The Tax Cuts and Jobs Act (TCJA) added Section 4960 to the Internal Revenue Code (IRC). The new section applies to any "applicable tax-exempt organizations" and imposes an excise tax on excess executive compensation (remuneration) and excess parachute payments. Such excess amounts are taxed at the corporate tax rate of 21 percent. Like many provisions in TCJA, the new provision is effective for taxable years beginning after Dec. 31, 2017.
The IRS released IRS Notice 2019-09 on Dec. 31, 2018, and the much-awaited details provide informal guidance on this new provision. While waiting for the proposed regulations and final regulations, taxpayers can rely on the Notice as a reasonable interpretation of the law. Comments on Notice 2019-09 are due by April 2, 2019.
The Notice leans heavily on guidance issued previously by the IRS under Section 162(m) (an older provision regarding excess compensation for certain publicly traded companies) and Section 280G (an older provision regarding golden parachute payment when there is a change in control of a company such as a merger or acquisition). As with Section 162(m) and Section 280G, new Section 4960 imposes additional burdens on tax-exempt organizations to assess, track and potentially pay the excise tax.
Those entities subject to Section 4960 include an organization that is exempt from tax under Section 501(a) or has income excluded from tax under Section 115(1) (which generally exempts from taxation income of state or political subdivision). Section 4960 taxes remuneration paid to a "covered employee" that exceeds $1 million or is considered an "excess parachute payment." A "covered employee" is one of the five highest-compensated employees in the current taxable year and any covered employee in any preceding taxable year beginning after Dec. 31, 2016. As noted below, the determination of who is a covered employee is based on remuneration paid during the calendar year by the exempt organization and any related organization. An "excess parachute payment" is defined as the excess of the total amount of any parachute payment (generally a payment contingent on the employee's separation) over the portion of a base amount (calculated by looking at past compensation) allocated to the payment.
Highlights of Notice 2019-09 are as follows:
While the guidance provides welcome clarification, the new provision does impose additional burdens on affected entities. Holland & Knight is prepared to answer any questions that organizations may have about Section 4960, and we can review policies and procedures to ensure compliance and exposure for this new tax. If you have any questions, please contact the authors or a member of Holland & Knight's Employee Benefits and Executive Compensation Group, including Partners Ari Alvarez, Kelly Bley, Gregory Brown, Bob Friedman, Claudia Hinsch or Victoria Zerjav.
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