Internal Revenue Code (IRC) Section 4960, part of 2017 tax reform legislation, imposes an excise tax on applicable tax-exempt organizations (ATEOs) for compensation to an employee covered for over $1 million. The excise tax also applies to any excess parachute payments that are more than three times the employee’s base salary.
The IRS released final regulations in January 2021 addressing the applicability of an excise tax to certain federal instrumentalities. These regulations provide that the excise tax doesn’t apply to federal instrumentalities with enabling acts that exempt them from current and future federal taxes.
The IRS hasn’t offered different guidance for federally chartered credit unions but has stated that it’ll consider additional guidance in the future.
In an IRS notice and earlier proposed regulations, the Department of the Treasury and the IRS considered federal instrumentalities described in IRC Section 501(c)(1), Corporations Organized Under Act of Congress, to be subject to the excise tax. Federal credit unions are described in IRC Section 501(c)(1) as they were established under the Federal Credit Union Act of 1934.
Other examples of federal instrumentalities include federal agencies, such as the Federal National Mortgage Association. Federal instrumentalities are exempt from current and future federal income and excise taxes.
Commenters to the earlier guidance requested clarification on whether federal instrumentalities would be subject to the excise tax. The final regulations, however, didn’t specifically address this issue, although sections of the final regulations were reserved for future rules to address federal instrumentalities.
Until that further guidance is released, the final regulations state that federal instrumentalities, for which their enabling acts provide for exemption from current and future federal income and excise taxes, wouldn’t be subjected to the IRC Section 4960 excise tax as an ATEO or related organization.
Account for Total Compensation
If a federal instrumentality is a related organization to an ATEO, any remuneration the federal instrumentality pays must be considered by the ATEO in determining if its employees are subject to the excise tax.
For example, an ATEO pays $700,000 to an employee and a related federal instrumentality pays $500,000 to the same employee. The ATEO, when considering if the employee’s compensation is subject to the tax, would use the total remuneration amount of $1.2 million.
Before the final regulations, some federal credit unions may have filed Form 4720 to pay excise tax on excess compensation. Any such federally chartered credit unions should explore the possibility of amending the Form 4720 to request refunds.
We’re Here to Help
If you have questions about the IRC Section 4960 excise tax or believe your federal credit union erroneously paid excise tax on excess compensation, please contact your Moss Adams professional.
You can also visit our Credit Union Practice for more resources.