IRS Issues Guidance for New Excise Tax on CU Executive Pay

IRS interim compliance guidance will not grandfather deferred compensation plans, which may require more credit unions to pay a new 21% federal excise tax for executives earning more than $1 million.

On December 31, the IRS finally issued a 92-page interim guidance document 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.

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, which also includes any lump-sum parachute or severance payments because of mergers or other circumstances and deferred compensation plans when they become vested.

Presumably, not many credit unions pay their executives a W2 base salary, plus incentives/bonuses and other compensation of more than $1 million. However, the 21% tax could be assessed against many more executives, particularly those who work for billion-dollar credit unions. When adding their total deferred compensation to their six-figure salaries, plus incentives/bonuses and other compensation, it could push them over the $1 million threshold.

A 2018 CU 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.

The tax payment is due on May 15.

In addition, form 4720 would be available to anyone who files a request via the Freedom of Information Act with the IRS.

Source: Credit Union Times