Early this morning, the House of Representatives passed a reconciliation bill that would enact significant tax provisions and spending cuts.  The House Bill now heads to the Senate, where changes are likely before passage.  This article is one of a series of articles discussing various proposals in the legislation that touch on tax withholding, reporting, and fringe benefits.

The House bill would expand the application of tax on excess compensation for tax-exempt organizations by redefining a covered employee as one who receives income in excess of $1 million annually. 

Under current law, nonprofits with executives earning over $1 million are subject to a 21 percent excise tax on the amount over $1 million for the top five earners under section 4960.  The excise tax rate is calculated by multiplying the corporate tax rate by the sum of any remuneration in excess of $1 million paid to a covered employee for a taxable year, and any excess parachute payment paid to a covered employee.

The House bill would retain the 21 percent excise tax but expand “covered employees” to include all current and former employees earning over $1 million.  In other words, the proposal would remove the “top five earners” threshold, and instead apply the excise tax to all nonprofit employees earning over $1 million. 

In the original version of the bill, a “covered employee” included the employees of the tax-exempt entity and any related person or governmental entity.  However, the House-passed bill removed related persons or governmental entities, clarifying that the excise tax will only be applied in relation to remuneration of current and former employees of the organization and retaining the current carveouts under the section 4960 regulations for employees of related entities for services provided to those entities.

Although this bill is not yet law, nonprofit employers should evaluate their executive compensation packages and policies to determine which, if any, employees earn over $1 million, to calculate the potential impact of the 21 percent excise tax on such compensation.