An Administrator's Guide to California Private School Law Compendium

D OCUMENT 2.B

C HECKLIST F OR A VOIDING E XCESS B ENEFIT T RANSACTIONS Section 4958 of the Internal Revenue Code (“IRC”) sets forth the rules for excess benefit transactions. An “excess benefit transaction” is a transaction in which an economic benefit is provided by a tax-exempt organization such as a school, directly or indirectly, to or for the use of a “disqualified person,” and the value of the economic benefit exceeds the value of consideration, including the performance of services, received by the organization providing the benefit. (IRC § 4958, subd. (c)(1)(A).) Three Part Test for Excess Benefit Transactions A three part test will determine if a school provided an employee an impermissible excess benefit. If the answer to all three of the following questions is “yes,” an improper excess benefit was provided:  Is the entity providing the benefit a 501(c)(3) or 501(c)(4) tax-exempt organization? 1  Is the person receiving the benefit a “disqualified person?” A disqualified person is: (a) Any person who during the last 5 years was in a position to exercise substantial influence over the affairs of the school , including, but not limited to, a voting member of the school’s governing body or the school’s CEO, COO, or CFO; (b) A member of the family of the person described in (a); (c) An entity in which individuals in (a) or (b) own more than 35%; (d) A person described in (a) through (c) with respect to a 509(a)(3) supporting organization of the entity; (e) A donor or donor advisor with respect to a donor advised fund; or (f) An investment advisor to a 509(3) supporting organization of the entity. 2  Is the transaction an “excess benefit transaction?” (See Section II, below.) “Excess Benefit Transaction” The total compensation paid by a school to a disqualified person must be fair and reasonable. To determine if a compensation package is an excess benefit transaction, a school must perform the following analysis:  I.  II.

An Administrator’s Guide to California Private School Law - Compendium ©2019 Liebert Cassidy Whitmore 12