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Nonprofits and conflicts of interest

When a nonprofit discusses conflicts of interest, it usually focuses on the financial benefit a board member could receive that could also be detrimental to the nonprofit. While some examples of conflicts of interest are cut and dried, such as hiring an unqualified family member of one of the board members at a salary that is too high, there are other situations that are not as easily identified.

The potential for a conflict of interest exists when someone can gain financially through "insider" connections to the non-profit. Perhaps the non-profit wants to offer health care insurance to its employees and one of the board members is a health care insurance broker. The problem occurs when the board member uses his or her influence to have the nonprofit purchase a health care insurance plan that provides the board member with higher commissions, but not the best coverage for the employees.

Most nonprofit policies that deal with conflict of interest focus on the board and have the following provisions:

Disclosure: Each year, every board member must write down all possible conflicts of interests and give the list to the organization.

Exclusion from discussion and vote: If there is a potential for conflict of interest and the nonprofit is considering purchasing that board member's health care insurance plan, then that board member needs to be excused from the room while the rest of the board discusses it and then votes. This allows the board to address the potential benefits and risks so that the members can make an informed decision.

If the Internal Revenue Service determines that an excess benefit was paid to an "insider," then intermediate sanctions or penalty taxes are due. The nonprofit is not responsible for these taxes — the insider is.

The nonprofit can establish the rebuttable presumption of reasonableness in order to ensure that the officers and directors who approved the transaction in question are not subject to any intermediate sanctions. This is done by following a three-step procedure:

-- Advance approval by the board

-- Reliance on appropriate data

-- Adequate and contemporaneous documentation of the board's decision

Nonprofits that have questions regarding conflict of interest, intermediate sanctions and the rebuttable presumption of reasonableness can find answers from an experienced attorney.

Source: blueavocado.org, "Nonprofit Conflict of Interest: A 3-Dimensional View," Jan Masaoka, accessed Sep. 09, 2016

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