IRS Provides Guidance with IRS Notice 2019-9

IRS guidelines on excess executive pay at tax-exempt organizations.

On December 31, 2018, the IRS released its IRS Notice 2019-9.  This document offers interim guidance on Section 4960 which was added to the Internal Revenue Code by the Tax Cuts and Jobs Act.  Section 4960 imposes an excise tax on a tax-exempt organizations that matches the corporate tax rate (21%).  The tax applies to a “covered employee’s” pay when it exceeds $1 million or is treated as an excess parachute payment.  Here are some of the things that you should know about the IRS guidelines on excess executive pay at tax-exempt organizations.

• Who does the excise tax apply to?

The Section 4960 excise tax applies to applicable tax-exempt organizations and related organizations paying excess remuneration or excess parachute payments to a covered employee.  Applicable tax-exempt organizations (ATEOs) include organizations exempt from taxes under Code Section 501(a).  Such organizations include public charities, chambers of commerce, trade associations, and so on.  Other exempt organizations include governmental entities that have their income excluded under tax code Section 115(1) as well as other entities specifically listen in Section 4960.  The excise tax will also apply to “related organizations;” taxable, tax-exempt, and governmental entities that meet certain criteria listen in the Notice.

• Who is a covered employee?

A covered employee must be one of an ATEO’s five most highly-compensated employees.  Once an employee is considered a covered employee, they will be treated as such, even if they are no longer one of the top five most highly-compensated or if they terminate employment.

• What is excess remuneration?

Excess remuneration is the portion of an employee’s pay that is subject to the excise tax.  This amount is the remuneration from the ATEO combined with the remuneration that the employee receives from related organizations that exceed $1 million a year.  Remuneration is a term that refers to the wages that are subject to income tax withholding purposes under tax code Section 3401(a).

• Excise tax reporting and payment?

Section 4960 taxes are reported and paid via IRS form 4720.  Entities that qualify as a related organization must file their own Form 4720.  This filing is due on May 15 for calendar year employers.

This is a brief overview of the IRS guidelines on excess executive pay at tax-exempt organizations.   Looking for a consulting firm with experience working with salary, legal, and other human resources issues?  Then don’t hesitate to contact the professionals at McKnight Associates, Inc.  We are ready to offer you hands-on human resources consulting for colleges, universities, medical centers, and organizations of all sizes.