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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
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
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It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
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Rulings and procedures reported in the Bulletin do not have the
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and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
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This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B,
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To the extent practicable, pertinent cross references to these
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The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

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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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.

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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
wi

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3Acb7b7dd3a6d0cefd. Public record. Not legal advice.