The Society For Human Resources Management reported recently on some important news for HR professionals working in the non-profit sector, noting that the Department of the Treasury and the Internal Revenue Service (IRS) published a final rule on January 19th to help tax-exempt organizations comply with Section 4960 of the Internal Revenue Code (IRC), specifically the excise tax on ‘pay considered to be excessive.’
The excise tax specified in Section 4960 is levied on tax-exempt organizations that pay compensation of one million dollars or higher to any of the five highest-paid employees of the organization, which usually means the CEO or other C-suite executives. The rate mirrors the standard corporate tax rate, currently at 21 percent.
Among the key points addressed in the final rule for HR professionals to be aware of are the following items:
- No grandfathering – The excise tax applies to all compensation in taxable years beginning January 1, 2018. Despite requests from leaders in the non-profit sector, amounts paid before Section 4960 passed will not be grandfathered.
- Applicable organizations – The tax will apply to all organizations deemed tax-exempt under IRC Section 501(a).
- Deferred compensation – This compensation applies in the year in which it becomes vested.
- Pay from related organizations – The IRS rejected requests to loosen the aggregation rule in order to prevent abuse.
While there are differing opinions on this rule by HR professionals in the non-profit world, the final rule does provide some clarification.