IRS Releases Section 4960 Final Regulations

It has been a long time coming, but the IRS has released final regulation on the excise tax imposed on tax-exempt organizations for excess remuneration. These final regulations mostly follow the proposed regulations issued in June 2020, with the exception of a few changes resulting from public comments.

To provide some background on the topic:  As part of the 2017 Tax Cuts and Jobs Act (TCJA), Section 4960 imposes a 21% excise tax on tax-exempt organizations that pay their covered employees remuneration in excess of $1 million, or parachute payments equal to at least three times a covered employee’s average pay over the past 5 years. 

The final regulations are consistent with the proposed regulations when defining a covered employee. These regulations state that whether an employee is one of an applicable tax-exempt organization’s five highest-compensated employees is determined separately for each organization, not for a group of related organizations. This means one individual could be considered a covered employee of more than one organization for a tax year. Further, for determining whether an employee is the highest-compensated employee for the tax year, the final regulations provide that remuneration paid by an applicable tax-exempt organization is aggregated with any remuneration paid by a related organization for that specific tax year.

The final regulations follow the proposed regulations related to the limited-hours exception. Some practitioners were worried that the section 4960 tax could be imposed on for-profit companies when their highly paid employees volunteer for their firm’s foundations – thereby discouraging employees from volunteering for their tax-exempt organizations. However, the limited-hours exception adopted under the proposed and final regulations state an individual is not one of the applicable tax-exempt organization’s five highest compensated employees if he/she receives no remuneration from the tax-exempt organization or related tax-exempt organization, and his/her services at the tax-exempt organization consist of no more than 10 percent of the total hours worked at these tax-exempt organizations, including the time worked at the for-profit company, or for no more than 100 hours in a year.

If you have any additional questions, please contact a member of the Schneider Downs tax-exempt group.

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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