Interim Guidance Under Section 4960
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1
Interim Guidance Under Section 4960
Notice 2019-09
Contents
I.
PURPOSE AND OVERVIEW ............................................................... 4
A.
Section 4960 — In General ...................................................................... 5
B.
Applicable Tax-Exempt Organizations and Related Organizations .......... 9
C.
Covered Employees ............................................................................... 11
D.
Excess Remuneration ............................................................................ 15
E.
Medical and Veterinary Services ............................................................ 22
F.
Excess Parachute Payments .................................................................. 24
G.
Three-Times-Base-Amount Test for Parachute Payments ..................... 32
H.
Computation of Excess Parachute Payments ........................................ 33
I.
Reporting Liability Under Section 4960 .................................................. 34
J.
Miscellaneous Issues ............................................................................. 35
K.
Effective Date ......................................................................................... 36
II.
INTERIM GUIDANCE ON APPLICATION OF SECTION 4960 .......... 36
A.
Section 4960 — In General .................................................................... 36
Q–1: What is the effect of section 4960? .................................................... 36
Q–2: What year is used in calculating the section 4960 excise tax? .......... 37
Q–3: Who is liable for the section 4960 excise tax? ................................... 37
B.
Applicable Tax-Exempt Organizations and Related Organizations ........ 38
2
Q–4: What is an applicable tax-exempt organization within the meaning of
section 4960(c)(1)?............................................................................
lating the section 4960 excise tax? .......... 37
Q–3: Who is liable for the section 4960 excise tax? ................................... 37
B.
Applicable Tax-Exempt Organizations and Related Organizations ........ 38
2
Q–4: What is an applicable tax-exempt organization within the meaning of
section 4960(c)(1)?............................................................................. 38
Q–5: When is a governmental entity an applicable tax-exempt organization
within the meaning of section 4960(c)(1)? .......................................... 39
Q–6: May a governmental entity with a determination letter recognizing its
tax exemption relinquish its section 501(c)(3) status? ........................ 40
Q–7: What is a related organization for purposes of section 4960? ........... 40
Q–8: What is the meaning of “control” for purposes of section
4960(c)(4)(B)(i)-(ii) and Q/A–7 of this notice? ..................................... 41
C.
Covered Employees ............................................................................... 42
Q–9: Who is a covered employee within the meaning of section 4960(c)(2)?
........................................................................................................... 42
Q–10: How are the five highest-compensated employees determined?..... 43
D.
Excess Remuneration ............................................................................ 44
Q–11: What is excess remuneration paid by an applicable tax-exempt
organization under section 4960(a)(1)? .............................................. 44
Q–12: What is remuneration under section 4960(c)(3)? ............................. 44
Q–13: When is remuneration treated as paid for purposes of section
4960(a)(1)? ........................................................................................
excess remuneration paid by an applicable tax-exempt
organization under section 4960(a)(1)? .............................................. 44
Q–12: What is remuneration under section 4960(c)(3)? ............................. 44
Q–13: When is remuneration treated as paid for purposes of section
4960(a)(1)? ......................................................................................... 46
Q–14: How is liability for the section 4960(a)(1) excise tax determined if
remuneration is paid to a covered employee by both an applicable tax-
exempt organization and a related organization? ............................... 55
E.
Medical and Veterinary Services ............................................................ 59
Q–15: How is remuneration for medical services treated under section
4960? ................................................................................................. 59
F.
Excess Parachute Payments .................................................................. 62
Q–16: What is an excess parachute payment under section 4960(c)(5)(A)?
........................................................................................................... 62
Q–17: What is a parachute payment under section 4960(c)(5)(B)?............ 62
Q–18: What is a payment in the nature of compensation? ......................... 64
Q–19: When is a payment in the nature of compensation considered to be
made? ................................................................................................ 65
Q–20: What is a payment that is contingent on an employee’s separation
from employment? .............................................................................. 66
Q–21: What is a payment made under a window program? ....................... 69
Q–22: What is an involuntary separation from employment? ..................... 70
Q–23: What is a separation from employment? ........................................
ent that is contingent on an employee’s separation
from employment? .............................................................................. 66
Q–21: What is a payment made under a window program? ....................... 69
Q–22: What is an involuntary separation from employment? ..................... 70
Q–23: What is a separation from employment? ......................................... 70
Q–24: How is an accelerated payment or accelerated vesting resulting from
an involuntary separation from employment treated? ......................... 72
G.
Three-Times-Base-Amount Test for Parachute Payments ..................... 76
Q–25: Are all payments that are in the nature of compensation, made to a
covered employee, and contingent on a separation from employment,
parachute payments? ......................................................................... 76
Q–26: As of what date is the present value of a payment determined? ...... 77
Q–27: What discount rate is used to determine present value? ................. 78
3
Q–28: If the present value of a payment to be made in the future is
contingent on an uncertain future event or condition, how is the present
value of the payment determined? ..................................................... 78
Q–29: What is the base amount for purposes of section 4960(c)(5)(D)? .... 80
Q–30: What is the base period? ................................................................. 81
Q–31: How is the base amount determined in the case of a covered
employee who did not perform services for the applicable tax-exempt
organization (or a predecessor entity or a related organization), prior to
the calendar year in which the separation from employment with the
applicable tax-exempt organization occurred? ................................... 82
H.
Computation of Excess Parachute Payments ........................................ 83
Q–32: How is the amount of an excess parachute payment computed? ... 83
I
empt
organization (or a predecessor entity or a related organization), prior to
the calendar year in which the separation from employment with the
applicable tax-exempt organization occurred? ................................... 82
H.
Computation of Excess Parachute Payments ........................................ 83
Q–32: How is the amount of an excess parachute payment computed? ... 83
I.
Reporting Liability Under Section 4960 .................................................. 84
Q–33: How do applicable tax-exempt organizations or related organizations
report and pay the excise tax imposed under section 4960? .............. 84
Q–34: When is the excise tax imposed under section 4960 due? .............. 85
Q–35: Are applicable tax-exempt organizations or related organizations
required to pay estimated taxes for the excise tax imposed under
section 4960? ..................................................................................... 87
J.
Miscellaneous Issues ............................................................................. 87
Q–36: Does the payment of remuneration subject to excise tax under
section 4960 automatically constitute an excess benefit transaction
under section 4958? ........................................................................... 87
Q–37: Does the payment of remuneration subject to excise tax under
section 4960 necessarily constitute an act of self-dealing described in
section 4941? ..................................................................................... 87
Q–38: Does section 4960 apply to amounts to which section 162(m)
applies? .............................................................................................. 88
K.
Effective Date ......................................................................................... 88
Q–39: What is the effective date of section 4960? ..................................... 88
III.
REQUEST FOR COMMENTS ............................................................ 89
IV
.............................................................................................. 88
K.
Effective Date ......................................................................................... 88
Q–39: What is the effective date of section 4960? ..................................... 88
III.
REQUEST FOR COMMENTS ............................................................ 89
IV.
RELIANCE ......................................................................................... 91
V.
PAPERWORK REDUCTION ACT ...................................................... 92
VI.
DRAFTING INFORMATION ............................................................... 92
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I.
PURPOSE AND OVERVIEW
This notice provides interim guidance regarding section 4960 of the Internal
Revenue Code (Code), enacted on December 22, 2017, pursuant to section 13602 of
Tax Cuts and Jobs Act, Pub. L. No. 115-97 (the Act). Section 4960(a) imposes an
excise tax equal to the rate of tax under section 11 (currently 21 percent) on the amount
of remuneration in excess of $1 million and any excess parachute payment paid by an
applicable tax-exempt organization to a covered employee.
The interim guidance is intended to assist taxpayers in applying section 4960
while the Department of the Treasury (Treasury Department) and the Internal Revenue
Service (IRS) develop further guidance on the application of section 4960, and
addresses certain issues under section 4960 on which stakeholders have indicated that
they would benefit from interim guidance. Specifically, the Treasury Department and
the IRS intend to issue proposed regulations on the amendments made by
section 13602 of the Act that will incorporate the guidance provided in this notice.
However, as provided in Section IV of this notice, any future guidance under section
4960 will be prospective and will not apply to taxable years beginning before the
issuance of that guidance
e. Specifically, the Treasury Department and
the IRS intend to issue proposed regulations on the amendments made by
section 13602 of the Act that will incorporate the guidance provided in this notice.
However, as provided in Section IV of this notice, any future guidance under section
4960 will be prospective and will not apply to taxable years beginning before the
issuance of that guidance. Until further guidance is issued, to comply with the
requirements of section 4960, taxpayers may base their positions upon a good faith,
reasonable interpretation of the statute, including consideration of the legislative history,
if appropriate. The positions reflected in this notice constitute a good faith, reasonable
interpretation of the statute. Whether a taxpayer’s position that is inconsistent with this
notice constitutes a good faith, reasonable interpretation of the statute generally will be
determined based upon all of the relevant facts and circumstances, including whether
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the taxpayer has applied the position consistently and the extent to which the taxpayer
has resolved interpretive issues based on consistent principles and in a consistent
manner. Notwithstanding the previous sentence, this preamble describes certain
positions that the Treasury Department and the IRS have concluded are not consistent
with a good faith, reasonable interpretation of the statutory language. The Treasury
Department and the IRS intend to embody these positions as part of the forthcoming
proposed regulations.
Comments are requested on all aspects of this notice. See Section III of this
notice regarding requests for comments on specific aspects of this notice and for
information on how to submit comments.
A
with a good faith, reasonable interpretation of the statutory language. The Treasury
Department and the IRS intend to embody these positions as part of the forthcoming
proposed regulations.
Comments are requested on all aspects of this notice. See Section III of this
notice regarding requests for comments on specific aspects of this notice and for
information on how to submit comments.
A. Section 4960 — In General
Section 4960(a) of the Code generally provides that an applicable tax-exempt
organization (ATEO), or a related organization, that pays remuneration in excess of
$1 million or any excess parachute payment to a covered employee is subject to an
excise tax on the amount of the excess remuneration and excess parachute payments
at a rate equal to the rate of tax imposed on corporations under section 11 (currently 21
percent).
Section 4960(a)(1) refers to remuneration paid “for the taxable year,” but does
not specify which taxpayer’s taxable year is used, 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. Q/A–2 provides that the excise tax imposed
on excess remuneration and excess parachute payments is determined based on
remuneration paid and excess parachute payments made in the calendar year ending
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with or within the taxable year of the employer. This measurement period, as
commenters suggested, will reduce the administrative burdens that would arise if
taxpayers were required to allocate remuneration paid during a single calendar year to
multiple non-calendar taxable years. Moreover, this approach will reduce administrative
burdens by aligning more closely with the calendar year reporting of compensation on
Form W-2, Wage and Tax Statement, and Form 990, Return of Organization Exempt
From Income Tax
ministrative burdens that would arise if
taxpayers were required to allocate remuneration paid during a single calendar year to
multiple non-calendar taxable years. Moreover, this approach will reduce administrative
burdens by aligning more closely with the calendar year reporting of compensation on
Form W-2, Wage and Tax Statement, and Form 990, Return of Organization Exempt
From Income Tax.
Some commenters recommended that ATEOs and related organizations be
allowed, but not required, to treat remuneration paid during the calendar year ending
with or within the taxable year of the employer as remuneration paid “for the taxable
year” under section 4960(a)(1). Commenters recommended this rule be elective in
order for non-calendar year taxpayers to avoid the potential inclusion of remuneration
for a period prior to the effective date of section 4960 (the first taxable year beginning
after December 31, 2017). Q/A–13 and Q/A–39 avoid that result by treating
remuneration in which the covered employee vested before the effective date of
section 4960 as paid before that effective date. Because these Q/As address the issue
raised by the commenters, the Treasury Department and the IRS have concluded that
an election for the remuneration measurement period is unnecessary.
The guidance in this notice provides rules regarding the entity that is liable for the
excise tax under section 4960, and how that excise tax is calculated. Q/A–3 provides
that the common-law employer, as determined generally for federal tax purposes, is
liable for the excise tax imposed under section 4960. A common-law employer may not
avoid treating a payment as remuneration under section 4960 by reason of a third party
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payor arrangement
tity that is liable for the
excise tax under section 4960, and how that excise tax is calculated. Q/A–3 provides
that the common-law employer, as determined generally for federal tax purposes, is
liable for the excise tax imposed under section 4960. A common-law employer may not
avoid treating a payment as remuneration under section 4960 by reason of a third party
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payor arrangement. A payment to the employer’s employee from a third party payor
(including a payroll agent, common paymaster, statutory employer under
section 3401(d)(1), or certified professional employer organization) or from an unrelated
management company, is considered a payment to the employee from the common-law
employer. Similarly, a payment to the employee from a related entity, including a
related entity that is an ATEO, for services rendered to the common-law employer, is
considered a payment to the employee from the common-law employer for purposes of
calculating remuneration and determining liability for the excise tax. Q/A–3 also clarifies
that calculation of the excise tax is separate from any arrangement that an ATEO and
any related organization may have for bearing the cost of the excise tax under
section 4960.
One commenter requested guidance providing that remuneration paid by a
separate employer that is a related for-profit or governmental entity (other than an
ATEO) is taken into account in determining whether a covered employee has
remuneration in excess of $1 million, but that the related entity is not liable for its share
of the excise tax under section 4960. There is no statutory support for creating such an
exception for for-profit and governmental entities. Section 4960(c)(4)(B), which defines
related organizations, applies to any “person or governmental entity” that meets any of
the relationship tests in section 4960(c)(4)(B)(i)-(v)
ss of $1 million, but that the related entity is not liable for its share
of the excise tax under section 4960. There is no statutory support for creating such an
exception for for-profit and governmental entities. Section 4960(c)(4)(B), which defines
related organizations, applies to any “person or governmental entity” that meets any of
the relationship tests in section 4960(c)(4)(B)(i)-(v). Unlike the definition of an ATEO
under section 4960(c)(1)(C), which applies only to a governmental entity that excludes
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income from taxation under section 115(1),1 section 4960(c)(4)(B) applies to any
“governmental entity” that is related to an ATEO. Similarly, a for-profit entity is a
“person” under generally applicable tax principles. In addition, excepting for-profit
entities from liability as related organizations would be inconsistent with
section 4960(c)(6), which coordinates the tax on excess parachute payments with the
section 162(m) deduction limitation (which only applies to for-profit entities). Further,
section 4960(c)(4)(C), which describes the liability for the excise tax, refers to any case
in which remuneration from more than one employer is taken into account, stating that
“each such employer” shall be liable, without qualification as to the employer’s status as
an ATEO. For these reasons, the Treasury Department and the IRS have concluded
that the position that a for-profit or governmental entity that is a related organization with
regard to an ATEO is not liable for its share of the excise tax under section 4960 is not
consistent with a good faith, reasonable interpretation of the statute.
Some ATEOs will not be impacted by section 4960 because they do not pay an
employee enough remuneration to trigger the tax
have concluded
that the position that a for-profit or governmental entity that is a related organization with
regard to an ATEO is not liable for its share of the excise tax under section 4960 is not
consistent with a good faith, reasonable interpretation of the statute.
Some ATEOs will not be impacted by section 4960 because they do not pay an
employee enough remuneration to trigger the tax. There can be no excess
remuneration under section 4960(a)(1) if an ATEO (together with any related
organization) pays remuneration of less than $1 million to each of its employees for a
1 Section 4960(c)(1)(C) refers to an entity that “has income excluded from taxation under section
115(1).” However, section 115(1) refers to income that is excluded from gross income. For consistency
with the language in section 115(1), this notice refers to an entity that “has income excluded from gross
income under section 115(1),” except where directly quoting section 4960(c)(1)(C).
9
taxable year, and there can be no excess parachute payment under section 4960(a)(2)
if the employer does not have any “highly compensated employees” under
section 414(q)2 for the taxable year. In that case, no excise tax under section 4960 is
owed. For example, an ATEO that does not pay compensation (within the meaning of
section 414(q)) of $125,000 or more to any employee in 2018 and 2019 is not subject to
excise tax under section 4960 for 2019.
However, there is no minimum dollar threshold for an employee to be a covered
employee. Even if an ATEO has no liability under section 4960 for one year, the ATEO
may later need to determine its five highest-compensated employees for that taxable
year, as those employees continue be covered employees in all future years and may
be paid excess remuneration or excess parachute payments in a future year.
B
is no minimum dollar threshold for an employee to be a covered
employee. Even if an ATEO has no liability under section 4960 for one year, the ATEO
may later need to determine its five highest-compensated employees for that taxable
year, as those employees continue be covered employees in all future years and may
be paid excess remuneration or excess parachute payments in a future year.
B. Applicable Tax-Exempt Organizations and Related Organizations
Section 4960(c)(1) provides that an “applicable tax-exempt organization” is any
organization that for the taxable year—(A) is exempt from taxation under section 501(a),
(B) is a farmers’ cooperative organization described in section 521(b)(1), (C) has
income excluded from taxation under section 115(1), or (D) is a political organization
described in section 527(e)(1).
One commenter requested clarification on the application of section 4960 to
governmental entities. Q/A–5 clarifies that certain governmental entities are not ATEOs
within the meaning of section 4960(c)(1). A governmental entity (including a state
2 The limitation used in the definition of highly compensated employee under section 414(q)(1)(B)
is adjusted for inflation. For 2019, the limitation is $125,000. Notice 2018-83, 2018-47 I.R.B. 774.
10
college or university) that is not recognized as exempt from taxation under
section 501(a) and does not exclude income from gross income under section 115(1) is
not an ATEO described in section 4960(c)(1). Conversely, a governmental entity that
excludes income from gross income under section 115(1) (even if the entity has other
income that is not excluded from gross income under section 115(1)), or is recognized
as exempt from taxation under section 501(a), is an ATEO described in
section 4960(c)(1)
e income from gross income under section 115(1) is
not an ATEO described in section 4960(c)(1). Conversely, a governmental entity that
excludes income from gross income under section 115(1) (even if the entity has other
income that is not excluded from gross income under section 115(1)), or is recognized
as exempt from taxation under section 501(a), is an ATEO described in
section 4960(c)(1).
Q/A–6 clarifies that a governmental entity that sought and received a
determination letter recognizing its tax-exempt status under section 501(c)(3) may
relinquish this status pursuant to the procedures described in section 3.01(12) of
Rev. Proc. 2018-5, 2018-1 I.R.B. 233, 239. However, an entity that excludes income
from gross income under section 115(1) is an ATEO regardless of whether it has a
private letter ruling to that effect.
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. The Treasury Department and the IRS
interpret the phrase “any related person or governmental entity” to include not only
related ATEOs but also related taxable organizations and related governmental units or
other governmental entities. Section 4960(c)(4)(B) provides that a person or
governmental entity is related to an ATEO if such person or governmental entity—
(i) controls, or is controlled by, the organization; (ii) is controlled by one or more persons
which control the organization; (iii) is a supported organization (as defined in
section 509(f)(3)) during the taxable year with respect to the organization; (iv) is a
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supporting organization described in section 509(a)(3) during the taxable year with
respect to the organization; or (v) in the case of an organization which is a voluntary
employees’ beneficiary association described in section 501(c)(9), establishes,
maintains, or makes contributions to such voluntary employees’ beneficiary associati
year with respect to the organization; (iv) is a
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supporting organization described in section 509(a)(3) during the taxable year with
respect to the organization; or (v) in the case of an organization which is a voluntary
employees’ beneficiary association described in section 501(c)(9), establishes,
maintains, or makes contributions to such voluntary employees’ beneficiary association.
For purposes of defining “control” within the meaning of section
4960(c)(4)(B)(i)-(ii), Q/A–8 provides rules based on the definition of control under
section 512(b)(13)(D). Thus, the definition of related organization for purposes of
section 4960 generally aligns with the definition of related organization for purposes of
the annual reporting requirements on Form 990, reducing the burden on organizations
in identifying related organizations, calculating compensation from related
organizations, and determining liability under section 4960.
Q/A–8 does not adopt the test for control under section 414(b) and (c), which
generally uses the same test for control of a nonprofit organization as
section 512(b)(13)(D) except that it replaces the 50 percent threshold with an
80 percent threshold. Instead, Q/A–8 adopts the control test under section
512(b)(13)(D) for the administrative convenience of taxpayers, to align more closely with
other exempt organization control tests, and to prevent abuse that may occur in the
section 4960 context under the higher 80 percent control threshold that was established
for qualified plans.
C. Covered Employees
Section 4960(c)(2) defines a covered employee as any employee who is one of
an ATEO’s five highest-compensated employees for the current taxable year or who
was a covered employee of the ATEO (or any predecessor) for any preceding taxable
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year beginning after December 31, 2016. Therefore, once an employee is a covered
employee, he or she continues to be a covered employee for all subsequent taxable
years
nes a covered employee as any employee who is one of
an ATEO’s five highest-compensated employees for the current taxable year or who
was a covered employee of the ATEO (or any predecessor) for any preceding taxable
12
year beginning after December 31, 2016. Therefore, once an employee is a covered
employee, he or she continues to be a covered employee for all subsequent taxable
years. There is no minimum dollar threshold for an employee to be a covered
employee; thus, an employee need not be paid excess remuneration or an excess
parachute payment nor be a highly compensated employee within the meaning of
section 414(q) to be a covered employee for a taxable year and all future years.
Commenters requested that the Treasury Department and the IRS provide a rule
of administrative convenience under which a covered employee is no longer considered
a covered employee of an ATEO after a certain period of time. The guidance in this
notice does not adopt that suggestion because it is inconsistent with the statute. For
this reason, the Treasury Department and the IRS have concluded that the position that
a covered employee ceases to be a covered employee after a certain period of time is
not consistent with a good faith, reasonable interpretation of the statute.
Section 4960 does not provide rules for identifying an ATEO’s five highest-
compensated employees for a taxable year. Q/A–10 provides that whether an
employee is one of an ATEO’s five highest-compensated employees is based on
remuneration paid in the calendar year ending with or within the employer’s taxable
year. The Treasury Department and the IRS considered using certain existing reporting
standards for determining the amount of compensation paid, such as the Securities and
Exchange Commission standards that are used for section 162(m) purposes or the
standards that are used for Form 990 reporting purposes
on
remuneration paid in the calendar year ending with or within the employer’s taxable
year. The Treasury Department and the IRS considered using certain existing reporting
standards for determining the amount of compensation paid, such as the Securities and
Exchange Commission standards that are used for section 162(m) purposes or the
standards that are used for Form 990 reporting purposes. However, Q/A–10 uses
remuneration paid for purposes of identifying an ATEO’s five highest-compensated
employee because, as defined in Q/A-12, remuneration is a fair representation of
13
compensation earned by an employee and it is more administrable to use a single
standard for both identifying covered employees and computing the tax, if any, imposed
by section 4960(a)(1). In addition, having the calendar year ending with or within the
ATEO’s or related organization’s taxable year as the measurement period for identifying
the ATEO’s five highest-compensated employees is consistent with the measurement
period for purposes of determining remuneration paid for a taxable year.
Q/A-10 provides that remuneration paid for medical services is not taken into
account for purposes of identifying the five highest-compensated employees. One
commenter requested that remuneration paid for medical services be taken into account
for purposes of determining the five highest-compensated employees. An interpretation
that remuneration for medical services is taken into account for purposes of identifying
the five-highest compensated employees would be inconsistent with the statutory
structure and the legislative intent, and therefore the Treasury Department and the IRS
have concluded that this interpretation is not consistent with a good faith, reasonable
interpretation of section 4960. As the Conference Report to accompany H.R
edical services is taken into account for purposes of identifying
the five-highest compensated employees would be inconsistent with the statutory
structure and the legislative intent, and therefore the Treasury Department and the IRS
have concluded that this interpretation is not consistent with a good faith, reasonable
interpretation of section 4960. As the Conference Report to accompany H.R. 1
(Conference Report) states, “[f]or purposes of determining a covered employee,
remuneration paid to a licensed medical professional which is directly related to the
performance of medical or veterinary services by such professional is not taken into
account, whereas remuneration paid to such a professional in any other capacity is
taken into account.” H.R. Rep. No. 115-466, at 494 (2017) (Conf. Rep.).
As set forth in Q/A–9, only an ATEO’s common law employees (including
officers) can be one of an ATEO’s five highest-compensated employees. To identify its
five highest-compensated employees, the ATEO must include remuneration paid for the
14
taxable year by any related organization, including remuneration paid by a related for-
profit organization or governmental entity, for services performed as an employee of
such related organization. Q/A–12(c) also provides that remuneration paid by a
separate organization on behalf of the ATEO, 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 purposes of section 4960. To prevent circumstances in which an employee to
whom the ATEO paid minimal remuneration displaces an employee who would
otherwise be a covered employee of the ATEO, Q/A–10(b) provides a limited services
exception under which, unless an ATEO pays at least 10 percent of the total
remuneration paid by the ATEO and all related organizations to an employee during the
calendar year, the employee is not treated as one of the ATEO’s five highest-
compensated employees
inimal remuneration displaces an employee who would
otherwise be a covered employee of the ATEO, Q/A–10(b) provides a limited services
exception under which, unless an ATEO pays at least 10 percent of the total
remuneration paid by the ATEO and all related organizations to an employee during the
calendar year, the employee is not treated as one of the ATEO’s five highest-
compensated employees. However, if no ATEO pays at least 10 percent of an
employee’s total remuneration during a calendar year, this exception does not apply to
the ATEO that paid the most remuneration to the employee during the calendar year.
Whether an employee is one of the five highest-compensated employees is
determined separately for each ATEO, and not for the entire group of related
organizations; thus, each ATEO has its five highest-compensated employees. As a
result, in many cases, a group of related organizations will have more than five covered
employees. Some commenters suggested that a group of related ATEOs should have
only five highest-compensated employees among all of the related ATEOs, noting that
this is the case for purposes of section 162(m)(1)-(4), as Treas. Reg. § 1.162-27(c)(1)(ii)
treats a publicly held corporation and all nonpublic corporations related to the publicly
held corporation as a single corporation. Section 4960 does not provide for such
15
treatment. Further, under Treas. Reg. § 1.162-27(c)(1)(ii), each related subsidiary
within an affiliated group of corporations that is itself a publicly held corporation is
separately subject to the deduction limitation, just as each ATEO within a group of
related organizations is separately subject to section 4960
ion as a single corporation. Section 4960 does not provide for such
15
treatment. Further, under Treas. Reg. § 1.162-27(c)(1)(ii), each related subsidiary
within an affiliated group of corporations that is itself a publicly held corporation is
separately subject to the deduction limitation, just as each ATEO within a group of
related organizations is separately subject to section 4960. Accordingly, this notice
does not adopt the commenter’s suggestion, and the Treasury Department and the IRS
have concluded that the position that a group of related organizations with more than
one ATEO has a single set of five highest-compensated employees is not consistent
with a good faith, reasonable interpretation of section 4960.
D. 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. Q/A–11 provides that this amount is referred to as “excess remuneration.”
Consistent with the statute, the $1 million threshold is not adjusted for inflation.
Section 4960(c)(3)(A) generally defines “remuneration” as wages under section
3401(a) (wages 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). Q/A–12 clarifies that remuneration includes a
parachute payment that is not an excess parachute payment, but remuneration does
not include certain retirement benefits (see section 3401(a)(12)) or certain directors’
fees (see Rev. Rul. 57-246, 1957-1 C.B. 338).
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
16
forfeiture of the rights to the remuneration
parachute payment, but remuneration does
not include certain retirement benefits (see section 3401(a)(12)) or certain directors’
fees (see Rev. Rul. 57-246, 1957-1 C.B. 338).
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
16
forfeiture of the rights to the remuneration. The term “substantial risk of forfeiture” is
defined by cross-reference to section 457(f)(3)(B). Proposed regulations under
section 457(f) were published in 2016 (81 FR 40548 (Jun. 22, 2016)). The preamble to
the proposed regulations states that taxpayers may rely on them before they are
finalized. Q/A–13 provides that the definition of substantial risk of forfeiture under
Prop. Treas. Reg. § 1.457-12(e)(1) is the definition of substantial risk of forfeiture within
the meaning of section 457(f)(3)(B) for purposes of section 4960(a).3 Under
Prop. Treas. Reg. § 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.
Consistent with common usage, Q/A–13 refers to an amount the right to which is not
subject to a substantial risk of forfeiture as being “vested” and the lapsing of a
substantial risk of forfeiture as “vesting.”
Q/A–13 clarifies that 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 upon vesting is not limited to
remuneration that is otherwise subject to section 457(f), nor is it limited to nonqualified
deferred compensation under section 457(f) or section 409A. Rather, this timing rule for
determining when remuneration is treated as paid applies to all forms of remuneration
ction 457(f)(3)(B), the rule under section 4960(a)
providing that remuneration is treated as paid upon vesting is not limited to
remuneration that is otherwise subject to section 457(f), nor is it limited to nonqualified
deferred compensation under section 457(f) or section 409A. Rather, this timing rule for
determining when remuneration is treated as paid applies to all forms of remuneration.
3 Any changes to the proposed regulations under section 457(f) when finalized will be taken into account
for purposes of section 4960, and further guidance may be issued if appropriate.
17
Some commenters argued that section 4960(c)(3), which defines remuneration
largely by cross-reference to the definition of wages under section 3401(a), should be
interpreted as a timing rule. 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, Treas. Reg.
§ 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 Treasury
Department and the IRS conclude that 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, and that the flush language in section 4960(a) establishes the
timing rule that applies to all forms of remuneration. Accordingly, Q/A–13 provides that,
for purposes of determining when remuneration is treated as paid, the timing rule in
section 4960(a) applies and the timing rule for wage inclusion under Treas. Reg.
§ 31.3402(a)-1(b) is not relevant.
Under Q/A–13, the amount of remuneration treated as paid at vesting is the
present value of the remuneration in which the covered employee vests
muneration. Accordingly, Q/A–13 provides that,
for purposes of determining when remuneration is treated as paid, the timing rule in
section 4960(a) applies and the timing rule for wage inclusion under Treas. Reg.
§ 31.3402(a)-1(b) is not relevant.
Under Q/A–13, the amount of remuneration treated as paid at vesting is the
present value of the remuneration in which the covered employee vests. The employer
must determine the present value using reasonable actuarial assumptions regarding the
time and likelihood of actual or constructive payment. The employer may use the rules
set forth in Prop. Treas. Reg. § 1.457-12(c)(1) to determine the present value. In
addition, for purposes of determining the present value of remuneration that is
scheduled to be paid within 90 days of vesting, the employer may elect to treat the
amount that is to be paid as the present value of the amount on the date of vesting.
18
Until actually or constructively paid, the amount treated as paid at vesting is referred to
as “previously paid remuneration.”
Q/A–13 provides specific rules for timing of inclusion for earnings and losses on
previously paid remuneration. Net earnings on previously paid remuneration are treated
as paid at the close of the calendar year in which they accrue. For example, the
present value of vested remuneration credited to an employee’s account under an
account balance plan described in Treas. Reg. § 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
credited to the employee’s account and, until subsequently actually or constructively
paid, is treated as previously paid remuneration
er an
account balance plan described in Treas. Reg. § 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
credited to the employee’s account and, until subsequently actually or constructively
paid, is treated as previously paid remuneration. However, at the close of each
calendar year in which there is previously paid remuneration allocable to a covered
employee, the present value of any net earnings accrued on that previously paid
remuneration (the increase in present value due to the predetermined actual investment
or a reasonable market interest rate) is treated as remuneration paid (and subsequently
is treated as previously paid remuneration until actually or constructively paid).
Similarly, the present value of a vested, fixed amount of remuneration under a
nonaccount balance plan described in Treas. Reg. § 1.409A-1(c)(2)(i)(C) is treated as
paid on the date of vesting and subsequently as previously paid remuneration until
actually or constructively paid. But, at the close of each calendar year in which there is
previously paid remuneration allocable to a covered employee, the net increase in the
present value of that amount during the year constitutes earnings and is treated as
remuneration paid (and subsequently is also treated as previously paid remuneration
19
until actually or constructively paid). For this purpose, earnings and losses from one
arrangement may be aggregated with earnings and losses from any other arrangement
provided by the same employer in which the employee participates, resulting in a single
amount of remuneration and one amount, if any, of carryover losses (but no carryover
gains, since any net gain would be treated as remuneration for the taxable year)
ively paid). For this purpose, earnings and losses from one
arrangement may be aggregated with earnings and losses from any other arrangement
provided by the same employer in which the employee participates, resulting in a single
amount of remuneration and one amount, if any, of carryover losses (but no carryover
gains, since any net gain would be treated as remuneration for the taxable year). For
purposes of determining earnings and losses, previously paid remuneration is reduced
by the amount actually or constructively paid under the plan or arrangement granting
the rights to such remuneration. Q/A–13 further illustrates the operation of these rules
through examples.
One commenter requested a “grandfather” rule like the transition rule under
section 13601 of the Act that amended section 162(m). Because section 13602 of the
Act, which added section 4960 to the Code, does not provide a transition rule (in
contrast to section 13601 of the Act), and there is no indication in the legislative history
that Congress intended there to be a transition rule for section 4960, the Treasury
Department and the IRS have concluded that it is inappropriate to provide an effective
date exception similar to the one provided for purposes of section 13601 of the Act.
However, Q/A–13 clarifies and demonstrates the grandfathering effect of the
remuneration payment timing rule. Specifically, Q/A–13 clarifies that any vested
remuneration, including vested but unpaid earnings on deferred amounts, that is treated
as paid before section 4960 is applicable (January 1, 2018, in the case of a calendar
year employer) is not subject to the excise tax imposed under section 4960(a)(1),
although earnings after the effective date on those amounts are treated as remuneration
paid for purposes of section 4960(a)(1)
any vested
remuneration, including vested but unpaid earnings on deferred amounts, that is treated
as paid before section 4960 is applicable (January 1, 2018, in the case of a calendar
year employer) is not subject to the excise tax imposed under section 4960(a)(1),
although earnings after the effective date on those amounts are treated as remuneration
paid for purposes of section 4960(a)(1). Similarly, Q/A–13 clarifies that vested amounts
20
that would have been treated as remuneration paid (including vested but unpaid
earnings) before the year in which an employee first becomes a covered employee are
not remuneration for the first year the employee becomes a covered employee or any
subsequent year and, therefore, are not subject to the excise tax imposed under
section 4960(a)(1). However, subsequent earnings on that vested remuneration may
be subject to excise tax under section 4960(a)(1).
To reduce administrative burdens, some commenters recommended that
remuneration be determined solely by reference to the amount reportable in Form W-2,
box 1. For the following reasons, the Treasury Department and the IRS have concluded
it is inappropriate to adopt that recommendation. In defining remuneration,
section 4960(c)(3) explicitly cross-references and modifies the definition of wages under
section 3401(a). Although the amount reportable in Form W-2, box 1 includes wages as
defined under section 3401(a), it may also include amounts that are includible in the
employee’s gross income but are not wages under section 3401(a). In addition, as
explained previously, the timing rule for when remuneration is paid under section
4960(a) differs from the timing rule for when wages are paid under section 3401(a).
Therefore, the amount reported in Form W-2, box 1 in many cases will not be the same
as the employee’s remuneration for purposes of section 4960
e
employee’s gross income but are not wages under section 3401(a). In addition, as
explained previously, the timing rule for when remuneration is paid under section
4960(a) differs from the timing rule for when wages are paid under section 3401(a).
Therefore, the amount reported in Form W-2, box 1 in many cases will not be the same
as the employee’s remuneration for purposes of section 4960.
As an alternative to using the amount reported in Form W-2, box 1, some
commenters recommended that remuneration be defined solely by reference to the
amount reportable in Form W-2, box 5, which reports the amount of wages (as defined
in section 3121(a)) subject to the Hospital Insurance tax under sections 3101(b) and
3111(b). However, there are differences between the definitions of wages under
21
sections 3401(a) and 3121(a), and there is no indication in the statute or legislative
history that Congress intended that the definition of wages in section 3121(a) be used to
determine remuneration under section 4960(a). In addition, the payment timing
differences discussed previously apply so that the amounts reported in Form W-2, box 5
may not accurately reflect the remuneration paid for the applicable period for purposes
of section 4960. For these reasons, the Treasury Department and the IRS have
concluded it is not appropriate to adopt this recommendation.
An individual may perform services as a common-law employee for two different
related organizations during the calendar year, one or both of which is an ATEO, in
which case remuneration paid for the taxable year is aggregated for purposes of
determining whether excess remuneration has been paid. To address these cases,
Q/A–14 provides rules for allocating liability for the excise tax among the employers
al may perform services as a common-law employee for two different
related organizations during the calendar year, one or both of which is an ATEO, in
which case remuneration paid for the taxable year is aggregated for purposes of
determining whether excess remuneration has been paid. To address these cases,
Q/A–14 provides rules for allocating liability for the excise tax among the employers. As
provided in section 4960(c)(4)(C), in any case in which an ATEO includes remuneration
from one or more related organizations as separate employers of the individual in
determining the excise tax imposed by section 4960(a), each employer is liable for its
proportionate share of the excise tax.
The guidance in this notice provides specific instructions for calculating the
excise tax on excess remuneration under section 4960(a)(1), including rules for
allocating the excise tax among related employers and rules regarding a change in
related status during the calendar year. As described further in Q/A–14, an employee
may be a covered employee of more than one ATEO and each ATEO employer
calculates its liability under section 4960(a)(1) taking into account the organizations to
which it is related. In that case, Q/A–14 provides that, rather than owing tax as both an
22
ATEO and a related organization for the same remuneration paid to a covered
employee, an employer is liable only for the greater of the excise tax it would owe as an
ATEO or the excise tax it would owe as a related organization with respect to that
covered employee.
E. Medical and Veterinary Services
Section 4960(c)(3)(B) and (c)(5)(C)(iii) exclude from remuneration and parachute
payments, respectively, the portion of any compensation that is for the performance of
medical or veterinary services by a licensed medical professional (including a
veterinarian)
or the excise tax it would owe as a related organization with respect to that
covered employee.
E. Medical and Veterinary Services
Section 4960(c)(3)(B) and (c)(5)(C)(iii) exclude from remuneration and parachute
payments, respectively, the portion of any compensation that is for the performance of
medical or veterinary services by a licensed medical professional (including a
veterinarian). The Conference Report states that “[f]or purposes of determining a
covered employee, remuneration paid to a licensed medical professional which is
directly related to the performance of medical or veterinary services by such
professional is not taken into account, whereas remuneration paid to such a
professional in any other capacity is taken into account.” Conf. Rep. at 494 (emphasis
added).
Sections 4960(c)(3)(B) and (c)(5)(C)(iii) both use the phrase “medical or
veterinary services.” Consistent with the legislative history quoted previously, Q/A–15
provides that remuneration for the direct performance of medical or veterinary services
is excluded for purposes of section 4960. Commenters requested guidance as to the
meaning of “licensed medical professional,” which is not defined in the statute. The
Conference Report states that “[a] medical professional for this purpose includes a
doctor, nurse, or veterinarian.” Conf. Rep. at 494. Q/A–15 provides that a licensed
medical professional is an individual who is licensed under state or local law to perform
medical or veterinary services. In addition to those professionals listed, this generally
23
includes dentists and nurse practitioners and may include other medical professionals
depending on state or local law.
Commenters also requested guidance on the definition of medical services for
purposes of section 4960. Q/A–15 adopts the definition of medical care under
section 213(d) for purposes of determining whether services are medical services
onals listed, this generally
23
includes dentists and nurse practitioners and may include other medical professionals
depending on state or local law.
Commenters also requested guidance on the definition of medical services for
purposes of section 4960. Q/A–15 adopts the definition of medical care under
section 213(d) for purposes of determining whether services are medical services. This
standard is consistent with the legislative intent that the exception apply only to
remuneration for the direct performance of medical services and is a familiar standard
for taxpayers. Section 213(d) provides that medical care consists of services for the
diagnosis, cure, mitigation, treatment, or prevention of disease, including services for
the purpose of affecting any structure or function of the body. For a veterinarian or
other licensed veterinary professional, section 213(d)(1)(A) applies by analogy to
determine whether the activity constitutes veterinary services.
In addition, commenters requested guidance on whether activities related to
medical services, such as administrative, teaching, and research services, are medical
services. Q/A–15 provides that these activities generally are not medical services.
However, to the extent a licensed medical professional provides direct medical care to a
patient in the course of these activities, he or she performs medical services, and
remuneration allocable to those services is not taken into account for purposes of
section 4960.
When a covered employee is compensated for both medical services and other
services, the employer must allocate remuneration paid to such employee between
medical services and such other services. Q/A–15 permits taxpayers to use any
reasonable, good faith method to allocate remuneration between medical services and
24
other services
taken into account for purposes of
section 4960.
When a covered employee is compensated for both medical services and other
services, the employer must allocate remuneration paid to such employee between
medical services and such other services. Q/A–15 permits taxpayers to use any
reasonable, good faith method to allocate remuneration between medical services and
24
other services. For this purpose, taxpayers may rely on a reasonable allocation set
forth in an employment agreement that explicitly allocates a portion of the remuneration
as for medical services or other services. If some or all of the remuneration is not
reasonably allocated in an employment agreement, taxpayers must use a reasonable
method of allocation. As an example of a reasonable method, a taxpayer may use
records such as patient, insurance, and Medicare/Medicaid billing records or internal
time reporting mechanisms to determine the time spent providing medical services, and
then allocate remuneration to medical services in the proportion such time bears to the
total hours the covered employee worked for the employer. The same rules apply with
respect to veterinary services.
F. Excess Parachute Payments
Section 4960(a)(2) imposes an excise tax on “any excess parachute payment.”
Section 4960(c)(5)(A) provides that the term “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 the term
“parachute payment” means any payment in the nature of compensation to (or for the
benefit of) a covered employee if (i) such payment is contingent on such employee’s
separation from employment with the employer, and (ii) the aggregate present value of
the payments in the nature of compensation to (or for the benefit of) such individual
which are contingent on such separation equals or exceeds an amount equal to three
times the base amount
ure of compensation to (or for the
benefit of) a covered employee if (i) such payment is contingent on such employee’s
separation from employment with the employer, and (ii) the aggregate present value of
the payments in the nature of compensation to (or for the benefit of) such individual
which are contingent on such separation equals or exceeds an amount equal to three
times the base amount. Section 4960(c)(5)(C) provides exceptions for certain
25
retirement plans, certain payments to licensed medical professionals, and payments to
individuals who are not highly compensated employees as defined in section 414(q).4
The excess parachute payment rules under section 4960 are modeled after
section 280G. Section 280G disallows a deduction for any excess parachute payment.
Although sections 280G and 4960 both use the term “parachute payment,” they define it
differently. Whereas the section 4960 definition refers to payments contingent on an
employee’s separation from employment, 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). There are also
other differences between sections 280G and 4960. For example, section 280G does
not include exceptions for payments to licensed medical professionals or non-highly
compensated employees. The guidance in this notice incorporates many of the
questions and answers (Q/As) under Treas. Reg. § 1.280G-1, with modifications to
reflect the statutory differences between sections 280G and 4960. However, certain
Q/As under Treas. Reg. § 1.280G-1 are not incorporated into this notice because they
address issues that do not arise under section 4960. Conversely, certain Q/As in this
notice do not have parallel Q/As under Treas. Reg. § 1.280G-1 because they address
issues that arise under section 4960 but not under section 280G
t the statutory differences between sections 280G and 4960. However, certain
Q/As under Treas. Reg. § 1.280G-1 are not incorporated into this notice because they
address issues that do not arise under section 4960. Conversely, certain Q/As in this
notice do not have parallel Q/As under Treas. Reg. § 1.280G-1 because they address
issues that arise under section 4960 but not under section 280G.
4 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 2017-64, 2017-45 I.R.B. 486, and Notice 2018-83, provide that the inflation-adjusted amounts for
2018 and 2019 are $120,000 and $125,000, respectively. See section 414(q) and the regulations
thereunder for additional details, 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.
26
The discussion of Q/A–16 through Q/A–34 that follows provides an overview of
the guidance in this notice for purposes of calculating the excise tax under section
4960(a)(2), noting certain similarities and differences between those Q/As and the Q/As
under Treas. Reg. § 1.280G-1. As a preliminary matter, however, the following
summarizes the basic steps used to determine the amount of excise tax (if any) under
section 4960(a)(2):
Step 1: Determine if a covered employee is entitled to receive payments in the
nature of compensation that are contingent on an involuntary separation from
employment and are not subject to an exclusion
he Q/As
under Treas. Reg. § 1.280G-1. As a preliminary matter, however, the following
summarizes the basic steps used to determine the amount of excise tax (if any) under
section 4960(a)(2):
Step 1: Determine if a covered employee is entitled to receive payments in the
nature of compensation that are contingent on an involuntary separation from
employment and are not subject to an exclusion.
Step 2: Calculate the total aggregate present value of the contingent payments,
taking into account the special valuation rules that apply when an involuntary separation
from employment accelerates payment or vesting of a right to a payment.
Step 3: Calculate the covered employee’s base amount with respect to the base
period.
Step 4: Determine if the contingent payments are parachute payments. The
contingent payments are parachute payments if their total aggregate present value
equals or exceeds an amount equal to three times the covered employee’s base
amount.
Step 5: Calculate the amount of excess parachute payments. A parachute
payment is an excess parachute payment to the extent the payment exceeds the base
amount allocated to the payment. (Note that this is the excess over 1 times the base
amount, and not the excess over 3 times the base amount.)
27
Step 6: Calculate the amount of excise tax under section 4960(a)(2). The excise
tax is the amount equal to the product of the rate of tax under section 11 and the sum
of any excess parachute payments paid by an ATEO or related organization to the
covered employee.
Q/A–16 defines the term “excess parachute payment,” and Q/A–17 defines the
term “parachute payment.” Q/A–18, which defines a “payment in the nature of
compensation,” is based on Treas. Reg. § 1.280G-1, Q/A–11
tax is the amount equal to the product of the rate of tax under section 11 and the sum
of any excess parachute payments paid by an ATEO or related organization to the
covered employee.
Q/A–16 defines the term “excess parachute payment,” and Q/A–17 defines the
term “parachute payment.” Q/A–18, which defines a “payment in the nature of
compensation,” is based on Treas. Reg. § 1.280G-1, Q/A–11. Q/A–19, which describes
when a payment is considered made for purposes of section 4960(a)(2), including the
treatment of section 83 property, stock options, and stock appreciation rights and the
treatment of consideration paid by an employee, is based on Treas. Reg. § 1.280G-1,
Q/A–12 through Q/A–14.
Q/A–20 describes when a payment is contingent on an employee’s separation
from employment. Commenters requested that the Treasury Department and the IRS
clarify what it means for a payment to be contingent on a separation from employment,
noting that the statute does not provide a definition. One commenter suggested that the
Treasury Department and the IRS issue guidance treating a payment as contingent on
an employee’s separation from employment only if the payment is subject to a
substantial risk of forfeiture (defined in a manner consistent with section 457(f) or
section 409A) at the time of a separation from employment and the separation causes
the risk of forfeiture to lapse. The guidance in this notice is generally consistent with
that suggestion, with certain exceptions discussed in the next several paragraphs.
Separation from employment (whether voluntary or involuntary) is often used in
compensation arrangements as the trigger to pay vested amounts. For example, it is
28
typical for a nonqualified deferred compensation plan to provide that payments will be
made or begin upon a separation from employment, including separation from
employment resulting from death or disability. In contrast, Treas. Reg
from employment (whether voluntary or involuntary) is often used in
compensation arrangements as the trigger to pay vested amounts. For example, it is
28
typical for a nonqualified deferred compensation plan to provide that payments will be
made or begin upon a separation from employment, including separation from
employment resulting from death or disability. In contrast, Treas. Reg. § 1.280G-1,
Q/A–22 generally treats a payment as contingent on a change in ownership or control if
the payment would not have been made had no change in ownership or control
occurred, taking into consideration whether vesting or payment is accelerated by reason
of the change in ownership or control. Similarly, in defining when a payment is
contingent on separation from employment, this notice does not focus solely on whether
the payment would not have been made but for a separation from employment, but
instead also takes into consideration whether the separation from employment results in
the employee becoming vested or otherwise accelerates the right to payment.
The guidance in this notice limits the payments treated as contingent on a
separation from employment to payments contingent on an involuntary separation from
employment because payments that vest upon a separation from employment typically
vest only upon an involuntary separation from employment. If an employee may
voluntarily separate from service and still be entitled to a payment, then the payment
either is not subject to a substantial risk of forfeiture or the forfeiture condition is not
related to the separation from employment. If, however, there are other types of
separation from employment conditions that may result in the lapse of a substantial risk
of forfeiture applicable to a payment, the standard in this notice may be expanded in
future guidance to ensure that those payments are also treated as contingent on a
separation from employment
e forfeiture condition is not
related to the separation from employment. If, however, there are other types of
separation from employment conditions that may result in the lapse of a substantial risk
of forfeiture applicable to a payment, the standard in this notice may be expanded in
future guidance to ensure that those payments are also treated as contingent on a
separation from employment.
29
Specifically, Q/A–20 provides that a payment is contingent on a separation from
employment if the payment would not have been made in the absence of an involuntary
separation from employment. It further provides that if the right to a payment vests as a
result of an involuntary separation from employment, the payment is treated as a
payment that is contingent on a separation from employment. For example, a right to a
severance payment provided in an employment agreement that vests upon an
involuntary separation from employment is a payment contingent on a separation from
employment.
However, not all payments that are made after an involuntary separation from
employment are contingent on a separation from employment. For example, a payment
of deferred compensation after an involuntary separation from employment that vested
based on years of service completed before the involuntary separation from
employment generally is not a payment that is contingent on a separation from
employment because the payment would be paid at some point, and the separation
from employment may impact the time of, but not the right to, the payment. Similarly,
medical benefits that vested based on years of service completed before an involuntary
separation from employment but that are provided after the involuntary separation from
employment generally are not treated as payments that are contingent on a separation
from employment
at some point, and the separation
from employment may impact the time of, but not the right to, the payment. Similarly,
medical benefits that vested based on years of service completed before an involuntary
separation from employment but that are provided after the involuntary separation from
employment generally are not treated as payments that are contingent on a separation
from employment.
Q/A–20 also provides that an amount that was included in gross income in a
previous year and excess remuneration that was treated as paid under Q/A–13 before
the separation from employment are not contingent on the separation from employment.
30
Therefore, while these amounts may be included in the employee’s base amount,
payments of these amounts are not parachute payments.
Q/A–24 provides that if a payment is accelerated or a substantial risk of forfeiture
lapses as a result of an involuntary separation from employment, the additional value
due to the acceleration is treated as a payment contingent on a separation from
employment. Q/A–24 is based on the rules of Treas. Reg. § 1.280G-1, Q/A–24(b) and
(c) for purposes of determining the value of these accelerations.
Notwithstanding the foregoing, if the facts and circumstances demonstrate that
either vesting or payment of an amount (whether before or after the involuntary
separation from employment) would not have occurred but for the involuntary nature of
the separation from employment, the amount will be treated as contingent on a
separation from employment. For example, an employer’s exercise of discretion to
accelerate vesting of an amount shortly before an involuntary separation from
employment may indicate that the acceleration of vesting was due to the involuntary
nature of the separation from employment and, thus, was contingent on the employee’s
separation from employment
ount will be treated as contingent on a
separation from employment. For example, an employer’s exercise of discretion to
accelerate vesting of an amount shortly before an involuntary separation from
employment may indicate that the acceleration of vesting was due to the involuntary
nature of the separation from employment and, thus, was contingent on the employee’s
separation from employment. Similarly, payment of an amount in excess of an amount
otherwise payable (for example, increased salary) shortly before or after an involuntary
separation from employment may indicate that the amount was paid because the
separation was involuntary and, thus, was contingent on the employee’s separation
from employment.
Q/A–21 provides that payments pursuant to certain window programs are treated
as payments contingent on a separation from employment and is based on Treas. Reg.
§ 1.409A-1(b)(9).
31
Q/A–23 generally adopts the standards of the regulations under section 409A for
purposes of determining whether there has been a separation from employment, except
that a bona fide change from employee to independent contractor status is treated as a
separation from employment. However, the IRS may assert based on all the facts and
circumstances that there was not a bona fide change from employee to independent
contractor status. Specifically, Q/A–23 adopts the standards of Treas. Reg. § 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 and an anticipated reduction in the
level of services of less than 50 percent is not treated as a separation from employment,
with the treatment of an anticipated reduction between these two levels depending on
the facts and circumstances. The guidance in this notice does not adopt the rule of
Treas. Reg
the level of services of more than 80
percent is treated as a separation from employment and an anticipated reduction in the
level of services of less than 50 percent is not treated as a separation from employment,
with the treatment of an anticipated reduction between these two levels depending on
the facts and circumstances. The guidance in this notice does not adopt the rule of
Treas. Reg. § 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. Instead, the default 80 percent and 50 percent levels provided under
Treas. Reg. § 1.409A-1(h)(1)(ii) apply for purposes of section 4960.
Unlike Q/A–25 and Q/A–26 of Treas. Reg. § 1.280G-1, the guidance in this
notice does not provide a presumption that a payment made pursuant to an agreement
entered into or modified within twelve months of a separation from employment is a
payment that is contingent on a separation from employment. However, as noted
previously, if the facts and circumstances demonstrate that either the vesting or the
payment of an amount would not have occurred but for the involuntary nature of the
separation from employment, the amount will be treated as a payment contingent on a
separation from employment.
32
In addition, the guidance in this notice does not incorporate Treas. Reg.
§ 1.280G-1, Q/A–9, excluding reasonable compensation for services from the definition
of parachute payment. In many cases, whether payments after a separation from
employment are reasonable compensation for services will not be an issue because the
employee will not provide services after the separation from employment
In addition, the guidance in this notice does not incorporate Treas. Reg.
§ 1.280G-1, Q/A–9, excluding reasonable compensation for services from the definition
of parachute payment. In many cases, whether payments after a separation from
employment are reasonable compensation for services will not be an issue because the
employee will not provide services after the separation from employment. However, if
the employee continues to provide services (including as a bona fide independent
contractor) after a separation from employment, payments for those services are not
contingent on the involuntary separation from employment to the extent those payments
are reasonable and are not made due to the involuntary nature of the separation from
employment.
Finally, the guidance in this notice does not include a rule similar to Treas. Reg.
§ 1.280G-1, Q/A–16, under which a personal service corporation (PSC) is treated as an
employee. Q/A–3 provides that section 4960 applies to amounts paid to common law
employees who are covered employees of an ATEO. Although a PSC that performs
services for an ATEO is not treated as an employee, the IRS may assert that the
individual owner of a PSC is in fact a common law employee of an ATEO based on all
the facts and circumstances.
G. Three-Times-Base-Amount Test for Parachute Payments
Section 4960(c)(5)(B) provides that a payment is a parachute payment only if the
aggregate present value of the payments in the nature of compensation to (or for the
benefit of) an individual that are contingent on a separation from employment equals or
exceeds an amount equal to three times the base amount.
33
Section 4960(c)(5)(D) provides that rules similar to the rules of
section 280G(b)(3) apply for purposes of determining the base amount, and
section 4960(c)(5)(E) provides that rules similar to the rules of paragraphs (3) and (4) of
section 280G(d) apply for purposes of present value determinations
ion from employment equals or
exceeds an amount equal to three times the base amount.
33
Section 4960(c)(5)(D) provides that rules similar to the rules of
section 280G(b)(3) apply for purposes of determining the base amount, and
section 4960(c)(5)(E) provides that rules similar to the rules of paragraphs (3) and (4) of
section 280G(d) apply for purposes of present value determinations.
Section 280G(b)(3) provides that the term “base amount” means an individual’s
annualized includible compensation for a base period. Section 280G(d)(2) defines
“base period” as the period consisting of the five most recent taxable years of the
service provider ending before the date on which the change in ownership or control
occurs or the portion of such period during which the individual performed personal
services for the corporation. Section 280G(d)(3) provides that any transfer of property
is treated as a payment and is taken into account at its fair market value.
Section 280G(d)(4) provides that present value is determined using a discount rate
equal to 120 percent of the applicable Federal rate determined under section 1274(d),
compounded semiannually.
Q/A–25 through Q/A–31 are based on the rules under Treas. Reg. § 1.280G-1,
Q/A–30 through Q/A–35 (substituting an involuntary separation from employment for a
change in control) for determining whether a payment is an excess parachute payment,
including the rules for applying the three-times-base-amount test, determining the base
amount and base period, and determining present value, including determining the
present value of payments that are contingent on uncertain future events.
H. Computation of Excess Parachute Payments
Section 4960(c)(5)(A) provides that an “excess parachute payment” is an amount
equal to the excess of any parachute payment over the portion of the base amount
34
allocated to such payment. Q/A–32(a) is based on Treas. Reg
ng present value, including determining the
present value of payments that are contingent on uncertain future events.
H. Computation of Excess Parachute Payments
Section 4960(c)(5)(A) provides that an “excess parachute payment” is an amount
equal to the excess of any parachute payment over the portion of the base amount
34
allocated to such payment. Q/A–32(a) is based on Treas. Reg. § 1.280G-1, Q/A–38,
regarding allocating the base amount to a parachute payment (that is, determining the
portion that is not a parachute payment because it does not exceed the base amount).
Q/A-2 provides that the excise tax on excess parachute payments for a taxable year is
based on any excess parachute payments made in the calendar year ending with or
within the taxable year of the ATEO.
I. Reporting Liability Under Section 4960
As requested by some commenters, Q/A-34 provides guidance as to the
reporting and due date for paying the section 4960 excise tax. On November 7, 2018,
the Treasury Department and the IRS issued proposed regulations under sections 6011
and 6071 (Prop. Treas. Reg. §§ 53.6011-1 and 53.6071-1, 83 F.R. 55653) to address
reporting and the due date for paying the tax. The proposed regulations provide that
the excise tax under section 4960 is reported on Form 4720, Return of Certain Excise
Taxes Under Chapters 41 and 42 of the Internal Revenue Code, which is the form
generally used for reporting and paying chapter 42 taxes. Each employer liable for
section 4960 tax, whether an ATEO or a related organization described in
section 4960(c)(4)(B), is responsible for separately reporting and paying its share of the
tax. The proposed regulations provide that Form 4720 and payment are due when
chapter 42 taxes ordinarily are due (the 15th day of the 5th month after the end of the
taxpayer’s taxable year—May 15 for a calendar year employer), subject to an extension
of time for filing that generally applies. This rule is also reflected in Q/A–34(a)
sible for separately reporting and paying its share of the
tax. The proposed regulations provide that Form 4720 and payment are due when
chapter 42 taxes ordinarily are due (the 15th day of the 5th month after the end of the
taxpayer’s taxable year—May 15 for a calendar year employer), subject to an extension
of time for filing that generally applies. This rule is also reflected in Q/A–34(a).
Q/A–34(b) provides that an employer may elect to prepay the excise tax imposed
under section 4960(a)(2) in the year of separation from employment (or any taxable
35
year prior to the year in which the parachute payment is actually paid). This rule is
similar to the rule in Treas. Reg. § 1.280G-1, Q/A–11(c), under which a disqualified
employee may elect to prepay the excise tax under section 4999 based on the present
value of the excise tax that would be owed by the employee when the parachute
payments are actually made.
Some commenters requested clarification as to whether section 4960 excise tax
is subject to quarterly payments of estimated tax under section 6655. Since
section 6655 was not amended to include section 4960, no quarterly payments of
estimated section 4960 tax are required under section 6655. See Q/A–35.
J. Miscellaneous Issues
Q/A–36 through Q/A–38 address coordination of section 4960 with other Code
provisions. Commenters requested clarification of the relationship between the
section 4960 excise tax and excise taxes for unreasonable or excessive compensation
under section 4958 or, in the case of compensation to disqualified persons for personal
services, section 4941. Q/A–36 and Q/A–37 confirm that there is no particular
relationship between liability for excise tax under section 4960 and liability under these
other provisions
tion of the relationship between the
section 4960 excise tax and excise taxes for unreasonable or excessive compensation
under section 4958 or, in the case of compensation to disqualified persons for personal
services, section 4941. Q/A–36 and Q/A–37 confirm that there is no particular
relationship between liability for excise tax under section 4960 and liability under these
other provisions. In cases involving excessive compensation for purposes of
section 4958 or section 4941, there may or may not be concurrent excise tax liability
under section 4960, and in cases involving section 4960 excise tax liability, there may or
may not be concurrent liability under section 4958 or section 4941.
Q/A–38 addresses the rule under section 4960(c)(6) that remuneration for which
a deduction is disallowed under section 162(m) is not taken into account under
section 4960. For example, an ATEO’s covered employee may also be a covered
36
employee of a publicly held corporation (as those terms are defined in section 162(m)(2)
and (3)) if the publicly held corporation is related to the ATEO under section
4960(c)(4)(B). In that case, any portion of remuneration disallowed as a deduction by
reason of section 162(m) is not taken into account under section 4960.
K. Effective Date
Section 4960 is effective for the first taxable year beginning after December 31,
2017. Q/A–39 provides that amounts paid before the beginning of that taxable year are
not subject to the excise tax under section 4960. As described previously in the
discussion of remuneration for purposes of section 4960(a)(1), remuneration that was
vested before the effective date of section 4960 is not subject to excise tax under
section 4960 because it is treated as having been paid at vesting. For example,
amounts includible in gross income under section 457(f)(1)(A) and any vested earnings
that accrued before the effective date of section 4960 are not subject to the excise tax
under section 4960
on 4960(a)(1), remuneration that was
vested before the effective date of section 4960 is not subject to excise tax under
section 4960 because it is treated as having been paid at vesting. For example,
amounts includible in gross income under section 457(f)(1)(A) and any vested earnings
that accrued before the effective date of section 4960 are not subject to the excise tax
under section 4960. However, earnings accrued on those amounts in taxable years
beginning after December 31, 2017, may be subject to excise tax under section
4960(a)(1).
II.
INTERIM GUIDANCE ON APPLICATION OF SECTION 4960
A. Section 4960 — In General
Q–1: What is the effect of section 4960?
A–1: An ATEO or related organization that pays excess remuneration or an excess
parachute payment to a covered employee is subject to an excise tax on that amount at
a rate equal to the rate of tax under section 11. For taxable years beginning after
37
December 31, 2017, the rate of tax under section 11 is 21 percent. See section 13001
of the Act.
Q–2: What year is used in calculating the section 4960 excise tax?
A–2: Excess remuneration paid and excess parachute payments made in the calendar
year ending with or within the taxable year of an ATEO or a related organization,
whichever is the applicable employer, are treated as paid for that taxable year. Thus,
the excise tax on excess remuneration and excess parachute payments is calculated
based on excess remuneration paid and excess parachute payments made during the
calendar year ending with or within the employer’s taxable year.
Q–3: Who is liable for the section 4960 excise tax?
A–3: (a) In general. The common-law employer, as generally determined for federal tax
purposes, is liable for the excise tax imposed under section 4960. Only an ATEO has
covered employees, but a covered employee may also be an employee of a related
organization
during the
calendar year ending with or within the employer’s taxable year.
Q–3: Who is liable for the section 4960 excise tax?
A–3: (a) In general. The common-law employer, as generally determined for federal tax
purposes, is liable for the excise tax imposed under section 4960. Only an ATEO has
covered employees, but a covered employee may also be an employee of a related
organization. When an employer that is an ATEO or a related organization pays a
covered employee either excess remuneration or an excess parachute payment, each
employer is liable for the excise tax under section 4960. See Q/A–14 for rules that
apply when more than one employer is liable for the excise tax on excess remuneration.
Whether a person or entity is the common-law employer generally depends on
the facts and circumstances. A common-law employer may not avoid liability under
section 4960 by reason of a third party payor arrangement, such as an arrangement
with a payroll agent, common paymaster, statutory employer under section 3401(d)(1),
or certified professional employer organization, or any similar arrangement. For
purposes of section 4960, a payment to an employee by a third-party payor is
38
considered paid by the common-law employer with respect to the services for which the
payment is made. Similarly, a payment to an employee on behalf of the common-law
employer (such as a payment from a related organization for which the individual is not
providing services as an employee or a payment from an unrelated management
company), is considered paid by the common-law employer for purposes of section
4960.
(b) Disregarded entities. In the case of employment by a disregarded entity
described in Treas. Reg. § 301.7701-3, the sole owner of the disregarded entity is
treated as the common-law employer for purposes of section 4960.
not
providing services as an employee or a payment from an unrelated management
company), is considered paid by the common-law employer for purposes of section
4960.
(b) Disregarded entities. In the case of employment by a disregarded entity
described in Treas. Reg. § 301.7701-3, the sole owner of the disregarded entity is
treated as the common-law employer for purposes of section 4960.
(c) Arrangements between an ATEO and a related organization. Calculation of,
and liability for, the excise tax based on excess remuneration or an excess parachute
payment in accordance with this Q/A–3 is separate from and unaffected by any
arrangement that the ATEO and any related organization may have for bearing the cost
of any excise tax liability under section 4960.
B. Applicable Tax-Exempt Organizations and Related Organizations
Q–4: What is an applicable tax-exempt organization within the meaning of section
4960(c)(1)?
A–4: As provided in section 4960(c)(1), an ATEO is any organization which for its
taxable year–
(A) is exempt from taxation under section 501(a),
(B) is a farmers’ cooperative organization described in section 521(b)(1),
(C) has income excluded from taxation under section 115(1), or
(D) is a political organization described in section 527(e)(1).
39
Q–5: When is a governmental entity an applicable tax-exempt organization within
the meaning of section 4960(c)(1)?
A–5: Governmental entities specifically described in section 4960(c)(1), that is,
organizations that have income excluded from taxation under section 115(1) and
organizations that are exempt from taxation under section 501(a), are ATEOs. For
example, federal instrumentalities exempt from tax under section 501(c)(1) and public
universities with IRS determination letters recognizing their tax-exempt status under
section 501(c)(3) are governmental entities exempt from tax under section 501(a), and
thus are ATEOs
d from taxation under section 115(1) and
organizations that are exempt from taxation under section 501(a), are ATEOs. For
example, federal instrumentalities exempt from tax under section 501(c)(1) and public
universities with IRS determination letters recognizing their tax-exempt status under
section 501(c)(3) are governmental entities exempt from tax under section 501(a), and
thus are ATEOs.
A governmental entity that is separately organized from a state or political
subdivision of a state may meet the requirements to exclude income from gross income
(and thereby have income excluded from taxation) under section 115(1). See Rev. Rul.
77-261, 1977-2 C.B.45. However, a state, political subdivision of a state, or integral part
of a state or political subdivision, often referred to as a “governmental unit,” does not
meet the requirements to exclude income from gross income under section 115(1)
because section 115(1) does not apply to income from an activity that the state
conducts directly, rather than through a separate entity. See Rev. Rul. 77-261; see also
Rev. Rul. 71-131, 1971-1 C.B. 28 (superseding and restating the position stated in
G.C.M. 14407, C.B. XIV-1 103).
Instead, under the doctrine of implied statutory immunity, the income of a
governmental unit generally is not taxable in the absence of specific statutory
authorization for taxing that income. See Rev. Rul. 87-2, 1987-1 C.B. 18; Rev. Rul. 71-
131; Rev. Rul. 71-132, 1971-1 C.B. 29; and G.C.M. 14407. Section 511(a)(2)(B), which
imposes tax on the unrelated business taxable income of state colleges and
40
universities, is an example of a specific statutory authorization for taxing income earned
by a state, a political subdivision of a state, or an integral part of a state or political
subdivision of a state
. 18; Rev. Rul. 71-
131; Rev. Rul. 71-132, 1971-1 C.B. 29; and G.C.M. 14407. Section 511(a)(2)(B), which
imposes tax on the unrelated business taxable income of state colleges and
40
universities, is an example of a specific statutory authorization for taxing income earned
by a state, a political subdivision of a state, or an integral part of a state or political
subdivision of a state.
Thus, a governmental unit (including a state college or university) that does not
have a determination letter recognizing its exemption from taxation under section 501(a)
and does not exclude income from gross income under section 115(1) is not an ATEO
described in section 4960(c)(1). However, such a governmental unit may be liable for
excise tax under section 4960 if it is a related organization under section 4960(c)(4)(B)
with respect to an ATEO.
Q–6: May a governmental entity with a determination letter recognizing its tax
exemption relinquish its section 501(c)(3) status?
A–6: Yes, a governmental entity may voluntarily relinquish its section 501(c)(3) tax-
exempt status pursuant to section 3.01(12) of Rev. Proc. 2018-5, 2018-1 I.R.B. 233,
239 (or the analogous section in any successor revenue procedure), under the
procedures described in that revenue procedure.
Q–7: What is a related organization for purposes of section 4960?
A–7: As provided in section 4960(c)(4)(B), a person or governmental entity is related to
an ATEO if such person or governmental entity–
(i) controls, or is controlled by, the ATEO;
(ii) is controlled by one or more persons which control the ATEO;
(iii) is a supported organization (as defined in section 509(f)(3)) with respect to
the ATEO;
(iv) is a supporting organization described in section 509(a)(3) with respect to the
ATEO; or
41
n or governmental entity is related to
an ATEO if such person or governmental entity–
(i) controls, or is controlled by, the ATEO;
(ii) is controlled by one or more persons which control the ATEO;
(iii) is a supported organization (as defined in section 509(f)(3)) with respect to
the ATEO;
(iv) is a supporting organization described in section 509(a)(3) with respect to the
ATEO; or
41
(v) in the case of an ATEO which is a voluntary employees’ beneficiary
association described in section 501(c)(9), establishes, maintains, or makes
contributions to such voluntary employees’ beneficiary association.
See Q/A–14(c) for rules regarding a change in related status during the year.
Q–8: What is the meaning of “control” for purposes of section 4960(c)(4)(B)(i)-(ii)
and Q/A–7 of this notice?
A–8: (a) In general. For purposes of section 4960(c)(4)(B)(i)-(ii) and Q/A–7 of this
notice, the term “control” is defined as follows:
(1) Stock corporation. In the case of a stock corporation, control means
ownership (by vote or value) of more than 50 percent of the stock in such corporation.
(2) Partnership. In the case of a partnership, control means ownership of more
than 50 percent of the profits interest or capital interest in such partnership.
(3) Trust. In the case of a trust with beneficial interests, control means ownership
of more than 50 percent of the beneficial interests in the trust.
hip (by vote or value) of more than 50 percent of the stock in such corporation.
(2) Partnership. In the case of a partnership, control means ownership of more
than 50 percent of the profits interest or capital interest in such partnership.
(3) Trust. In the case of a trust with beneficial interests, control means ownership
of more than 50 percent of the beneficial interests in the trust.
(4) Nonstock organization. In the case of a nonprofit organization or other
organization without owners or persons having beneficial interests (nonstock
organization), including a governmental entity, control means that (i) more than 50
percent of the directors or trustees of the ATEO or nonstock organization are either
representatives of, or are directly or indirectly controlled by, the other entity; or (ii) more
than 50 percent of the directors or trustees of the nonstock organization are either
representatives of, or are directly or indirectly controlled by, one or more persons that
control the ATEO. For purposes of this paragraph, a “representative” means a trustee,
director, agent, or employee, and control includes the power to remove a trustee or
director and designate a new trustee or director.
42
(5) Constructive ownership. For purposes of Q/A-7 and this Q/A-8, section 318
(relating to constructive ownership of stock) applies for purposes of determining control
of stock in a corporation. For purposes of determining control of any other entity,
including a nonstock organization, under this Q/A–8, the principles of section 318 apply.
esignate a new trustee or director.
42
(5) Constructive ownership. For purposes of Q/A-7 and this Q/A-8, section 318
(relating to constructive ownership of stock) applies for purposes of determining control
of stock in a corporation. For purposes of determining control of any other entity,
including a nonstock organization, under this Q/A–8, the principles of section 318 apply.
(b) Examples. The following examples illustrate how the rules of Q/A-7 and this
Q/A–8 apply:
Example 1. A, B, and C are nonstock organizations and are ATEOs within the meaning
of section 4960(c)(1). C owns 80 percent of the stock of corporation D. Eighty percent
of B’s directors are representatives of A. In addition, 80 percent of C’s directors are
representatives of A. A is a related organization with respect to B (and vice versa)
because more than 50 percent of B’s directors are representatives of A; thus, A controls
B. Based on the same analysis, A is also a related organization with respect to C (and
vice versa). D is a related organization with respect to C because, as the owner of
more than 50 percent of D’s stock, C controls D. Applying the principles of section 318,
A is deemed to own 64 percent of the stock of D (80 percent of C’s stock in D). Thus, D
is a related organization with respect to A because A controls D. B is a related
organization with respect to C, C is a related organization with respect to B, and D is a
related organization with respect to B because B, C, and D are all controlled by the
same person (A).
Example 2. X, Y, and Z are nonstock organizations and are ATEOs within the meaning
of section 4960(c)(1). Sixty percent of Y’s directors are representatives of X. In
addition, 60 percent of Z’s directors are representatives of Y. X is a related organization
with respect to Y (and vice versa) because more than 50 percent of Y’s directors are
representatives of X; thus, X controls Y
on (A).
Example 2. X, Y, and Z are nonstock organizations and are ATEOs within the meaning
of section 4960(c)(1). Sixty percent of Y’s directors are representatives of X. In
addition, 60 percent of Z’s directors are representatives of Y. X is a related organization
with respect to Y (and vice versa) because more than 50 percent of Y’s directors are
representatives of X; thus, X controls Y. Based on the same analysis, Z is a related
organization with respect to Y (and vice versa). Applying the principles of section 318,
X is deemed to control 36 percent of Z’s directors (60 percent of Y’s 60 percent control
over Z). Because less than 50 percent of Z’s directors are representatives of or
controlled by X, and absent any facts suggesting that X directly or indirectly controls Z,
X is not a related organization with respect to Z.
C. Covered Employees
Q–9: Who is a covered employee within the meaning of section 4960(c)(2)?
A–9: The term “covered employee” means any employee (including any former
employee) of an ATEO, if the employee–
43
(A) is one of the five highest-compensated employees of the organization for the
taxable year of the ATEO, or
(B) was a covered employee of the ATEO (or any predecessor) for any of the
ATEO’s preceding taxable years beginning after December 31, 2016.
Q–10: How are the five highest-compensated employees determined?
A–10: (a) In general. Except as provided in Q/A–10(b), the determination of whether an
employee is one of the five highest-compensated employees of an ATEO is made on
the basis of his or her remuneration for services performed as an employee of the
ATEO, including remuneration for services performed as an employee of a related
organization with respect to the ATEO. The remuneration used for purposes of
identifying the five highest-compensated employees is the remuneration paid to an
employee during the calendar year ending with or within the ATEO’s or related
organization’s taxable year
tion for services performed as an employee of the
ATEO, including remuneration for services performed as an employee of a related
organization with respect to the ATEO. The remuneration used for purposes of
identifying the five highest-compensated employees is the remuneration paid to an
employee during the calendar year ending with or within the ATEO’s or related
organization’s taxable year. Remuneration paid for medical services (or veterinary
services) is not taken into account for purposes of identifying the five highest-
compensated employees.
(b) Limited services exception. An employee is not one of an ATEO’s five
highest-compensated employees for a taxable year if, during the calendar year ending
with or within the taxable year, as described in Q/A–2, the ATEO paid less than 10
percent of the employee’s total remuneration for services performed as an employee of
the ATEO and all related organizations. However, if an employee would not be treated
as one of 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
44
remuneration paid by the group during the calendar year, then this exception does not
apply to the ATEO that paid the employee the most remuneration during that year.
(c) Examples. The following examples illustrate the rules of this Q/A–10:
Example 1. X and Y are both calendar year taxpayers and ATEOs that are related
organizations with respect to each other, and both employ E during calendar year 2020.
Of the total remuneration paid to E for services performed as an employee of X and Y,
50 percent was for services for X and 50 percent was for services for Y. Based on the
aggregate remuneration from X and Y, E is one of the five highest-compensated
employees of both X and Y. E is a covered employee of both X and Y for 2020 and all
future taxable years.
Example 2
ing calendar year 2020.
Of the total remuneration paid to E for services performed as an employee of X and Y,
50 percent was for services for X and 50 percent was for services for Y. Based on the
aggregate remuneration from X and Y, E is one of the five highest-compensated
employees of both X and Y. E is a covered employee of both X and Y for 2020 and all
future taxable years.
Example 2. Assume the same facts as Example 1, except that of the total
remuneration paid to E for services performed as an employee of X and Y, 95 percent
was for services for X and 5 percent was for services for Y. E is a covered employee of
X for 2020 and all future taxable years, but is not a covered employee of Y for 2020
because Y did not pay at least 10 percent of the total remuneration paid to E by Y and
all related organizations and at least one other related ATEO paid at least 10 percent of
that remuneration.
D. Excess Remuneration
Q–11: What is excess remuneration paid by an applicable tax-exempt
organization under section 4960(a)(1)?
A–11: For each covered employee, excess remuneration is the excess (if any) for a
taxable year of the remuneration that is paid (other than any excess parachute
payment) by an ATEO, including remuneration paid by a related organization, over $1
million for the taxable year.
Q–12: What is remuneration under section 4960(c)(3)?
A–12: (a) General rule. The term “remuneration” has the same meaning as the term
“wages,” as defined in section 3401(a), except that it excludes any designated Roth
contribution (as defined in section 402A(c)) and includes amounts required to be
included in gross income under section 457(f). Remuneration includes an amount that
is a parachute payment; however, a parachute payment is not subject to tax as excess
45
remuneration if it is also subject to tax as an excess parachute payment
n section 3401(a), except that it excludes any designated Roth
contribution (as defined in section 402A(c)) and includes amounts required to be
included in gross income under section 457(f). Remuneration includes an amount that
is a parachute payment; however, a parachute payment is not subject to tax as excess
45
remuneration if it is also subject to tax as an excess parachute payment. Further,
remuneration does not include the portion of any remuneration paid to a licensed
medical professional (including a veterinarian) that is directly related to the performance
of medical or veterinary services by such professional.
(b) Section 3401(a) wages. Section 3401(a) provides that the term “wages”
generally means all remuneration for services performed by an employee for his
employer (with certain exceptions provided under section 3401(a)(1) through (a)(23)),
including the cash value of all remuneration (including benefits) paid in any medium
other than cash. Among the more broadly applicable exclusions, section 3401(a)(12)
provides that wages do not include remuneration paid to, or on behalf of, an employee
or his beneficiary–
(1) from or to a trust described in section 401(a) which is exempt from tax under
section 501(a) at the time of such payment unless such payment is made to an
employee of the trust as remuneration for services rendered as such employee and not
as a beneficiary of the trust;
(2) under or to an annuity plan which, at the time of such payment, is a plan
described in section 403(a);
(3) for a payment described in section 402(h)(1) and (2) if, at the time of such
payment, it is reasonable to believe that the employee will be entitled to an exclusion
under such section for payment;
(4) under an arrangement to which section 408(p) applies; or
46
of the trust;
(2) under or to an annuity plan which, at the time of such payment, is a plan
described in section 403(a);
(3) for a payment described in section 402(h)(1) and (2) if, at the time of such
payment, it is reasonable to believe that the employee will be entitled to an exclusion
under such section for payment;
(4) under an arrangement to which section 408(p) applies; or
46
(5) under or to an eligible deferred compensation plan which, at the time of such
payment, is a plan described in section 457(b) that is maintained by an eligible
employer described in section 457(e)(1)(A) (governmental employer).
(c) Remuneration paid by related organizations. Remuneration includes
remuneration paid to a covered employee by any related organization with respect to
the employee’s employment by that related organization. (See Q/A–14(b) for rules on
allocating the liability for the excise tax when remuneration from more than one
employer is taken into account in determining the liability for the excise tax under
section 4960(a)(1).) In contrast, remuneration paid by another organization, whether or
not a related organization, with respect to an employee’s employment by an ATEO, is
treated as remuneration paid by that ATEO for purposes of section 4960.
(d) Directors. Compensation paid by an organization to a member of its board of
directors (or an individual holding a substantially similar position) for serving in that
capacity is not remuneration because the fees received by the director for performing
those services constitute self-employment income, rather than wages under section
3401(a). See Rev. Rul. 57-246, 1957-1 C.B. 338. If the individual also performs
services for the organization as an employee, then the compensation paid for the
services as an employee is remuneration. Moreover, for purposes of section 4960,
compensation that an employer pays to an employee to serve as a director of another
organization is remuneration
come, rather than wages under section
3401(a). See Rev. Rul. 57-246, 1957-1 C.B. 338. If the individual also performs
services for the organization as an employee, then the compensation paid for the
services as an employee is remuneration. Moreover, for purposes of section 4960,
compensation that an employer pays to an employee to serve as a director of another
organization is remuneration.
Q–13: When is remuneration treated as paid for purposes of section 4960(a)(1)?
A–13: (a) General rule. For purposes of section 4960(a)(1), remuneration is paid for a
taxable year if it is paid during the calendar year ending with or within the employer’s
47
taxable year. Remuneration is treated as paid on the first date that the right to the
remuneration is not subject to a substantial risk of forfeiture within the meaning of
section 457(f)(3)(B) (regardless of whether the arrangement under which the amount is
or will be paid is subject to section 457(f) or section 409A). An amount of remuneration
is subject to a substantial risk of forfeiture if the right to the remuneration would be
treated as subject to a substantial risk of forfeiture under Prop. Treas. Reg. § 1.457-
12(e)(1). In general, this means that the amount 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 remuneration if the possibility of forfeiture is substantial. See Prop. Treas. Reg.
§ 1.457-12(e)(1) for further guidance on the application of this standard.5 For purposes
of this notice, remuneration that is no longer subject to a substantial risk of forfeiture is
referred to as “vested” remuneration and the lapsing of a substantial risk of forfeiture is
referred to as “vesting.”
of the remuneration if the possibility of forfeiture is substantial. See Prop. Treas. Reg.
§ 1.457-12(e)(1) for further guidance on the application of this standard.5 For purposes
of this notice, remuneration that is no longer subject to a substantial risk of forfeiture is
referred to as “vested” remuneration and the lapsing of a substantial risk of forfeiture is
referred to as “vesting.”
(b) Amount of remuneration treated as paid – (1) In general. The amount of
remuneration treated as paid upon vesting is the present value (on the vesting date) of
the future payments to which the participant has a legally binding right. The present
value of the right to future payments as of the vesting date includes any earnings that
have accrued as of the vesting date. The present value must be determined using
5 When the proposed regulations under section 457(f) are finalized, the Treasury Department and
the IRS anticipate providing further guidance on how and when those final regulations apply for purposes
of section 4960.
48
reasonable actuarial assumptions. Present value determined in accordance with the
rules set forth in Prop. Treas. Reg. § 1.457-12(c)(1), including the assumptions
regarding payment timing set forth in those proposed regulations, will be deemed to
have been determined using reasonable actuarial assumptions. For purposes of
determining the present value of remuneration under a nonaccount balance plan
described in Treas. Reg. § 1.409A-1(c)(2)(i)(C) that is scheduled to be actually or
constructively paid within 90 days of vesting, the employer may elect to treat the
nominal amount that is to be paid as the present value of the amount on the date of
vesting.
Net earnings, as defined in paragraph (b)(2)(C), on previously paid remuneration,
as defined in paragraph (b)(2)(D)(i), are treated as paid at the close of the calendar year
in which they accrue
led to be actually or
constructively paid within 90 days of vesting, the employer may elect to treat the
nominal amount that is to be paid as the present value of the amount on the date of
vesting.
Net earnings, as defined in paragraph (b)(2)(C), on previously paid remuneration,
as defined in paragraph (b)(2)(D)(i), are treated as paid at the close of the calendar year
in which they accrue. For example, the present value of vested remuneration credited
to an employee’s account under an account balance plan described in Treas. Reg.
§ 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 credited to the employee’s account, but the present
value of any net earnings accrued on that amount (the increase in value due to the
predetermined actual investment or a reasonable market interest rate) is treated as paid
at the close of the calendar year in which they accrue. Similarly, the present value of a
vested, fixed amount of remuneration under a nonaccount balance plan described in
Treas. Reg. § 1.409A-1(c)(2)(i)(C) is treated as paid on the date of vesting, but the
present value of the net earnings on that amount (the increase in the present value) is
treated as paid at the close of the calendar year in which they accrue.
49
(2) Earnings and losses. (A) Earnings. Earnings generally refer to any increase
in the vested present value of any previously paid remuneration as of the close of a
calendar year, regardless of whether the plan or arrangement denominates such
increase as earnings, to the extent the employee’s right to payment of the increase is
vested. For example, an increase in the vested account balance of a nonqualified
deferred compensation plan based solely on the investment return of a predetermined
actual investment (and disregarding any additional contributions) constitutes earnings
less of whether the plan or arrangement denominates such
increase as earnings, to the extent the employee’s right to payment of the increase is
vested. For example, an increase in the vested account balance of a nonqualified
deferred compensation plan based solely on the investment return of a predetermined
actual investment (and disregarding any additional contributions) constitutes earnings.
Similarly, an increase in the vested present value of a benefit under a nonqualified
nonaccount balance plan described in Treas. Reg. § 1.409A-1(c)(2)(i)(C) due solely to
the passage of time (and disregarding any additional benefit accruals) constitutes
earnings. However, an increase in an account balance of a nonqualified deferred
compensation plan due to a salary reduction contribution or an employer contribution
does not constitute earnings. Likewise, an increase in the benefit under a nonaccount
balance plan described in Treas. Reg. § 1.409A-1(c)(2)(i)(C) due to an additional year
of service or an increase in compensation that is reflected in a benefit formula does not
constitute earnings.
(B) Losses. Losses generally refer to any decrease in the vested present value
of any previously paid remuneration as of the close of the calendar year, regardless of
whether the plan denominates that decrease as losses.
(C) Net earnings and losses. Net earnings and losses for each covered
employee are determined on a net aggregate basis for each taxable year based on the
previously paid remuneration paid by the employer. For example, losses under an
account balance plan described in Treas. Reg. § 1.409A-1(c)(2)(i)(A) may offset
50
earnings under a nonaccount balance plan described in Treas. Reg. § 1.409A-
1(c)(2)(i)(C) maintained by the same employer for the same employee, but earnings and
losses from a plan maintained by another employer are disregarded
reviously paid remuneration paid by the employer. For example, losses under an
account balance plan described in Treas. Reg. § 1.409A-1(c)(2)(i)(A) may offset
50
earnings under a nonaccount balance plan described in Treas. Reg. § 1.409A-
1(c)(2)(i)(C) maintained by the same employer for the same employee, but earnings and
losses from a plan maintained by another employer are disregarded.
Net earnings refer to the amount (if any) by which the earnings accrued during a
calendar year ending with or within the taxable year (as described in Q/A–2) on any
previously paid remuneration exceeds the sum of the losses accrued on those amounts
during that calendar year and any net losses carried forward from a previous taxable
year. Net losses refer to the amount (if any) by which the sum of the losses accrued
during a calendar year ending with or within the taxable year (as described in Q/A–2) on
any previously paid remuneration and the net losses carried forward from a previous
taxable year exceeds the earnings accrued on those amounts during that calendar year.
Losses do not reduce the remuneration treated as paid in a calendar year except to the
extent of the earnings for that calendar year. Thus, if an employee vests in an amount
of earnings under a nonaccount balance plan within the meaning of Treas. Reg.
§ 1.409A-1(c)(2)(i)(C), and also has losses under an account balance plan within the
meaning of Treas. Reg. § 1.409A-1(c)(2)(i)(A) that exceed the vested earnings treated
as remuneration under the nonaccount balance plan, those excess losses are carried
forward to the next following taxable year and offset vested earnings for purposes of
determining net earnings or losses for that taxable year
§ 1.409A-1(c)(2)(i)(C), and also has losses under an account balance plan within the
meaning of Treas. Reg. § 1.409A-1(c)(2)(i)(A) that exceed the vested earnings treated
as remuneration under the nonaccount balance plan, those excess losses are carried
forward to the next following taxable year and offset vested earnings for purposes of
determining net earnings or losses for that taxable year. If, for the next following year,
there are not sufficient earnings to offset the entire amount of losses carried forward
from the previous year (and any additional losses), the offset process repeats for each
later year until there are earnings for the calendar year in excess of the losses carried
forward.
51
(D) Previously paid remuneration – (i) In general. Remuneration is treated as
previously paid remuneration for a taxable year to the extent that, by the close of the
calendar year ending with or within such taxable year (as described in Q/A–2), it is
treated as paid under Q/A–13(b)(1) but is not actually or constructively paid.
(ii) Employee who becomes a covered employee. Any remuneration that is
vested but is not actually or constructively paid as of the close of the calendar year
preceding the calendar year ending with or within the taxable year of the employer for
which an employee first becomes a covered employee of an ATEO is treated as paid for
the employer’s preceding taxable year. For example, if an employee first becomes a
covered employee of an employer for the employer’s taxable year ending June 30,
2022, any remuneration that was vested but was not actually or constructively paid as of
December 31, 2020, is treated as paid for the taxable year ending June 30, 2021, and
thus is not subject to the excise tax. Net losses from the preceding taxable year do not
carry forward to the taxable year an employee becomes a covered employee.
employer for the employer’s taxable year ending June 30,
2022, any remuneration that was vested but was not actually or constructively paid as of
December 31, 2020, is treated as paid for the taxable year ending June 30, 2021, and
thus is not subject to the excise tax. Net losses from the preceding taxable year do not
carry forward to the taxable year an employee becomes a covered employee.
(iii) Pre-effective date remuneration. Any remuneration that was vested but was
not actually or constructively paid as of the close of the taxable year preceding the first
taxable year in which section 4960 is effective for the employer is treated as paid for the
preceding taxable year and is not subject to the excise tax. Thus, for an employer that
uses a calendar year taxable year, the present value of any remuneration that was
vested but was not actually or constructively paid as of December 31, 2017, is treated
as paid for taxable year 2017. For an employer that uses a non-calendar year taxable
year, the present value of any remuneration that was vested but was not actually or
constructively paid as of the close of the taxable year that includes December 31, 2017
52
(for example, June 30, 2018 in the case of an employer with a taxable year beginning
July 1 and ending June 30) is treated as paid for that taxable year. Regardless of the
employer’s taxable year, there is no carryover of net losses from the preceding taxable
year to the first taxable year for which section 4960 is effective.
lose of the taxable year that includes December 31, 2017
52
(for example, June 30, 2018 in the case of an employer with a taxable year beginning
July 1 and ending June 30) is treated as paid for that taxable year. Regardless of the
employer’s taxable year, there is no carryover of net losses from the preceding taxable
year to the first taxable year for which section 4960 is effective.
(c) Examples. The following examples illustrate the rules described in this Q/A–
13.
Example 1. E is a covered employee of R, an ATEO that uses a calendar year taxable
year. E participates in a nonqualified deferred compensation plan in which the account
balance is adjusted based on the investment returns on predetermined actual
investments chosen by the employee. On January 1, 2019, R credits $100,000 to E’s
account under the plan, subject to the requirement that E remain employed through
June 30, 2021. On June 30, 2021, the vested account balance is $110,000. Due to
earnings or losses on the account balance, the closing account balance on each of the
following dates is: (i) $115,000 on December 31, 2021, (ii) $120,000 on December 31,
2022, (iii) $100,000 on December 31, 2023, and (iv) $110,000 on December 31, 2024.
During 2025, E defers an additional $10,000 under the plan, which is vested at the time
of deferral. On December 31, 2025, the closing account balance is $125,000. In 2026,
R distributes $10,000 to E under the plan. On December 31, 2026, the closing account
balance is $135,000 due to earnings on the account balance.
2019 and 2020 (nonvested amounts). For 2019 and 2020, R pays no remuneration to E
under the plan. The substantial future services condition is not met; thus, any amount
deferred under the plan, including unvested earnings, remains subject to a substantial
risk of forfeiture within the meaning of section 457(f)(3)(B) as of December 31, 2019,
and December 31, 2020.
2021 (amounts in year of vesting)
2020 (nonvested amounts). For 2019 and 2020, R pays no remuneration to E
under the plan. The substantial future services condition is not met; thus, any amount
deferred under the plan, including unvested earnings, remains subject to a substantial
risk of forfeiture within the meaning of section 457(f)(3)(B) as of December 31, 2019,
and December 31, 2020.
2021 (amounts in year of vesting). For 2021, R pays E $115,000 of remuneration,
including (i) $110,000 of remuneration on June 30, 2021, when the substantial future
services condition is met and the amount is no longer subject to a substantial risk of
forfeiture within the meaning of section 457(f)(3)(B), and (ii) an additional $5,000 of
earnings on the previously paid remuneration ($110,000) on December 31, 2021.
2022 (earnings). For 2022, R pays E $5,000 of remuneration, the additional earnings
on the previously paid remuneration ($115,000) as of December 31, 2022.
2023 (losses). For 2023, R pays no remuneration to E since the vested present value
of the previously paid remuneration ($120,000) declines to $100,000 as of December
31, 2023. The $20,000 loss for 2023 does not reduce any amount previously treated as
remuneration but is available for carry over to future taxable years.
53
2024 (recovery of losses through earnings). For 2024, R pays no remuneration to E,
since the vested present value of the previously paid remuneration ($120,000) was
$110,000 as of December 31, 2024. Due to earnings on the account balance, R
recovers $10,000 of the $20,000 of losses carried over from 2023. The net losses as of
December 31, 2024, are $10,000, and none of the $10,000 in earnings during 2024 is
remuneration paid in 2024.
2025 (no recovery of losses against additional deferrals of compensation). For 2025, R
pays E $10,000 of remuneration to E
0,000 as of December 31, 2024. Due to earnings on the account balance, R
recovers $10,000 of the $20,000 of losses carried over from 2023. The net losses as of
December 31, 2024, are $10,000, and none of the $10,000 in earnings during 2024 is
remuneration paid in 2024.
2025 (no recovery of losses against additional deferrals of compensation). For 2025, R
pays E $10,000 of remuneration to E. The additional $10,000 deferral is not subject to
a substantial risk of forfeiture within the meaning of section 457(f)(3)(B), and thus is
remuneration paid on the date deferred. This deferral increases the amount previously
treated as remuneration from $120,000 to $130,000. Additionally, due to earnings on
the account balance, R recovers $5,000 of losses of the $10,000 of losses carried over
from 2024, none of which was remuneration for 2025, so that the net losses as of
December 31, 2025 is $5,000.
2026 (distributions, recovery of remainder of losses through earnings and additional
earnings). For 2026, R pays E $15,000 in remuneration. The vested present value of
the account balance increases by $20,000 to $135,000 as of December 31, 2026.
Therefore, due to earnings on the account balance, R recovers the remaining $5,000 of
losses carried over from 2025 and pays E an additional $15,000 of remuneration as
earnings. The $10,000 distribution reduces the amount of previously paid remuneration
($130,000) to $120,000, and the additional remuneration paid in 2026 increases the
amount of previously paid remuneration by $15,000 to $135,000.
Example 2. F is a covered employee of S, an ATEO, and is also employed by
corporation C, a related organization. S and C are calendar year taxpayers. On
January 1, 2018, C and F enter into an agreement under which C will pay F $100,000
on December 31, 2021, if F remains employed by C through January 1, 2020. F
remains employed by C through January 1, 2020
muneration by $15,000 to $135,000.
Example 2. F is a covered employee of S, an ATEO, and is also employed by
corporation C, a related organization. S and C are calendar year taxpayers. On
January 1, 2018, C and F enter into an agreement under which C will pay F $100,000
on December 31, 2021, if F remains employed by C through January 1, 2020. F
remains employed by C through January 1, 2020. On January 1, 2020, the present
value based on reasonable actuarial assumptions of the $100,000 to be paid on
December 31, 2021 is $75,000. On December 31, 2020, the vested present value
increases to $85,000 due solely to the passage of time. On December 31, 2021, C
pays F $100,000.
2018 and 2019. For 2018 and 2019, C pays F no remuneration because the amount
deferred under the plan remains subject to a substantial risk of forfeiture within the
meaning of section 457(f)(3)(B).
2020. For 2020, C pays F $75,000 in remuneration on January 1, 2020, which is the
vested present value of $100,000 payable on December 31, 2021. In addition C pays F
an additional $10,000 in remuneration on December 31, 2020 as earnings based on the
increase in the vested present value of the previously paid remuneration ($75,000) to
$85,000 as of December 31, 2020.
54
2021. For 2021, C pays R $15,000 in additional remuneration and distributes $100,000
of previously paid remuneration. The $100,000 distribution is treated as reducing the
amount of previously paid remuneration ($85,000) to zero, and the remaining $15,000 is
a payment of earnings.
Example 3. G is a covered employee of T, an ATEO that uses a calendar year taxable
year. G participates in a nonqualified deferred compensation plan in which the account
balance is adjusted based on the investment returns on predetermined actual
investments chosen by the employee. All amounts credited under the plan are vested
when credited. On December 31, 2017, T credits $100,000 to G’s account and the
closing account balance is $100,000
hat uses a calendar year taxable
year. G participates in a nonqualified deferred compensation plan in which the account
balance is adjusted based on the investment returns on predetermined actual
investments chosen by the employee. All amounts credited under the plan are vested
when credited. On December 31, 2017, T credits $100,000 to G’s account and the
closing account balance is $100,000. On June 30, 2018, T credits $50,000 to G’s
account. On December 31, 2018, T credits $50,000 to G’s account and the closing
account balance is $210,000.
2017. T is a calendar year taxpayer, so the present value of all remuneration in which
G was vested but that was not actually or constructively paid to G as of December 31,
2017, ($100,000) is treated as paid for 2017 and is not subject to excise tax under
section 4960.
2018. For 2018, T pays G $110,000 of remuneration, including $50,000 credited to G’s
account on June 30 and $50,000 credited on December 31 (totaling $100,000), plus
$10,000 in remuneration as earnings, as the vested present value of the $200,000 of
previously paid remuneration ($100,000 as of December 31, 2017 + $100,000 in 2018)
increases to $210,000 as of December 31 2018.
Example 4. Assume the same facts as Example 3, except that T uses a non-calendar
year taxable year that begins on July 1 and ends on June 30. The closing account
balance on June 30, 2018 is $155,000.
Amounts paid through June 30, 2018. T is a non-calendar year taxpayer, so the
present value of all remuneration in which G is vested but that is not actually or
constructively paid as of the close of the first taxable year ending after December 31,
2017 (June 30, 2018) ($155,000) is treated as paid for that year and is not subject to
excise tax under section 4960.
Amounts paid from July 1 through December 31, 2018
ne 30, 2018. T is a non-calendar year taxpayer, so the
present value of all remuneration in which G is vested but that is not actually or
constructively paid as of the close of the first taxable year ending after December 31,
2017 (June 30, 2018) ($155,000) is treated as paid for that year and is not subject to
excise tax under section 4960.
Amounts paid from July 1 through December 31, 2018. For the taxable year ending
June 30, 2019, T pays G $55,000 in remuneration, including $50,000 credited to G’s
account on December 31, 2018, plus $5,000 in remuneration as earnings, as the
previously paid remuneration ($155,000 as of June 30, 2018 + $50,000 credited on
December 31, 2018) increases to $210,000 as of December 31, 2018.
Example 5. H is an employee of U, an ATEO that uses a calendar year taxable year.
H participates in a nonqualified deferred compensation plan in which the account
balance is adjusted based on the investment returns on predetermined actual
investments chosen by the employee. All amounts credited under the plan are vested
when credited. On January 1, 2018, U credits $100,000 to H’s account under the plan.
On December 31, 2018, the closing account balance is $105,000. On January 1, 2019,
55
U credits $100,000 to H’s account. On December 31, 2019, the closing account
balance is $210,000. H becomes a covered employee of U for U’s taxable year ending
December 31, 2019.
2018 (remuneration paid before becoming a covered employee). Remuneration that is
vested as of the last day of the calendar year preceding the calendar year for which the
employee becomes a covered employee is not subject to excise tax under section 4960.
Thus, H’s vested account balance on December 31, 2018 ($105,000) is not subject to
excise tax under section 4960.
2019 (remuneration in the year an employee becomes a covered employee)
employee). Remuneration that is
vested as of the last day of the calendar year preceding the calendar year for which the
employee becomes a covered employee is not subject to excise tax under section 4960.
Thus, H’s vested account balance on December 31, 2018 ($105,000) is not subject to
excise tax under section 4960.
2019 (remuneration in the year an employee becomes a covered employee). For the
taxable year ending December 31, 2019, U pays H $105,000 of remuneration, including
the $100,000 credited to H’s account on January 1, 2019, plus $5,000 in net earnings in
2019, the amount by which the vested account balance at the close of the calendar year
($210,000) exceeds the amount of previously paid remuneration ($205,000, consisting
of $105,000 as of December 31, 2018 + $100,000 paid on January 1, 2019).
Example 6. J is a covered employee of T, an ATEO that uses a calendar year taxable
year. J participates in a nonqualified deferred compensation plan under which T agrees
to pay J $100,000 two months after the date a specified performance goal that is a
substantial risk of forfeiture within the meaning of section 457(f)(3)(B) is satisfied. J
satisfies the performance goal on November 30, 2019. T elects to treat the amount to
be paid as the present value of the amount at vesting.
Election to treat amount payable within 90 days treated as paid at vesting. For taxable
year 2019, T pays J $100,000 of remuneration. J vests in the $100,000 amount in 2019
upon meeting the performance goal. Under the general rule, T would be required to
treat the present value as of November 30, 2019 of $100,000 payable in 2020 (two
months after the performance goal was met) as paid in 2019, the difference between
that amount and the present value as of December 31, 2019 as earnings for 2019, and
any difference between the sum of the two present values and $100,000 as earnings for
2020
ce goal. Under the general rule, T would be required to
treat the present value as of November 30, 2019 of $100,000 payable in 2020 (two
months after the performance goal was met) as paid in 2019, the difference between
that amount and the present value as of December 31, 2019 as earnings for 2019, and
any difference between the sum of the two present values and $100,000 as earnings for
2020. However, because T elected to treat the amount of remuneration payable within
90 days of vesting as paid at vesting in 2019, the $100,000 payable to J in 2020 is
treated as remuneration paid in 2019 for purposes of section 4960(a)(1).
Q–14: How is liability for the section 4960(a)(1) excise tax determined if
remuneration is paid to a covered employee by both an applicable tax-exempt
organization and a related organization?
A–14: (a) In general. As provided in section 4960(c)(4)(C), in any case in which an
ATEO includes remuneration from one or more other employers of a covered employee
that are related organizations in determining the excise tax imposed by section
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4960(a)(1), each employer is liable for the excise tax in an amount that bears the same
ratio to the total excise tax determined with respect to the remuneration as–
(1) the amount of remuneration paid by the employer with respect to that
employee, bears to
(2) the amount of remuneration paid by all the employers to that employee.
(b) Calculation of excise tax involving multiple related organizations. Each ATEO
calculates liability for the excise tax under section 4960(a)(1) with respect to a covered
employee by including remuneration paid by the ATEO and any related organization
that employs the covered employee and then allocating that excise tax liability among
each of the employers. However, the ATEO may also be liable for the excise tax under
section 4960(a)(1) as a related organization with respect to another ATEO that
calculates the excise tax for its own covered employees
covered
employee by including remuneration paid by the ATEO and any related organization
that employs the covered employee and then allocating that excise tax liability among
each of the employers. However, the ATEO may also be liable for the excise tax under
section 4960(a)(1) as a related organization with respect to another ATEO that
calculates the excise tax for its own covered employees. If an employer is liable for the
excise tax under section 4960(a)(1) as an ATEO and as a related organization for the
same remuneration to a covered employee, the employer is not liable for the excise tax
in both capacities; rather it is liable for the greater of the excise tax it would owe as an
ATEO or the excise tax it would owe as a related organization with respect to that
covered employee.
In order to calculate liability under this provision, an ATEO should take the
following steps:
(1) calculate remuneration paid (other than any excess parachute payment) for
each of its covered employees, including remuneration from any related organization (if
remuneration for any covered employee calculated in this step (1) is more than $1
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million, then the remuneration over $1 million is subject to the excise tax under section
4960(a)(1) at the rate of tax under section 11);
(2) calculate the share of liability for each employer that employs the covered
employee that was included in step (1) as a fraction of the total excise tax liability that
bears the same ratio to the total excise tax as the amount of remuneration paid by the
employer bears to the total remuneration calculated in step (1);
(3) inform any related organization of its share of liability calculated in step (2);
the share of liability for each employer that employs the covered
employee that was included in step (1) as a fraction of the total excise tax liability that
bears the same ratio to the total excise tax as the amount of remuneration paid by the
employer bears to the total remuneration calculated in step (1);
(3) inform any related organization of its share of liability calculated in step (2);
(4) obtain information on the ATEO’s share of liability as a related organization
for any covered employee of another ATEO. If the ATEO is a related organization to
more than one other ATEO, treat the ATEO’s highest share of liability as a related
organization as its liability as a related organization for the covered employee; and
(5) compare the ATEO’s liability as an ATEO in step (2) to its share of liability as
a related organization under step (4) for each of the ATEO’s covered employees. The
ATEO reports the greater of the share calculated under step (4) or the share calculated
under step (2) (or the share calculated under step (2) if they are the same) as the
ATEO’s share of liability for remuneration paid to the covered employee.
(c) Change in related status during the year. If an employer becomes or ceases
to be a related organization with respect to an ATEO during the calendar year ending
with or within the ATEO’s taxable year, then only the remuneration paid by the related
organization to a covered employee with respect to services performed during that
portion of the calendar year that the employer is a related organization is included for
purposes of calculating liability for the excise tax under section 4960(a)(1). Thus, only
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remuneration that vests while the employer is a related organization with regard to the
ATEO is taken into account for purposes of section 4960.
ered employee with respect to services performed during that
portion of the calendar year that the employer is a related organization is included for
purposes of calculating liability for the excise tax under section 4960(a)(1). Thus, only
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remuneration that vests while the employer is a related organization with regard to the
ATEO is taken into account for purposes of section 4960.
(d) Examples. The following examples illustrate the rules of this Q/A–14.
Assume for purposes of these examples that the rate of excise tax under section 4960
is 21 percent.
Example 1. F and G are each ATEOs; G is a related organization with respect to F. E
is a covered employee of both F and G. F pays E $1.2 million of remuneration, and G
pays E $800,000 of remuneration for a total of $2 million of remuneration, and $1 million
of excess remuneration. The total excise tax is $210,000 (21 percent of the $1 million
excess remuneration). F paid 3/5 of E’s total remuneration ($1.2 million / $2 million);
thus, F is liable for 3/5 of the excise tax, which is $126,000. G is liable for 2/5 of the
excise tax, which is $84,000.
Example 2. H, I, and J are each ATEOs. J owns 60 percent of the stock of Corporation
K. Sixty percent of I’s directors are representatives of H. In addition, 60 percent of J’s
directors are representatives of I. Employee L is a covered employee of H, I, and J. H,
I, J, and K each pay Employee L $1.2 million per year. Under the rules described in
Q/A–7 and Q/A–8, I determines that its related organizations are H and J. H determines
that its related organization is I. J determines that its related organizations are I and K.
ATEO I. Under I’s calculation as an ATEO, Employee L receives a total of $3.6 million
in remuneration from H, I, and J (3 x $1.2 million). The total excise tax is $546,000 (21
percent of the $2.6 million excess remuneration)
A–8, I determines that its related organizations are H and J. H determines
that its related organization is I. J determines that its related organizations are I and K.
ATEO I. Under I’s calculation as an ATEO, Employee L receives a total of $3.6 million
in remuneration from H, I, and J (3 x $1.2 million). The total excise tax is $546,000 (21
percent of the $2.6 million excess remuneration). H, I, and J each paid 1/3 of the total
remuneration to Employee L ($1.2 million / $3.6 million); thus, H, I, and J are each liable
for 1/3 of the excise tax, which is $182,000.
ATEO H. Under H’s calculation as an ATEO, Employee L receives a total of $2.4
million in remuneration from H and I (2 x $1.2 million). The total excise tax is $294,000
(21 percent of the $1,400,000 excess remuneration). H and I each paid 1/2 of the total
remuneration to Employee L ($1.2 million / $2.4 million); thus, H and I are each liable for
1/2 of the excise tax, which is $147,000.
ATEO J. Under J’s calculation as an ATEO, L receives a total of $3.6 million in
remuneration from I, J, and K (3 x $1.2 million). The total excise tax is $546,000 (21
percent of the $2.6 million excess remuneration). I, J, and K each paid 1/3 of the total
remuneration to Employee L ($1.2 million / $3.6 million); thus, I, J, and K are each liable
for 1/3 of the excise tax, which is $182,000.
Liability of H, I, J, and K. I is liable as a related organization for $147,000 of excise tax
according to H’s calculation and $182,000 according to J’s calculation, but under I’s
calculation, I is liable for $182,000 of excise tax. Thus, I’s excise tax liability is
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$182,000. H is liable for $182,000 of excise tax under I’s calculation, which is greater
than the $147,000 of excise tax H calculated under H’s calculation. Thus, H’s excise
tax liability is $182,000. J is liable as a related organization for $182,000 of excise tax
under I’s calculation, but is liable for $182,000 of excise tax under J’s calculation
us, I’s excise tax liability is
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$182,000. H is liable for $182,000 of excise tax under I’s calculation, which is greater
than the $147,000 of excise tax H calculated under H’s calculation. Thus, H’s excise
tax liability is $182,000. J is liable as a related organization for $182,000 of excise tax
under I’s calculation, but is liable for $182,000 of excise tax under J’s calculation. Thus,
J’s excise tax liability is $182,000. K is liable as a related organization for $182,000 of
excise tax according to J’s calculation.
E. Medical and Veterinary Services
Q–15: How is remuneration for medical services treated under section 4960?
A–15: (a) In general. Remuneration paid to a licensed medical professional for the
direct performance of medical services (including nursing services) or veterinary
services by the professional is not remuneration for purposes of calculating the excess
remuneration (if any) subject to the excise tax. However, remuneration paid to the
professional for any other services, including administrative and management services
associated with the performance of medical or veterinary services, is remuneration for
purposes of calculating the excess remuneration (if any) subject to the excise tax.
Remuneration for medical services is also disregarded for purposes of determining
whether an individual is a covered employee and for purposes of determining whether a
payment is a parachute payment.
(b) Licensed medical professional. A licensed medical professional is an
individual who is licensed under state or local law to perform medical services (including
nursing services) or veterinary services.
or medical services is also disregarded for purposes of determining
whether an individual is a covered employee and for purposes of determining whether a
payment is a parachute payment.
(b) Licensed medical professional. A licensed medical professional is an
individual who is licensed under state or local law to perform medical services (including
nursing services) or veterinary services.
(c) Medical and veterinary services. A licensed medical professional directly
performs medical services to the extent that the services constitute “medical care” as
defined in section 213(d)(1)(A) and the regulations thereunder. Thus, medical services
are services for the diagnosis, cure, mitigation, treatment, or prevention of disease,
including services for the purpose of affecting any structure or function of the body. For
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example, teaching or research services are not medical services to the extent the
services performed do not relate directly to the diagnosis, cure, mitigation, treatment, or
prevention of disease or affect a structure or function of the body. For purposes of
section 4960, documenting the care and condition of a patient is part of the direct
performance of medical services, as is accompanying another licensed professional as
a supervisor while that medical professional performs medical services. But managing
an organization’s operations, including scheduling, staffing, appraisal, and other similar
functions that may relate to a particular medical professional or professionals who
perform medical services, is not the performance of medical services. With respect to
veterinary services, the rules in this paragraph apply by analogy to determine whether
services performed with respect to an animal are veterinary services.
tions, including scheduling, staffing, appraisal, and other similar
functions that may relate to a particular medical professional or professionals who
perform medical services, is not the performance of medical services. With respect to
veterinary services, the rules in this paragraph apply by analogy to determine whether
services performed with respect to an animal are veterinary services.
(d) Allocation. If during a calendar year an employer pays a covered employee
remuneration for both medical services and other services, the employer must make a
reasonable, good faith allocation between remuneration for medical services and other
services. For example, if a medical doctor receives remuneration for both medical
services and for administrative or management services, the employer must make a
reasonable allocation between remuneration for the medical services and remuneration
for the administrative or management services. For this purpose, if an employment
agreement or similar written arrangement sets forth the remuneration to be paid for
particular services, that allocation of remuneration must be applied unless the facts and
circumstances demonstrate that the amount allocated for medical services is
unreasonable for those services or that the allocation was established for purposes of
avoiding application of the excise tax under section 4960. If some or all of the
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remuneration is not reasonably allocated in an employment or other agreement, an
employer may use any reasonable allocation method. For example, an employer may
use a representative sample of records, such as patient, insurance, and
Medicare/Medicaid billing records or internal time reporting mechanisms to determine
the time spent providing medical services, and then allocate remuneration to medical
services in the proportion such time bears to the total hours the covered employee
worked for the employer for purposes of making a reasonable allocation of
remuneration
tive sample of records, such as patient, insurance, and
Medicare/Medicaid billing records or internal time reporting mechanisms to determine
the time spent providing medical services, and then allocate remuneration to medical
services in the proportion such time bears to the total hours the covered employee
worked for the employer for purposes of making a reasonable allocation of
remuneration. Similarly, if some or all of the remuneration is not reasonably allocated in
an employment or other agreement, an employer may use salaries or other
remuneration for duties comparable to those the employee performs (for example,
hospital administrator and physician) for purposes of making a reasonable allocation
between remuneration for medical services and nonmedical services. These same
allocation rules also apply with respect to veterinary services.
(e) Examples. The following examples illustrate the rules of this Q/A–15.
Assume for purposes of these examples that there is no employment agreement or
similar written arrangement allocating remuneration to any particular services.
Example 1. H is a hospital and is an ATEO. A is a covered employee of H. A provides
patient care services to H and also provides management and administrative services to
H as the head of a medical practice group within H. Based on a representative sample
of insurance and Medicare billing records, as well as time reports that A submits to H, H
determines that A spends half of her time providing medical care to patients and half of
her time performing administrative and management services in her capacity as head of
the practice group. H allocates half of A’s remuneration to medical services. H’s
allocation of A’s remuneration is a reasonable, good faith allocation. Accordingly, only
the portion of A’s remuneration allocated to the other, non-medical services is
remuneration for purposes of the excise tax.
Example 2. R is a medical research organization and is an ATEO. B is a covered
employee of R
the practice group. H allocates half of A’s remuneration to medical services. H’s
allocation of A’s remuneration is a reasonable, good faith allocation. Accordingly, only
the portion of A’s remuneration allocated to the other, non-medical services is
remuneration for purposes of the excise tax.
Example 2. R is a medical research organization and is an ATEO. B is a covered
employee of R. B is employed to work on a research trial. B provides an experimental
treatment to patients afflicted by a disease. B tracks the patients' individual conditions
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in a manner that occurs ordinarily in a medical practice. As part of the research trial, B
also compiles the patients' records on their individual conditions and prepares reports
detailing both individual and overall results. These reports are not ordinarily prepared
for patients or provided to patients in a medical practice. Although the primary purpose
of B’s activities is research, B is treating a patient’s disease within the meaning of
section 213(d) when B performs services that are ordinarily performed in a medical
practice, and, thus, these services are medical services for purposes of section 4960.
Accordingly, any remuneration allocable to the medical services is not remuneration for
purposes of the excise tax. However, B does not directly perform medical services to
the extent B performs research services that are not ordinarily performed in a medical
practice; accordingly, any remuneration allocable to those services is remuneration for
purposes of section 4960.
Example 3. C is a medical doctor who is employed by a university hospital that is an
ATEO. C’s duties include overseeing and teaching a group of resident physicians who
have a restricted license to practice medicine. C’s duties include supervising and
instructing the resident physicians while they treat patients. C’s other duties include
instructing the resident physicians in a classroom setting
e 3. C is a medical doctor who is employed by a university hospital that is an
ATEO. C’s duties include overseeing and teaching a group of resident physicians who
have a restricted license to practice medicine. C’s duties include supervising and
instructing the resident physicians while they treat patients. C’s other duties include
instructing the resident physicians in a classroom setting. To the extent that C, in
conjunction with the resident physicians, performs services directly related to the
diagnosis, cure, mitigation, treatment or prevention of a patient’s disease, or affecting a
structure or function of the patient's body, those services constitute “medical care” for
purposes of section 213(d), and, thus, C directly performs medical services.
Accordingly, any remuneration allocable to those medical services is not remuneration
for purposes of the excise tax. However, because classroom instruction does not
involve actual patient treatment, those activities are not medical care for purposes of
section 213(d), and, thus, do not constitute the direct performance of medical services.
Accordingly, any remuneration allocable to those services is remuneration for purposes
of section 4960.
F. Excess Parachute Payments
Q–16: What is an excess parachute payment under section 4960(c)(5)(A)?
A–16: The term “excess parachute payment” means an amount equal to the excess (if
any) of the total amount of any parachute payment over the portion of the base amount
allocated to such payment.
Q–17: What is a parachute payment under section 4960(c)(5)(B)?
A–17: (a) In general. The term “parachute payment” means any payment in the nature
of compensation made by an ATEO (or a predecessor organization of the ATEO) or a
related organization to (or for the benefit of) a covered employee if–
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(1) the payment is contingent on the employee's separation from employment
with the employer; and
s a parachute payment under section 4960(c)(5)(B)?
A–17: (a) In general. The term “parachute payment” means any payment in the nature
of compensation made by an ATEO (or a predecessor organization of the ATEO) or a
related organization to (or for the benefit of) a covered employee if–
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(1) the payment is contingent on the employee's separation from employment
with the employer; and
(2) 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 three times the base amount.
(b) Exclusions. The term “parachute payment” does not include any payment:
(1) to or from a plan described in section 401(a) that includes a trust exempt from tax
under section 501(a), an annuity plan described in section 403(a), a simplified employee
pension (as defined in section 408(k)), or a simple retirement account described in
section 408(p);
(2) made under or to an annuity contract described in section 403(b) or a plan
described in section 457(b);
(3) made to a licensed medical professional (including a veterinarian) for the
performance of medical or veterinary services performed by such professional; or
(4) made to an individual who is not a highly compensated employee as defined
in section 414(q). See generally Treas. Reg. § 1.414(q)-1T. Under Treas. Reg.
§ 1.414(q)-1T, Q/A-14(a)(1), for purposes of determining the group of highly
compensated employees for a determination year, the determination year calculation is
made on the basis of the applicable year of the plan or other entity for which a
determination is made and the look-back year calculation is made on the basis of the
twelve month period immediately preceding that year. An ATEO that maintains a
qualified retirement plan should have already identified the employees who are HCEs
for purposes of the plan and the same individuals are HCEs for purposes of section
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4960
able year of the plan or other entity for which a
determination is made and the look-back year calculation is made on the basis of the
twelve month period immediately preceding that year. An ATEO that maintains a
qualified retirement plan should have already identified the employees who are HCEs
for purposes of the plan and the same individuals are HCEs for purposes of section
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4960. For an ATEO that does not maintain a qualified retirement plan, the rules are
applied by analogy, substituting the calendar year for the plan year. Accordingly, in
2019, for an ATEO that does not maintain a qualified retirement plan, the ATEO would
use the employees’ 2018 annual compensation (as defined in Tre
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