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Executive Benefits at Non-Profits after the Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (the Act) was passed by the House and Senate and signed into law by President Trump at the end of 2017. The Act made significant changes to certain Internal Revenue Code (Code) provisions dealing with highly compensated employees. Among these are restrictions (in the form of excise taxes) on compensation of certain highly paid employees of “applicable tax-exempt organizations” (i.e., 501(c) organizations, political organizations, and farmers' cooperatives as well as non-profit healthcare systems, hospitals, credit unions,federal, state, and local governmental entities with excludable income).
Effective for all taxable years beginning after Dec. 31, 2017, new Section 4960 imposes an excise tax on applicable tax-exempt organizations where the “remuneration” received by an employee (or former employee) that is one of the five highest compensated employees for any prior taxable year beginning after Dec. 31, 2016 exceeds certain amounts. For this purpose, remuneration includes amounts that become taxable under Section 457(f) upon a lapse of a substantial risk of forfeiture, but excludes amounts paid directly to certain medical professionals for performance of services. Amounts credited under qualified and welfare plans are not included in remuneration. The Section 4960 excise tax equals 21% of the sum of the remuneration exceeding $1M annually. These employers must now comply with the remuneration (compensation and benefits) ceiling for the highest compensated top five employees under §4960 and §162(m). Additionally, once an individual is labeled in that group they will remain in that group so the group may expand and the excise tax is annually applied.
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