Tax on Excess Tax-Exempt Org. Executive Compensation

Present Law

Taxable employers and other service recipients generally may deduct reasonable compensation expenses. However, in some cases, compensation in excess of specific levels is not deductible. A publicly held corporation generally cannot deduct more than $1 million of compensation (that is not compensation otherwise excepted from this limit) in a taxable year for each “covered employee.” For this purpose, a covered employee is the corporation's principal executive officer (or an individual acting in such capacity) defined in reference to the Securities Exchange Act of 1934 (Exchange Act) as of the close of the taxable year, or any employee whose total compensation is required to be reported to shareholders under the Exchange Act by reason of being among the corporation's three most highly compensated officers for the taxable year (other than the principal executive officer or principal financial officer). Unless an exception applies, generally a corporation cannot deduct that portion of the aggregate present value of a “parachute payment” that equals or exceeds three times the “base amount” of certain service providers. The nondeductible excess is an “excess parachute payment” — a payment of compensation that is contingent on a change in corporate ownership or control made to certain officers, shareholders and highly compensated individuals. An individual's base amount is the average annualized compensation includible in the individual's gross income for the five taxable years ending before the date on which the change in ownership or control occurs. Certain amounts are not considered parachute payments, including payments under a qualified retirement plan, a welfare benefit plan payment actuarially determined to fund only through working life, a simplified employee pension plan, or a simple retirement account. Under Section 162(m)(6), limits apply to deductions for compensation of individuals performing services for certain health insurance providers. See, Notice 2007-49, IRB 2007-2 1429, IRC §§280G(a) and (b)(1) 280G(b)(2) and (c), 280G(b)(3) 401(a), 403(a), 408(k), and 408(p). These deduction limits generally did not affect a tax-exempt organization.