Children's Hospitals Today - Winter 2018 - 15

OPERATIONS / FEATURE

The covered employee category. This
is calculated again for each year after
2017. It consists of the five highest-paid
current or former employees for that
year. It also includes former employees
who were previously among the "high
five" in any year after 2016 and are still
being paid any form of post-termination compensation subject to withholding that exceeds $1 million in the
current year. Therefore, the number of
covered employees is not actually limited to five per year.
Compensation. This excise tax applies
to current compensation and all forms of
deferred compensation-in many cases,
when it becomes vested, whether or not
paid. It also applies to "excess parachute
payments" to any high-five employee
triggered by separation from employment, to the extent the total parachute
payments exceed three times the fiveyear average total compensation.
Multi-corporate tax-exempt systems.
For large hospitals and universities,
the excise tax applies on an entity-byentity basis. If two tax-exempt entities
within the system each have five people earning more than $1 million, all 10
of the employees will trigger the excise
tax. With careful planning and structuring, a multi-corporate system may
be able to restructure its top executives
to lower the excise taxes due.
Limited carve-out. The excise tax does
not apply to payments made to licensed
medical professionals, such as physicians and nurses, as long as compensation relates directly to the performance
of medical services. In other words, it's
only the portion of the payment attributed to administrative and executive
services that will count toward the excise tax. This may present challenges for
organizations that will need to track-
and categorize as clinical or nonclinical
pay-compensation paid to physician
executives who perform multiple roles.

The excise tax is intended to put taxexempt organizations in the same position as publicly-held companies that are
subject to limits on the deductibility
of high compensation amounts under
Internal Revenue Code Sections 162(m)
and 280G. But the tax goes beyond this,
putting tax-exempt organizations at a
disadvantage with respect to for-profit
companies that are not publicly traded.
Tax-exempt organizations have to pay
a 21 percent surcharge to pay comparable salaries for comparable positions.
Private companies do not face these
limitations, so tax-exempt organizations are now at a disadvantage to their
private, for-profit competitors when it
comes to executive compensation.
Tax-exempt organizations
should consult with legal
advisors or tax professionals to evaluate if there are
actions they could take to
minimize the effect of the
excise tax. Going forward,
organizations subject to
the tax should reconsider
executive
compensation
structures. Assess the possibility of modified vesting schedules
or restructured severance arrangements, the effect of the excise tax on
the rebuttable presumption analysis,
and the use of offset or reduction provisions in compensation agreements
with new executives who may become
covered employees. This is a standard
practice by for-profit companies planning for potential Section 280G parachute payments.

(so-called "private activity bonds").
This proposal caused concern among
the tax-exempt sector, as many rely on
tax-free bonds as a major source of capital. As expected, this proposal was not
included in the Act, so private activity
bonds will remain an important part of
capitalizing tax-exempt operations.
Advance refunding bonds, however,
have been eliminated, restricting refinancing options for exempt borrowers.
To be clear, existing bonds can still be
refinanced, provided they are callable
at the time of refunding. The Act only
eliminated refundings where the bonds
are not yet callable at the desired date
of the refunding. Typically tax-exempt
bonds are only callable 10 and one half

Leaders should be prepared
with proactive defenses of
exempt operations.

Bonds
Advance refunding bonds, which are
used to pay off another outstanding
bond and issued at a lower rate, have
been repealed. But tax-free bond financing does remain available for Section
501(c)(3) organizations. The House bill
released in November threatened to
eliminate tax-exempt bond financing for Section 501(c)(3) organizations

years after issuance. If existing bonds
are callable at the desired time of refunding, a "current refunding" may still
be possible. It will be interesting to see
whether the Act results in the bond
market moving to shorten the callable
periods for tax-exempt bonds, making
refunding easier despite the elimination
of advance refundings.

Higher education
Proposals to impose a 1.4 percent excise
tax on the net investment income of
certain private educational institutions
were retained in the final law. This applies to private colleges and universities with more than 500 students and
aggregate assets exceeding $500,000
per student. This excludes assets used
to carry out the institution's exempt
purpose, such as classroom buildings
and office equipment.

CHILDREN'S HOSPITAL S TODAY Winter 2018

Table of Contents for the Digital Edition of Children's Hospitals Today - Winter 2018