As discussed here, the IRS’s initial interpretation of a new excise tax under Section 4960 of the Internal Revenue Code could catch for-profit employers who set up foundations, trusts, PACs, and other tax-exempt entities off guard.  The tax is 21% of certain compensation paid to the top five highest paid employees of the tax-exempt entity.  Although the tax was designed to apply for compensation to high-paid executives of tax-exempt entities, an aggregation rule in the IRS’s initial guidance (Notice 2019-9) picks up compensation paid by related employers, even if they are for-profit companies.

For example, suppose a for-profit company controls more than 50% of the board of a tax-exempt foundation, and the company’s treasurer also serves as an officer of the foundation.  If the foundation is treated as a common law employer of the treasurer (even if the for-profit company is also a common law employer), the CIO could be a covered employee of the foundation.  If the treasurer makes more than $1 million—whether in the current year or in the future—the excise tax can be triggered, even if all of the treasurer’s compensation is paid by the for-profit company.  A similar issue could arise if the treasurer receives significant separation pay, even if it does not reach the $1 million threshold.  The tax would be owed by the for-profit employer and any others who pay the treasurer’s compensation.

The deadline for submitting comments to the IRS is April 2^nd.  Employers who are affected by the rule’s broad net should consider submitting comments (and we can help).

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