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Incentive Compensation Limitations in the Education Industry

Incentive Compensation Limitations in the Education Industry

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group of students at Title IV schoolIt’s been a few years since the U.S. Department of Education issued authoritative guidance related to activities subject to the incentive compensation ban for Title IV eligible institutions and their employees who are involved in securing enrollment (recruitment) and securing financial aid. We continue to receive numerous questions each year involving what types of payments are allowed and whether the “12 safe harbors” still exist. The answer is “No” – the safe harbors have been gone for several years.    

As a result of questions like these, we thought it may be time to review some of the specifics, such as:
• What are considered Covered Activities (activities that are always subject to the ban on incentive compensation)?
• What are considered Exempt Activities (Activities that are not subject to the ban, unless the employee or entity are also involved in a covered activity)?
• What types of payments are considered payments of incentive compensation? (Dear Colleague Letter GEN 11-05)

Exempt Activities (Dos) – NOT Subject to the Ban

  • Broad information dissemination
  • Advertising programs that disseminate information to groups of potential students
  • Collecting contact information
  • Screening pre-enrollment information to determine whether a prospective student meets the requirements that an institution has established for enrollment in an academic program
  • Determining whether an enrollment application is materially complete, as long as the enrollment decision remains with the institution
  • General student counseling
  • Career counseling
  • Financial aid counseling, including loan management
  • Online course support – both professional services and computer hardware and software
  • Academic support services, including tutoring aimed at student retention, whether that support is provided prior to attendance in classes or after attendance has begun

Covered Activities (Don’ts) -These are Subject to the Ban

  • Targeted information dissemination to individuals
  • Solicitations to individuals
  • Contacting potential enrollment applicants; aiding students in filling out enrollment application information
  • Completing financial aid applications on behalf of prospective applicants

Once you and your team have reviewed and vetted your internal systems to ensure you are only engaging in activities under the Exempt Activity section, the next step is to ensure that any compensation being paid is not considered a direct or indirect form of incentive compensation.

Man-Typing-on-Calculator

Let’s start with the types of payments that ARE considered direct or indirect payments of incentive compensation (the Don’ts):

  • Tuition sharing as a measure of compensation when based on a formula that relates to the amount payable to the entity to the number of students enrolled as a result of the activity of the entity (i.e. bonuses paid based on number of students enrolled)
  • Profit sharing plans from which distributions are made to individuals based on the number of students enrolled (i.e. profit-sharing payments paid based on number of students enrolled)
  • Salary adjustments that take the form of incentive payments based directly or indirectly on success in securing enrollments or financial aid (i.e. employees should not have spikes and valleys in their payroll throughout the year related to securing enrollments)
  • Payments based on the application of an admissions policy
  • Bonus or other payments based on success in securing enrollments or financial aid 

That leaves us with the ways Title IV eligible post-secondary institutions can compensate its employees with incentives:

  • Tuition as a source of revenue from which compensation is paid to an unrelated third party for a variety of bundled services (i.e. the educational institution can engage an outside third party to provide bundled services including marketing)
  • Profit sharing plans from which distributions are made to individuals on a basis that is neutral with respect to the role the recipient plays in student recruitment or the securing of financial aid
  • Employee benefit plans offered to all employees on a basis that is neutral with respect to the role the recipient plays in student recruitment or the securing of financial aid
  • Cost of living adjustments
  • Compensation adjustments based upon seniority
  • Payments to faculty based upon student class size or academic achievement
  • Payments to senior executives with responsibility for the development of policies that affect recruitment, enrollment or financial aid
  • Payments based upon securing student housing or other student services, including career counseling
  • Volume driven arrangements based on services that are not recruitment or securing of financial aid

Your institution should review these tenets regularly to ensure that any changes to your compensation plans in this competitive job market meet the requirements above. As part of your annual audit, our auditors will review these points and ensure that compensation paid meets the requirements as well.   

We always advise our clients to be proactive about these rules. The last thing we want to see is the institution “reacting” to something noted during our annual audit testing, as a result of not being current on the regulations.

For more information about Title IV audits or incentive compensation, please contact one of our Sikich Advisors.

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