When it comes to tax reform, there’s always more than one side to the story. Dozens of American corporations are making headlines, sharing the wealth created when the Tax Cuts and Jobs Act left them with unexpected windfalls. Some organizations are distributing one-time bonuses to their employees, and other companies are using the tax reduction as an opportunity to increase starting salaries, hand out raises, pay down debt, or augment company contributions to employee 401(k) plans.
Yet even as the Tax Cuts and Jobs Act is creating short-term gains for many organizations and generally simplifying recordkeeping and the filing of federal returns for millions of taxpayers, other organizations are in a very different position.
Specifically, nonprofits with highly compensated employees, such as colleges and universities with highly paid leadership or top-talent sports coaches, high-profile charities, and nongovernment nonprofit community hospitals are positioned to feel the burn of the new tax laws.
How Nonprofit Hospitals May be Impacted by Tax Reform
Included among the recent tax code modifications that can potentially affect nonprofit organizations are these changes:
- Each of the top 5 highest paid employees of any nonprofit face the prospect of a 21 percent excise tax on annual compensation above $1 million.
- Once an employee is covered by the law, he or she is always covered, even if his salary and benefits change in the future and would otherwise exclude him. This may expand the group far beyond 5 employees and thereby complicate an organization’s tracking and recordkeeping requirements.
According to the American Hospital Association, the US has 5534 registered hospitals, of which, 2849 are nongovernment not-for-profit community facilities. Approximately 16 percent of these hospitals, around 400 entities, have one or more employees that earn at least $1 million annually.
Consider the following example:
According to an article in HealthLeaders Media, (About 16% of Nonprofit Hospital Orgs Face New Excise Tax on Exec Pay), Kevin Brown, president and CEO of Piedmont Healthcare, Atlanta, earned more than $1.8 million in 2015. Piedmont Healthcare’s Chief Operating Officer, Gregory A. Hurst, earned more than $1.9 million in reportable compensation from the organization that same year. Steven Porter, editor at HealthLeaders Media, observed, “The 21% excise tax on those two pay checks alone would cost the system more than $350,000 per year moving forward.”
And Brown was quoted, saying, “With all of the other pressures we have on [us] from an organizational perspective, it’s another one that we’ll have to evaluate and determine, how do we navigate through it?”
Nonprofit Hospitals and Other Organizations Have Options When It Comes to Tax Reform
Nonprofit hospitals, universities, and other charitable organizations facing the challenges of the 21 percent excise tax on annual compensation are not without options. One consideration is to consolidate multiple organizations under one system; for example, dozens of separate nonprofit hospitals can elect to restructure as a single nonprofit entity. Instead of five-plus highly paid executives at each hospital, the restructured nonprofit has five-plus executives overall that are subject to the excise tax.
Like their for-profit counterparts, healthcare organizations and other nonprofits can greatly benefit by working with an experienced executive benefits advisory, modeling their outcomes and then strategically implementing changes to offset their tax burden.