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Program Integrity Q&A

In addition to the following Q&As, please see the following resources for guidance related to Incentive Compensation:

- Preamble  to the final regulations ( https://www.govinfo.gov/content/pkg/FR-2010-10-29/pdf/2010-26531.pdf ) – published 10/29/2010
- GEN-11-05  ( http://ifap.ed.gov/dpcletters/GEN1105.html ) – published 3/17/2011

IC-Q1: What activities are  subject to the ban on incentive compensation?

IC-A1: Only two types of  activities are subject to the incentive compensation ban: securing enrollment  (recruitment) and securing financial aid. No other activities are subject to  the ban.

**Table One**

| **Covered Activities****Activities that are ALWAYS subject to the ban on incentive compensation**                                                                                                                                                                                                                                         | **Exempt Activities****Activities not subject to the ban on incentive compensation include the    following, unless the activities of the employee or entity also involve a    covered activity.**                                                                                                                                                                                                                                                                                                                                                          |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Recruitment activities, including:**      Targeted information dissemination to individuals;        Solicitations to    individuals;        Contacting potential enrollment applicants; aiding students in filling out enrollment application information                                                                               | **Marketing activities, including:**      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         |
| **Services related to securing financial aid, including:**      Completing financial aid    applications on behalf of prospective applicants (including activities which    are authorized by the Department, such as the FAA Access tool, which can be    used to enter, correct, verify, or analyze financial aid application data)**** | **Student    support services offered after the point at which financial aid is allowed to    be disbursed for a payment period, including:**      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****  |
| ** **                                                                                                                                                                                                                                                                                                                                | Policy    decisions made by senior executives and managers related to the manner in    which recruitment, enrollment, or financial aid will be pursued or provided, such    as, e.g., decisions to admit only high school graduates                                                                                                                                                                                                                                                                                                                         |

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Example 1-A:Employee A at XYZ.com posts  information about available programs and enrollment application procedures on a  Web site for a local business school. Employee A also answers general questions  about completing an enrollment application and forwards completed enrollment  applications to the school. Employee A has no additional direct contact with  these applicants. Payments to Employee A for these activities are not subject  to the ban on incentive compensation because the employee is only engaged in  exempt activities.

Example 1-B—Financial Aid  Servicer:  A third-party servicer provides  services related to securing financial aid. In addition to collecting financial  aid information, the servicer uses that information to contact the financial  aid applicant and helps him or her locate other publicly available information  about programs and resources in completing the submission of information that  could lead to the award of financial aid. Once the applicant has submitted the  information, no further contact is made by the servicer. This level of activity  is not subject to the ban on incentive compensation. (See 75 FR 66878 (Oct. 29,  2010).) However, if the servicer helps the student identify missing information  on a financial aid application and then continues to counsel the applicant on  receiving financial aid, the conduct of the servicer is now subject to the ban  on incentive compensation as the conduct now encompasses covered activities.

Example 1-C:  Employee B tutors students after  they have been admitted and become eligible to receive a disbursement of  financial aid, but before they have actually received financial aid or started  classes. None of the academic support services provided by Employee B is  subject to the ban on incentive compensation.

Example 1-D:  Employee C encourages students to  consider enrollment in an educational program before a purported enrollment  deadline. Employee C’s compensation is subject to the ban on incentive compensation  as it involves covered recruitment activities.

Example 1-E:  Employee D is involved in  recruitment activities and is therefore subject to the ban on incentive  compensation. Nonetheless, Employee A is eligible for a merit increase to his  or her annual salary based on standard evaluative factors, as discussed in  Question 4, that are independent of the number of students recruited, retained,  or graduated.

[Guidance issued 3/17/2011]

IC-Q2: What types of payment are  considered direct or indirect payments of incentive compensation?

IC-A2: The following table and  subsequent examples provide examples of different types of payments relative to  their characterization as incentive compensation.

**TABLE 2**

| **Types of payment that are direct or indirect payment of incentive compensation**                                                                                                                    | **Types of payment that are not direct or indirect payment of incentive compensation**                                                                                                                                              |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| “Tuition sharing” as a measure of compensation when based on a formula that relates the amount payable to the entity to the number of students enrolled as a result of the activity of the entity     | Tuition as a source of revenue from which compensation is paid to an unrelated third party for a variety of bundled services (Example 2-B)                                                                                          |
| Profit sharing plans from which distributions are made to individuals based on the number of students enrolled by virtue of covered activities by the recipient  (section 668.14(b)(22)(ii)(B))       | Profit sharing plans, including 401(k) type 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 |
| Salary adjustments that take the form of incentive payments based directly or indirectly on success in securing enrollments or financial aid                                                          | Employee benefits 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                                                    |
| Payments based on the application of an admissions policy                                                                                                                                             | Cost of living adjustments (COLAs)                                                                                                                                                                                                  |
| Bonus or other payments based on success in securing enrollments or financial aid                                                                                                                     | 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                                                                                                                                  |

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Neither persons nor entities may  receive direct or indirect payments of incentive compensation.The Department received numerous  questions about the use of "persons" rather than "persons or entities" in some  parts of the preamble to the final rule. The Department will issue a technical  correction to the regulations, consistent with this letter, which will clarify  that in all places in the preamble related to incentive compensation, the  Department was referencing the statutory prohibition that applies to both  persons and entities.

**"Tuition sharing:"** The Department has been informed that some third parties charge institutions a percentage of tuition as a way of  assuming the business risk associated with student recruitment. Further, such third parties have typically combined student recruitment services with other  services not covered by the incentive compensation prohibition, such as advertising, marketing, counseling, and support services to admitted students, and  verification of student aid application information.

Section 487(a)(20) of the HEA  mandates that the "institution will not provide any commission, bonus, or other  incentive payment based directly or indirectly on success in securing  enrollments or financial aid to any **persons or entities**engaged in any  student recruiting or admission activities or in making decisions regarding the  award of student financial assistance." The Department generally views the  payment based on the amount of tuition generated as an indirect payment of  compensation based on success in recruitment and therefore a prohibited basis  upon which to measure the value of the services provided. This is true  regardless of the manner in which the entity compensates its employees. 

However, as illustrated in the  examples below, the Department does not consider payment based on the amount of  tuition generated by an institution to violate the incentive compensation ban  if that payment compensates an unaffiliated third party that provides a set of  services that may include recruitment services. The independence of the third  party (both as a corporate matter and as a decision maker) from the institution  that provides the actual teaching and educational services is a significant  safeguard against the abuses the Department has seen heretofore. When the  institution determines the number of enrollments and hires an unaffiliated  third party to provide bundled services that include recruitment, payment based  on the amount of tuition generated does not incentivize the recruiting as it  does when the recruiter is determining the enrollment numbers and there is  essentially no limitation on enrollment.

With the statutory mandate in  mind, the Department offers the following guidance with respect to certain possible  business models:

Example 2-A:  A third-party servicer provides  services that do not include student recruitment or the awarding of student  financial aid, such as student counseling, verification of student aid  application information, advertising, and collection of contact information  about enrollment applicants. The ban on incentive compensation does not apply  to the entity and does not apply to the employees of the entity because no  services are offered that are subject to the ban.

Example 2-B:A third party that is not  affiliated with the institution it serves and is not affiliated with any other  institution that provides educational services, provides bundled services to  the institution including marketing, enrollment application assistance, recruitment  services, course support for online delivery of courses, the provision of  technology, placement services for internships, and student career counseling.  The institution may pay the entity an amount based on tuition generated for the  institution by the entity's activities for all bundled services that are offered and provided collectively, as long as the entity does not make  prohibited compensation payments to its employees, and the institution does not  pay the entity separately for student recruitment services provided by the  entity.

Example 2-C:  The employees at Business A ensure that enrollment applications are complete and then forward the  enrollment applications to the institution for admissions decisions. In  addition, Business A employees receive financial aid files along with required  verification documentation, complete the verification process, then return the  files to the institution. In each instance, payments by Business A to compensate its own employees based on the number of files processed by those  employees would be permitted because the employees do not undertake recruiting  or admitting of students, or make decisions about and award title IV, HEA  program funds.

In all of these examples, the  institution receiving title IV funds remains responsible for the actions of any  entity that performs functions and tasks on the institution's behalf. These  responsibilities include ensuring that employees are not paid for services that  would convert these payments into prohibited incentive compensation because of  the activity the employees engage in. [Guidance issued 3/17/2011]

IC-Q3: Does the incentive  compensation prohibition apply to all employees regardless of title or  position?

IC-A3: Yes, the incentive compensation prohibition applies to all employees "with responsibility for  recruitment or admission of students, or making decisions about awarding title  IV, HEA program funds." (75 FR 66874 (Oct. 29, 2010).) As shown in Table 1, the  Department makes a distinction between recruitment activities that involve  working with individual students and policy-level determinations that affect  recruitment, admission, or the awarding of title IV funds. The Department  expects that employees who have titles such as enrollment counselors,  recruitment specialists, recruiters, and enrollment managers have sufficiently  direct involvement in recruitment that the incentive compensation ban applies  to them. Senior managers and executive level employees who are only involved in  the development of policy and do not engage in individual student contact or  the other covered activities listed in Table 1 will not generally be subject to  the incentive compensation ban.

Likewise, a college president or  dean who speaks with prospective students about the value of a college education  or the virtues of attending a particular institution would not violate the  incentive compensation prohibition. (75 FR 66874 (Oct. 29, 2010).) [Guidance  issued 3/17/2011]

IC-Q4: What "standard evaluative  factors" other than seniority may an institution take into account in  determining compensation of employees?

IC-A4: Institutions may use  factors such as seniority or length of employment as a basis for compensating  employees covered by the incentive compensation prohibition. Many other  qualitative factors may also be used so long as they are not related to the  employee’s success in securing student enrollments or the award of financial  aid. These factors may include such things as job knowledge and  professionalism, skills such as analytic ability, initiative in work  improvement, clarity in communications, and use and understanding of  technology, and traits such as accuracy, thoroughness, dependability,  punctuality, adaptability, peer rankings, student evaluations, and  interpersonal relations. (See also 75 FR 66877 (Oct. 29, 2010).) [Guidance  issued 3/17/2011]

IC-Q5: Can institutions make  payments to persons or entities engaged in any student recruitment or admission  activity or in making decisions regarding the award of financial aid based upon  the institution’s students’ academic performance while enrolled?

IC-A5: No. The compensation of  recruiters based on the academic performance of the students recruited violates  the incentive compensation ban. (See 75 FR 34817-34818 (June 18, 2010).) However, many activities  are not considered recruitment activities subject to the ban on incentive  compensation as shown in Table 1. To the extent that employees are engaged in  these other activities their compensation may be based on successful student  performance.

The preamble noted that bonuses  for athletic personnel to reward performance other than securing enrollment or  awarding financial aid, such as a successful athletic season, team academic  performance, or other measures of a successful team, are permitted. (See 75 FR  66874-66875 (Oct. 29, 2010).) This statement merely reflects the fact that the  payment of bonuses to athletic personnel is a common practice and is not  typically viewed as incentive compensation based on recruitment of individuals  as students, but at most may indirectly reward success in recruiting that small  subset of individuals whose enrollment would benefit the institution’s athletic  program. This discussion was not intended to suggest that incentive payments in  other areas of the institution are allowed. [Guidance issued 3/17/2011]

IC-Q6: The preamble discusses the  making of profit sharing payments and suggests that in certain circumstances  they may be permitted. (See 75 FR 66878 Oct. 29, 2010.)  Can you provide further clarity  regarding when profit sharing is allowed?

IC-A6: The final rule on profit  sharing arrangements is at 34 C.F.R. § 668.14(b)(22)(ii)(B). In using the term  "profit sharing," the Department intended to address plans that for-profit  corporations use to compensate employees and officers of the corporation. The  term “profits” here was not intended to address revenue generated at nonprofit  corporations. This section was also intended to make clear that the Department  does not view eligible retirement plans pursuant to section  402(c)(8)(B)(iii-vi) of the IRS Code as prohibited incentive compensation. 

As stated in the response to  Question 2, the sharing of profits with employees is permitted when they are  shared in a way that is neutral relative to the type of work that an employee  does. The rule prohibits using profit sharing as a bonus or commission for  employees involved in recruitment or financial aid activities as described in  the response to Question 1.

The Department has received  requests for clarification regarding whether the profit sharing rule applies to  payments to entities in addition to payments to individuals. The incentive  compensation ban applies to payments to entities. However, section  668.14(b)(22)(ii)(B) was not intended to address payments to third parties as  specifically addressed in Question 2. As illustrated in Table 2, nothing in the  Department's regulations is intended to limit an institution’s ability to  reward its employees with traditional profit sharing payments as long as such  payments are not designed to benefit recruitment and financial aid personnel  distinct from all other institutional employees. In that regard, section  668.14(b)(22)(ii)(B) was offered to provide assurance that profit sharing  within the confines of traditional pensions plans is allowed as long as the  payments are not a substitute for otherwise impermissible compensation to  individuals engaged in recruitment or the provision of financial aid. [Guidance  issued 3/17/2011]

IC-Q7:  Do the incentive compensation rules apply to study abroad situations for Title IV eligible students?

IC-A7:  Yes, the incentive compensation rules apply to a participating home school and a participating study abroad school.  In addition, even if one of the two schools involved in providing a study abroad program  (home school and  study abroad school) is not participating, the participating school remains responsible for violations of incentive compensation rules, regardless of whether it is the non-participating school that performs the unlawful recruitment or securing of financial aid.

In addition, DCL GEN 11-05 states that "the Department does not consider payment based on the amount of tuition generated by an institution to violate the incentive compensation ban if that payment compensates an unaffiliated third party that provides a set of services that may include recruitment services."  Importantly, the third party cannot pay its recruiters of students in a manner that is inconsistent with the HEA's prohibition against incentive compensation.   Further, "The independence of the third party (both as a corporate matter and as a decision maker) from the institution that provides the actual teaching and educational services is a significant safeguard against the abuses the Department has seen heretofore. When the institution determines the number of enrollments and hires an unaffiliated third party to provide bundled services that include recruitment, payment based on the amount of tuition generated does not incentivize the recruiting as it does when the recruiter is determining the enrollment numbers and there is essentially no limitation on enrollment."   [Guidance issued 11/17/2011]

IC-Q8:  Where a non-profit or public institution has a wholly owned for-profit subsidiary that solely and exclusively provides bundled services to the parent institution and to no other institution are transactions between the institution and its subsidiary included within the scope of the ban on the payment of incentive compensation?

IC-A8:  Yes.  Incentive compensation includes "tuition sharing" as a measure of compensation when based on a formula that relates the amount payable to the entity to the number of students enrolled as a result of the activity of the entity.  As noted in the answer to the immediately preceding question ((IC-Q-7), "the Department does not consider payment based on the amount of tuition generated by an institution to violate the incentive compensation ban if that payment compensates an **unaffiliated third party** that provides a set of (bundled) services that may include recruitment services."  (emphasis added).   A subsidiary is not an unaffiliated third party.  *See also IC-A-2.* [Guidance issued 2/2/2012]

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Program Integrity Q&A

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