Fall 2003

In this issue:
Sound Orientation Pays Off with Better Boards
The Board Manual: A Primer for Success
Selecting the Right Retirement Plan
New Tax Act a Mixed Bag for Nonprofits

“Sound Orientation Pays Off with Better Boards”
Nonprofits need effective boards now more than ever. Lapses in board oversight in both the profit and not-for-profit sectors have drawn attention to the important stewardship role that boards play.

But getting the board you deserve is not simply a matter of luck. A well-planned and executed orientation process is necessary to ensure board members have the knowledge they need to serve.

A good orientation process begins with recruitment. Often, there’s a gap between what new board members expect to encounter once they join a board and what the situation really is. Sometimes an organization contributes to this problem by not being completely candid about what board service entails or downplaying the challenges faced.

Although this approach may help secure board members, it’s counterproductive in the long run. Nonprofits should tell candidates if there are funding problems or a significant time commitment is required. This improves the odds of assembling a board with a commitment level that matches the nonprofit’s needs.

Maintain a Prospect List
One not-for-profit uses a selection process that begins well before openings even exist. It maintains a list of board prospects.

The board president or another representative goes through a due diligence process with these individuals that involves information gathering, telephone interviews or in-person meetings and facility tours. The goal is to convey and clarify expectations on both the part of the nonprofit and the prospective member.

If there is mutual interest, the candidate joins the pool from which new members are selected. Using this screening process, the organization has had excellent success identifying board members who truly have the desire and time to serve. At many nonprofits, a nominating committee also plays a key role in selecting members. Particularly in the nonprofit world – where there’s an absence of motivators such as pay and stock options – organizations must choose board members who are truly motivated by passion for the organization’s mission.

The Learning Curve
Once you’ve selected the right people for your board, an effective orientation will shorten the learning curve for new members and solidify their bond with your organization.

An overview of the nonprofit is essential: its background, mission, financial condition, legal and organizational structure, and board member roles and responsibilities. New members should also be provided with the most recent audit and management letter.

Ideally, they’ll also receive briefings from the chairperson or other key board members, the organization’s attorney and accountant, and a handful of staff members who can discuss different aspects of the not-for-profit’s mission or the challenges it faces. Board members will benefit, too, from exposure to the nonprofit’s work, such as a facility tour or observation of field work.

An effective board upholds its legal and fiduciary duties and helps a nonprofit realize its mission, vision and goals. The orientation process should focus on explaining exactly what this entails, rather than assuming new members will figure it out. For instance, board members need to understand that their primary functions are stewardship and governance, not management.

Roles and Responsibilities
Aspects of board protocol, such as expectations for board member conduct and meeting rules, should also be conveyed. In addition, members need to know they have certain legal duties of care, loyalty and obedience to the organization that require them to:

• Act with common sense and informed judgment in making decisions,

• Be faithful to the organization and avoid conflicts of interest, and

• Follow governing documents.

An understanding of the board’s basic responsibilities should also be outlined for new members. As adapted from boardsource.org, these areas generally include:

• Determining the organization’s mission and purpose,

• Selecting the chief executive, providing guidance and evaluating the executive’s performance,

• Ensuring effective organizational and strategic planning,

• Determining and monitoring programs and services,

• Ensuring adequate resources and helping manage them effectively,

• Enhancing the organization’s public image,

• Ensuring legal and ethical integrity and maintaining accountability, and

• Recruiting new board members and assessing board performance.

Mentoring also helps in assimilating new board members and preparing them for leadership roles. The mentoring process is ideally a structured one, with the board chairperson assigning mentors to new members and following up to ensure they’re receiving the support and information they need.

Finally, to ensure your orientation process is successful, continue to fine-tune it. Ask new board members to evaluate its adequacy and offer suggestions. By using their feedback to improve the process, it will become even more effective over time.

“The Board Manual: A Primer for Success”
Although much of the orientation process involves verbal presentations and discussion, written reinforcement of key information is necessary. A board manual is the perfect tool for this purpose.

During the orientation process, it’s used as a guidebook. Afterward, it serves as a resource that can be updated, expanded and customized to meet board member needs.

A loose-leaf binder is a popular format for manuals because of its flexibility and ease of use. Organize the binder with tabs for subject areas, and date individual documents to track the need for updates.

In selecting the contents, aim to be both comprehensive and discriminating. You don’t want to inundate board members with paper, but they’ll need copies of all important organizational documents.

These documents might include roles and responsibilities of the board, individual members and committees; board member bios and contact information; and policies governing board member conduct and meetings, e.g., rules of order, attendance, public representation and reimbursement.

Additionally, board members should receive financial information and statements, including the annual and audit reports, Form 990, the annual budget and the investment policy. Legal documents should include the bylaws, articles of incorporation and the IRS determination letter.

And, finally, board members should receive a staff listing; information about the chief executive and the evaluation process; a nonprofit fact sheet that includes the organization’s history, corporate structure, and services; and stationery and promotional materials.

By ensuring new board members have the information they need at their fingertips, nonprofits can help them start their tenure on the right track.

“Selecting the Right Retirement Plan”
Nonprofits have had limited retirement plan options in the past. Although those options have expanded, this often serves to complicate the selection process. Making the right decision becomes easier, though, once you take stock of your goals for the plan. Consider these questions in weighing different options:

Does your tax status dictate your choice of plans? Your exempt status may narrow or expand your options. For instance, 403(b) plans are mainly available to those with a 501(c)(3) exemption or an educational institution.

What are you trying to achieve? Motivations for offering plans vary. Are you trying to add extra compensation for executives? Or do you primarily want to offer employees an opportunity for pretax retirement savings?

What are the main considerations in choosing a plan? Factors to consider include cost, ease of administration, available investment options and funding flexibility.

Traditionally, nonprofits have offered 403(b) plans, which remain popular because of their usefulness and administrative simplicity. If employers simply want to allow employees the option of contributing to a tax-deferred plan, a 403(b) is usually the most cost-efficient solution.

EGTRRA Increases Limits
Furthermore, the 2001 Economic Growth and Tax Relief Reconciliation Act of 2001 made these plans more attractive by allowing participants to achieve the same contribution limits as 401(k) plans. That amount is $12,000 for 2003 and $2,000 in catch-up contributions for those 50 and over. A drawback of 403(b) plans, however, is that investments can only be made in mutual funds and annuities, not individual stocks.

With a 403(b), an employer can act mostly as a conduit by making information available to employees and handling payroll deductions. Employers can also make contributions to 403(b) plans, but this makes them subject to regulatory requirements, thereby increasing costs and complexity.

For employers who want significant flexibility and more all-around options, 401(k) plans typically fit the bill. They allow for discretionary employer contributions, extensive investment options and loan provisions.

But with greater flexibility comes added costs and administrative burdens, including annual fees, federal compliance reporting and discrimination testing. An annual audit is also required for plans with more than 100 participants.

In addition, one problem with a standard 401(k) is that higher-paid employees may not be able to maximize their contributions if lower-paid employees don’t significantly participate in the plan. Profit sharing and safe harbor features can address this problem, however.

Options to Maximize Contributions
A profit-sharing component allows for different allocation schemes or none at all in a particular year. And despite the name, profits are not necessary for a profit-sharing plan. A safe harbor feature removes the need to comply with discrimination testing and top-heavy plan requirements, allowing higher-paid employees to maximize contributions.

One drawback, though, to safe harbor plans is that they require mandatory contributions to all eligible employees and contributions are immediately vested.

Section 457 plans are another option for nonprofits wanting to attract and retain executives. These are nonqualified deferred compensation arrangements designed for a small number of executive employees (also called "top-hat plans"). Contributions to these plans can be made in addition to other plans, so as much as $24,000 can be deferred.

Small nonprofits can also consider Savings Incentive Match Plans for Employees (SIMPLEs). An organization must have 100 or fewer employees to adopt one.

As the name suggests, these plans are easy and inexpensive. Contributions are usually made to individual retirement accounts on behalf of employees. Employers must make a contribution, which is immediately vested. The annual contribution limit is lower than with other options, though – $8,000 in 2003 with a $1,000 catch-up contribution.

These are just a few of the more popular retirement plan options for nonprofits; there may be others available to your organization. If you’re looking to add or change a plan, ask your business advisor to help you select one that meets your needs.

“New Tax Act a Mixed Bag for Nonprofits”
Although the recently passed Jobs and Growth Tax Relief Reconciliation Act of 2003 lacks any direct implications for nonprofits, they could feel some side effects.

Organizations with a for-profit subsidiary may see the greatest impact from the new law, thanks to its expanded depreciation opportunities. The 30% "bonus" depreciation enacted in 2000 has increased to 50% for qualifying property placed in service after May 5, 2003, and before 2005.

On top of that, for-profit entities can now write off as much as $100,000 of the cost of qualified purchases (an increase from $25,000). Off-the-shelf software also now qualifies for expensing.

Unrelated Business Activities
To be expensed, new equipment must be used in connection with the carrying on of unrelated trade or business activities. Common sources of unrelated business income for nonprofits include affinity card and insurance programs, mailing list rental and advertising.

Another change affecting for-profit entities is that the filing deadline for paying the balance of third-quarter estimated taxes on unrelated business income (UBIT) has been extended to Oct. 1, 2003 (75% is still due by Sept. 15, 2003).

No Charitable Giving Incentives
To the dismay of many not-for-profits, the tax act failed to offer any incentives for charitable giving. Some even believe that certain provisions – such as the cut in the maximum long-term capital gain tax rate from 20% to 15% and lower individual tax rates – could negatively affect nonprofits.

The reasoning: Individuals might be more likely to cash in capital gains rather than donate stock or other property that has appreciated substantially. And with lower individual tax rates, the value of the deduction decreases somewhat.

It’s too early to know whether the new tax act will have a tangible effect on not-for-profits. But if it succeeds as an economic stimulus, it could potentially boost the fortunes of nonprofit organizations as well.

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