Excise tax on Executive Comp at Tax-exempt Employers

Understanding and planning for the excise tax on executive compensation payable by tax-exempt organizations.

In the past decade or so, the competition for executive leadership talent in the tax-exempt sector of the United States economy has increased. Executives seldom begin and end their careers with the same organization any longer and there is increased competition for executive talent with the for-profit sector of the economy. Consequently, compensation levels paid to executives of tax-exempt organizations have steadily increased.

As levels of compensation have escalated in the tax-exempt sector so has the level of Congressional scrutiny. Thus, in December 2017, Congress, as part of broader tax legislation, enacted a new excise tax on annual compensation paid by all tax-exempt organizations in excess of $1 million and on excess parachute payments. The purpose of this paper is to explain how the new excise tax works and identify several planning options available to mitigate its effects on current and deferred compensation paid by tax-exempt employers to highly-compensated employees.