The NAFCU Journal September-October 2020 - 34

COMPLIANCE CENTRAL

IRS Proposes Regulations
for Excise Tax on
Executive Compensation
By David Park

I

n June, the Internal Revenue Service
(IRS) issued proposed regulations
under Section 4960 of the Internal
Revenue Code (Code). Section 4960
originated from the Tax Cuts and Jobs Act
(TCJA), which became law in late 2018.
Overall, Section 4960 covers elements
of benefits and tax law, which are both
highly complex and require a large degree
of specialization. Therefore, credit unions
may wish to consult with benefits or tax
counsel for a more detailed analysis about
your credit union's or credit union service
organization's (CUSO's) specific obligations under Section 4960, the IRS' interim
guidance or the proposed regulations. As
a starting point, here is a summary of the
provisions and proposal.
Under Section 4960, applicable taxexempt organizations (ATEOs) must
pay excise taxes on excess remuneration
(remuneration in excess of $1 million)
and excess parachute payments made to
covered employees. An ATEO includes
any organization that is exempt from
taxation under Section 501(a). Section
501(a) exempts from taxation organizations described under Sections 501(c)
and (d). Federally chartered credit unions
are exempt from taxation under Section
501(c)(1), and state-chartered credit
unions are identified in Section 501(c)
(14)(A). In other words, both are ATEOs
under the TCJA. The law could also apply
to a CUSO as a related organization.
How is the amount of tax calculated?
First, determine the amounts of excess
34

remuneration and excess parachute
payments made to covered employees.
Second, apply the applicable tax rate set
forth in Section 4960(a) - 21 percent at
the moment - to those amounts. While
this may seem straightforward, the
express language of the law left some
things unclear. For example, the statute
defines remuneration in a way that
incorporates the definition of wages
under Section 3401(a) of the Code
and amounts included in gross income
through Section 457(f) nonqualified
deferred compensation plans, but
remuneration does not include Section
402A(c) Roth contributions. Other
definitions provide even less clarity -
like the definition of excess parachute
payment: "an amount equal to the
excess of any parachute payment over
the portion of the base amount allocated to such payment." The meaning of
excess parachute payment depends on
what constitutes a parachute payment
and a base amount, terms also defined
in the law.
The IRS' interim guidance was designed
to address these murky issues and to
provide taxpayers with clarity about how
to comply. It included several examples
in the form of questions and answers
that explained what the defined terms in
Section 4960 really meant in the context
of real-world examples.
The proposed rule, for the most part,
remains consistent with the interim
guidance. This includes the request

for a grandfather rule to achieve
parity with for-profit corporations
under the TCJA. The TCJA grandfathered for-profit corporate executive
nonqualified deferred compensation
contracts entered into on or before
Nov. 2, 2017, from the deduction limit
under Section 162(m) of the Code.
NAFCU asked the IRS to examine
whether it had the authority to grandfather certain employment contracts to
establish parity with for-profit corporations under the new law. Through
the interim guidance, Treasury and
the IRS explained their conclusion that
grandfathering contracts for ATEOs
was inappropriate because the legislative history of the TCJA did not make
evident an intent to do so. The proposed rule restates this position, but it
clarifies that the proposal effectively
grandfathers certain types of compensation: (1) nonqualified deferred
compensation that vested prior to the
first day of the first taxable year of the
ATEO beginning after Dec. 31, 2017;
and (2) vested deferred compensation
from years prior to the taxable year
in which the employee first became a
covered employee.
The proposed rule, like the interim
guidance, includes representative
examples to demonstrate how these
rules are designed to work. These
examples are especially useful in providing guidance about some of the
more technical aspects of Section
4960. One example shows how to

THE NAFCU JOURNAL  SEPTEMBER-OCTOBER 2020



The NAFCU Journal September-October 2020

Table of Contents for the Digital Edition of The NAFCU Journal September-October 2020

The NAFCU Journal September-October 2020 - Cover1
The NAFCU Journal September-October 2020 - Cover2
The NAFCU Journal September-October 2020 - 1
The NAFCU Journal September-October 2020 - 2
The NAFCU Journal September-October 2020 - 3
The NAFCU Journal September-October 2020 - 4
The NAFCU Journal September-October 2020 - 5
The NAFCU Journal September-October 2020 - 6
The NAFCU Journal September-October 2020 - 7
The NAFCU Journal September-October 2020 - 8
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The NAFCU Journal September-October 2020 - Cover3
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