Thankfully, personal security threats for a nonprofit’s employees tend to be extremely rare. However, for nonprofits addressing polarizing issues amidst turbulent dynamics, provision of personal security for key employees may turn into a critically pressing priority. Nonprofit employees may be targeted personally with threats of violence, vitriol expressed through social media, or through their involvement with highly publicized events. Not only should these threats be addressed through effective safety measures and risk management, but nonprofits must also be aware that tax considerations apply as well.
Wait - tax aspects, too? Yes, indeed!
Employees receive taxable compensation from their employers, most typically through wages. An employer’s provision of security protection to an employee may constitute taxable compensation too. However, if the employer correctly utilizes an overall security program to address a bona fide business-oriented security concern, the resulting economic benefit to its employees should instead constitute a non-taxable working condition fringe benefit. The following sections unpack these technical tax terms for optimal legal compliance and effective implementation.
Security Services: Nontaxable Working Condition Fringe Benefit
Under the Internal Revenue Code, anything of value provided to an employee constitutes taxable income, absent specific exclusions (e.g., employer-provided health insurance coverage, 401k retirement benefits, de minimis non-cash gifts). Though Section 132 of the Code and the corresponding Treasury Regulations exclude “fringe benefits” from taxable income, particularly “working condition fringes” provided to employees.
Under Treasury Regulation § 1.132-5(m), to classify employer-provided security as a non-taxable working condition fringe, an employer must:
1. establish that a “bona fide business-oriented security concern” exists and
2. implement an “overall security program.”
These phrases are technical terms for legal purposes, which may be defined as follows.
Preliminary Tax and Risk Management Considerations
An overall security program typically includes round-the-clock security, specially equipped security vehicles, trained bodyguards, and other robust measures. An employer may classify a less comprehensive employer-provided security program as a working condition fringe, however, if the program is based upon an outside, independent security consultant’s report and recommendations.
For nonprofits, this framework may seem counterintuitive. In order to classify security services as a working condition fringe, the organization may need to spend more money to implement an overall security program or obtain an independent security study. This approach stands in contrast to nonprofits’ general maxim to avoid abuse of charitable assets. Consequently, nonprofit employers may need to think carefully and strategically about whether it can (and should) meet the tax definition for this working condition fringe benefit, as a nontaxable benefit for affected employees.
Other risk management considerations may be relevant too, such as whether to implement organization-wide security measures instead of focusing on security for just one (or a few) employees. Such matters may involve significant judgment calls by the executive leadership and/or nonprofit board members, including evaluation of accompanying liability and risk mitigation aspects along with professional consultation about proper tax treatment. These considerations are addressed further in other W&O blog articles addressing threats and disturbances implicating nonprofits’ program activities as well as potentially advisable workplace orders of protection.
Bona Fide Business-Oriented Security Concern
In order to offer a security program for an employee’s benefit, an employer must first determine whether a bona fide business-oriented security concern exists. A bona fide business-oriented security concern exists only if the facts and circumstances establish a specific basis for concern regarding the safety of an employee – essentially a credible risk of harm to that employee. A generalized concern for an employee’s safety does not present a bona fide business-oriented security concern. While nonprofit leaders in certain circumstances may experience a general fear for their employees’ safety, this fear therefore will not likely rise to the level of a bona fide business-oriented security concern in the absence of a particularized threat.
Significantly, the factors supporting a specific basis for concern within an employment context must be because of the employee’s status as an employer’s employee, such as a threat of death, kidnapping, or serious bodily harm to the employee or a similarly situated employee. For example, if an employee receives a threat of bodily harm from a disgruntled neighbor, this threat will probably not create a bona fide business-oriented security concern because it has nothing to do with the threatened individual’s status as an employee. Notably too, if a bona fide business-oriented security concern exists with respect to an employee, the concern also applies to an employee’s spouse and dependents. Once an employer establishes that a bona fide business-oriented security concern exists, the employer also must periodically evaluate the circumstances giving rise to the concern to confirm that the concern still exists.
After an employer determines that a bona fide business-oriented security concern exists, two types of security programs may be properly classified as a working condition fringe: (1) a comprehensive overall security program or (2) an overall security program that is tailored to the results of an independent security study.
Overall Security Program
An overall security program is intended to protect an employee on a twenty-four-hour basis, including time spent at the workplace, commuting, and at the employee’s residence. The program must protect the employee while traveling both at home and away from home whether for business or personal purposes. An overall security program must include the provision of a bodyguard or chauffeur who is trained in evasive driving techniques; an automobile specially designed for security, guards, metal detectors, alarms, or other similar methods of controlling access to the employee’s workplace and residence; and, in appropriate cases, flights on the employer’s aircraft.
The Treasury Regulations clearly direct that an overall security program must be truly comprehensive to qualify as a working condition fringe, which is therefore not treated as taxable income to the employee. Security services will not be classified as an overall security program when the employer does not provide security at the employee’s residence or when the employer solely provides a specially equipped vehicle but provides no other security services.
Independent Security Study - Safe Harbor
Even if an employer does not provide comprehensive, 24/7 security, federal tax law provides that an “overall security program” with respect to an employee may still exist so long as:
1. The employer commissions an independent security consultant to perform a security study with respect to the employer and employee;
2. The security study objectively assesses of all the facts and circumstances;
3. The study recommends that an overall security program is not necessary, and the recommendation is reasonable given the circumstances;
4. The employer implements the specific security recommendations contained in the security study to the employee on a consistent basis.
Securing an independent security study and implementing the study’s recommendations is usually the most desirable option for nonprofit organizations. However, this route may create tax issues when immediate threats arise because of the lag time associated with commissioning a study and implementing specific recommendations.
Consequently, to properly classify security services as a working condition fringe, employers should commission a security study as soon as possible after a threat arises and implement the specific recommendations contained in the report.
Other Tax Compliance – Excess Benefits
Section 4958 of the Code is relevant here too for nonprofit employers. Section 4958 authorizes “intermediate sanctions” against nonprofit leaders who receive or approve of improper private benefits, known as “excess benefit transactions” (EBT). Such potential EBTs may include excessive compensation, reimbursement of unverified expenses, zero-interest loans to employees, spousal travel without proper business purpose, private club memberships, other perks that lack substantiation to valid employment purposes.
Notably, most working condition fringe benefits that are excluded from income under Section 132 are disregarded for Section 4958 purposes. Accordingly, if a nonprofit employee who is also a leader (e.g., CEO, board member) receives a nontaxable working condition fringe benefit in connection with employment, the economic value of such benefit is excluded from the calculation of reasonable compensation for purposes of Section 4958. However, if security services are not properly classified as working condition fringes under Section 132, then such benefit will be treated as taxable compensation and automatically classified as an EBT under Section 4958. The tax consequences for such unfavorable results can be quite severe, including required payment of the full “excess” benefits and statutory penalties of up to 200% thereof. Employers and employees alike thus should scrupulously guard against this potentially punitive outcome, particularly by carefully structuring any security program for optimal fringe benefit qualification.
Form 990 Reporting
If a tax-exempt organization provides security services to employees, its leaders should also make sure to properly report such services on its annual Form 990 filing. Schedule J of Form 990 is used to report compensation information for officers, directors, and key employees. In particular, Part I, Line 1a contains a question of whether the nonprofit provided any “personal services.” The instructions to Schedule J clarify that personal services may include bodyguard services. It is unclear whether the IRS intended “personal services” to encompass bodyguard services provided pursuant to an overall security program or at the recommendation of an independent security consultant. Indeed, the other “personal services” listed in the instructions to Schedule J are items likely classified as taxable income, such as babysitting, personal chef services, personal training, or tutoring for nonbusiness purposes.
Given this ambiguity regarding the definition of “personal services” under Schedule J, Schedule O of the Form 990 may be a more appropriate place to report security services in their entirety. Schedule O is a general catch-all opportunity to provide supplemental information in response to Form 990 questions. Either on Schedule J or Schedule O, the reporting organization should provide explanatory disclosures where applicable in consultation with their accountant and attorney.
Planning Ahead
Nonprofit leaders should be continually mindful of appropriate security and safety protections for their employees and, indeed, for their entire operations. Providing security protection to a specific employee may be quite rare among a nonprofit’s many potential risk management options. But it may also develop into a vitally important responsive measure, depending on the circumstances. As with all financial matters affecting employees, responsible nonprofit leaders should attend to accompanying tax compliance aspects too – especially to avoid any unintended taxable compensation consequences for nonprofit employees.
