How To Pay For Employees' Health Care?; Proposals To Give Tax Credits Backed By Smaller Non-profits

The health care reform proposals making their way through Congress stand to have effects on non-profits that reach beyond those organizations directly involved in providing health care.

One top concern for smaller non-profits is figuring out how to pay for the insurance they likely will be required to provide their employees. Some of the reform proposals offer payroll tax credits to small businesses to help them foot those bills, and at least one version would extend that help to non-profits as well.

The original plan put forward by Senate Finance Committee Chairman Max Baucus omitted non-profits from those receiving the credits. But after several other senators proposed amendments offering the tax relief to non-profit organizations, the Montana Democrat relented. The tax break would cover employers with no more than 25 full-time workers with annual wages averaging no more than $40,000.

That change is critical for the majority of non-profit groups, most of which are small operations, said Linda Czipo, executive director of the Center for Nonprofit Organizations.

"Non-profits employ 7 percent of the workforce in New Jersey, and they face the same hardships other small employers have meeting the burdens of providing health insurance," said Czipo, whose North Brunswick-based group represents non-profits around the state. "If the idea is to insure as many people as possible, you need an incentive for small organizations who otherwise can't afford to do it."

Two other proposed amendments to the Baucus plan have generated concern among non-profits, although neither is sure to be included in the final language of whatever health care reform emerges from Congress.

One, proposed by five senators including New Jersey Democrat Robert Menendez, would help pay for the cost of providing health insurance to all Americans by reducing the amount people who itemize deductions on their tax returns can take off for donating to charity.

The deduction limit has split the non-profit world. Many larger institutions, particularly hospitals, universities, museums and other arts organizations, have come out strongly against it, arguing that it will discourage wealthy individuals from giving. Other non-profits have argued that such proposals will help fund much-needed health coverage for the needy and also make the tax laws more equitable. They point out that people in lower tax brackets get less of a tax break for giving to charity than do the wealthy.

The split has left some in the non-profit world walking a tightrope as they try to balance their support for expanding the availability of health insurance with their desire to encourage charitable giving by the rich.

Responding to a similar proposal by President Obama in March, Independent Sector in Washington ? the nation's largest advocacy organization for non-profits ? issued a statement that reflected the charitable world's dilemma.

"It is essential that the administration and Congress move forward on the health care challenges facing our nation, and explore all of the available options for addressing the costs of health care reform," Independent Sector declared. "It is also imperative that the administration and Congress preserve strong incentives to encourage Americans to give back to their communities, particularly those of substantial means who have both the capacity and the responsibility to give back to communities."

The other amendment has been offered by Sen. Charles Grassley of Iowa, the ranking Republican on the Finance Committee. Grassley spent years as chairman of the committee investigating and trying to rein in abuses by non-profit organizations, especially those that pay exorbitant salaries to their top executives. His proposal has little to do with health care reform.

Grassley wants to enact language that would change the way non-profits comply with federal laws barring excessive compensation. Under current law, the board of a non-profit can justify the salary it pays its executives by hiring a consulting firm to conduct a comparability study. The consultant looks at the pay of executives at other organizations to make sure that the amount the board proposes paying its leaders is similar. If it is, federal law says that creates a "presumption of reasonableness" making it nearly impossible for federal authorities to sue a non-profit for violating the excessive compensation law.

"Right now what happens is the board decides, we want to pay this person $1 million, and then they hire a consultant and tell him to go find justification for that $1 million salary," said Dean Zerbe, Grassley's former investigative counsel who helped write most of the senator's charity regulation proposals. Once the study is completed, Zerbe added, the Internal Revenue Service is virtually blocked from enforcing the excessive compensation section of the tax law.

"It's a very difficult burden for the [IRS] to overcome," he said. Zerbe said changing the law probably wouldn't have much of an impact on most large non-profits like hospitals and universities, but it would make it easier for the IRS to go after organizations that abuse the system. "It would begin to put real teeth into a toothless provision of the law."