Final Section 4960 Executive Compensation Excise Tax Regulations: Significant Changes for Tax-Exempt Organizations

Description

Deferred compensation and other executive compensation plans and arrangements for tax-exempt organizations differ from those of for-profit entities. Section 4960 imposes an excise tax on tax-exempt organizations that pay excessive compensation to certain employees. ERISA counsel must understand complex tax rules, reporting requirements, and available planning techniques when structuring executive compensation for tax-exempt organizations.

On Jan. 19, 2021, the IRS published Final Regulations interpreting the excise tax under Section 4960 on certain executive compensation paid by tax-exempt organizations. Under Section 4960, a tax-exempt organization may be subject to a 21 percent excise tax on excessive compensation paid to employees if such compensation exceeds one million dollars during the tax year or the aggregate present values of an individual's separation payments and benefits equals or exceeds three times their five-year average pay.

Applying Section 4960 involves identifying entities and employees subject to these rules and how parachute payments and aggregation rules can determine if any compensation exceeds the threshold. The final regulations provide several items for tax-exempt organizations subject to the rules, such as the 50 percent percent test for related organizations, covered employees with a few exceptions, and special timing rules for remuneration, amongst other key provisions.

Listen as our panel discusses the application of Section 4960, guidance provided under the final regulations, and practical methods to avoid the 21 percent excise tax.