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Do Your Company’s Highly Compensated Employees Provide Services to Your Foundation?

Fulcrum Partners Deferred Compensation News

As Winston & Strawn Attorney, Michael Melbinger, observes in the Executive Compensation Blog, many companies and their top executives are still crossing their fingers that revisions are forthcoming to IRS Notice 2019-09. But as time slips by, the potential problems that could be created for publicly traded and for-profit companies become increasingly more disconcerting.

Read Mike’s commentary here, in entirety, as it relates to certain highly compensated employees:

Warning: Public and Other For-Profit Employers Could Become Subject to New 21% Excise Tax on Tax-Exempt Organizations

IRS Notice 2019-09 is the early leader for this year’s No Good Deed Goes Unpunished Award.

Now that the Notice has been out for several months, the potentially serious implications for publicly traded and other for-profit companies are becoming more worrisome. Although this Notice was published in January, we have not written about it previously because we believed that revision by IRS and the Treasury Department were certain to follow. We continue to believe that revisions are inevitable, but now want to provide a warning, just in case.

Section 4960, as amended by the Tax Cuts and Jobs Act of 2017, imposes a 21% excise tax on (i) the amount of compensation in excess of $1 million paid by an applicable tax-exempt organization (ATEO) to its five highest paid “covered employees” and (ii) any “excess parachute payments” made to a covered employee. Section 4960 was intended to put tax-exempt organizations on par with public company employers subject to Code Section 162(m) denial of deduction for compensation paid to covered employees over $1,000,000, and liability for so-called golden parachute payments under Section 280G.

“But Mike,” you say, “we are decidedly a for-profit corporation, not an ATEO.” Ah, but that is where Notice 2019-09 has the potential to poison the well. Under the Notice, all wages paid to the covered employees of the ATEO over $1,000,00 by any related organization, including taxable entities, is subject to the 21% excise tax. Code Section 4960 provides that an entity shall be treated as a related organization to an ATEO if the:

  • organizations that control or are controlled by the ATEO;
  • organizations that are controlled by one or more persons which control the ATEO; and
  • organizations that are a “supporting organization” or “supported organization” (as defined in Section 509(f)(3)) with respect to the organization.

Many companies and other for-profit organizations have established foundations for the benefit of their communities. These companies now could be at risk if they lend employees or otherwise provide employee services to the ATEO. If your company has a foundation, now might be a good time to determine whether any highly paid employees provide services to it. And then, cross your fingers.

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