That code section is at:
and it has, in part, that the 501(c)(3) organization must be
"operated exclusively for religious, charitable, scientific,
testing for public safety, literary, or educational purposes ...
no part of the net earnings of which inures to the benefit of any
private shareholder or individual". That is the main issue that
needs to be addressed, as a 501(c)(3) organization is supposed
to use its assets for charitable, educational or religious
In fact, the IRS defines a severance payment in the instructions to
the new Form 990 (which is the annual form used by exempt
organizations to report their activities to the IRS) as "payment
made if the right to the payment is contingent solely upon the
person's severance from service in specified circumstance, such as
upon an involuntary separation of service.... Treat as a severance
payment any payment to a listed person in satisfaction or
settlement of a claim for wrongful termination or demotion."
on the right column of page 2
A severance payment is allowed to be given to someone going out
the door if there was something of equal value given to the
employer by the employee, such as the agreement to terminate an
existing employment contract.
The Internal Revenue Code at section 102(a) provides that generally
gifts are not income. "Gross income does not include the value of
property acquired by gift..."
However, further in that code section is "(c) Employee gifts
(1) In general--Subsection (a) shall not exclude from gross income
any amount transferred by or for an employer to, or for the benefit
of, an employee."
Therefore, if there is no legal right to receive such payments,
then any payment would be considered by the IRS as compensation
given to the employee.
Harvey Mechanic, Attorney at Law -
P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.