Treasury and IRS Issue Interim Guidance on Executive Compensation Excise Tax; Impacts CU Executive Pay

On December 31, 2018, the Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) issued Notice 2019-09 providing comprehensive interim guidance under section 4960 of the Internal Revenue Code to assist tax exempt organizations to comply with the new excise tax that was part of the Tax Cuts and Jobs Act passed by Congress and signed into law by President Donald Trump in December 2017.

Most notably, Section 4960 disallows a deduction to publicly held corporations for remuneration in excess of $1 million paid to covered employees in a taxable year and disallows a deduction for excess parachute payments that are contingent on a change in the ownership or control of a company. 

Credit unions, including the industry’s national trade organizations, state leagues, and foundations, will be required to pay the 21% tax for executives who earn more than $1 million in total compensation under Section 4960, according to Credit Union Times. The $1 million also includes any lump-sum parachute or severance payments because of mergers or other circumstances and deferred compensation plans when they become vested.

A 2018 Credit Union Times review of CEO compensation at the 55 largest state-chartered credit unions in the nation showed that more than half of them — about 30 — could be paying the 21% excise tax. The review was based on IRS 990 documents filed by state-chartered credit unions that manage assets ranging from $2.3 billion to $37 billion. Presumably, the approximate same number of federal credit unions will be paying the new tax as well.

The excise tax will apply to the credit union’s five highest compensated executives.

While state-chartered credit unions will continue to report executive compensation in their annual IRS 990 documents, federal credit unions will be required to file IRS form 4720, schedule N.

On this form, federal credit unions will have to list the executive’s name and title, but only the amount in excess of $1 million will be required to be reported to the IRS.