Legacy Haven Academy Compensation Policy for Officers and Key Employees

Article I: Introduction

The Legacy Haven Academy Foundation (the "Academy"), an organization seeking 501(c)(3) tax-exempt status and dedicated to providing educational and supportive services for orphaned and homeless youth aged 10-18, recognizes the importance of fair, transparent, and compliant compensation practices. This policy establishes guidelines for determining and approving compensation for officers, directors, trustees, key employees, and other highly compensated individuals (collectively, "Covered Persons"). It ensures that all compensation is reasonable, aligns with the Academy's charitable mission, and complies with applicable federal, state, and local regulations, including anticipated compliance with Internal Revenue Code (IRC) Section 4958 upon achieving 501(c)(3) status, Arizona Revised Statutes (ARS) Title 10 governing non-profit corporations, and general employment laws applicable in Mohave County, Arizona (Internal Revenue Service, 2024a; Arizona Legislature, 2024a). This policy is designed to facilitate accurate preparation for future Form 990 reporting.

Article II: Purpose

The purpose of this policy is to:

• Define processes for establishing reasonable compensation that reflects market value for services rendered without providing undue private benefit.
• Establish an independent approval process to align with IRS rebuttable presumption of reasonableness standards for 501(c)(3) organizations.
• Prepare for compliance with reporting requirements for Form 990, including Schedule J disclosures, upon achieving tax-exempt status.
• Promote equity, transparency, and accountability in compensation decisions, in line with officers' fiduciary duties under ARS § 10-3842 (Arizona Legislature, 2024b).

Article III: Scope

This policy applies to all Covered Persons, defined as:

• Officers (e.g., President, CEO, Treasurer).
• Directors and trustees.
• Key employees (those with responsibilities, powers, or influence substantially comparable to officers, per IRS definition).
• The five highest compensated employees earning over $150,000 annually (excluding those already reported as key employees).

Compensation includes base salary, bonuses, incentives, deferred compensation, nontaxable benefits, severance payments, and other reportable items anticipated for Form 990, Schedule J (Internal Revenue Service, 2024b). It excludes de minimis fringes, accountable plan reimbursements, and working condition fringes exempt under IRC regulations (Internal Revenue Service, 2024b).

Volunteers and board members serving without compensation are not covered, though reimbursements for expenses must follow accountable plan rules (Internal Revenue Service, 2024a).

Article IV: Determination of Reasonable Compensation

Compensation for Covered Persons must be reasonable, defined as the amount that would ordinarily be paid for like services by like organizations under like circumstances (Internal Revenue Service, 2024a). Factors considered include:

• Comparability Data: Use of independent compensation surveys (e.g., from GuideStar, state non-profit associations, or professional consultants) for similar positions in organizations of comparable size, budget, geography (Mohave County/Arizona), and mission (youth education/non-profits) (National Council of Nonprofits, 2024).
• Organizational Factors: Academy's budget, revenue, program scale, and performance metrics (e.g., student outcomes, graduation rates).
• Individual Factors: Experience, qualifications, tenure, and performance evaluations.

Total compensation packages (salary + benefits + incentives) will be benchmarked against the 50th-75th percentile of comparables to ensure competitiveness without excess (Foundation Group, 2024).

Prohibited Practices:

• No compensation contingent on net earnings (to avoid private inurement in preparation for 501(c)(3) status).
• Revenue-based incentives permitted only if tied to charitable mission achievement (e.g., program expansion), not personal gain (Internal Revenue Service, 2024b).

All determinations must comply with ARS § 10-3842, requiring officers to act in good faith, with prudent care, and in the corporation's best interests, relying on competent data sources (Arizona Legislature, 2024b).

Article V: Approval Process

To align with IRS rebuttable presumption of reasonableness standards and protect against potential IRC § 4958 excise taxes upon achieving 501(c)(3) status:

• Compensation Committee: An independent committee of at least three disinterested board members (no family or business ties to Covered Persons) will review and approve compensation. If unavailable, the full board may approve, excluding interested parties (Internal Revenue Service, 2024a; Treasury Regulations § 53.4958-6).
• Steps:
  1. Annual review of proposed compensation using comparability data.
  2. Committee approval prior to contract execution.
  3. Contemporaneous documentation: Minutes recording data reviewed, deliberations, and vote (signed by participants within a reasonable time).
• For initial contracts with new hires, approval follows the same process; existing contracts are grandfathered if meeting initial contract exception criteria (Internal Revenue Service, 2024b).

Mohave County has no specific ordinances regulating non-profit compensation; thus, state and federal standards prevail, supplemented by Arizona's minimum wage and overtime laws (ARS Title 23) (Arizona Department of Administration, 2024; U.S. Department of Labor, 2024).

Article VI: Types of Compensation and Benefits

• Base Compensation: Fixed salary, approved annually.
• Incentives/Bonuses: Performance-based, tied to measurable mission outcomes (e.g., 85% student placement rate), reportable on Schedule J, Column (B)(ii) upon Form 990 filing.
• Deferred Compensation: Contributions to qualified plans (e.g., 401(k)) or nonqualified plans, reportable on Schedule J, Column (C).
• Nontaxable Benefits: Health insurance, educational assistance (up to limits), reportable on Schedule J, Column (D) if over de minimis thresholds.
• Severance/Change-of-Control: Capped at 12-18 months' salary, approved in advance (Internal Revenue Service, 2024b).
• Expense Reimbursements: Under accountable plans only (substantiation required; excess returned within 120 days).

All benefits must be substantiated and reported as taxable if not qualifying for exclusions.

Article VII: Compliance and Monitoring

• Conflict of Interest: Covered Persons must disclose conflicts annually; no self-approval allowed (ARS § 10-3856).
• Audits and Reviews: Annual internal audit of compensation records; external consultant every three years for comparability.
• Violations: Excess benefits, upon 501(c)(3) status, trigger repayment plus 25% excise tax (IRC § 4958); board must report to IRS if discovered.
• Recordkeeping: Retain comparability data, minutes, and contracts for at least seven years.

Article VIII: Form 990 Preparation and Reporting

Upon achieving 501(c)(3) status, the Academy will prepare and file Form 990 annually, including Schedule J for compensation disclosures. Key requirements:

• Part I (Compensation Practices): Disclose methods (e.g., surveys, committee approval), supplemental benefits, and contingent payments; explain in Part III (Internal Revenue Service, 2024b).
• Part II (Detailed Reporting): For Covered Persons with >$150,000 total reportable compensation, break out base, bonuses, deferred, and nontaxable benefits from the Academy and related organizations. Include former persons and unrelated compensation for services rendered (Internal Revenue Service, 2024b).
• Part VII (Form 990 Core): List Covered Persons and aggregate compensation.
• Timeline: Compensation reported for the calendar year ending with/within the tax year; estimates used for deferred amounts, with reasonable accrual methods.
• Responsibility: Finance Officer prepares draft; independent reviewer verifies; Board approves filing.

Non-compliance risks delays in 501(c)(3) approval or penalties (Internal Revenue Service, 2024c).

Article IX: Policy Review and Amendment

This policy will be reviewed annually by the Compensation Committee and amended as needed to reflect regulatory changes or 501(c)(3) status updates. Approval requires majority board vote. Effective date: [Insert Date]. Prior versions superseded.