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The IRS has issued final regulations implementing the excise tax on executive compensation enacted as part of the Tax Cuts and Jobs Act of 2017.

The tax, section 4960 of the Internal Revenue Code (IRC), applies to private colleges and universities and imposes a 21 percent tax on amounts of compensation paid to the five highest-compensated employees, which either exceeds $1 million per year or is an excess parachute payment.

The final rules closely follow the proposed regulations published in June 2020 and include definitions for key terms and the rules for determining—

  • The amount of remuneration paid to a covered employee for a taxable year
  • When remuneration will be deemed an excess parachute payment
  • The allocation of tax liability for the excise tax among related organizations

Covered Employees

A covered employee means any employee (including former employees) who is one of the institution’s five highest-paid employees for the taxable year or any preceding taxable year beginning after December 31, 2016. Similar to the proposed regulations, the final rules state that whether an employee is one of an applicable tax-exempt employer organization’s (ATEO) five highest-compensated employees is determined separately for each ATEO, not for a group of related organizations. Therefore, a group of related exempt organizations could have more than five highly paid employees for the year, and an employee could be a covered employee of more than one ATEO in a related group of organizations for the year.


There are certain exceptions that permit an employee to be disregarded for purposes of determining the institution’s five highest-compensated employees: if the employee performs only limited volunteer services or services that are entirely compensated using non-exempt funds.

For employees who perform medical services, employers are permitted to use a reasonable, good-faith method to allocate remuneration between medical and non-medical services and provide examples of reasonable methods.

This tax will not affect most public colleges and universities. The final rules reiterate that public entities are only subject to the excise tax if they are separately organized from a state or political subdivision and are tax-exempt under IRC section 115.

Vested Deferred Compensation

The final regulations adopted the proposed rule that any nonqualified deferred compensation arrangements vested prior to the first taxable year beginning after December 31, 2017, will not be considered remuneration for purposes of the excise tax. All other deferred compensation, retention, or retirement bonuses not vested prior to that time are subject to the tax.


Mary Bachinger

Director, Tax Policy


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