Removing Barriers Blog

CUNA Provides Update on New Executive Compensation Excise Tax
Posted November 08, 2018 by CUNA Advocacy

The Tax Cuts and Jobs Act of 2017 (TCJA) imposes an excise tax on certain executive compensation provided by tax-exempt organizations.  Tax-exempt entities are now required to pay a 21% excise tax on the five highest paid employees’ compensation that individually exceed $1 million annually.  This excise tax will be paid by the employer on amounts that exceed $1 million annually and is effective for tax years beginning January 1, 2018.  This provision was designed by lawmakers to “create parity” with respect to for-profit entities that can only deduct the first $1 million of each individual employee’s compensation. 

The definition of compensation includes cash and the cash value of most benefits.  “Roth” retirement plan contributions are not included, nor are 457(b) deferred compensation plans.  However, somewhat different treatment is defined for 457(f) plans, also known as “ineligible” deferred compensation plans.  For these plans, the new law treats the definition of compensation as including plan amounts paid when the rights to the remuneration are no longer subject to a substantial risk of forfeiture.  Thus, the 21 percent excise tax can apply to the value of remuneration that is vested in the plan (and any increases in its value or vested remuneration), even if it is has yet to be received. 

UPDATE … the Congressional Joint Committee on Taxation (JCT) has recently informed stakeholders that amounts vested in such plans prior to December 31, 2017 are NOT subject to the tax, even if such amounts are unpaid.  For example, if an employee earns $100,000 in Section 457(f) deferred compensation every year from 2016 to 2020, as part of a 5-year vesting plan, the $200,000 earned and vested in 2016 and 2017 will not be subject to the excise tax even if the amount is unpaid.  However, the $300,000 earned and vested in 2018, 2019, and 2020 is subject to the excise tax. 

In addition, this law has a huge parity problem between existing for-profit and not-for-profit employee contracts with regard to the not-for-profit 21 percent excise tax and the deductibility of corporate executive compensation.  It exempts from deductibility limits existing corporate executive compensation contracts by “grandfathering” in “for- profit” executive contracts in effect on or before November 2, 2017.  No such provision is included for not-for-profit employee contracts.  This amounts to a retroactive tax on the nonprofit sector as these contracts were agreed upon with certain tax considerations assumed. 

CUNA and many other not-for-profit employers have been urging Congress to create parity by grandfathering the sector’s contracts in effect on or before November 2, 2017.  We expect a tax extender and technical corrections bill to be considered in a lame duck session of Congress in December of 2018 and CUNA is actively advocating for not-for-profit parity with for-profit businesses regarding employee contract parity and the "grandfathering" of existing contracts.  A tax technical corrections bill would be an appropriate vehicle to address this possible oversight.  Guidance from Treasury and the IRS has been sparse on this issue, particularly for not-for-profit employers.  Further, should a grandfather clause be extended to not-for-profit employers, it is unclear how renewing or terminating a covered employee’s compensation contract midway through its term would affect how the compensation is grandfathered. 

We have learned that the IRS’ Exempt Organizations Director Margaret Von Lienen has stated that IRS tax form 4720 is being revised so that exempt organizations can report and pay the new excise tax. 

CUNA lobbyists have been in contact with certain key tax staffers and lawmakers regarding a fix to the not-for-profit business parity problem with corporations.  CUNA believes that the best chance of enacting a parity provision remains with the tax writers in the House of Representatives, the body that originated the provision.