The Tax Cuts and Jobs Act added Section 4960 to the Internal Revenue Code, which imposes an excise tax on remuneration paid to certain highly compensated employees of tax-exempt organizations. The excise tax rate is equal to the corporate tax rate (currently 21%) and applies to remuneration in excess of $1 million and any excess parachute payments made to covered employees. The group of covered employees includes the five highest compensated employees for the current taxable year and anyone who was a covered employee in any prior taxable year beginning after December 31, 2016.
The Internal Revenue Service recently released Notice 2019-9, which provides certain important clarifications that tax-exempt hospital systems should take note of:
- Amounts paid for the performance of medical services by a licensed medical professional are excluded from the definition of remuneration subject to the excise tax. If a covered employee is compensated for both medical and non-medical services, the employer must use a reasonable, good faith method of allocating remuneration between medical and other services. For example, an employer may use a reasonable allocation method set forth in a covered employee's employment agreement, or it may look to billing or time reports to determine what portion of compensation is excluded from covered remuneration.
- Each tax-exempt organization subject to Code Section 4960 must separately determine its group of covered employees. As a result, a hospital system comprised of multiple tax-exempt organizations will likely have more than five covered employees.
- Remuneration paid to a covered employee includes amounts paid to the employee for employment with any related organization, including a related taxable organization. Any excise tax owed is allocated among the covered employee's employers.
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