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IRS Releases Proposed Rule on Executive Compensation for Tax-Exempt Organizations; Relief for Certain Employees Who Volunteer

On June 11, 2020, the IRS published a proposed rule under Section 4960 of the Internal Revenue Code (the “Code”), which was added to the Code by Section 13602 of the Tax Cuts and Jobs Act. Under Section 4960 of the Code, during a taxable year, an applicable tax-exempt organization (“ATEO”) that pays to certain of its highest compensated employees remuneration in excess of $1,000,000 or any excess parachute payments would be subject to a 21% excise tax on the excess remuneration and excess parachute payments. Prior to the proposed rule, the IRS issued Notice 2019-09, which provided interim guidance on Section 4960. The proposed rule generally incorporates the guidance in Notice 2019-09. However, in response to comments received on Notice 2019-09, the proposed rule makes certain modifications and clarifications to the initial guidance. Notably, the proposed rule includes an exception so that employees of a related non-ATEO who provide services as employees of an ATEO are not treated as one of the highest compensated employees of the ATEO, provided that certain conditions related to the employees’ remuneration or hours of service are met. The proposed rule will apply to taxable years beginning on or after the date the final regulations are published in the Federal Register. Until the effective date of the final regulations, taxpayers may rely either on the earlier guidance provided in Notice 2019-09 or, alternatively, on the guidance provided in the proposed rule.

The proposed rule is available here.

The lawyers of our Employee Benefits and Executive Compensation Practice Group are readily able to assist companies on a nationwide basis with implementing sophisticated benefit plans and providing answers to their most challenging compensation issues. Additionally, our lawyers are well aware of the daily employee benefits challenges facing companies of all sizes and are capable of helping in-house lawyers and human resources personnel with the day-to-day advice and guidance necessary to properly administer employee benefits plans.

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