Tax Reform Act Impacts Cooperatives, Part III: Executive Compensation

Part III of the series on the impact of tax reform on cooperatives continues the prior part’s focus on tax-exempt organizations, including Section 501(c)(12) electric, telephone, and telecommunications cooperatives.  This part discusses a tax imposed on excess executive compensation.

On December 22, 2017, Congress’ new tax reform bill became law as Public Law 115-97 (the “Act”).  The Act substantially amends the Internal Revenue Code including provisions that directly impact cooperatives.

The Act added new Section 4960, which imposes a tax on remuneration paid by a tax-exempt organization in excess of $1,000,000.   The new tax applies to tax years beginning after December 31, 2017.

  • Applicable Tax-Exempt Organizations

The new tax applies to organizations that are exempt under Section 501(a), exempt farmers’ cooperatives, and other organizations.  The tax is imposed on the employer of the applicable employee.

  • Applicable Employees

The new tax applies to remuneration paid to “covered employees,” which include the top 5 highest compensated employees for the current tax year or any prior tax year after 2016.

  • Applicable Compensation

For purposes of the new tax, “remuneration” includes wages and deferred compensation deemed taxable under Section 457(f) (due to the absence of a substantial risk of forfeiture).  It does not include designated Roth contributions.

“Remuneration” also includes the foregoing amounts received from related organizations, using some of the same definitions used with Form 990.  The tax is allocated among employers in proportion to their contribution to the total remuneration.

“Remuneration” excludes compensation which the employer cannot deduct due to Section 162(m).   It also does not include excess parachutes payments, as they are separately addressed (below).

  • Excess Parachute Payments

In addition to excess remunerations, the new tax applies to “excess parachute payments.”  Such payments are compensation that is contingent upon separation from employment, but only to the extent the present value of payments exceed a base compensation amount.  The term does not include amounts paid under certain qualified and other plans.

Read the prior parts of this series on the tax reform law.

Read more Cooperative Tax posts.

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