These synopses are intended only as aids to the reader in

HIGHLIGHTS

OF THIS ISSUE





Bulletin No. 2021–7

February 16, 2021

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

EXCISE TAX, EXEMPT

ORGANIZATIONS

T.D. 9938, page 838.

Section 4960 imposes an excise tax on remuneration in excess of $1 million and excess parachute payments paid by

an applicable tax-exempt organization (and its related organization(s)) to a covered employee. These regulations explain

how to determine the amount of remuneration paid, whether

there is an excess parachute payment, what is an excess

parachute payment, what is an applicable tax-exempt organization, what is a related organization, and how to determine

an organization’s covered employees, and how to report and

pay the tax. REG-122345-18. Published January 19, 2021.

Finding Lists begin on page ii.

INCOME TAX

Notice 2021-10, page 888.

This notice provides additional relief under section

7508A of the Internal Revenue Code (Code) for qualified opportunity funds (QOFs) and their investors in

response to the ongoing Coronavirus Disease 2019

(COVID-19) pandemic. This notice also provides additional relief pursuant to section 1400Z-2(f)(3) and Income Tax Regulations under section 1400Z-2 of the

Code (section 1400Z-2 regulations). Specifically, this

notice extends the relief for QOFs and their investors

provided by Notice 2020-39, 2020-26 I.R.B. 984.

The IRS Mission

Provide America’s taxpayers top-quality service by helping

them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.

Introduction

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February 16, 2021 

Bulletin No. 2021–7

Part I

26 CFR 53.4960-0 through 53.4960-6

T.D. 9938

DEPARTMENT OF THE

TREASURY

Internal Revenue Service

26 CFR Parts 1 and 53

Tax on Excess Tax-Exempt

Organization Executive

Compensation

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document sets forth

final regulations under section 4960 of

the Internal Revenue Code (Code), which

imposes an excise tax on remuneration

in excess of $1,000,000 and any excess

parachute payment paid by an applicable

tax-exempt organization to any covered

employee. The regulations affect certain

tax-exempt organizations and certain entities that are treated as related to those

organizations. DATES: Effective Date:

These final regulations are effective on

January 15, 2021.

Applicability Dates: For dates of applicability, see §53.4960-6.

FOR FURTHER INFORMATION

CONTACT: William McNally at (202)

317-5600 or Patrick Sternal at (202) 3175800 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document amends the Foundation and Similar Excise Tax Regulations

(26 CFR part 53) by adding final regulations under section 4960. Section 4960

was added to the Code by section 13602

of the Tax Cuts and Jobs Act, Pub. L.

115–97, 131 Stat. 2054, 2157 (TCJA).

Section 4960(a) generally provides that

February 16, 2021

an applicable tax-exempt organization

(ATEO) that pays to a covered employee

remuneration in excess of $1 million for

a taxable year or any excess parachute

payment is subject to an excise tax on the

amount of the excess remuneration (as described in section IV of the Summary of

Comments and Explanation of Revisions,

titled “Excess Remuneration”) plus excess parachute payments paid during that

taxable year at a rate equal to the rate of

tax imposed on corporations under section

11 (currently 21 percent). Section 4960 is

effective for taxable years beginning after

December 31, 2017.

An ATEO is defined in section 4960(c)

(1) as any organization that for the taxable year is exempt from taxation under

section 501(a) as well as certain other

tax-exempt organizations. A covered employee is defined in section 4960(c)(2)

as any employee (including any former

employee) of an ATEO if the employee is

one of the five highest-compensated employees of the organization for the taxable

year or any preceding taxable year beginning after December 31, 2016. Section

4960(c)(4)(A) provides that remuneration

paid to a covered employee by an ATEO

includes any remuneration paid with respect to employment of such employee

by any related person or governmental

entity. Section 4960(c)(4)(B) defines a

related person or governmental entity as

an entity that controls, or is controlled by,

the ATEO; is controlled by one or more

persons that control the ATEO; or is a

supported or supporting organization as

described in sections 509(f)(3) and 509(a)

(3), respectively. An excess parachute

payment is defined in section 4960(c)(5)

(A) as an amount equal to the excess of

any parachute payment over the portion

of the base amount (as described in section V.D. of the Summary of Comments

and Explanation of Revisions, titled

“Three-Times-Base-Amount Test”) allocated to such payment; section 4960(c)(5)

(B) defines a parachute payment as any

payment in the nature of compensation

to a covered employee if the payment is

contingent on the employee’s separation

from employment with the employer and

the aggregate present value of such payments exceeds 3-times the base amount.

838

On December 31, 2018, the Department of the Treasury (Treasury Department) and the Internal Revenue Service

(IRS) issued Notice 2019‑09 (2019-04

I.R.B. 403), setting forth initial guidance

on the application of section 4960. On

June 11, 2020, the Treasury Department

and the IRS published proposed regulations on section 4960 in the Federal Register (REG-122345-18, 85 FR 35746) (the

proposed regulations). The statutory provisions and the initial guidance provided

by Notice 2019-09 are described in detail

in the proposed regulations.

The Treasury Department and the IRS

received written comments on the proposed regulations. No public hearing was

requested or held. All written comments

received in response to the proposed

regulations are available at www.regulations.gov or upon request. Comments

received that are outside of the scope of

the proposed regulations generally are

not addressed in this preamble but may

be considered in connection with future

guidance projects. After consideration of

the relevant comments received, the proposed regulations under section 4960 are

adopted as final regulations as modified

by this Treasury Decision. The major areas of comment and the revisions to the

proposed regulations are discussed in the

Summary of Comments and Explanation

of Revisions. With respect to provisions

in the proposed regulations on which no

comments were received or for which

comments were received prior to the issuance of the proposed regulations, the

preamble to the proposed regulations may

provide additional information.

Summary of Comments and

Explanation of Revisions

These final regulations provide guidance on the excise tax imposed by section

4960 and the entities that are subject to the

tax.

I. Scope of Final Regulations

These final regulations retain the basic

approach and structure of the proposed

regulations, with certain revisions. These

final regulations restate certain statutory

Bulletin No. 2021–7

definitions and define various terms set

forth in section 4960. These final regulations also provide rules for determining:

the amount of remuneration paid for a

taxable year for purposes of identifying

covered employees and calculating the

excise tax; whether excess remuneration

has been paid and in what amount; whether a parachute payment has been paid and

in what amount; the allocation of liability

for the excise tax among related organizations; and the date of applicability of these

final regulations. These definitions and

rules apply solely for purposes of section

4960.

II. Definitions

A. Applicable Tax-Exempt Organization

These final regulations adopt the definition of “applicable tax-exempt organization” or “ATEO” as set forth in the

proposed regulations. Consistent with section 4960(c)(1), the proposed regulations

provided that an “applicable tax-exempt

organization” or “ATEO” includes an organization that is exempt from tax under

section 501(a); is a farmers’ cooperative

organization described in section 521(b)

(1); has income excluded from taxation

under section 115(1); or is a political organization described in section 527(e)(1).

In response to comments on Notice

2019-09 regarding the applicability of

the excise tax imposed by section 4960 to

certain Federal instrumentalities, section

II.A. of the Explanation of Provisions of

the proposed regulations, titled “Applicable Tax-Exempt Organization,” stated

that the Treasury Department and the IRS

consider all Federal instrumentalities described in section 501(c)(1) to be included

in the statutory ATEO definition as an organization exempt from tax under section

501(a) and thus subject to section 4960.

However, the Treasury Department and

the IRS requested comments regarding the

application of section 4960 to Federal instrumentalities. One commenter requested that these final regulations confirm

that Federal instrumentalities described

under section 501(c)(1)(A)(i), for which

the enabling acts provide for exemption

from all current and future Federal taxes

are not subject to tax under section 4960.

These final regulations do not address this

Bulletin No. 2021–7

issue but reserve §53.4960‑1(b)(3) and

§53.4960‑4(a)(5) for future rules to address these Federal instrumentalities. The

Treasury Department and the IRS will

continue to consider whether section 4960

should apply to Federal instrumentalities

for which the enabling acts provide for exemption from all current and future Federal taxes. Until further guidance is issued,

a Federal instrumentality for which an enabling act provides for exemption from all

current and future Federal taxes may treat

itself as not subject to tax under section

4960 as an ATEO or related organization.

However, if that Federal instrumentality is

a related organization of an ATEO, remuneration it pays must be taken into account

by that ATEO.

B. Applicable Year

Section 4960(a)(1) refers to remuneration paid “for the taxable year,” but does

not specify which taxpayer’s taxable year

is referenced, what it means for remuneration to be paid “for” a taxable year, or

how to measure remuneration if an ATEO

and a related organization have different

taxable years. The proposed regulations

provided that remuneration is treated as

paid for a taxable year if it is paid during

the applicable year, and that the applicable

year is defined as the calendar year ending

with or within an ATEO’s taxable year.

The proposed regulations provided rules

for determining the applicable year of an

organization with respect to the taxable

year in which the organization becomes

an ATEO or ceases to be an ATEO, including rules addressing short applicable years

that may arise in these situations and rules

addressing related organizations with different taxable years. No comments were

received on those proposed rules, and

these final regulations adopt those rules

without change.

C. Employee

Section 4960(a) imposes a tax on excess remuneration and any excess parachute payment paid by an ATEO for the

taxable year with respect to employment

of a covered employee. Section 4960(c)

(2) defines a “covered employee” as an

employee (including any former employee) of the ATEO who meets certain other

839

conditions. Accordingly, the excise tax

imposed by section 4960(a) applies only

with respect to a current or former employee of the ATEO.

The proposed regulations defined “employee” by reference to the definition of

“employee” for purposes of Federal income tax withholding in section 3401(c)

and the regulations thereunder. Specifically, the proposed regulations cross-referenced the definition of “employee”

in §31.3401(c)-1, which includes common-law employees, officers or elected

or appointed officials of governments, or

agencies or instrumentalities thereof, and

certain officers of corporations. The proposed regulations restated certain rules

from §31.3401(c)-1 that are particularly

relevant to section 4960, including the

rules that a member of a board of directors

of a corporation is not an employee of the

corporation (in the member’s capacity as a

director), and that an officer is an employee of the entity for which the officer serves

as an officer (unless the officer performs

no services or only minor services and

neither receives, nor is entitled to receive,

any remuneration for such services). For

further discussion, see section II.E. of this

Summary of Comments and Explanation

of Revisions, titled “Covered Employee.”

No comments were received on those proposed rules, and these final regulations

adopt those provisions of the proposed

regulations without change.

One commenter requested clarification

regarding the source of the remuneration

that is considered for purposes of applying the minor services exception to the

rule that treats a corporation’s officer as

an employee. The minor services exception in Prop. §53.4960-1(e)(1) incorporated the standard in §31.3401(c)-1 and

provided that “an officer of a corporation

who as such does not perform any services

or performs only minor services and who

neither receives, nor is entitled to receive,

any remuneration is not considered to be

an employee of the corporation solely due

to the individual’s status as an officer of

the corporation.” The commenter stated

that it is unclear whether an individual

qualifies for the exception if he or she receives remuneration from a related person

or governmental entity for services performed for an organization other than the

ATEO and also volunteers his or her time

February 16, 2021

as an officer of the ATEO (and performs

no services or only minor services for

the ATEO). The commenter recommended that these final regulations clarify that

the relevant remuneration for purposes of

meeting the minor services exception is

only remuneration paid by the ATEO. The

minor services exception applies if an individual is not paid (nor is entitled to be

paid) remuneration based “solely” on the

individual’s status as an officer. Thus, the

source of the remuneration is not relevant,

but rather the standard is whether the individual received any remuneration for the

minor services as an officer regardless of

the source of the remuneration. Therefore,

the Treasury Department and the IRS have

concluded that this clarification of the minor services exception in these final regulations is unnecessary.

For a discussion of how this definition

of “employee” and other rules address

employees of non-ATEO related organizations performing limited or temporary

services for the related ATEO (in particular, while also receiving compensation

from the non-ATEO related organization),

see section II.E.5. of this Summary of

Comments and Explanation of Revisions,

titled “Volunteer Services and Other Exceptions.”

D. Employer

Section 4960(b) provides that the employer is liable for the tax imposed under

section 4960(a). Similar to the definition

of “employee,” the proposed regulations

defined “employer” by reference to the

definition of “employer” for purposes of

Federal income tax withholding in section

3401(d) and the regulations thereunder,

without regard to the special rules in section 3401(d)(1) and (2). Accordingly, control of the payment of wages would not be

relevant for determining whether an entity

is the employer for section 4960 purposes.

Further, the proposed regulations provided

that a person or governmental entity does

not avoid status as an employer of an employee by using a third-party payor to pay

remuneration to that employee. Third-party payors include a payroll agent, an agent

under section 3504, a common paymaster,

a statutory employer under section 3401(d)

(1), or a certified professional employer

organization under section 7705 (which is

February 16, 2021

an “employer” only for purposes of subtitle C of the Code). Similarly, consistent

with existing principles for determining

the employer, under certain facts and circumstances, a management company may

also be acting as a third-party payor for the

employees of its ATEO client, rather than

as the common law employer of the employees. Thus, the proposed regulations

provided that remuneration that is paid to

an individual by a separate organization

for services the individual performed as

an employee of the ATEO would be remuneration paid by the ATEO to its employee

for purposes of section 4960, whether or

not the separate organization is related to

the ATEO. In addition, the proposed regulations provided that the sole owner of

an entity that is disregarded as separate

from its owner under §301.7701-2(c)(2)

(i) would be treated as the employer of

any employee of the disregarded entity,

notwithstanding that the entity is regarded

for subtitle C purposes under §301.77012(c)(2)(iv). No comments were received

on these provisions of the proposed regulations, and these final regulations adopt

them without change.

E. Covered Employee

1. In General

Section 4960(c)(2) defines “covered

employee” as any individual who is one

of the five highest-compensated employees of the ATEO for a taxable year or was

a covered employee of the ATEO (or any

predecessor) for any preceding taxable

year beginning after December 31, 2016.

Thus, once an employee is a covered employee of an ATEO, the employee continues to be a covered employee for all

subsequent taxable years of that ATEO.

The proposed regulations provided that

whether an employee is one of the five

highest-compensated employees of an

ATEO is determined separately for each

ATEO and not for an entire group of related organizations. As a result, a group of

related ATEOs could have more than five

“five highest-compensated employees”

for a taxable year. Similarly, an employee could be a covered employee of more

than one ATEO in a related group of organizations for a taxable year. No comments

were received on these provisions of the

840

proposed regulations, and these final regulations adopt them without change.

2. Aggregation of Remuneration Paid By

the ATEO and Its Related Organizations

For Purposes of Determining the Five

Highest-Compensated Employees

For purposes of determining whether an employee is one of an ATEO’s five

highest-compensated employees for a

taxable year, the proposed regulations

provided that remuneration paid by the

ATEO during the ATEO’s applicable year

is aggregated with remuneration paid

by any related organization during the

ATEO’s applicable year, including remuneration paid by a related taxable organization or governmental entity, for services

performed as an employee of that related

organization. Remuneration for which

a deduction is disallowed under section

162(m) generally is not considered for

purposes of determining whether excess

remuneration is paid for a taxable year,

but that remuneration is considered for

purposes of determining an ATEO’s five

highest-compensated employees.

One commenter suggested that, for

purposes of determining an ATEO’s five

highest-compensated employees, these

final regulations should consider only remuneration paid (directly or indirectly) by

an ATEO for services provided by an employee to the ATEO, rather than aggregating all remuneration paid to the individual

for services the individual provides as an

employee of the ATEO and as an employee of any related organization, including

a related non-ATEO (for example, a taxable organization). The commenter reasoned that aggregating remuneration for

purposes of determining covered employee status is not required by the statutory

text and is unnecessary to comply with

Congressional intent to achieve parity between ATEOs and publicly held corporations that are subject to the section 162(m)

deduction disallowance for compensation

paid to a covered employee in excess of $1

million. The commenter also reasoned that

because only an ATEO can have a “covered employee” under section 4960(c)(2),

the reference to the “five highest-compensated employees of the organization” (emphasis in comment) in section 4960(c)(2)

(A) should be read to include only com-

Bulletin No. 2021–7

pensation paid by the ATEO, directly or

indirectly (for example, by reimbursing

another entity), for services provided by

the employee to the ATEO, regardless of

the payor. The commenter asserted that

the language in section 4960(c)(4)(A),

which provides that “remuneration of a

covered employee by an [ATEO] shall include any remuneration paid with respect

to employment of such employee by any

related person or governmental entity”

(emphasis in comment) should not override a plain reading of section 4960(c)(2),

which refers only to employment with the

ATEO. The commenter further reasoned

that section 4960(c)(4)(A) applies after a

determination of the ATEO’s covered employees has already been made, and thus it

is circular to read section 4960(c)(4)(A) as

requiring inclusion of remuneration paid

to a covered employee of an ATEO by a

related person or governmental entity for

purposes of determining an ATEO’s highest-compensated employees (and, thus, its

covered employees).

While the Treasury Department and the

IRS acknowledge that alternative interpretations as to whether sections 4960(c)(2)

and (c)(4)(A) take into account remuneration paid by a related organization for

purposes of determining an ATEO’s covered employees may be reasonable, for the

reasons set forth below, these final regulations adopt the relevant provisions of the

proposed regulations without change and

do not adopt the commenter’s recommendation. Section 4960 does not define the

“five highest-compensated employees” of

an ATEO. The ambiguity in this term is

highlighted by the fact that the only provision in the statute that references “compensation” is section 4960(c)(2), which

defines “covered employee” as one of

the “5 highest compensated employees”;

the statute otherwise uses the defined

terms “remuneration” and “parachute

payment” for purposes of determining

the excise tax imposed by section 4960.

In addition, there is no discussion in the

legislative history describing how Congress intended an ATEO to determine its

five highest-compensated employees. The

Treasury Department and the IRS have

concluded that the commenter’s suggested interpretation—that only remuneration

paid by the ATEO for services performed

for the ATEO should be considered for

Bulletin No. 2021–7

purposes of determining who is a covered

employee—would raise significant tax

administration issues and the potential for

abuse in circumstances in which an individual provides services to, and receives

compensation from, the ATEO and one

or more related organizations during the

applicable year. In these cases, it may be

difficult to determine the proper allocation

of the compensation among the organizations to which the individual provides the

services and whether the allocation was

properly based on the value of the services

provided. Due to the highly factual nature

of this analysis and the potential for differing conclusions on one or more of these

issues, the commenter’s suggested rule

would result in an unpredictable standard

to be applied by taxpayers and the IRS

and would raise the potential for abusive

mischaracterizations of the nature of the

services and compensation provided.

The commenter further asserted that

the requirement to aggregate compensation paid by the ATEO and all related organizations is not required to ensure parity with the rules for identifying covered

employees under section 162(m). Under

§§1.162‑27(c)(2)(ii) and 1.162-33(c)(1)

(ii)(B), the amount of compensation used

to identify the covered employees who are

the three most highly compensated executive officers (other than the principal executive officer and the principal financial

officer) for the taxable year is determined

pursuant to the executive compensation disclosure rules under the Securities

Exchange Act of 1934. Under 17 CFR

§229.402(a)(2), the amount of compensation paid to an employee by a publicly

held corporation is measured by reference

to remuneration paid by the registrant and

remuneration paid by the registrant’s subsidiaries, and is not limited to remuneration for services provided to the registrant.

Although the provisions of sections 4960

and 162(m) are similar in many respects,

there is no indication in the legislative history that sections 162(m) and 4960 are intended to apply in the same manner in all

situations. Further, the section 162(m) and

section 4960 statutory language and the

application of the rules differ significantly

in many respects that would not allow that

strict parity. Regardless of the conclusion

that the sections 162(m) and 4960 rules

do not allow for strict parity, the Treasury

841

Department and the IRS have concluded

that the aggregation of compensation paid

by all related entities in identifying covered employees is more analogous to the

rules under section 162(m) than considering only remuneration for services provided to the ATEO.

Thus, while the Treasury Department

and the IRS considered several alternatives for determining the ATEO’s five

highest-compensated employees, including the alternative proposed by the commenter, the Treasury Department and the

IRS ultimately concluded that including

remuneration paid by all related organizations is appropriate and that it is more

administrable to use a single standard for

identifying covered employees and computing the excise tax, if any, imposed by

section 4960(a)(1). However, to mitigate

the effect of requiring the aggregation of

remuneration paid by an ATEO and all

related organizations for purposes of determining the ATEO’s covered employees, these final regulations retain the limited hours, nonexempt funds, and limited

services exceptions (discussed in section

II.E.5. of this Summary of Comments and

Explanation of Revisions, titled “Volunteer Services and Other Exceptions”).

3. Remuneration for Medical Services

Consistent with section 4960(c)(3)(B)

and the proposed regulations, these final

regulations provide that for purposes of

identifying an ATEO’s five highest-compensated employees for a taxable year,

remuneration paid during the applicable

year for medical services is not taken into

account. For a discussion of the rules for

determining the remuneration paid for

medical or veterinary services and for

allocating remuneration to medical and

non-medical services, see section II.F. of

this Summary of Comments and Explanation of Revisions, titled “Medical Services.”

4. Covered Employee Status Continues

for all Subsequent Taxable Years

In accordance with section 4960(c)(2),

the proposed regulations provided that a

covered employee includes any employee (including any former employee) of

an ATEO who was a covered employ-

February 16, 2021

ee of the organization (or a predecessor)

for any preceding taxable year beginning

after December 31, 2016. In response to

the proposed regulations, one commenter

suggested that the Treasury Department

and the IRS reconsider the rule that an

individual who is a covered employee of

an ATEO (or of a predecessor ATEO) for

one taxable year remains a covered employee of that ATEO (and any successor

ATEOs) for all subsequent taxable years.

The commenter suggested that an ATEO

should be relieved of the burden of continuing to include an employee among its

covered employees when a consolidation

or restructuring of a tax-exempt organization results in changes to the employee’s

job responsibilities and compensation, if

it no longer furthers the purpose of the

statute to include the employee among

its covered employees. The commenter

asserted that the requirement that an individual remain a covered employee for all

subsequent years, even after the employment relationship has ended, creates a potentially excessive administrative burden

for the ATEO. These final regulations do

not adopt this suggestion because that rule

would be inconsistent with the statutory

language.

5. Volunteer Services and Other

Exceptions

The proposed regulations provided

certain exceptions to the definition of

“covered employee” and the rules for

identifying the five highest-compensated

employees of an ATEO. Several commenters supported the inclusion of the exceptions provided in Prop. §53.4960‑1(d)

(2)(ii), (iii), and (iv). These final regulations adopt these exceptions with certain

modifications in response to comments as

discussed later in this section.

The exceptions to the definition of

“covered employee” in the proposed

regulations were provided in response to

comments on Notice 2019-09 expressing concern that the rules for identifying

an ATEO’s five highest-compensated

employees in the notice would subject a

non-ATEO to the excise tax on remuneration it pays to an employee who performs

limited or temporary services for a related

ATEO and who typically receives remuneration only from the non-ATEO. The

February 16, 2021

exceptions were intended to ensure that

certain employees of a related non-ATEO

providing services as an employee of an

ATEO are not treated as one of the five

highest-compensated employees of the

ATEO, and thus considered a covered

employee, if certain conditions related to

the individuals’ remuneration or hours of

service are met. To avoid manipulation of

the rules through the deferral of compensation, in determining whether an employee is one of the five highest-compensated

employees, the proposed regulations provided that a grant of a legally binding right

to vested remuneration is considered to be

remuneration paid, and any grant of a legally binding right to nonvested remuneration by the ATEO (or a related ATEO),

for example under a deferred compensation plan or arrangement, disqualifies the

ATEO from claiming a relevant exception.

No comments were received on those proposed rules, and these final regulations

adopt those rules without change.

a. No Remuneration and NonEmployment Exceptions

The proposed regulations provided that

the remuneration paid to an individual who

is never an employee of an ATEO is not

considered for purposes of section 4960.

For example, an individual who, under all

the facts and circumstances, performs services for an ATEO solely as a bona fide

independent contractor is not an employee

of the ATEO, and thus is not considered

for purposes of determining the ATEO’s

five highest-compensated employees.

Similarly, an individual who, under all the

facts and circumstances, performs services

solely as a bona fide employee of a related

organization, including a related organization that provides services to the ATEO, is

not an employee of the ATEO, and thus is

not considered for purposes of determining the ATEO’s five highest-compensated

employees. No comments were received

on those provisions of the proposed regulations, and these final regulations adopt

them without change.

The proposed regulations further provided that, for purposes of determining

an ATEO’s five highest-compensated employees for a taxable year, an employee is

disregarded if neither the ATEO nor any

related organization pays remuneration or

842

grants a legally binding right to nonvested

remuneration for services the individual

performed as an employee of the ATEO or

any related organization. Thus, if none of

an ATEO’s employees received remuneration from the ATEO or from a related organization, then the ATEO has no covered

employees. Benefits excluded from gross

income are not considered remuneration,

including expense allowances and reimbursements under an accountable plan

(see §1.62-2) and most insurance for liability arising from service with an ATEO,

such as directors and officers liability insurance (see §1.132-5(r)(3)). These final

regulations adopt these provisions of the

proposed regulations without change.

In section II.E.2. of the Explanation of

Provisions of the proposed regulations,

titled “Volunteer Services and Similar Exceptions,” the Treasury Department and

the IRS requested comments on whether

certain taxable benefits, such as employer-provided parking in excess of the value excluded under section 132, should be

disregarded for purposes of determining

whether an individual receives remuneration for services and what standards

should apply to identify those benefits. No

comments were received on this issue. Because taxable fringe benefits that are wages within the meaning of section 3401(a)

are included in the statutory definition

of remuneration, these final regulations

adopt the provisions of the proposed regulations providing that these amounts are

considered for purposes of determining

an ATEO’s five highest-compensated employees and for purposes of applying the

exceptions from covered employee status.

For a discussion of comments received

on the exclusion of taxable fringe benefits from the definition of remuneration

for purposes other than the determination

of the five highest-compensated employees, see section III.A. of this Summary of

Comments and Explanation of Revisions,

titled “In General” under “Remuneration.”

b. Limited Hours Exception

These final regulations adopt the “limited hours” exception as provided in the

proposed regulations for purposes of determining an ATEO’s five highest-compensated employees. Under this exception,

an employee of an ATEO is disregarded

Bulletin No. 2021–7

for purposes of determining the ATEO’s

five highest-compensated employees for a

taxable year if neither the ATEO nor any

related ATEO pays remuneration or grants

a legally binding right to nonvested remuneration to the employee for services

performed for the ATEO and the employee performs only limited hours of service

for the ATEO. For purposes of this exception, an ATEO is not treated as paying an

amount paid to an individual by a related

organization that employs the individual,

so long as the ATEO does not reimburse

the payor. An employee qualifies for this

exception only if the hours of service the

employee performs as an employee of the

ATEO and all related ATEOs comprise

10 percent or less of the employee’s total

hours of service for the ATEO and all related organizations during the applicable

year. For purposes of this rule, an employee who performs fewer than 100 hours

of service as an employee of an ATEO

(and all related ATEOs) during an applicable year is treated as having worked no

more than 10 percent of the employee’s

total hours for the ATEO (and all related

ATEOs).

One commenter recommended that

these final regulations replace the 10 percent hours of service threshold in the limited hours exception with the 50 percent

hours of service threshold that is used for

the nonexempt funds exception (discussed

later in this section) because the 10 percent

threshold fails to capture many common

arrangements between ATEOs and taxable

related organizations controlled by the

ATEO (“controlled taxable related organizations”) that are not structured to avoid

the excise tax imposed by section 4960.

These final regulations do not adopt this

suggestion because the limited hours exception was intended to address arrangements in which services are sufficiently

limited so that the arrangements resemble

volunteer arrangements. This exception

therefore has a much lower hours of service threshold than the nonexempt funds

exception but may be used by a broader

group of ATEOs. Further, the Treasury

Department and the IRS have concluded

that adopting the commenter’s suggestion

would be inconsistent with the legislative

intent of section 4960. As explained in

section II.E.2 of the Explanation of Provisions of the proposed regulations, titled

“Volunteer Services and Similar Exceptions,” the legislative history indicates

that Congress intended to tax excessive

compensation paid to covered employees from tax-exempt funds.1 Consistent

with this intent, the proposed regulations

provided a nonexempt funds exception,

which applies if certain criteria are satisfied, but does not apply if an ATEO’s

controlled taxable related organization

pays remuneration to an employee of the

ATEO. The Treasury Department and the

IRS reasoned that a controlled taxable related organization that pays remuneration

to an employee for services provided to

an ATEO uses the ATEO’s funds to do so,

either because the controlled taxable related organization’s assets are, effectively,

the ATEO’s assets, or because the payment reduces the related organization’s

assets, which in turn reduces the value of

the ATEO’s interest in the related organization. The Treasury Department and

the IRS consider the funds of an ATEO’s

controlled taxable related organization as,

in substance, equivalent to tax-exempt

funds, and thus the use of such funds to

compensate an individual for services provided to an ATEO is in substance the use

of tax-exempt funds.2

One commenter expressed concern

about the “cliff” nature of the proposed

limited hours exception (as well as the

nonexempt funds and limited services

exceptions), noting that exceeding the

thresholds even slightly may result in

the employee being a covered employee

for the applicable year and all subsequent

applicable years. The commenter recommended that these final regulations allow

a 3-year (or longer) measurement period

to qualify for the limited hours exception

or the other exceptions, primarily to prevent the ATEO from inadvertently failing

to satisfy the exception.

A 3-year measurement period would

reduce the potential for inadvertent failures for an employer intending to be at or

below the threshold for every applicable

year. However, for an employer that intends to meet the limited hours exception

during only one applicable year, the suggested 3-year standard would effectively

raise the 10 percent hours of service limit to 30 percent and create a new “cliff”

at that 30 percent threshold. In addition,

permitting a 3-year measurement period

would create additional complexity and

burdens for taxpayer compliance and

tax administration. For these reasons,

the Treasury Department and the IRS do

not adopt this suggestion. However, the

modification to the nonexempt funds exception described later in this section, expanding the measurement period to two

applicable years, is intended to address

some of the commenter’s concerns with

respect to inadvertent failures to meet the

requirements of the nonexempt funds exception.

Another commenter recommended that

Example 5 in the provisions of the proposed regulations, which illustrated the

application of the limited hours exception

(Prop. §53.4960‑1(d)(3)(v)), be modified

to eliminate from the facts that ATEO 5

does not control CORP 3, as control of another corporation by an ATEO is irrelevant

for purposes determining whether the requirements of this exception are met, and

thus irrelevant to the conclusion in that example. The commenter further suggested

that this fact be moved to Example 8 in the

proposed regulations, which illustrated

the application of the separate nonexempt

funds exception (Prop. §53.4960-1(d)(3)

(viii)), since control of another corporation by an ATEO is relevant for determining whether the requirements of that

exception are met, and thus relevant to

the conclusion in that example. The Treasury Department and the IRS agree with

the commenter’s suggestion, and modified Example 5 in these final regulations

describing the limited hours exception

(§53.4960-1(d)(3)(v)) accordingly. However, because of changes to the nonexempt

funds exception as described later in this

Summary of Comments and Explanation

of Revisions, these final regulations replace Example 8 (§53.4960‑1(d)(3)(viii))

with a new example.

H. Rep. 115–409, 115th Cong., 1st Sess. 333 (Nov. 13, 2017).

In a similar context, §53.4958-4(a)(2) treats excessive compensation paid to a disqualified person with respect to an applicable tax-exempt organization by a controlled entity of the organization as excessive compensation paid by the organization, and thus as an excess benefit transaction.

1

2

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843

February 16, 2021

c. Nonexempt Funds Exception

As previously discussed, the proposed

regulations also provided a “nonexempt

funds” exception for employees of a related non-ATEO organization who may

perform a large portion of their overall

services as an employee of the ATEO under certain circumstances. Under the nonexempt funds exception, an employee is

disregarded for purposes of determining

an ATEO’s five highest-compensated employees for a taxable year provided that

none of the ATEO, any related ATEO, or

any controlled taxable related organization, pays the employee of the ATEO any

remuneration or grants a legally binding

right to nonvested remuneration to the

employee. When applying these requirements for the nonexempt funds exception,

the ATEO is not treated as paying remuneration that is paid by a related organization that also employs the individual,

so long as the ATEO does not reimburse

the payor. Further, to prevent indirect payment of remuneration by the ATEO, a related ATEO, or controlled taxable related

organization, no related organization that

paid remuneration to the individual may

provide services for a fee to the ATEO,

related ATEO, or any controlled taxable

related organization.

To satisfy the nonexempt funds exception, the proposed regulations also stated

that the employee must have provided

services primarily to a taxable related organization or other non-ATEO (other than

a controlled taxable related organization

of the ATEO) during the applicable year.

For this purpose, an employee is treated as

having provided services primarily to the

taxable related organization or other nonATEO (other than a controlled taxable

related organization of the ATEO) only

if the employee provided services to the

taxable related organization or other nonATEO for more than 50 percent of the employee’s total hours worked for the ATEO

and all related organizations (including

ATEOs) during the applicable year.

One commenter expressed concern

that, for purposes of the nonexempt funds

exception, the requirement limiting the

employee’s hours worked for the ATEO

and all related ATEOs to not more than

50 percent of the total hours worked for

the ATEO and all related organizations

February 16, 2021

during an applicable year was too restrictive and may result in inadvertent failures.

The Treasury Department and the IRS

acknowledge the issues presented by this

comment. These final regulations modify

the exception by expanding the measurement period from one applicable year to

two applicable years (that is, the current

applicable year and the preceding applicable year are treated as a single measurement period) for purposes of determining

whether an employee provided services to

the ATEO and all related ATEOs for not

more than 50 percent of the employee’s

total hours worked as an employee of the

ATEO and all related organizations during

the applicable year and the prior applicable year. This modification provides additional flexibility for situations in which an

employee “rotates” to an ATEO for a period that extends longer than six months, or

when an employee unexpectedly provides

services beyond six months in an applicable year.

Another commenter recommended that

the nonexempt funds exception be modified to prohibit the provision of services

for a fee to a taxable entity only if the

ATEO actually owns a controlling interest

in the taxable entity, as opposed to being

attributed the ownership interest under the

section 318 attribution principles, which

were incorporated into the definitions of

a related organization and control. The

commenter asserted that the related organizations requirement under the proposed nonexempt funds exception (Prop.

§53.4960-1(d)(2)(iii)(A)(3)), which incorporates the section 318 attribution principles, is unduly restrictive, and would have

unintended results, as illustrated by the

following example. An individual who is

the sole shareholder of two taxable corporations (Corporation 1 and Corporation

2) also controls an ATEO (by having the

power to appoint a majority of the ATEO’s

board of directors); Corporation 1 provides administrative services for a fee to

Corporation 2; employee of Corporation

1 provides services only to Corporation 1

and does not provide any services to the

ATEO. Under these facts, Corporation 2 is

deemed to be controlled by the ATEO because, for purposes of determining whether an ATEO controls an organization under Prop. §53.4960‑1(i)(2)(vii)(B)(2), if

a person controls an ATEO, the ATEO is

844

treated as owning a percentage of the stock

owned by that person in accordance with

the percentage of directors of the ATEO

that are controlled by that person. Because

the related organizations requirement prohibits the payment of a fee by a related organization to a controlled taxable related

organization for services performed by an

employee of the controlled taxable related

organization, and because Corporation 1

is providing services for a fee to Corporation 2, which is deemed to be controlled

by the ATEO, no employee of Corporation

1 could meet the requirements of the proposed nonexempt funds exception. The

commenter suggested that this result is

inappropriate because the sharing of services between two taxable corporations in

which an ATEO has no actual ownership

interest would not circumvent the legislative intent of section 4960. The Treasury

Department and the IRS agree with the

commenter’s recommendation. Accordingly, these final regulations modify the

attribution rules as they apply for purposes of determining eligibility for the nonexempt funds exception by disregarding

the application of downward attribution in

applying section 318(a)(3) to corporations

and other entities and in applying section

318 principles to nonstock organizations.

This modification applies only for purposes of applying the nonexempt funds

exception and does not apply for purposes

of determining whether an organization is

a related organization generally.

d. Limited Services Exception

The proposed regulations provided a

“limited services” exception, under which

an employee is not considered for purposes of determining an ATEO’s five highest-compensated employees for a taxable

year if, during the applicable year, the

ATEO paid less than 10 percent of the

employee’s total remuneration during the

applicable year for services performed as

an employee of the ATEO and all related

organizations. However, if an employee

would not be considered for purposes of

determining the five highest-compensated employees of any ATEO in an ATEO’s

group of related organizations because no

ATEO in the group paid at least 10 percent of the total remuneration paid by the

group during the applicable year, then this

Bulletin No. 2021–7

exception does not apply to the ATEO that

paid the employee the most remuneration

during that applicable year. No comments

were received on that proposed rule, and

these final regulations retain that rule

without change.

F. Medical Services

Section 4960(c)(3)(B) provides that remuneration for purposes of section 4960

does not include the portion of any remuneration paid to a licensed medical professional (including a veterinarian) that is for

the performance of medical or veterinary

services by such professional. Section

4960(c)(5)(C)(iii) provides a substantially similar exception from the definition of

“parachute payment.” The proposed regulations provided rules relating to medical

services and licensed medical professionals. No comments were received on those

rules in the proposed regulations, and

these final regulations adopt the rules in

the proposed regulations without change.

For further discussion of these rules, see

section II.F. of the Explanation of Provisions of the proposed regulations, titled

“Medical Services.”

These final regulations also adopt the

rule in the proposed regulations that a “licensed medical professional” is an individual who is licensed under state or local

law to perform medical services. In addition to doctors, nurses, and veterinarians,

a licensed medical professional generally

would include dentists and nurse practitioners and may include other medical

professionals, depending on the applicable

state or local law. For a discussion of other

issues related to remuneration for medical

or veterinary services, including a rule

for allocating remuneration received for a

combination of medical and non-medical

services, see section III.B. of this Summary of Comments and Explanation of Revisions, titled “Remuneration Related to

Medical Services.”

G. Predecessor Organization

Section 4960(c)(2)(B) provides that a

covered employee includes any employee

who was a covered employee of the ATEO

3

(or any predecessor) for any preceding

taxable year beginning after December 31,

2016. Because a covered employee, under

section 4960(c)(2), must be (or have been)

an employee of an ATEO, the predecessor

must also have been an ATEO at the time

the individual was employed by the predecessor to be a covered employee. Thus, an

individual who is a covered employee of

an ATEO (or of an ATEO predecessor of

an ATEO) for one taxable year remains a

covered employee of that ATEO (and any

successor ATEOs) for subsequent taxable

years.

The proposed regulations defined “predecessor” by reference to several enumerated categories of organizational changes,

including acquisitions, mergers, other reorganizations, and changes in tax-exempt

status. A predecessor ATEO ordinarily is

an ATEO that has transferred, by any of

several legal means, its assets and operations to another pre-existing or newly created ATEO (the successor of the predecessor ATEO). No comments were received

with respect to the proposed rules. These

final regulations adopt the definition of

predecessor as provided in the proposed

regulations without change. For further

information concerning these rules, see

section II.G. of the Explanation of Provisions of the proposed regulations, titled

“Predecessor Organization.”

H. Related Organization

Section 4960(c)(4)(A) provides that

remuneration paid to a covered employee by an ATEO includes any remuneration paid with respect to employment of

the employee by any related person or

governmental entity,3 and includes in the

definition of “remuneration” any remuneration paid by the employer ATEO, related

ATEOs, and related non-ATEOs (including taxable entities, nonprofit entities that

are not ATEOs, and governmental entities

that are not ATEOs). Section 4960(c)(4)

(B) defines a “related organization” of an

ATEO as a person or governmental entity that controls, or is controlled by, the

ATEO; is controlled by one or more persons that control the ATEO; is a supported organization or a supporting organiza-

tion (as defined in sections 509(f)(3) and

509(a)(3), respectively) during the taxable

year of the ATEO, or, in the case of an

ATEO that is a voluntary employees’ beneficiary association described in section

501(c)(9) (VEBA), establishes, maintains,

or makes contribution to the VEBA.

Section 4960(c)(4) does not define

“control” for purposes of identifying related organizations. To determine which

persons are related organizations under

section 4960(c)(4)(B), the proposed regulations generally adopted the definition of

‘‘control’’ set forth in section 512(b)(13)

(D) and §1.512(b)‑1(l)(4). Section II.H.

of the Explanation of Provisions of the

proposed regulations, titled “Related Organization,” explained that this standard

(and its ‘‘greater than 50 percent’’ threshold) was intended to align the definition

of ‘‘related organization’’ for purposes of

section 4960 with the definition of ‘‘related organization’’ for purposes of the annual reporting requirements on Form 990,

“Return of Organization Exempt From

Income Tax,” and with other exempt organization control tests.

One commenter recommended that

these final regulations instead define

“control” based on the controlled group

rules in section 414(b) and (c) and the

regulations thereunder, which include an

80 percent control test. The commenter

suggested that the section 414(b) and (c)

controlled group test was more appropriate for a number of reasons: the purpose

of section 414(b) and (c) is to treat related parties as a single employer (the same

purpose as section 4960(c)(4)(C)), whereas the purpose of section 512(b)(13) is to

tax abusive transactions; the regulations

under section 512(b)(13) do not reflect

statutory revisions; the control definition

under section 512(b)(13) is overinclusive;

and using the Form 990 test for control

does not reduce administrative burdens

because the Form 990 rules for identifying

an ATEO’s highest-compensated employees and calculating compensation differ

significantly from the section 4960 rules.

These final regulations do not adopt the

suggestion in this comment. Instead, these

final regulations adopt the rules in the proposed regulations, which align the defini-

The proposed and final regulations refer to related persons and governmental entities collectively as related organizations.

Bulletin No. 2021–7

845

February 16, 2021

tion of control with the definition in the

Form 990 instructions, which, in turn, is

generally based on the section 512(b)(13)

standards. The Treasury Department and

the IRS have concluded that this definition of control is more appropriate and administrable because the Form 990 control

definition and the section 512(b)(13) rules

are familiar to and used by exempt organizations. Similarly, an 80 percent control

threshold, while used in section 414(b)

and (c), as well as in regulations under

section 162(m), generally is not a standard

used for purposes of tax administration

related to exempt organizations, whereas

the 50 percent control threshold is a control test familiar to exempt organizations.

See, for example, the instructions to Form

990; §§1.509(a)‑4(g)(1)(i); 1.509(a)-4(j)

(1); 56.4911‑7(b); 53.4941(d)‑1(b)(5);

53.4943‑3(b)(3)(ii); 53.4958‑4(a)(2)(ii)

(B); and 53.4968-3(b). In addition, section 509(a)(3) supporting organizations

and their section 509(f)(3) supported organizations are defined as related organizations under section 4960(c)(4)(B); the

adoption of an 80 percent control threshold would be incongruous with the lower

standards of control for such organizations under §1.509(a)-4 (particularly in

the case of Type III supporting organizations, for which control is not required).

Further, the legislative history states that

the purpose for enacting section 4960 is

to deter “excessive compensation,”4 indicating an intent to deter arguably abusive

practices, and the Treasury Department

and the IRS have determined that use of a

higher control threshold would allow potentially abusive compensation arrangements among organizations that are related to a lesser degree.5 For these reasons,

and the reasons set forth in section II.H.

of the Explanation of Provisions of the

proposed regulations, titled “Related Organization,” these final regulations adopt

the rules regarding the overall definition

of “control” in the proposed regulations

without change.

To determine control of a nonstock

organization, the proposed regulations

provided rules similar to other regulations dealing with control of tax-exempt organizations (§§1.512(b)-1(l)(4)

(i)(b), 53.4958-4(a)(2)(ii)(B)(1)(iii), and

1.414(c)-5(b))6 that provide that a person

is considered to control a nonstock organization under either a “removal power” test

or a “representative” test. No comments

were received addressing the “removal power” test, and the final regulations

adopt these rules from the proposed regulations without change. Comments were

received on the “representative” test, and

in particular the manner in which the proposed regulations would address certain

situations involving “accidental control.”

Under the representative test, a person

or governmental entity generally controls

a nonstock organization if more than 50

percent of the nonstock organization’s directors or trustees are also trustees, directors, officers, agents, or employees of the

person or governmental entity. Unlike the

representative test in §§1.512(b)-1(l)(4)

(i)(b), 53.4958‑4(a)(2)(ii)(B)(1)(iii), and

1.414(c)-5(b), the proposed regulations

expressly included an officer of the person

or governmental entity as a representative

for purposes of determining control of a

nonstock organization.

In response to Notice 2019-09, a commenter raised the issue of “accidental control” presented by the representative test

in which, for example, control of an organization by an employer may be found because a few lower-level employees of the

employer serve on the board of directors

of the organization. The proposed regulations addressed this issue by permitting

a nonstock organization (or its putative

controlling person or governmental entity) to qualify for an exception from control status if the employees of the person

or governmental entity that are directors

or trustees of the nonstock organization

are not trustees, directors, officers, or employees with the powers of a director or

officer, of the person or governmental entity and are not acting as representatives of

the person or governmental entity in their

service with the nonstock organization. A

nonstock organization that relies on this

exception must report its reliance on this

exception on the applicable Form 990 and

provide supporting details.

Another commenter on the proposed

regulations stated that compliance with

this exception to avoid “accidental control” under the representative test places

additional reporting burdens on exempt

organizations and recommended that these

final regulations remove “employees”

altogether from the list of deemed representatives and instead focus the representative test on the actual decision-makers

in the organization. The commenter suggested that an expansive list of deemed

representatives, including employees, is

more justifiable with an 80 percent control threshold. These final regulations do

not adopt the commenter’s suggestions.

The Treasury Department and the IRS

have concluded that a rule that treats as

non-officers any employees not defined

as officers under the organization’s organizing documents may be subject to

abuse because employees frequently function as officers, even if they do not have

that title. Further, a rule that treats any

employee without the title of officer as

a non-officer would be inconsistent with

other Code provisions addressing exempt

organizations, which generally treat as an

officer any person with similar powers.

See, for, sections 4946(b)(1), 4955(f)(2)

(A), 4958(f)(2), 4965(d)(1), and 4966(d)

(3)(A). In addition, an employee of an

organization (such as a department head)

may serve ex officio on the board of another organization, and, in substance, serve in

a representative capacity. Similarly, the

facts of other arrangements in which an

employee serves on another organization’s

board may demonstrate that the employee

is serving as a representative of the employer. Finally, the percentage threshold

of control is not necessarily relevant to the

determination of whether the individual is

serving in a representative capacity—an

employer with less than a specific threshold percentage may still have reasons to

have an employee represent its interests

H. Rep. 115–409, supra, at 333.

The imposition of excise tax under section 4960 is not determinative as to whether the remuneration paid to the covered employee is excessive or unreasonable compensation for purposes of

sections 4941 or 4958. Similarly, there is no presumption, inference, or basis for concluding that remuneration paid to a covered employee that is not subject to excise tax under section 4960

is reasonable compensation for purposes of determining liability for excise tax under sections 4941 or 4958.

6

See also the representative test in section 4911(f)(2)(B)(i) for determining affiliated organizations.

4

5

February 16, 2021

846

Bulletin No. 2021–7

on another organization’s board of directors. For these reasons, these final regulations adopt without change the representative rules in the proposed regulations.

The proposed regulations also addressed the status of foreign organizations

as ATEOs, excluding them from ATEO

status if described in section 4948(b) and

the regulations thereunder. The Treasury

Department and the IRS requested comments on whether a foreign related organization described in section 4948(b) should

be exempt from tax imposed by section

4960(c)(4)(C) and, if so, whether remuneration paid by such an organization

should nonetheless be taken into account

for purposes of determining excess remuneration and allocating liability among the

ATEO and related organizations that are

subject to the excise tax imposed by section 4960. No comments were received on

these issues. However, the Treasury Department and the IRS have concluded that

it is appropriate to address these issues in

these final regulations.

Chapter 42 of the Code applies generally to private foundations and other

tax-exempt organizations and the excise

taxes in chapter 42 generally are payable

by exempt organizations and in some cases by persons associated with them. However, under section 4948(b), sections 507

and 508 and chapter 42 do not apply to a

foreign organization that has not received

substantial support (other than gross investment income) from United States

sources. Section 509(d) defines support for

purposes of chapter 42 as including gifts,

gross receipts from an activity that is not

an unrelated trade or business under section 513, net income from unrelated business activities, gross investment income,

tax revenues levied for the benefit of the

organization, and the value of services

or facilities furnished by a governmental

unit without charge—a breadth of items

that support a tax-exempt organization.

Section 4948(b) is thus concerned with

foreign private foundations (including

entities treated as private foundations for

purposes of chapter 42) and other tax-exempt organizations that have received sufficient support from United States sources

to warrant subjection to taxation and various prohibitions under chapter 42. Therefore, the Treasury Department and the IRS

have determined that it is appropriate to

exclude from taxation under section 4960

as a related organization any foreign organization that is both described in section

4948(b) and is either exempt from tax

under section 501(a)7 or a taxable private

foundation.8 Such organizations excluded

from the excise tax imposed by section

4960 are referred to as “section 4948(b)

related organizations.”

While chapter 42 taxes are inapplicable to section 4948(b) related organizations, those organizations’ activities that

otherwise would have resulted in chapter

42 taxes may have other consequences.

For example, section 4948(c) in certain

circumstances imposes loss of exemption

on an exempt organization described in

section 4948(b) that engages in activities

that would result in chapter 42 taxes for

domestic organizations. Therefore, the

Treasury Department and the IRS have

determined that the remuneration paid to

a covered employee of an ATEO by a section 4948(b) related organization must be

taken into account by the ATEO and any

related organizations subject to the excise

tax imposed by section 4960 for purposes

of determining an ATEO’s (and related organizations’) liability under section 4960

and the ATEO’s five highest-compensated employees, even though the section

4948(b) related organization is not subject

to the excise tax imposed by section 4960

on the excess remuneration that is otherwise allocable to that organization. These

final regulations also clarify that for purposes of applying the exclusion from status as an ATEO or a related organization,

whether the foreign organization meets

the requirements of section 4948(b) is determined at the end of the organization’s

taxable year.

III. Remuneration

A. In General

Consistent with section 4960(c)(3)

(A), the proposed regulations defined

“remuneration” as wages under section

3401(a) (meaning generally amounts subject to Federal income tax withholding),

but excluding designated Roth contributions under section 402A(c) and including

amounts required to be included in gross

income under section 457(f). Remuneration does not include certain retirement

benefits, including payments that are contributions to or distributions from a trust

described in section 401(a); payments

under or to an annuity plan described in

section 403(a) at the time of payment;

payments described in section 402(h)(1)

and (2) if, at the time of the payment, it

is reasonable to believe that the employee

will be entitled to an exclusion under that

section for the payment; payments under

an arrangement to which section 408(p)

applies; or payments under or to an eligible deferred compensation plan described

in section 457(b) and maintained by an

eligible employer described in section

457(e)(1)(A) (governmental employer) at

the time of payment. See section 3401(a)

(12). Remuneration includes a parachute

payment, but excess remuneration does

not include a parachute payment that is

an excess parachute payment. These final

regulations adopt these rules provided in

the proposed regulations without change.

One commenter recommended that, for

purposes of computing the excise tax, section 4960(c)(4)(A) should be interpreted

to include only remuneration related to the

employment of an employee by an ATEO,

which would include remuneration paid

by a related person or related governmental entity with respect to an ATEO or by

any other third party, but only if the payment related to the employee’s employment by the ATEO. The commenter stated

that this suggested interpretation would

ensure that all remuneration with respect

to a covered employee’s employment by

an ATEO, including remuneration paid by

a related organization of an ATEO with respect to services performed for the ATEO,

would be included in computing the tax

under section 4960(a). The commenter

asserted that the suggested interpretation

would avoid the unintended result, caused

by the proposed regulations, of subjecting

Some types of exempt organizations are limited to domestic organizations, such as section 501(c)(10) fraternal organizations.

A private foundation that loses its exemption under section 501(c)(3) remains a taxable private foundation until its private foundation status is terminated under section 507. See sections

509(b) and 4940(b).

7

8

Bulletin No. 2021–7

847

February 16, 2021

to the excise tax remuneration that is paid

by persons who are not ATEOs for an individual’s services that are unrelated to an

ATEO.

The Treasury Department and the IRS

have concluded that the more natural

reading of the statute is that remuneration

paid to a covered employee of an ATEO

includes remuneration paid by a related organization with respect to services

performed as an employee for the related

organization. In addition, adoption of the

commenter’s suggestion could raise the

potential for abuse because it relies on an

ability to identify the specific recipient

of services that an employee provides to

multiple entities and determine the relative value of the services or allocate the

compensation to the entities under a reasonable allocation method. Specifically,

given the facts and circumstances analysis

that in many cases may be difficult and

burdensome to administer, adoption of

the suggestion could provide an opening

for related taxpayers to coordinate their

activities to mischaracterize the employer

of an individual with respect to some or

all services provided to a related organization, or to misallocate portions of the total

remuneration paid by the related taxpayers to the individual as paid for services

provided as an employee of a related organization, so that all the related entities

avoid any liability under section 4960

while still providing what would otherwise be excess remuneration to the individual as an employee of an ATEO. While

this type of identification and allocation

may be needed for other tax purposes,

including in some cases the allocation of

liability under section 4960, those applications do not involve a situation such as

this in which all the entities may benefit

from the mischaracterizations through the

avoidance of the potential liability. Thus,

the interpretation provided in these final

regulations also is consistent with the exercise of authority in section 4960(d) to

prevent avoidance of the tax imposed by

section 4960 by providing compensation

through a third party. Further, adoption of

the commenter’s suggestion could raise issues regarding the role of section 4960(c)

(6), the statutory provision coordinating

the application of section 162(m) and section 4960, given the impact that adoption

of the suggestion would have on the scope

February 16, 2021

of circumstances to which that provision

may apply. For these reasons, these final

regulations do not limit the application

of section 4960(c)(4)(A) to remuneration

paid solely with respect to employment

by an ATEO or for services provided to an

ATEO, as suggested by the commenter.

The commenter also suggested that

these final regulations not treat remuneration paid by a related organization as paid

by the ATEO if a covered employee is not

employed by an ATEO at any time during

an applicable year. For example, in circumstances in which a covered employee

of an ATEO performs services for a related non-ATEO but provides no services for

the ATEO during an applicable year, the

commenter suggested that compensation

for those services not be treated as remuneration under section 4960. These final

regulations do not adopt this suggestion.

Section 4960(c)(2)(B) provides that once

an individual is a covered employee of

an ATEO (or any predecessor), the employee remains a covered employee for

all subsequent years. Section 4960(c)(4)

(A) provides that “remuneration of a covered employee by an [ATEO]” includes

“any remuneration paid with respect to

employment of such employee by any

related person or governmental entity.”

The Treasury Department and the IRS

have concluded that the better interpretation of section 4960(c)(2)(B) and (c)(4)

(A), when read together, is that compensation paid to a covered employee by a

related organization during an applicable

year is remuneration for purposes of section 4960, even if the covered employee

does not perform services as an employee

of the ATEO during the applicable year.

In addition, the commenter’s suggestion

also raises administrability issues similar

to those that would arise if only remuneration for services provided to the ATEO

were taken into account. If an employee

provides services to different members of

a group of related organizations from year

to year, it may be difficult to determine

what remuneration is allocable to services

provided to each group member. Therefore, the commenter’s suggestion would

be similarly difficult and burdensome to

administer and could raise the potential

for abuse.

The same commenter also suggested

that these final regulations apply the sub-

848

stance of the limited hours and nonexempt

funds exceptions for purposes of determining remuneration paid. These final

regulations do not adopt this suggestion

because the Treasury Department and the

IRS have concluded that the statute does

not provide the authority to apply these exceptions to the definition of remuneration.

The statute does not define compensation

for purposes of identifying the five highest-compensated employees, and thus the

statute permits flexibility in the rules for

determining the five highest-compensated

employees. In contrast, section 4960(c)(3)

(A) defines remuneration as wages within

the meaning of section 3401(a) (with certain specified modifications) paid by an

ATEO and section 4960(c)(4)(A) provides

that “remuneration of a covered employee by an [ATEO] shall include any remuneration paid with respect to employment

of such employee by any related person

or governmental entity.” These statutory

provisions do not provide the flexibility to

adopt the commenter’s suggestion to include the exceptions applicable to the determination of a covered employee in the

definition of remuneration.

Another commenter requested that

these final regulations limit the scope of

the definition of remuneration to include

only regular employee wages, as defined

in section 3401(a), and to exclude taxable

fringe benefits from the section 4960 definition of remuneration. The commenter

asserted that certain taxable fringe benefits, such as paid parking above the excludable limit and reimbursement of childcare

expenses, are not the type of remuneration

that was intended to be taxed under section

4960. The commenter further suggested

that the inclusion of taxable fringe benefits in remuneration would have an adverse effect on certain employers’ ability

to attract and retain key employees. These

final regulations do not adopt this commenter’s suggestion because it would be

inconsistent with the statutory provisions.

Section 4960(c)(3)(A) defines remuneration as amounts that are “wages” within

the meaning of section 3401(a). Section

3401(a) defines “wages” as all remuneration for services performed by an employee for his employer, including the cash

value of all remuneration (including benefits) paid in any medium other than cash,

with certain specific exclusions. Taxable

Bulletin No. 2021–7

fringe benefits, including parking above

the excludable limit and reimbursement of

childcare expenses, are not excluded from

wages under section 3401(a). In addition,

section 4960(c)(3) specifically excludes

other type of wages, such as designated

Roth contributions and remuneration for

medical services, indicating a legislative

intent for all other types of wages to be

included. For these reasons, the Treasury

Department and the IRS have determined

that providing further exclusions such as

those suggested would be inconsistent

with the statute and these final regulations

do not adopt this suggestion.

The proposed regulations clarified that

remuneration includes any amount includible in gross income as compensation

under section 7872 and the regulations

thereunder. For example, under §1.787215(e)(1)(i), a below-market split-dollar

loan between an employer and employee

generally is treated as a compensation-related loan, and thus any imputed transfer

from the employer to the employee generally is a payment of compensation. Although section 7872(f)(9) provides that

no amount shall be withheld under chapter 24 of the Code with respect to any

amount treated as transferred or retransferred under section 7872(a) or received

under section 7872(b), those amounts are

“remuneration … for services performed

by an employee for his employer” within

the meaning of section 3401(a) and are not

specifically excluded from wages under

section 3401(a). Thus, those amounts are

remuneration as defined in section 4960(c)

(3)(A). ATEOs that are private foundations or section 509(a)(3) supporting organizations should consider, before entering into these arrangements, that loans

(including transactions treated as loans for

Federal tax purposes, such as split-dollar

arrangements) to certain employees may

constitute an act of self-dealing under section 4941 or an excess benefit transaction

under section 4958(c)(3).

A commenter recommended that

these final regulations, or alternatively

the preamble to these final regulations,

confirm that remuneration does not include amounts that are not includible in

gross income pursuant to the $10,000 de

minimis exception under section 7872(c)

(3). Under that exception, the foregone

interest attributable to any day on which

Bulletin No. 2021–7

the aggregate outstanding amount of

loans between the borrower and lender

does not exceed $10,000 is not includible in gross income. These final regulations adopt the commenter’s suggestion

and clarify that, in accordance with section 7872, these de minimis amounts are

not remuneration for purposes of section

4960. Other than this comment that resulted in this clarification, no further

comments were received on those provisions of the proposed regulations, and

these final regulations adopt them without further changes.

B. Remuneration Related to Medical

Services

Remuneration that is paid to a licensed

medical professional for medical services is excluded from the definition of

“remuneration” for purposes of section

4960. (See section II.F. of the Summary

of Comments and Explanation of Revisions, titled “Medical Services,” for a

further discussion of the scope of this exception.) When an employer pays remuneration to an employee for both medical

services (including related services, such

as medical recordkeeping) and other services, the employer must allocate that

remuneration between remuneration paid

for medical services or for other services.

These final regulations adopt the proposed

regulations, with minor clarifications, and

permit taxpayers to use a reasonable, good

faith method to allocate remuneration between these two categories of services.

For this purpose, taxpayers may rely on a

reasonable allocation set forth in an employment agreement allocating remuneration between medical services and other

services. If some or all of the remuneration is not reasonably allocated in an employment agreement, taxpayers must use

another reasonable method of allocation.

For example, allocating remuneration to

medical services based on the portion of

the total hours the employee worked for

the employer providing medical services

(determined based on records such as

patient, insurance, Medicare/Medicaid

billing records, or internal time reporting

mechanisms) would be a reasonable method.

In section III.B. of the Explanation of

Provisions of the proposed regulations,

849

titled “Remuneration Related to Medical

Services,” the Treasury Department and

the IRS requested comments on other reasonable methods of allocating remuneration between medical services and other

services. One commenter recommended

that an employer be permitted to make a

reasonable, good faith allocation between

remuneration for providing medical services and remuneration for providing nonmedical services, not only with respect

to current remuneration but also with respect to contributions and earnings under

a deferred compensation plan. These final

regulations adopt this recommendation

and clarify that an employer may make a

reasonable, good faith allocation between

remuneration for medical and nonmedical services, regardless of the form of

compensation, and that an employer may

apply the same principles with respect to

contributions and earnings under a deferred compensation plan.

C. When Remuneration Is Treated as

Paid

The proposed regulations addressed

when remuneration is treated as paid for

purposes of section 4960. The flush language at the end of section 4960(a) provides that, for purposes of section 4960(a),

remuneration is treated as paid when

there is no substantial risk of forfeiture

of the rights to the remuneration within

the meaning of section 457(f)(3)(B). Although section 4960(a) cross-references

the definition of “substantial risk of forfeiture” in section 457(f)(3)(B), the rule under section 4960(a) providing that remuneration is treated as paid when there is no

substantial risk of forfeiture of the rights

to the remuneration is neither limited to

remuneration that is otherwise subject

to section 457(f) nor limited to amounts

paid pursuant to a nonqualified deferred

compensation arrangement. The proposed

regulations provided that, for purposes of

section 4960(a), all forms of remuneration

except for “regular wages” as described

in the next paragraph are treated as paid

when the remuneration is not subject to a

substantial risk of forfeiture. These final

regulations adopt this payment timing rule

provided in the proposed regulations with

certain modifications, as discussed in further detail in this section.

February 16, 2021

To clarify when remuneration that is

never subject to a substantial risk of forfeiture is treated as paid, the proposed

regulations provided that remuneration

that is a “regular wage” within the meaning of §31.3402(g)-1(a)(ii) is treated as

paid at the time of actual or constructive

payment. A “regular wage” is defined

in §31.3402(g)‑1(a)(ii) as remuneration

“paid at a regular hourly, daily, or similar periodic rate (and not an overtime

rate) for the current payroll period or

at a predetermined fixed determinable

amount for the current payroll period.”

These final regulations adopt these rules

provided in the proposed regulations

without change. Because the final regulations provide that remuneration that

is a regular wage within the meaning of

§31.3402(g)‑1(a)(1)(ii) is treated as paid

when actually or constructively paid,

an employer will not need to determine

amounts of regular wages that vested in

the preceding year for purposes of section

4960. For example, if a pay period begins

December 25, 2022, and ends January 7,

2023, and the salary for that period is not

actually paid until January 14, 2023, then

the salary for the pay period is treated as

paid in 2023, and the employer need not

treat any amount as remuneration paid in

2022 due to vesting in 2022.

The proposed regulations treated

an amount that is not regular wages as

paid when it is no longer subject to a

substantial risk of forfeiture within the

meaning of section 457(f)(3)(B) and referred to such an amount as “vested.”

The Treasury Department and the IRS issued proposed regulations under section

457(f) in 2016 (81 FR 40548 (June 22,

2016)), upon which taxpayers may rely

for periods before the applicability date

of the final section 457(f) regulations.

Under Prop. §1.457‑12(e)(1), an amount

of compensation is subject to a substantial risk of forfeiture only if entitlement

to the amount is conditioned on the future performance of substantial services,

or upon the occurrence of a condition

that is related to a purpose of the compensation if the possibility of forfeiture

is substantial. See Prop. §1.457-12(e)(3)

for examples of the rules relating to substantial risk forfeiture. These final regulations adopt the rules provided in the

proposed regulations, including the defi-

February 16, 2021

nition of “substantial risk of forfeiture”

in Prop. §1.457-12(e)(1). Any changes to

the proposed regulations under section

457(f) when finalized will be considered

for purposes of section 4960, and further

guidance may be issued, if appropriate,

including any transition guidance that

may be needed to take into account periods before and after the applicability date

of the definition of substantial risk of

forfeiture under the final section 457(f)

regulations.

In section III.C. of the Explanation of

Provisions of the proposed regulations,

titled “When Remuneration Is Treated

as Paid,” the Treasury Department and

the IRS invited comments regarding any

burdens that could be avoided through a

short-term deferral rule and how such a

rule could be designed to avoid permitting inappropriate avoidance of the tax.

One commenter recommended that these

final regulations extend the rule for “regular wages” as defined in §31.3402(g)1(a) to amounts that are not treated as deferred compensation under §1.409A-1(b)

(4) or Prop. §1.457-12(d)(2) because

such amounts are paid within the “shortterm deferral” period. The commenter

suggested that other remuneration that

falls outside the definition of “regular

wages” be treated as remuneration when

actually or constructively paid, including

benefits under bona fide severance pay

plans and death and disability plans, as

well as annual bonuses, long-term incentive pay, business expense reimbursements, and noncash fringe benefits. The

commenter noted that such amounts are

treated as wages for other reporting purposes, including Federal Insurance Contributions Act (FICA) wage reporting,

when actually or constructively paid, and

thus the rules under the proposed regulations result in a timing mismatch. The

commenter asserted that this recommendation would substantially reduce the

administrative burden and potential for

errors created by the broad timing rule

in the proposed regulations, yet affect a

limited range of remuneration.

Another commenter recommended

that these final regulations provide that

the short-term deferral exception to the

definition of deferred compensation for

section 457(f) apply to section 4960

such that the year of inclusion for in-

850

come tax purposes matches the year of

inclusion for section 4960 purposes. The

commenter interpreted the statutory reference to wages under section 3401(a)

and amounts included in income under

section 457(f) as providing not only a

substantive rule but also a timing rule,

meaning the amount must either be wages within the meaning of section 3401(a)

paid during that year or be an amount

included in income under section 457(f)

during that year in order to be treated as

remuneration paid in that year. According to the commenter, since amounts that

meet the definition of a short-term deferral for purposes of section 457(f) are

neither wages under section 3401(a) nor

includible in income under section 457(f)

in the year of vesting, those amounts

should be treated as remuneration for

purposes of section 4960 only in the year

actually paid.

Further, the commenter noted that applying a short-term deferral rule would

simplify administration for employers

because the determination of remuneration would more closely track the determination of wages for Form W-2, “Wage

and Tax Statement,” reporting. The commenter acknowledged the concern stated

in section III.C. of the Explanation of

Provisions of the proposed regulations,

titled “When Remuneration Is Treated

as Paid,” that a short-term deferral rule

would permit an ATEO to select the year

in which remuneration would be subject

to tax under section 4960, but observed

that an individual may become a covered

employee during the section 457(f) shortterm deferral period after the year of

vesting, and thus the proposed rule could

actually result in amounts not being subject to the excise tax. The commenter

also observed that treating short-term

deferrals as remuneration in the year of

vesting requires that those amounts be

present-valued and that earnings be included in remuneration in the subsequent

year, resulting in additional complexity

for ATEOs. Finally, the commenter suggested that an employer be permitted to

include an amount in remuneration in the

year of vesting or include the amount in

the year of payment, as is permitted for

FICA tax purposes under §31.3121(v)

(2)-1(b)(3)(iii), and require that employers apply consistent treatment of amounts

Bulletin No. 2021–7

with respect to its selection of the timing

of FICA taxation of short-term deferrals

and timing of the treatment as remuneration for purposes of section 4960.

These final regulations do not adopt

the commenter’s suggestions to apply a

“short-term deferral” rule. Rather, these

final regulations adopt the applicable provisions of the proposed regulations without change. Under section 4960(c)(3), an

amount must either be wages under section 3401(a) or be includible in income

under section 457(f) in order to be remuneration under section 4960. However, the

rules under section 4960(c)(3) determine

whether an amount is remuneration, not

when the remuneration is considered to be

paid. The flush language at the end of section 4960(a) provides that, for purposes of

section 4960(a), remuneration is treated

as paid when there is no substantial risk

of forfeiture, as defined in section 457(f)

(3)(B), of the rights to the remuneration.

Section 3401(a) primarily focuses on

whether, not when, amounts are includible

in wages; the basic timing rule for wage

inclusion appears in regulations under

section 3402(a), not section 3401(a). Specifically, §31.3402(a)-1(b) provides that

wages are paid when actually or constructively paid and explains what it means for

an amount to be constructively paid. Thus,

the cross-reference to section 3401(a) (and

not section 3402(a)) in section 4960(c)(3)

establishes the scope of the term “remuneration” without regard to timing, but

the flush language in section 4960(a) establishes the timing rule that applies to

all forms of remuneration. In addition to

being inconsistent with the statutory language addressing the timing of the payment of remuneration, allowing a shortterm deferral rule similar to the rule in

§1.409A-1(b)(4) and Prop. §1.457‑12(d)

(2) could permit an employer to determine

the taxable year in which the amount is

treated as paid, which could be used not

only to manipulate the application of section 4960(a) to the remuneration paid, but

also to manipulate the identification of

covered employees.

This application of the statutory language results in circumstances in which

the amount of remuneration paid for purposes of section 4960 is not the same as

the amount reported in any box on Form

W-2 for an applicable year. However, as

Bulletin No. 2021–7

described later in this section, these final

regulations address the administrative

burden of calculating the present value of

vested but unpaid amounts by expanding

the ability to include at vesting the full

amount that is to be paid in circumstances in which there is a short delay between

vesting and payment.

These final regulations adopt the rule

set forth in the proposed regulations that

provided that an amount of remuneration

treated as paid generally is the present

value of the remuneration on the date on

which the covered employee vests in the

right to payment of the remuneration. The

employer must determine the present value using reasonable actuarial assumptions

regarding the amount, time, and probability that the payment will be made. These

final regulations do not provide rules for

the determination of present value. However, an employer may determine the

present value using the rules set forth in

Prop. §1.457-12(c)(1). The Treasury Department and the IRS anticipate that final

regulations addressing the determination

of present value for purposes of section

4960 will be issued when final regulations

under section 457(f) are issued. Until actually or constructively paid or otherwise

includible in gross income of the employee, any amount treated as paid at vesting

is referred to as “previously paid remuneration.”

To reduce the administrative burden of

determining the present value of remuneration in certain circumstances that would

involve minimal discounting, these final

regulations adopt the rule provided in the

proposed regulations that the employer

may treat the entire amount to be paid on a

future date (without making a present valuation determination) as the present value

on the date of vesting. However, these final regulations do not limit the application

of this rule to amounts that are paid under a nonaccount balance plan described

in §1.409A‑1(c)(2)(i)(C), but instead this

rule applies to any vested amount that is

scheduled to be paid within 90 days. For

example, an employer is not required to

discount an annual bonus of $10,000 that

vests on December 31, 2022, and is scheduled to be paid on February 15, 2023, to

reflect the delay in actual payment, but instead may treat $10,000 as remuneration

paid in 2022.

851

D. Earnings and Losses

These final regulations generally adopt

the proposed regulations and provide specific rules for the treatment of earnings

and losses on previously paid remuneration. In general, these rules are intended to

minimize administrative burdens in determining the amount of earnings and losses

treated as paid for an applicable year, as

well as in determining the amount of earnings and losses across multiple compensation arrangements.

The proposed regulations provided that

net earnings on previously paid remuneration are treated as vested (and therefore

paid) on the last day of the applicable year

in which they are accrued unless otherwise actually or constructively paid before

that date. For example, the present value

of vested remuneration accrued to an employee’s account under an account balance plan described in §1.409A-1(c)(2)(i)

(A) (under which the earnings and losses

attributed to the account are based solely

on a predetermined actual investment or

a reasonable market interest rate) is treated as paid on the date accrued to the employee’s account and, until subsequently

actually or constructively paid, is treated

as previously paid remuneration. In addition, at the end of each applicable year in

which there is previously paid remuneration remaining in the covered employee’s

account balance, the present value of any

net earnings accrued on that previously

paid remuneration (the increase in present

value due to the application of a predetermined actual investment or a reasonable

market interest rate) is treated as remuneration paid in that applicable year. This

remuneration is then treated as previously

paid remuneration for subsequent applicable years until actually or constructively

paid.

Similarly, the proposed regulations

provided that the present value of a vested, fixed amount of remuneration under

a nonaccount balance plan described in

§1.409A‑1(c)(2)(i)(C) is treated as paid

on the date of vesting and subsequently

treated as previously paid remuneration

until actually or constructively paid. In

addition, at the end of each applicable

year in which previously paid remuneration remains as part of the covered

employee’s benefit under the plan, the

February 16, 2021

net increase in the present value of that

amount during the year due solely to the

passage of time constitutes earnings and

is treated as remuneration paid. For this

purpose, earnings and losses from one

plan or arrangement are aggregated with

earnings and losses from any other plan

or arrangement in which the employee participates that is provided by the

same employer (but not across arrangements provided by related but separate

employers). For purposes of determining earnings and losses, previously paid

remuneration under a plan or arrangement is reduced by the amount actually

or constructively paid under the plan or

arrangement. These final regulations further illustrate the operation of these rules

through examples.

One commenter recommended that

these final regulations permit, but not require, related employers to determine net

earnings on previously paid remuneration

on an aggregate basis by treating all earnings and losses on the previously paid remuneration of related employers as paid

by the ATEO. The commenter explained

that in groups of related taxable and

tax-exempt organizations, related organizations often provide separate deferred

compensation plans to their employees.

Therefore, an individual employee who

works (or has worked) for multiple related employers might have several deferred compensation plans, which often

differ considerably, with some being

nonaccount balance plans and others being account balance plans that may offer

very different investment options. As a

result, an individual employee might accrue significant earnings in a year under

some deferred compensation plans but incur significant losses in others. The commenter therefore suggested that these final

regulations permit aggregation of losses

with earnings among related employers

to avoid the inappropriate inflation of remuneration in certain circumstances. Any

concerns about manipulation due to permitting aggregation could be addressed by

requiring employers to aggregate (or not

aggregate) earnings and losses consistently from year to year, with changes allowed

only infrequently—for example, every 3

years—unless in response to changes in

the composition of the group of related

organizations.

February 16, 2021

These final regulations do not adopt

the commenter’s suggestion to permit the

aggregation of earnings and losses among

related organizations. The commenter’s

suggestions would be feasible among related organizations only if they agreed to

either aggregate or disaggregate arrangements as to all employees and also to coordinate and integrate their remuneration

calculations across the separate plans

and arrangements that each employer established to permit timely and accurate

calculations for each covered employee

(and employees that may become covered

employees) who participated in more than

one employer arrangement. Even if this

was feasible for a particular year, the regulatory framework would need to account

for the entry and departure of members

of the group of related organizations and

how the aggregation or disaggregation

would account for those events. This regime would be complex and burdensome

for taxpayers and the IRS to administer

and is not warranted due to the limited potential benefits. In addition, the aggregation of earnings and losses across related

employers would implicate the statutory

allocation of the liability for the tax on excess remuneration under section 4960(c)

(4)(C), since the aggregation of earnings

and losses would impact the relative remuneration paid by the separate employers.

E. Request for a Grandfathering Rule

One commenter suggested that these

final regulations provide for grandfathering of employee remuneration contracts

executed on or before November 2, 2017,

so that amounts paid under such contracts

would not be treated as remuneration for

purposes of section 4960. The commenter

reasoned that the grandfathering of employee remuneration contracts executed

on or before November 2, 2017, would

help certain employers in overcoming

challenges in hiring executives, and that

the legislative history of the TCJA failed

to consider the differences between

tax-exempt employers and their taxable

counterparts. The final regulations do not

adopt the commenter’s suggested rule.

Section 13602(c) of TCJA, which added

section 4960 to the Code, did not provide

for a grandfathering rule and there is no

852

indication in the legislative history that

Congress intended that one be adopted

by regulation. In contrast, section 13601

of TCJA amended section 162(m) of the

Code and provided an explicit grandfathering rule. Under these circumstances,

the Treasury Department and the IRS do

not find it appropriate to provide a grandfathering rule. However, these final regulations provide rules that have the effect

of grandfathering remuneration that vested before the taxpayer’s first taxable year

beginning after December 31, 2017.

Section III.E. of the Explanation of

Provisions of the proposed regulations,

titled “Request for a Grandfather Rule,”

explained that one of the consequences of

treating remuneration as paid at the time

the remuneration vests is that any remuneration that vested prior to the first day

of the first taxable year of the ATEO beginning after December 31, 2017, is not

considered remuneration for purposes

of section 4960. One commenter recommended that the Treasury Department and

the IRS explicitly reflect this rule in these

final regulations. In response to this comment, these final regulations provide that

any vested remuneration, including vested

but unpaid earnings accrued on deferred

amounts, that is treated as paid before the

effective date of section 4960 (January 1,

2018, for a calendar year employer) is not

subject to the excise tax imposed under

section 4960(a)(1). All earnings on those

vested amounts that accrue or vest after

the effective date, however, are treated as

remuneration paid for purposes of section

4960(a)(1).

Similarly, for an employee who has

vested compensation from years prior to

the taxable year in which the employee

first became a covered employee, these

final regulations adopt the rule in the proposed regulations providing that vested

remuneration (including vested but unpaid

earnings) that would have been treated as

remuneration paid for a taxable year before the taxable year in which an employee first became a covered employee under

section 4960 is not remuneration subject to

the excise tax imposed by section 4960(a)

(1) for the first taxable year in which the

employee becomes a covered employee

or any subsequent year. However, subsequent earnings that accrue on those vested

amounts when the employee is a covered

Bulletin No. 2021–7

employee are treated as remuneration paid

for purposes of section 4960(a)(1).

F. Remuneration Paid to a Covered

Employee for Which a Deduction Is

Disallowed Under Section 162(m)

Section 4960(c)(6) provides that remuneration for which a deduction is

disallowed under section 162(m) is not

taken into account for purposes of section 4960. Thus, remuneration that is

paid to a covered employee of an ATEO

who is also a covered employee of a related “publicly held corporation” or an

applicable individual of a related “covered health insurance provider” (as defined in section 162(m)(2) and (m)(6)

(C), respectively), for which a deduction

is disallowed under section 162(m), generally is not treated as remuneration for

purposes of determining whether remuneration has been paid. However, that

remuneration is taken into account for

purposes of determining the ATEO’s five

highest-compensated employees. See

section II.E. of this Summary of Comments and Explanation of Revisions, titled “Covered Employee.”

As discussed in section III.F. of the

Explanation of Provisions of the proposed regulations, titled “Remuneration

Paid to a Covered Employee for Which a

Deduction Is Disallowed Under Section

162(m),” the application of this provision

raises significant issues stemming largely from the difference in timing between

the payment of remuneration under section 4960 (when the right to the amount

vests), and the availability of a deduction

that may be restricted by section 162(m)

(generally when the amount is paid).

Section III.F. of the Explanation of Provisions of the proposed regulations, titled

“Remuneration Paid to a Covered Employee for Which a Deduction Is Disallowed Under Section 162(m),” described

two possible approaches for addressing

these circumstances and requested comments on those approaches. The Treasury

Department and the IRS continue to consider the issues raised by this provision

in section 4960(c)(6) requiring coordination with section 162(m), including the

comments submitted, but have not yet

determined the appropriate manner of

implementation. Accordingly, these final

Bulletin No. 2021–7

regulations do not address the coordination of sections 4960 and 162(m) in these

circumstances, but instead reserve a section of these final regulations as a place

for future guidance.

Until that future guidance is issued,

taxpayers may use a reasonable, good faith

approach with respect to the coordination

of sections 4960 and 162(m) in circumstances in which it is not known whether

a deduction for the remuneration will be

disallowed under section 162(m) by the

due date (including any extension) of the

relevant Form 4720. For this purpose, a

reasonable, good faith approach must have

a reasonable basis for anticipating that the

compensation that a particular employee

will be paid in the future may be subject

to the deduction limitations of section

162(m). For example, it is not reasonable

for this purpose to anticipate that an ATEO

may become a public corporation by the

date the compensation will be paid absent

facts indicating that is a realistic potentiality. Additionally, until further guidance is

issued, the two approaches regarding deferred compensation described in section

III.F. of the Explanation of Provisions of

the proposed regulations, titled “Remuneration Paid to a Covered Employee for

Which a Deduction Is Disallowed Under

Section 162(m),” will be treated as reasonable, good faith approaches. However,

a third approach suggested by a commenter, under which section 162(m) would not

disallow a taxpayer’s deduction for remuneration that the taxpayer treated as excess

remuneration under section 4960 in a previous taxable year, will not be treated as a

reasonable, good faith approach, because

such an approach would be inconsistent

with section 162(m) and the regulations

thereunder.

IV. Excess Remuneration

In general, the excise tax imposed

under section 4960(a)(1) is based on the

remuneration paid (other than any excess

parachute payment) by an ATEO for the

taxable year with respect to employment

of any covered employee in excess of

$1 million. Consistent with the proposed

regulations, these final regulations refer

to this amount as “excess remuneration.”

The $1 million threshold provided in section 4960(a)(1) is not adjusted for infla-

853

tion, and an amount subject to tax under

section 4960(a)(2) as an excess parachute

payment is not subject to tax under section

4960(a)(1) as excess remuneration.

As provided in section 4960(c)(4)(C),

if an individual performs services as an

employee for two or more related organizations during an applicable year, one or

more of which is an ATEO, each employer

is liable for its proportionate share of the

excise tax. These final regulations adopt

the rules provided in the proposed regulations for allocating liability for the excise

tax among the employers. For this purpose, remuneration that is paid by a separate organization (whether related to the

ATEO or not) for services performed as an

employee of the ATEO is treated as remuneration paid by the ATEO. For a further

discussion of when amounts are treated as

paid by an ATEO, see section VI of this

Summary of Comments and Explanation

of Revisions, titled “Calculation, Reporting, and Payment of the Tax.”

V. Excess Parachute Payments

A. In General

The proposed regulations set forth rules

with respect to excess parachute payments

under section 4960. No comments were

received on these rules, and these final

regulations adopt them without change.

Section 4960(a)(2) imposes an excise tax

on any excess parachute payment. Section

4960(c)(5)(A) provides that “excess parachute payment” means an amount equal to

the excess of any parachute payment over

the portion of the base amount allocated

to such payment. Section 4960(c)(5)(B)

provides that “parachute payment” means

any payment in the nature of compensation to (or for the benefit of) a covered employee if the payment is contingent on the

employee’s separation from employment

with the employer and the aggregate present value of the payments in the nature of

compensation to (or for the benefit of) the

individual that are contingent on the separation equals or exceeds an amount equal

to 3-times the base amount. Under section

4960(c)(5)(C), certain retirement plan

payments, certain payments to licensed

medical professionals, and payments to

an individual who is not a “highly compensated employee” (HCE) as defined in

February 16, 2021

section 414(q) are not excess parachute

payments.9

The excess parachute payment rules

under section 4960 are modeled after

section 280G, but section 4960(c)(5)(B)

defines “parachute payment” differently than section 280G(b)(2). The section

4960 definition refers to payments contingent on an employee’s separation from

employment, whereas the section 280G

definition refers to payments contingent

on a change in the ownership or effective

control of a corporation (or in the ownership of a substantial portion of the assets

of the corporation). While these final regulations incorporate many of the concepts

found in the rules under §1.280G-1, with

modifications to reflect the statutory differences between sections 280G and 4960,

they do not incorporate other rules under

§1.280G-1 because those rules address issues that do not arise under section 4960.

In addition, many provisions in these final regulations do not have parallel rules

under §1.280G-1 because they address issues that arise under section 4960, but not

under section 280G.

The following sections provide a general overview of these final regulations

for purposes of calculating the excise tax

imposed under section 4960(a)(2), noting

certain similarities and differences between these final regulations and the rules

under §1.280G-1. For more information

concerning these rules, including additional similarities and differences with

the rules under section 280G, see section

V of the Explanation of Provisions of the

proposed regulations, titled “Excess Parachute Payments.”

B. Definitions Related to Excess

Parachute Payments

These final regulations define “excess

parachute payment” and the term “parachute payment” for purposes of section

4960. Any payment in the nature of compensation made by an ATEO (or any predecessor or related organization) to a covered employee that is contingent on the

employee’s separation from employment

is taken into account for purposes of the

parachute payment calculation, assuming

no exclusion applies. Those combined

payments constitute a parachute payment

if the aggregate present value of all such

payments made to an individual equals

or exceeds 3-times the individual’s base

amount. A parachute payment is an excess

parachute payment to the extent it exceeds

one-times the individual’s base amount allocated to the payment.

These final regulations define a “payment in the nature of compensation”

based on §1.280G-1, Q/A–11 and Q/A–

14. In general, any payment arising out of

an employment relationship is a payment

in the nature of compensation. A payment

in the nature of compensation is reduced,

however, by any consideration paid by

the covered employee in exchange for the

payment.

C. Payments Contingent on a Separation

from Employment

1. In General

Although section 4960 does not define

what it means for a payment to be contingent on a separation from employment,

these final regulations generally treat a

payment as contingent on an employee’s

separation from employment only if there

is an involuntary separation from employment. If the payment is subject to a

substantial risk of forfeiture (defined in

a manner consistent with section 457(f))

that lapses upon an involuntary separation from employment, and the separation

causes the risk of forfeiture to lapse, the

payment is contingent on separation from

employment.

2. Requirement of Involuntary Separation

from Employment

Separation from employment (whether

voluntary or involuntary) often is used in

compensation arrangements as a trigger to

pay vested compensation. For example, it

is typical for a nonqualified deferred compensation plan to provide that a payment

or a series of payments will be made or begin upon a separation from employment,

including separation from employment

resulting from death or disability. The

vested amounts that are to be paid after a

separation from employment generally are

not treated as contingent on a separation

from employment because the amounts

will never be subject to forfeiture or otherwise not paid (even if an employee does

not voluntarily or involuntarily terminate

employment during the employee’s lifetime, the payments will be made upon the

employee’s death). In these cases, the separation from employment functions only

as a payment timing event and is neither

a contingent event that may not occur nor

a precondition to entitlement to the payment.

3. Definition of “Involuntary Separation

from Employment”

If an amount is payable solely upon an

involuntary separation from employment,

then it is a payment contingent on an event

that may not occur and that is a precondition to entitlement to the payment. The

definition of an “involuntary separation

from employment” set forth in these final regulations is modeled after the definition of an “involuntary separation from

service” in §1.409A-1(n)(1), which also

was the model for the definition of an “involuntary severance from employment”

under Prop. §1.457‑11(d)(2). A separation from employment for good reason is

treated as an involuntary separation from

employment for purposes of section 4960

if certain conditions are met. For this purpose, these regulations generally adopt the

standards set forth in §1.409A‑1(n)(2) and

Prop. §1.457-11(d)(2)(ii).

These final regulations generally adopt

the standards of the section 409A regulations for purposes of determining whether

there has been a separation from employment, except that for purposes of section

4960 a bona fide change from employee

to independent contractor status is treated

as a separation from employment. Because the section 409A regulations do not

Under section 414(q), a “highly compensated employee” generally is defined as any employee who was a five-percent owner at any time during the year or the preceding year or who had

compensation from the employer in the preceding year in excess of an inflation-adjusted amount. Notice 2019-59 (2019-47 I.R.B. 1091) and Notice 2020-79 (2020-46 I.R.B 1014), provide

that the inflation-adjusted amounts for 2020 and 2021 are $130,000 and $130,000, respectively. See section 414(q) and the regulations thereunder for additional rules, including the availability

of an election to treat no more than the top 20 percent of an employer’s employees as highly compensated employees by reason of their compensation.

9

February 16, 2021

854

Bulletin No. 2021–7

provide a standard for determining when

an involuntary change of status from employee to independent contractor results

in a separation from employment, in section V.C.3. of the Explanation of Provisions of the proposed regulations, titled

“Definition of ‘Involuntary Separation

from Employment,’” the Treasury Department and the IRS requested comments on

whether additional guidance is needed on

this issue. No comments were received in

response to that request. Consistent with

the proposed regulations, these final regulations provide that a separation from

employment occurs in the case of a bona

fide and involuntary change of status from

employee to independent contractor in circumstances in which the change in status

otherwise meets the requirements for an

involuntary separation from employment.

With respect to when an employee otherwise has terminated employment, these

final regulations adopt rules based on the

section 409A regulations. Specifically,

these regulations adopt the standards of

§1.409A-1(h)(1)(ii), providing that an anticipated reduction in the level of services

of more than 80 percent is treated as a separation from employment, an anticipated

reduction in the level of services of less

than 50 percent is not treated as a separation from employment, and the treatment

of an anticipated reduction between these

two levels will depend on the facts and circumstances. The measurement of the anticipated reduction in the level of services

is based on the average level of bona fide

services performed over the immediately

preceding 3 years (or shorter period for

an employee employed for less than 3 full

prior years). However, these regulations

do not adopt the rule in §1.409A-1(h)(1)

(ii), under which an employer may modify the level of the anticipated reduction

in future services that will be considered

to result in a separation from employment.

4. When a Payment Is Contingent on

Separation from Employment

In defining when a payment is contingent on separation from employment,

these final regulations do not focus solely

on whether the payment would not have

been made but for a separation from employment, but also take into consideration

whether the separation from employment

Bulletin No. 2021–7

accelerates the right to payment or the

lapse of a substantial risk of forfeiture

with respect to the right to payment. Generally, if the payment or the lapse of a substantial risk of forfeiture is accelerated as

a result of an involuntary separation from

employment (such as a payment that otherwise would have vested and been paid

had the employee remained employed for

a subsequent period), then the value of any

accelerated payment plus the value of any

lapse of the substantial risk of forfeiture is

treated as contingent on a separation from

employment (since the employer would

not have provided the increased value in

the absence of an involuntary separation

from employment).

However, if the lapse of the substantial

risk of forfeiture is dependent on an event

other than the performance of services,

such as the attainment of a performance

goal, and if that event does not occur

prior to the employee’s separation from

employment, but the payment vests due

to the employee’s involuntary separation

from employment, then the full amount of

the payment is treated as contingent on the

separation from employment.

As discussed in section V.C.4. of the

Explanation of Provisions of the proposed

regulations, titled “When a Payment Is

Contingent on Separation from Employment,” a payment the right to which is not

subject to a substantial risk of forfeiture

within the meaning of section 457(f)(3)

(B) at the time of an involuntary separation from employment generally is not

contingent on a separation from employment (since the right to the payment is not

triggered by the separation from employment). However, the increased value of a

payment accelerated due to the involuntary

separation from employment, and the value of accelerated vesting due to the involuntary separation from employment, each

generally are treated as a payment contingent on a separation from employment. In

addition, a payment for damages due to

the breach of an employment agreement

that is related to an involuntary separation

from employment generally constitutes a

payment contingent on a separation from

employment, and a payment for compliance with a noncompetition agreement or

similar arrangement may, in certain situations, constitute a payment contingent on

a separation from employment.

855

Actual or constructive payment of an

amount that was previously includible in

gross income is not a payment contingent

on a separation from employment. For example, a payment of deferred compensation after an involuntary separation from

employment that vested based on years of

service completed before the involuntary

separation from employment generally is

not a payment that is contingent on a separation from employment because the separation from employment may affect the

time of, but not the right to, the payment

(although the value of an acceleration of

the payment may be contingent on a separation from employment).

Unlike Q/A–25 and Q/A–26 of

§1.280G-1, these regulations do not provide a presumption that a payment made

pursuant to an agreement entered into or

modified within 12 months of a separation from employment is a payment that

is contingent on a separation from employment. However, as discussed later in

this section, if the facts and circumstances

demonstrate that either the vesting or the

payment of an amount would not have occurred but for the involuntary nature of the

separation from employment, the amount

will be treated as a payment contingent on

a separation from employment.

In addition, these final regulations do

not provide a rule similar to §1.280G-1,

Q/A–9 (exempting reasonable compensation for services rendered on or after a

change in ownership or control from the

definition of “parachute payment”), which

would exclude reasonable compensation

for services provided after a separation

from employment. In most cases, the issue of whether payments made after a separation from employment are reasonable

compensation for services will not arise

because the employee will not provide

services after the separation from employment. However, if the employee continues

to provide services (including as a bona

fide independent contractor) after an involuntary separation from employment,

payments for those services are not contingent on the involuntary separation from

employment to the extent those payments

are reasonable and are not made due to the

involuntary nature of the separation from

employment.

Notwithstanding the foregoing, if the

facts and circumstances demonstrate that

February 16, 2021

either vesting or payment of an amount

(whether before or after an involuntary

separation from employment) would not

have occurred but for the involuntary nature of the separation from employment,

the amount will be treated as contingent

on a separation from employment. For

example, an employer’s exercise of discretion to accelerate vesting of an amount

shortly before an involuntary separation

from employment may indicate that the

acceleration of vesting was due to the involuntary nature of the separation from

employment and was therefore contingent

on the employee’s separation from employment.

In section V.C.4. of the Explanation of

Provisions of the proposed regulations, titled “When a Payment Is Contingent on

Separation from Employment,” the Treasury Department and the IRS requested

comments on whether there are additional types of payments made in connection

with separation from employment and

the extent to which these final regulations

under section 4960 should be modified to

ensure appropriate classification of those

payments as contingent or not contingent

on separation from employment. No comments were received in response to this

request, and no modifications have been

made in the final regulations.

D. Three-Times-Base-Amount Test

Section 4960(c)(5) provides rules for

determining the tax on any excess parachute payment imposed under section

4960(a)(2). Section 4960(c)(5)(B) provides that a payment is a parachute payment only if the aggregate present value

of the payments in the nature of compensation to (or for the benefit of) an individual that are contingent on a separation

from employment equals or exceeds an

amount equal to 3-times the base amount.

Section 4960(c)(5)(D) provides that rules

similar to the rules of section 280G(b)

(3) apply for purposes of determining

the base amount, and section 4960(c)(5)

(E) provides that rules similar to the rules

of section 280G(d)(3) and (4) apply for

purposes of present value determinations.

Section 280G(b)(3) provides that “base

10

amount” means an individual’s annualized includible compensation for the base

period. Section 280G(d)(2) defines “base

period” as the period consisting of the 5

most-recent taxable years of the service

provider ending before the date on which

the change in ownership or control occurs

or the portion of such period during which

the individual performed personal services for the corporation.

These final regulations provide that the

“base amount” is the average annual compensation as an employee of the ATEO

(including services performed as an employee of a predecessor or related organization) for the taxable years in the “base

period.” The base period is the 5 most-recent taxable years during which the individual was an employee of the ATEO (or

predecessor or related organization) or the

portion of the 5-year period during which

the employee was an employee of the

ATEO (or predecessor or related organization).

These final regulations provide rules

for determining whether a payment is an

excess parachute payment, including rules

for applying the 3-times-base-amount

test. The rules for determining the base

amount, base period, and present value,

including determining the present value of

payments that are contingent on uncertain

future events, are based on the rules under §1.280G-1, Q/A–30 through Q/A–36

(substituting an involuntary separation

from employment for a change in control).

These final regulations describe when a

payment in the nature of compensation is

considered made for purposes of section

4960(a)(2), based on the rules in §1.280G1, Q/A–11 through Q/A–14. Consistent

with the rules provided under §1.280G‑1,

Q/A–12(a), these final regulations provide

that the transfer of section 83 property

generally is considered a payment made

in the taxable year in which the fair market value of the property would be includible in the gross income of the covered

employee under section 83, disregarding

any election made by the employee under

section 83(b) or (i). In addition, similar to

the rules provided under §1.280G-1, Q/A–

13(a), these regulations generally provide

that stock options are treated as property

transferred on the date of vesting (regardless of whether the option has a “readily

ascertainable value” as defined in §1.837(b)). For purposes of determining the

timing and amount of any payment related

to an option, the principles of §1.280G-1,

Q/A–13 and Rev. Proc. 2003-68 (2003-2

C.B. 398) apply.

E. Computation of Excess Parachute

Payments

Consistent with section 4960(c)(5)

(A), these final regulations provide that an

“excess parachute payment” is an amount

equal to the excess of any parachute payment over the portion of the base amount

allocated to the payment. The portion of

the base amount allocated to any parachute payment is the amount that bears

the same ratio to the base amount as the

present value of the parachute payment

bears to the aggregate present value of all

parachute payments to be made to the covered employee. The rules on allocation of

the base amount in these regulations are

based on §1.280G-1, Q/A–38.

VI. Calculation, Reporting, and Payment

of the Tax

ATEOs (and any related non-ATEO organizations) are liable for the excise tax

imposed by section 4960 only if they pay a

covered employee sufficient remuneration

to trigger the tax. An ATEO is not subject

to the excise tax under section 4960(a)

(1) unless the ATEO (together with any

related organizations) pays more than $1

million of remuneration to a covered employee for a taxable year. An ATEO cannot make an excess parachute payment

subject to the excise tax under section

4960(a)(2) if the employer does not have

any HCEs under section 414(q)10 for the

taxable year. If both of these situations apply to an ATEO, the ATEO is not liable for

any excise tax under section 4960 for that

taxable year.

These final regulations generally adopt

the proposed rules regarding the entity

that is liable for the excise tax under section 4960 and how that excise tax is calculated. These regulations provide that

See footnote 9.

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856

Bulletin No. 2021–7

the employer, as determined under section

3401(d), without regard to paragraph (d)

(1) or (d)(2), is liable for the excise tax imposed under section 4960. Further, as authorized by section 4960(d), a payment by

the employer may be treated as remuneration or a parachute payment if, based on

the facts and circumstances, the payment

is structured such that it has the effect of

avoiding the tax applicable under section

4960. For example, the excise tax under

section 4960 would apply with respect to

an individual who is an employee of an

ATEO or related organization but who is

incorrectly classified as an independent

contractor. Similarly, the excise tax under

section 4960 would apply to an amount

paid to a limited liability company or other entity owned all or in part by an employee (or owned by another entity unrelated to the ATEO or related organization)

for services performed by an employee of

the ATEO or related organization if the

arrangement would otherwise have the effect of avoiding the tax applicable under

section 4960. For a further discussion of

the definition of “employer” see section

II.D. of this Summary of Comments and

Explanation of Revisions, titled “Employer.”

A. Calculation of Tax on Excess

Remuneration

An individual may perform services

as an employee of an ATEO and as an

employee of one or more related organizations during the same applicable year,

in which case remuneration paid for the

taxable year is aggregated for purposes

of determining whether excess remuneration has been paid. To address these cases,

these final regulations adopt the proposed

rules for allocating liability for the excise

tax among the related employers. As provided in section 4960(c)(4)(C), in any case

in which an ATEO includes remuneration

from one or more related organizations

as separate employers of the individual

in determining the excise tax imposed by

section 4960(a), each employer is liable

for its proportionate share of the excise

tax. In contrast, a payment to an individual for performing services as an employee

of an ATEO that is made by a third-party

payor (whether the payor is related to the

ATEO or not) is remuneration paid by the

Bulletin No. 2021–7

ATEO for section 4960 purposes and thus

is included with any remuneration paid directly by the ATEO (and the related liability is not allocated to the other organization). If a covered employee is employed

by one employer when the legally binding

right to the remuneration is granted and by

a different employer at vesting, then the

covered employee’s employer at vesting

is treated as paying the remuneration, provided the employment relationship is bona

fide and not a means to avoid tax under

section 4960. A related organization may

become (or cease to be) related during the

applicable year, in which case only remuneration the related organization pays

(or is treated as paying due to vesting) to

the ATEO’s covered employee during the

portion of the applicable year that it is a

related organization is treated as paid by

the ATEO for the taxable year, as provided

in section 4960(c)(4)(A).

If an employee is a covered employee

of more than one ATEO, these final regulations provide that each ATEO calculates

its liability under section 4960(a)(1), taking into account remuneration paid to the

employee by the organizations to which

it is related. These regulations also provide that, rather than owing tax as both

an ATEO and a related organization for

the same remuneration paid to a covered

employee, each employer is liable only

for the greater of the excise tax for which

it would be liable as an ATEO or the excise tax it would be liable for as a related organization with respect to that covered employee (and if there is more than

one related group of organizations, then

for the group that results in the greatest

amount of tax). These regulations provide

that these same allocation principles apply

in the case of the allocation of liability in

situations involving an ATEO or related

organization with a short taxable year,

and should be applied in a manner that

avoids, to the extent possible, duplicative

taxation of remuneration paid to the same

individual. Because the application of the

allocation rules may prove complicated in

situations involving short taxable years,

especially if those situations also involve

multiple short taxable years or differing

taxable years among the group constituting the ATEO and its related organizations, the regulations further provide that

the Commissioner may prescribe guid-

857

ance of general applicability addressing

how the allocation rules apply in particular circumstances involving short taxable

years.

Under section 4960(b) and (c)(4)(C),

the employer or employers are liable for

the excise tax imposed by section 4960.

Related organizations must obtain information from each other on remuneration

paid to covered employees in order to calculate the tax and their share of the liability. One commenter noted that there may be

situations in which an employer is unable

to obtain complete information on the remuneration and benefits paid by other employers. The commenter requested guidance on relief from penalties or interest

for an error if the employer made a bona

fide attempt to obtain the necessary information when it became aware of the error

and requested guidance on what would be

a bona fide attempt for this purpose. If an

ATEO or related organization fails to pay

tax it is liable for due to failure to obtain

information on remuneration paid by other organizations within the related group,

it may be liable for a civil penalty under

section 6651 (and in some cases, criminal

penalties). Section 6651 includes an exception for reasonable cause. Guidance as

to reasonable cause for penalty relief, and

therefore the guidance requested by this

commenter, is beyond the scope of these

final regulations, and therefore is not addressed in these final regulations.

B. Calculation of Tax on an Excess

Parachute Payment

These final regulations adopt the proposed regulations with respect to the rules

for the calculation of tax on an excess

parachute payment. With respect to the

calculation of, and liability for, the tax on

excess parachute payments, the proposed

regulations differed in one respect from

the guidance provided in Q/A–1 of Notice

2019‑09. Notice 2019-09 provided that

an ATEO or related organization may be

liable for the tax on an excess parachute

payment based on the aggregate parachute

payments made by the ATEO and its related organizations, including parachute payments based on separation from employment from a related organization. As in

the proposed regulations, these final regulations provide that only an excess para-

February 16, 2021

chute payment paid by an ATEO is subject

to the excise tax on excess parachute payments. However, consistent with the provision in section 4960(c)(5)(D) that rules

similar to section 280G(b)(3) apply for

purposes of determining the base amount

under section 4960, payments from all related organizations (including payments

from non-ATEOs) are considered for purposes of determining the base amount and

total payments in the nature of compensation that are contingent on the covered

employee’s separation from employment

with the employer. See §1.280G-1, Q/A–

34. Generally, this means that a covered

employee’s base amount calculation includes remuneration from the ATEO and

all related organizations, and that a covered employee’s parachute payment calculation includes all payments (made by

the ATEO and all related organizations)

that are contingent on the employee’s involuntary separation from employment.

However, only an ATEO is subject to the

excise tax on excess parachute payments

it makes to a covered employee. A nonATEO that pays an amount that would

otherwise be an excess parachute payment

is not subject to the excise tax. These regulations further provide that, based on the

facts and circumstances, the Commissioner may reallocate excess parachute payments to an ATEO if it is determined that

excess parachute payments were made by

a non-ATEO for the purpose of avoiding

the tax under section 4960. Step by step

instructions for calculating the tax on excess parachute payments were provided in

section VI.B. of the Explanation of Provisions of the proposed regulations, titled

“Calculation of Tax on an Excess Parachute Payment.”

C. Reporting and Payment of the Tax

These final regulations adopt without

change the rules provided in the proposed regulations relating to the reporting and payment of the excise tax. Under

§§53.6011-1 and 53.6071-1, the excise tax

under section 4960 is reported on Form

4720, “Return of Certain Excise Taxes

Under Chapters 41 and 42 of the Internal

Revenue Code,” which is the form generally used for reporting and paying chapter

42 taxes. The reporting and payment of

any applicable taxes are due when payments of chapter 42 taxes are ordinarily

due (the 15th day of the 5th month after

the end of the taxpayer’s taxable year—

May 15 for a calendar year employer),

subject to an extension of time for filing

returns and making payments11 that generally applies. Because section 6655 has

not been amended to include section 4960,

no quarterly payments of estimated excise

tax imposed by section 4960 are required

under section 6655.

These final regulations require that the

excise tax imposed by section 4960 be

reported and paid in the form and manner prescribed by the Commissioner, and

§53.6011-1 requires that every person (including a governmental entity) liable for

the excise tax imposed by section 4960

shall file Form 4720, “Return of Certain

Excise Taxes Under Chapters 41 and 42 of

the Internal Revenue Code.” Notice 201909, Q/A–‍33(a) required each employer liable for the excise tax imposed by section

4960 to file a separate Form 4720 to report

its share of liability. Two commenters recommended allowing related employers to

file a joint Form 4720, as has been permitted in §53.6011‑1(c) for private foundations and their disqualified persons and

foundation managers. In addition to being

beyond the scope of these regulations, permitting joint filing of Form 4720 is incompatible with electronic filing of Form 4720

that is required for certain tax-exempt organizations under the Taxpayer First Act,

Pub. L. 116–25. See Notice 2021‑01.

These final regulations also provide

that an employer may elect to prepay the

excise tax imposed under section 4960(a)

(2) for excess parachute payments in the

year of separation from employment or

any taxable year prior to the year in which

the parachute payment is actually paid.

This prepayment rule for the tax applicable to excess parachute payments is similar to the rule in §1.280G-1, Q/A–11(c),

under which a disqualified employee may

elect to prepay the excise tax under section 4999 based on the present value of the

excise tax that would be owed by the employee when the parachute payments are

actually made.

VII. Applicability Date

These final regulations were proposed

to apply to taxable years beginning after December 31 of the calendar year in

which the Treasury decision adopting

these rules as final regulations is published in the Federal Register. The Treasury Department and the IRS requested

comments on the burdens anticipated and

the timeframe expected to be necessary to

implement these final regulations (taking

into account that the statutory provisions

are already effective).

One commenter recommended that

these final regulations apply to taxable

years beginning after December 31 of the

calendar year that ends at least six months

after the date on which these final regulations are published in the Federal Register

in order for ATEOs and related organization to have sufficient time to understand

and apply these final regulations. The

Treasury Department and the IRS agree

with this recommendation, and therefore

these final regulations apply to taxable

years beginning after December 31, 2021

(with the first applicable year generally

being the 2022 calendar year).

The guidance provided in these final

regulations and the proposed regulations

generally is consistent with the guidance

provided in Notice 2019-09. Until the applicability date of these final regulations,

taxpayers may rely on the guidance provided in Notice 2019-09 in its entirety or

on the proposed regulations in their entirety. Alternatively, taxpayers may choose to

apply these final regulations to taxable

years beginning after December 31, 2017,

and on or before December 31, 2021, provided they apply the final regulations in

their entirety and in a consistent manner.

Until the applicability date of these final

regulations, taxpayers may also base their

positions upon a reasonable, good faith

interpretation of the statute that includes

consideration of any relevant legislative

history. Whether a taxpayer’s position that

The tentative tax, an estimate, must be paid by the due date of Form 4720 without extensions and may be paid with Form 8868, “Application for Automatic Extension of Time To File an

Exempt Organization Return.”

11

February 16, 2021

858

Bulletin No. 2021–7

is inconsistent with Notice 2019-09, the

proposed regulations, or these final regulations constitutes a reasonable, good faith

interpretation of the statute generally will

be determined based upon all of the relevant facts and circumstances, including

whether the taxpayer has applied the position consistently and the extent to which

the taxpayer has resolved interpretive issues based on consistent principles and in

a consistent manner. Notwithstanding the

previous sentence, the preamble to Notice 2019-09 describes certain positions

that the Treasury Department and the IRS

have concluded are not consistent with a

reasonable, good faith interpretation of

the statutory language, and the proposed

regulations and these final regulations reflect this view. For a description of each

of these positions, see section VII of the

Explanation of Provisions of the proposed

regulations, titled “Proposed Applicability

Date.”

Special Analyses

I. Regulatory Planning and Review

Executive Orders 13771, 13563, and

12866 direct agencies to assess costs and

benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize

net benefits (including potential economic, environmental, public health and safety

effects, distributive impacts, and equity).

Executive Order 13563 emphasizes the

importance of quantifying both costs and

benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. The

Executive Order 13771 designation for

this rule is “regulatory.”

The regulations have been designated

as subject to review under Executive Order 12866 pursuant to the Memorandum

of Agreement (April 11, 2018) between

the Treasury Department and the Office of

Management and Budget (OMB) regarding review of tax regulations. The Office

of Information and Regulatory Affairs

(OIRA) has designated the rulemaking as

significant under section 1(c) of the Memorandum of Agreement. Accordingly,

OMB has reviewed the regulations.

12

A. Background

1. The Excise Tax Under Section 4960

Section 4960 was added to the Code

by TCJA. Section 4960(a) subjects excess

remuneration above $1 million and excess

parachute payments that an ATEO pays to a

covered employee to an excise tax equal to

the rate of tax imposed on corporations under section 11 (21 percent for 2020). Before

TCJA, compensation paid by tax-exempt

organizations was not subject to an excise

tax, although section 4958 applies an excise tax to penalize excess benefit transactions in which an “applicable tax-exempt

organization“ (as defined in section 4958)

provides a benefit to a disqualified person

that exceeds the reasonable fair market value of the services received.

Section 4960 defines an “ATEO” as any

organization which is exempt from taxation

under section 501(a), is a farmers’ cooperative organization described in section

521(b)(1), has income excluded from taxation under section 115(1), or is a political

organization described in section 527(e)(1).

Covered employees of an ATEO include the

five highest-compensated employees of the

organization for the taxable year and any

employee or former employee who was a

covered employee of the organization (or

predecessor) for any preceding taxable year

beginning after December 31, 2016.

“Remuneration” means “wages” as

defined in section 3401(a) (excluding designated Roth contributions) and includes

amounts required to be included in gross

income under section 457(f). Section

4960 excludes from remuneration any

amount paid to a licensed medical professional for medical or veterinary services

provided. Remuneration also includes

payments with respect to employment

of a covered employee by any person or

government entity related to the ATEO. A

person or governmental entity is treated as

related to the ATEO if that person or governmental entity controls, or is controlled

by, the ATEO, is controlled by one or

more persons which control the ATEO, is

a “supported organization” (as defined in

section 509(f)(3)) during the taxable year

with respect to the ATEO, is a supporting

organization described in section 509(a)

(3) during the taxable year with respect

to the ATEO, or in the case of an organization which is a voluntary employees’

beneficiary association (VEBA) under

section 501(c)(9), established, maintains,

or makes contribution to such VEBA.

2. Notice 2019-09 and the Proposed and

Final Regulations

Notice 2019-09 provided taxpayers

with initial guidance on the application

of section 4960, including that taxpayers

may base their positions on a reasonable,

good faith interpretation of the statute

until further guidance is issued. On June

11, 2020, the Treasury Department and

the IRS published proposed regulations

on section 4960 in the Federal Register (REG-122345-18, 85 FR 35746) (the

proposed regulations). The Treasury Department and the IRS received comments

responding to the proposed regulations,

which were considered in these final regulations, published here. The comments

primarily discussed the treatment of employees of a related organization who also

provide services to the ATEO, suggesting

various exceptions for these situations.

Comments also addressed the possibility

of a grandfather rule for compensation to

be paid under arrangements in place prior

to the effective date of section 4960, treatment of deferred compensation as remuneration, the definition of “control,” and

which organizations are ATEOs.

B. Baseline

The Treasury Department and the IRS

have assessed the benefits and costs of the

final regulations relative to a no-action

baseline reflecting anticipated Federal income tax-related behavior in the absence

of these regulations.

C. Affected Entities

The final regulations affect an estimated 261,000 ATEOs and 77,000 non-ATEO

related organizations of ATEOs that in historical filings report substantial executive

compensation.12 Of the roughly 261,000

The methods and data used to estimate the number of affected entities are discussed in detail in the Paperwork Reduction Act special analysis.

Bulletin No. 2021–7

859

February 16, 2021

such ATEOs based on filings for tax year

2017, 239,000 are section 501(a) exempt

organizations (including 23,000 private

foundations), 19,000 are section 115 state

and local instrumentalities, 2,000 are section 527 political organizations, 600 are

exempt farmers’ cooperative organizations described in section 521(b)(1), and

200 are federal instrumentalities (although

the Treasury Department and the IRS will

continue to consider whether federal instrumentalities are ATEOs).

D. Economic Analysis

This section describes the key economic effects of the provisions of these final

regulations.

1. Clarifications

Most provisions of these final regulations clarify aspects of the excise tax

imposed by section 4960, minimizing the

burdens entities bear to comply with section 4960, and have little other economic

impact. Clarifications reduce uncertainty,

lowering the effort required to infer which

organizations, employees, and payments

are subject to the excise tax and the potential for conflict if entities and tax administrators interpret provisions differently.

Examples of provisions of these final regulations that are primarily clarifications

include the definition of “control,” treatment of deferred compensation and vesting, and which organizations are ATEOs.

2. “Volunteer” Exceptions

Several commenters expressed concern that highly-paid employees of a nonATEO performing services for a related

ATEO without receiving compensation

from the ATEO may be subject to the excise tax. To avoid the excise tax, individuals might cease performing such services,

or ATEOs might dissolve their relationships with related non-ATEOs, reducing

donations from related non-ATEOs.

The final regulations include exceptions to the definitions of “employee”

and “covered employees” (specifically to

the rules for determining the five highest

compensated employees for purposes of

identifying covered employees) to address

such situations. With respect to the first

February 16, 2021

exception, the regulations define “employee” consistent with section 3401(c),

in particular adopting the rule that a director is not an employee in the capacity as

a director and an officer performing minor or no services and not receiving any

remuneration for those services is not an

employee.

The general rule provides that employees of a related non-ATEO are not considered for purposes of determining the five

highest-compensated employees if they

are never employees of the ATEO. In addition, individuals who receive no remuneration (or grant of a legally binding right to

remuneration) from the ATEO or a related

organization cannot be among the ATEO’s

five highest-compensated employees.

Under the exceptions, an ATEO’s five

highest-compensated employees also exclude an employee of the ATEO who receives no remuneration from the ATEO

and performs only limited hours of service for the ATEO, which means that no

more than 10 percent of total annual hours

worked for the ATEO and related organizations are for services performed for the

ATEO. An employee who performs fewer

than 100 hours of services as an employee

of an ATEO and its related ATEOs is treated as having worked less than 10 percent

of total hours for the ATEO and related

ATEOs. An employee who is not compensated by an ATEO, related ATEO, or any

taxable related organization controlled by

the ATEO and who primarily (more than

50 percent of total hours worked) provides

services to a related non-ATEO is also disregarded. In response to comments on the

proposed regulations expressing concern

that this exception did not provide sufficient flexibility for situations in which

an employee of a non-ATEO performs

services for a related ATEO as a temporary assignment, these final regulations

provide that the 50 percent of total hours

worked threshold can be computed over

a period of two consecutive years, rather

than a single year. This modification expands the exception to provide additional

flexibility. An employee is also disregarded if an ATEO paid less than 10 percent

of the employee’s total remuneration for

services performed for the ATEO and all

related organizations, and the ATEO had

at least one related ATEO during the applicable year. Additionally, if neither the

860

ATEO nor any related ATEO paid more

than 10 percent of the employee’s total remuneration, then the ATEO that paid the

highest percent of remuneration does not

meet this exception.

Consider, for example, a corporate employee making $2 million per year who

spends 5 percent of her time (roughly one

day each month) working for the corporation’s foundation, a related ATEO, without

receiving compensation from the ATEO

and who would be a covered employee of

the ATEO absent the exceptions. Without

the exceptions, her compensation in excess of $1 million from the corporation,

which is a related party of the foundation,

is subject to a 21 percent excise tax, or

$210,000 in excise tax liability. The exceptions (either of the first two could apply here) remove that liability and the incentive it provides to stop providing such

services or to dissolve the relationship

between the ATEO and the related organization. The exceptions support a transfer

of substantial value (5 percent of the employee’s salary, or $100,000) that might

otherwise not take place.

Commenters on the proposed regulations suggested other ways in which the

exceptions could be expanded. The Treasury Department and the IRS considered

these suggested expansions of the exceptions and concluded that the suggestions

were inconsistent with the statute and

legislative history or would enable organizations to circumvent the excise tax in

situations where an individual performs

services for an ATEO on more than a

volunteer basis, creating the potential for

abuse and increasing the costs of administering the excise tax. Therefore, these final

regulations do not adopt the suggested expansions of the exceptions.

The exceptions in these final regulations may have a substantial impact on

donations relative to a no-action baseline,

although the magnitude of the potential

impact depends on how often the exceptions apply and on how responsive organizations and employees are to the excise

tax, both of which are uncertain.

The exceptions apply only in particular

circumstances: for example, the employee

must be employed by a related organization (typically an organization that controls or is controlled by the ATEO), the

employee must be highly compensated,

Bulletin No. 2021–7

and the employee’s work for the ATEO

must be sufficiently minimal. Historically,

many ATEOs report employees with compensation from related organizations. An

estimated 8,500 ATEOs filing Form 990 in

tax year 2017 reported both compensation

of $500,000 or more for any person and

any compensation from related organizations. These ATEOs are estimated to have

an average of 18 non-ATEO related organizations based on information reported on Form 990 Schedule R, yielding an

estimated 154,000 non-ATEO related organizations, of which half, or 77,000, are

estimated to employ a covered employee

of the ATEO. The fraction of the 154,000

non-ATEO related organizations with employees to whom the exceptions apply

(and who are thus not covered employees

of the ATEO) is uncertain, but perhaps

half the related organizations, or 77,000,

have such an employee.

This entity count omits a substantial

number of private foundations which may

have employees who receive no compensation from the ATEO but who are highly compensated by related organizations,

because while the ATEO count used in

these estimates includes approximately

100 private foundations that have historically reported employee compensation of

$500,000 or more on Form 990-PF, Form

990-PF (unlike Form 990) does not include

information on employee compensation

received from related organizations. The

exceptions are particularly likely to apply

to donations to foundations related to nonATEO businesses, as companies are highly likely to be related organizations of a

company’s foundation, many family foundations are controlled by the same family that controls a private business, and

executives of the related business often

provide services to the foundation without

payment from the foundation. Because of

these facts, looking at pre-TCJA tax forms

may underestimate the number of entities

potentially affected by the exceptions. In

the U.S. in 2015, there were about 2,000

company foundations responsible for $5.5

billion in giving, and 42,000 family foundations.13 It is reasonable to assume that

about half of these foundations, or 22,000,

have a related business with an employee

to whom the exceptions apply.

13

Under reasonable assumptions about

the response of donated services to the

excise tax, the exceptions may restore

substantial donations (transfers) of services that the excise tax could potentially

otherwise eliminate. Totaling both private

foundations and other ATEOs, roughly

99,000 related organizations are estimated

to have employees to whom the exceptions apply. If the excise tax would have

reduced services that are donated under

the exceptions by an average of just over

$5,000 per related organization, the total

transfer reduction exceeds $500 million.

Absent the exceptions, organizations

may also avoid the excise tax by dissolving the relationship between the ATEO

and non-ATEO, which may affect donations of money as well as services. Considering only corporate foundations and

setting aside other ATEOs, if such dissolutions would lead to a two percent reduction in the $5.5 billion in corporate giving

that would otherwise take place through

related foundations, the reduction exceeds

$100 million. The Treasury Department

and the IRS requested but did not receive

comments on the impact of the exceptions

on the dissolution of relationships between ATEOs and related organizations.

It is plausible that these final regulations restore substantial economic activity

relative to regulatory alternatives, under

which the excise tax would discourage

highly-compensated employees of related

non-ATEOs from providing services to a

related ATEO without compensation from

the ATEO and discourage relationships

between ATEOs and non-ATEOs.

3. Summary

This analysis suggests that these final regulations will reduce compliance

burden on affected entities by providing

clarifications and, through the exceptions,

increase services provided to ATEOs

without compensation from the ATEO by

a small but potentially economically significant amount ($100 million or more),

relative to regulatory alternatives. The

Treasury Department and the IRS requested but did not receive comments on the

economic impact of these proposed regulations (in particular, comments providing

data, other evidence, or models that provide insight).

II. Paperwork Reduction Act

The collections of information in these

final regulations are in §53.4960-1(d), (h),

and (i); §53.4960-2(a), (c) and (d); and

§53.4960-4(a) and (d). This information is

required to determine an ATEO’s “covered

employees” as defined in section 4960(c)

(2); to calculate remuneration in excess of

$1 million as described in section 4960(c)

(3); to determine remuneration from related organizations and allocation of liability

as described in section 4960(c)(4); and to

determine any excess parachute payments

to covered employees described in section

4960(c)(5).

The IRS intends that the burden of the

collections of information will be reflect

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