Tax-Exempt Entities Receive IRS Guidance on Executive Compensation Excise Tax

The Tax Cuts and Jobs Act (“TCJA”) enacted in December 2017 offered welcome tax relief to many American taxpayers. However, the TCJA also created headaches for tax-exempt entities in the form of a 21% excise tax on certain types of executive compensation programs. Organizations like churches, charities, social clubs, veterans’ organizations, certain trusts, and agricultural organization had to quickly learn how to calculate and pay this new tax. To assist with this task, the Internal Revenue Service (IRS) published Notice 2019-09, Interim Guidance Under Section 4960.

General Information About Section 4960

This section of the Internal Revenue Code (the “Code”) relates to the payment of excess remuneration and excess parachute payments to covered employees of applicable tax-exempt entities and related organizations. This type of payment is subject to an excise tax that equals the corporate tax rate under section 11 of the Code. “Covered employees” means an employee who is one of organization’s top five highest-compensated employees for the tax year.

IRS Guidance on Calculating the Excise Tax

Notice 2019-09 states that the following steps should be taken to calculate how much excise tax is owed, if any, on a parachute payment:

  • Is the covered employee entitled to compensation due to an involuntary termination that is not subject to any exclusions? If yes, then continue.
  • Determine the total aggregate present value of the expected contingent payments. Watch for pertinent special valuation rules that affect payment or the vesting of a right to payment.
  • Calculate the covered employee’s base amount of compensation.
  • Are the contingent payments considered parachute payments?
  • If so, then calculate the amount of excess parachute payments, if any.
  • Finally, use Code Section 4960(a)(2) to calculate the amount of excise tax owed.

Other factors affect this calculation, including whether a separation of employment is voluntary or involuntary.

What Does This Mean for Tax-Exempt Entities Going Forward?

Compliance with complex tax laws is hard. Even with IRS guidance on the executive compensation programs excise tax, companies need to hire knowledgeable, experienced advisors.

At Hall Benefits Law, we work closely with clients like you to make sure your employee benefit plans comply with federal and state laws. Please call 678-439-6236 to discuss your concerns with an experienced attorney. Our website contains more information about our firm, a Contact Form, and free resources for your review. From our home office in Georgia, we assist clients throughout the United States, from New York to New Mexico to California.

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