The partial federal government shutdown, which includes the U.S. Department of Treasury and the Internal Revenue Service (IRS), did not stop the IRS from issuing interim guidance on compensation of nonprofit employees and when an organization can get hit with penalties.
The interim guidance targets Section 4960(a) of the Internal Revenue Service Code. The IRS will accept comments on the guidance through April 2, 2019. The 92-page guidance can be found at https://www.irs.gov/pub/irs-drop/n-19-09.pdf
The limitation used in the definition of highly compensated employee is adjusted for inflation. For 2019, the limitation is $125,000, according to the interim guidance. For each covered employee, excess remuneration is the excess for a taxable year it is paid, including remuneration paid by a related organization, of more than $1 million for the taxable year.
A payment to the employer’s employee from a third-party payor (including a payroll agent, common paymaster, statutory employer, or certified professional employer organization) or from an unrelated management company, is considered a payment to the employee from the employer. Also, a payment to the employee from a related entity, including one that is an applicable tax-exempt organization (ATEO), for services rendered to the employer, is considered a payment to the employee for calculating remuneration and determining liability for the excise tax.
An ATEO that does not pay compensation 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.
The tax code 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 year beginning after December 31, 2016.” Therefore, once an employee is a covered employee, the person 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. An employee need not be paid excess remuneration or an excess parachute payment nor be a highly compensated employee to be a covered employee for a taxable year and all future years.
The tax code describes a parachute payment as “an amount equal to the excess of any parachute payment over the portion of the base amount allocated to such payment.” It also describes a situation where a “parachute payment” means any payment of compensation to (or for the benefit of) a covered employee if the payment is contingent on the employee’s separation from the employer, and 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.
The IRS provides guidance on parachute payments in a separate publication found at https://www.irs.gov/pub/irs-utl/goldenparachuteatg.pdf Public comments will be accepted until April 2, 2019.
Comments may be submitted electronically via the Federal eRulemaking Portal at www.regulations.gov. Submissions can also be sent to CC:PA:LPD:PR (Notice 2018-XX), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044. Submissions also may be hand delivered Monday through Friday between 8 a.m. and 4 p.m. to CC:PA:LPD:PR (Notice 2018-88), Courier’s Desk, Internal Revenue Service, 1111 Constitution Ave., NW, Washington, D.C. 20044. All recommendations for guidance submitted by the public in response to the notice will be available for public inspection and copying in their entirety.