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.