Posts

Executive Compensation Excise Tax On Tax-Exempt Organizations Produces Surprising Results

By Herman Spence III

The IRS recently issued Notice 2019-9 to provide interim guidance on the excise tax on certain executive compensation paid by applicable tax-exempt organizations (“ATEOs”).  Under Section 4960 of the new tax law, an ATEO is generally subject to a 21% tax for compensation paid to a covered employee in excess of $1 million per year.  Covered employees are the five highest compensated employees of the organization for the year plus anyone who is a covered employee of the organization in any year after 2016.  The tax also applies to excess parachute payments, which are severance-type compensation equal to more than three times the covered employee’s average annual compensation over a specified look-back.  The tax generally applies to deferred compensation when it vests, whether or not paid.  The tax does not apply to compensation to licensed medical professionals for medical services.

The excise tax produces surprising results in some situations, as illustrated in the examples below.  In each case assume a university pays annual compensation to its president, football coach, or prominent research professor of $5 million.

Read more