How the 21% excise tax impacts 457(f) plans and split dollar arrangements and what credit unions should evaluate.
Under the Tax Cuts and Jobs Act (the “Act”), an excise tax is imposed on a tax-exempt entity based on 21% of the amount of remuneration in excess of $1,000,000 paid to any of the top five employees or former employees in any given year. The tax is assessed on the entity itself, not on the employee receiving the remuneration. There are numerous details involved in the determination of the tax liability, but for purposes of this discussion, the critical element is the determination of remuneration potentially subject to the tax.
Internal Revenue Code (“IRC”) Section 4960, added by the Act, explicitly defines (in Section 4960(c)(3)(A)) the remuneration that is subject to the tax as broadly including everything includible in wages under IRC Section 3401(a)(excluding Roth contributions). In addition, amounts from all related organizations must be aggregated.
In a Collateral Assignment Split Dollar Plan taxable under the “loan regime” rules, where all money loaned to the employee to pay policy premiums will be repaid in full from death benefits if not before, there is no element of remuneration, other than the potential for taxable remuneration related to below market interest on premium loans. Treas. Regulation Section 53.4960-2(a)(1). Treas. Regulation 1.7872-15 is also clear on this point, with the result that the only exposure that “loan regime” Collateral Assignment Split Dollar plans have to the 21% tax is imputed income on below market loans. This is essentially the same reason that these types of plans are excluded from the IRC Section 409A deferred compensation rules, i.e., there is no element of remuneration that is being deferred.
In a “non-equity” Collateral Assignment Split Dollar Plan or a Split Dollar Agreement taxable under the “economic benefit” rules, the imputed income reported to the employee on the value of the benefit is treated as remuneration for purposes of the excise tax.
With respect to 457(f) plans, Section 4960 specifically states that remuneration includes amounts included in gross income under Section 457(f). In other words, everything that would go on a W-2 wage statement, including 457(f) deferrals as they become vested, are treated as remuneration for purposes of the excise tax. Remuneration is treated as paid when there is no substantial risk of forfeiture (within the meaning of IRC Section 457(f)(3)(B)) of the rights to such remuneration. Therefore, the excise tax applies when deferred amounts under a 457(f) plan become vested, not when they are paid to the employee.
Under current guidance, a federally chartered credit union is not subject to the excise tax as it is a “federal instrumentality” exempt from all current and future Federal taxes. However, the IRS is continuing to consider this question and it is possible that federal credit unions could become subject to the excise tax in the future.
Reprinted with permission of Cynthia A. Moore, Dickinson Wright PLLC. The views and opinions expressed are those of the Cynthia Moore. Any discussion of taxes is for general information purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice. Clients should confer with their qualified legal, tax and accounting advisors as appropriate.
Cynthia A. Moore, Member and Division Director at Dickinson Wright PLLC
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