02/28/2019

Tax Law Brings Golden Parachute Rules to Tax-Exempts

A recent Treasury notice has brought this to light

A recent Treasury notice has brought to light that even if an organization’s top five highest paid executives earn less than $1 million, the organization could still be subject to the 21 percent excise tax on executive compensation as part of the 2017 Tax Cuts and Jobs Act (TCJA).

According to Treasury’s Notice 2019-09, if an organization makes parachute payments (ie., compensation contingent on separation from employment) equal to three times greater than these executives’ salary, your organization may be liable for a 21 percent tax on these parachute payments. If the 457(f) distribution and any severance exceed three times the executive’s base salary, the association would have to pay the excise tax on the totalamount exceeding the executive’s base salary (not just the excess over three times the base salary), regardless of the executive’s compensation totaling less than $1 million.

Mark Poerio, senior counsel at Wagner Law Group, writes that 457(f) plans, “are typically structured to avoid immediate income taxation for executives by deferring benefit payments until their termination of employment. No one would think this could trigger golden parachute penalties for the organization. In the wake of IRS Notice 2019-09, however, tax-exempt organizations should think again. Consider the following example: At the time an HCE is involuntarily terminated from employment, her Base Amount is $200,000. If she collects $100,000 of severance pay and $600,000 of 457(f) plan benefits (which vest due to her involuntary termination), then she will have exceeded the 3x limit by $100,000. That is, however, not the amount for which the organization must pay a 21 percent excise tax under Code Section 4960. Instead, the excise tax is based on the excess of her $700,000 of parachute payments over her $200,000 Base Amount. The excise tax will accordingly be 21% of $500,000, or $105,000!”

Poerio shares that the TCJA brought Code Section 280G’s golden parachute rule to nonprofits. One major twist is that the three times pay limit applies to most forms of severance, not just changes in corporate control.

The American Society of Association Executives (ASAE) recommends associations review their compensation arrangements with their five highest paid employees and assess if they will be subject to the tax. ASAE would like to hear from you if this affects your organization so when the organization weighs in with members of Congress, it can accurately communicate the impact of these new rules on nonprofits. If this is a concern for your organization, you are encouraged to contact the ASAE Public Policy Department at publicpolicy@asaecenter.org. 

This article was provided to OSAE by the Power of A and ASAE's Inroads.