Executive Benefits at Non-Profits after the Tax Cuts and Jobs Act

Effective for all taxable years beginning after Dec. 31, 2017, new Section 4960 imposes an excise tax on applicable tax-exempt organizations where the “remuneration” received by an employee (or former employee) that is one of the five highest compensated employees for any prior taxable year beginning after Dec. 31, 2016 exceeds certain amounts. For this purpose, remuneration includes amounts that become taxable under Section 457(f) upon a lapse of a substantial risk of forfeiture, but excludes amounts paid directly to certain medical professionals for performance of services. Amounts credited under qualified and welfare plans are not included in remuneration. The Section 4960 excise tax equals 21% of the sum of the remuneration exceeding $1M annually. These employers must now comply with the remuneration (compensation and benefits) ceiling for the highest compensated top five employees under §4960 and §162(m). Additionally, once an individual is labeled in that group they will remain in that group so the group may expand and the excise tax is annually applied.

The IRS issued final regulations in June 2016 that provide a roadmap for a successful solution to the excise tax conundrum. A solution applies an actuarially based methodology to provide benefits for selected non-profit executives on a tax-efficient basis. If you already have a plan in place, it is most likely a 457(f) plan for the executive, management and professional employees. This is not meant to replace a plan in existence, rather to compliment it as there are decided differences. Most significant for the participants is the opportunity to provide for their families, a pre-retirement death benefit without risks of forfeiture and with enormous flexibility. This is not an ERISA plan; it does not need a Trustee and the participant and plan sponsor will avoid the claims of creditors while providing for the participant's loved ones. Because this is not a qualified plan and it is not considered deferred compensation by the IRS, the plan can be self-funded and the benefit amounts can vary on a participant-by-participant basis. Because it follows the “top hat” rules, it does not require any form of ongoing or annual filings with any regulatory agencies.