Tax on Excess Tax-Exempt Organization Executive Compensation, 6196-6242 [2021-00772]

Download as PDF 6196 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1 and 53 [TD 9938] RIN 1545–BO99 Tax on Excess Tax-Exempt Organization Executive Compensation Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. AGENCY: This document sets forth final regulations under section 4960 of the Internal Revenue Code (Code), which imposes an excise tax on remuneration in excess of $1,000,000 and any excess parachute payment paid by an applicable tax-exempt organization to any covered employee. The regulations affect certain tax-exempt organizations and certain entities that are treated as related to those organizations. DATES: Effective Date: These final regulations are effective on January 15, 2021. Applicability Dates: For dates of applicability, see § 53.4960–6. FOR FURTHER INFORMATION CONTACT: William McNally at (202) 317–5600 or Patrick Sternal at (202) 317–5800 (not toll-free numbers). SUPPLEMENTARY INFORMATION: SUMMARY: khammond on DSKJM1Z7X2PROD with RULES12 Background This document amends the Foundation and Similar Excise Tax Regulations (26 CFR part 53) by adding final regulations under section 4960. Section 4960 was added to the Code by section 13602 of the Tax Cuts and Jobs Act, Public Law 115–97, 131 Stat. 2054, 2157 (TCJA). Section 4960(a) generally provides that an applicable tax-exempt organization (ATEO) that pays to a covered employee remuneration in excess of $1 million for a taxable year or any excess parachute payment is subject to an excise tax on the amount of the excess remuneration (as described in section IV of the Summary of Comments and Explanation of Revisions, titled ‘‘Excess Remuneration’’) plus excess parachute payments paid during that taxable year at a rate equal to the rate of tax imposed on corporations under section 11 (currently 21 percent). Section 4960 is effective for taxable years beginning after December 31, 2017. An ATEO is defined in section 4960(c)(1) as any organization that for the taxable year is exempt from taxation under section 501(a) as well as certain other tax-exempt organizations. A VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 covered employee is defined in section 4960(c)(2) as any employee (including any former employee) of an ATEO if the employee is one of the five highestcompensated employees of the organization for the taxable year or any preceding taxable year beginning after December 31, 2016. Section 4960(c)(4)(A) provides that remuneration paid to a covered employee by an ATEO includes any remuneration paid with respect to employment of such employee by any related person or governmental entity. Section 4960(c)(4)(B) defines a related person or governmental entity as an entity that controls, or is controlled by, the ATEO; is controlled by one or more persons that control the ATEO; or is a supported or supporting organization as described in sections 509(f)(3) and 509(a)(3), respectively. An excess parachute payment is defined in section 4960(c)(5)(A) as an amount equal to the excess of any parachute payment over the portion of the base amount (as described in section V.D. of the Summary of Comments and Explanation of Revisions, titled ‘‘Three-Times-BaseAmount Test’’) allocated to such payment; section 4960(c)(5)(B) defines a parachute payment as any payment in the nature of compensation to a covered employee if the payment is contingent on the employee’s separation from employment with the employer and the aggregate present value of such payments exceeds 3-times the base amount. On December 31, 2018, the Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) issued Notice 2019–09 (2019–04 I.R.B. 403), setting forth initial guidance on the application of section 4960. On June 11, 2020, the Treasury Department and the IRS published proposed regulations on section 4960 in the Federal Register (REG–122345–18, 85 FR 35746) (the proposed regulations). The statutory provisions and the initial guidance provided by Notice 2019–09 are described in detail in the proposed regulations. The Treasury Department and the IRS received written comments on the proposed regulations. No public hearing was requested or held. All written comments received in response to the proposed regulations are available at www.regulations.gov or upon request. Comments received that are outside of the scope of the proposed regulations generally are not addressed in this preamble but may be considered in connection with future guidance projects. After consideration of the relevant comments received, the proposed regulations under section PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 4960 are adopted as final regulations as modified by this Treasury Decision. The major areas of comment and the revisions to the proposed regulations are discussed in the Summary of Comments and Explanation of Revisions. With respect to provisions in the proposed regulations on which no comments were received or for which comments were received prior to the issuance of the proposed regulations, the preamble to the proposed regulations may provide additional information. Summary of Comments and Explanation of Revisions These final regulations provide guidance on the excise tax imposed by section 4960 and the entities that are subject to the tax. I. Scope of Final Regulations These final regulations retain the basic approach and structure of the proposed regulations, with certain revisions. These final regulations restate certain statutory definitions and define various terms set forth in section 4960. These final regulations also provide rules for determining: The amount of remuneration paid for a taxable year for purposes of identifying covered employees and calculating the excise tax; whether excess remuneration has been paid and in what amount; whether a parachute payment has been paid and in what amount; the allocation of liability for the excise tax among related organizations; and the date of applicability of these final regulations. These definitions and rules apply solely for purposes of section 4960. II. Definitions A. Applicable Tax-Exempt Organization These final regulations adopt the definition of ‘‘applicable tax-exempt organization’’ or ‘‘ATEO’’ as set forth in the proposed regulations. Consistent with section 4960(c)(1), the proposed regulations provided that an ‘‘applicable tax-exempt organization’’ or ‘‘ATEO’’ includes an organization that is exempt from tax under section 501(a); is a farmers’ cooperative organization described in section 521(b)(1); has income excluded from taxation under section 115(1); or is a political organization described in section 527(e)(1). In response to comments on Notice 2019–09 regarding the applicability of the excise tax imposed by section 4960 to certain Federal instrumentalities, section II.A. of the Explanation of Provisions of the proposed regulations, titled ‘‘Applicable Tax-Exempt Organization,’’ stated that the Treasury E:\FR\FM\19JAR12.SGM 19JAR12 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations Department and the IRS consider all Federal instrumentalities described in section 501(c)(1) to be included in the statutory ATEO definition as an organization exempt from tax under section 501(a) and thus subject to section 4960. However, the Treasury Department and the IRS requested comments regarding the application of section 4960 to Federal instrumentalities. One commenter requested that these final regulations confirm that Federal instrumentalities described under section 501(c)(1)(A)(i), for which the enabling acts provide for exemption from all current and future Federal taxes are not subject to tax under section 4960. These final regulations do not address this issue but reserve § 53.4960–1(b)(3) and § 53.4960– 4(a)(5) for future rules to address these Federal instrumentalities. The Treasury Department and the IRS will continue to consider whether section 4960 should apply to Federal instrumentalities for which the enabling acts provide for exemption from all current and future Federal taxes. Until further guidance is issued, a Federal instrumentality for which an enabling act provides for exemption from all current and future Federal taxes may treat itself as not subject to tax under section 4960 as an ATEO or related organization. However, if that Federal instrumentality is a related organization of an ATEO, remuneration it pays must be taken into account by that ATEO. khammond on DSKJM1Z7X2PROD with RULES12 B. Applicable Year Section 4960(a)(1) refers to remuneration paid ‘‘for the taxable year,’’ but does not specify which taxpayer’s taxable year is referenced, what it means for remuneration to be paid ‘‘for’’ a taxable year, or how to measure remuneration if an ATEO and a related organization have different taxable years. The proposed regulations provided that remuneration is treated as paid for a taxable year if it is paid during the applicable year, and that the applicable year is defined as the calendar year ending with or within an ATEO’s taxable year. The proposed regulations provided rules for determining the applicable year of an organization with respect to the taxable year in which the organization becomes an ATEO or ceases to be an ATEO, including rules addressing short applicable years that may arise in these situations and rules addressing related organizations with different taxable years. No comments were received on those proposed rules, and these final regulations adopt those rules without change. VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 C. Employee Section 4960(a) imposes a tax on excess remuneration and any excess parachute payment paid by an ATEO for the taxable year with respect to employment of a covered employee. Section 4960(c)(2) defines a ‘‘covered employee’’ as an employee (including any former employee) of the ATEO who meets certain other conditions. Accordingly, the excise tax imposed by section 4960(a) applies only with respect to a current or former employee of the ATEO. The proposed regulations defined ‘‘employee’’ by reference to the definition of ‘‘employee’’ for purposes of Federal income tax withholding in section 3401(c) and the regulations thereunder. Specifically, the proposed regulations cross-referenced the definition of ‘‘employee’’ in § 31.3401(c)–1, which includes common-law employees, officers or elected or appointed officials of governments, or agencies or instrumentalities thereof, and certain officers of corporations. The proposed regulations restated certain rules from § 31.3401(c)–1 that are particularly relevant to section 4960, including the rules that a member of a board of directors of a corporation is not an employee of the corporation (in the member’s capacity as a director), and that an officer is an employee of the entity for which the officer serves as an officer (unless the officer performs no services or only minor services and neither receives, nor is entitled to receive, any remuneration for such services). For further discussion, see section II.E. of this Summary of Comments and Explanation of Revisions, titled ‘‘Covered Employee.’’ No comments were received on those proposed rules, and these final regulations adopt those provisions of the proposed regulations without change. One commenter requested clarification regarding the source of the remuneration that is considered for purposes of applying the minor services exception to the rule that treats a corporation’s officer as an employee. The minor services exception in Prop. § 53.4960–1(e)(1) incorporated the standard in § 31.3401(c)–1 and provided that ‘‘an officer of a corporation who as such does not perform any services or performs only minor services and who neither receives, nor is entitled to receive, any remuneration is not considered to be an employee of the corporation solely due to the individual’s status as an officer of the corporation.’’ The commenter stated PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 6197 that it is unclear whether an individual qualifies for the exception if he or she receives remuneration from a related person or governmental entity for services performed for an organization other than the ATEO and also volunteers his or her time as an officer of the ATEO (and performs no services or only minor services for the ATEO). The commenter recommended that these final regulations clarify that the relevant remuneration for purposes of meeting the minor services exception is only remuneration paid by the ATEO. The minor services exception applies if an individual is not paid (nor is entitled to be paid) remuneration based ‘‘solely’’ on the individual’s status as an officer. Thus, the source of the remuneration is not relevant, but rather the standard is whether the individual received any remuneration for the minor services as an officer regardless of the source of the remuneration. Therefore, the Treasury Department and the IRS have concluded that this clarification of the minor services exception in these final regulations is unnecessary. For a discussion of how this definition of ‘‘employee’’ and other rules address employees of non-ATEO related organizations performing limited or temporary services for the related ATEO (in particular, while also receiving compensation from the nonATEO related organization), see section II.E.5. of this Summary of Comments and Explanation of Revisions, titled ‘‘Volunteer Services and Other Exceptions.’’ D. Employer Section 4960(b) provides that the employer is liable for the tax imposed under section 4960(a). Similar to the definition of ‘‘employee,’’ the proposed regulations defined ‘‘employer’’ by reference to the definition of ‘‘employer’’ for purposes of Federal income tax withholding in section 3401(d) and the regulations thereunder, without regard to the special rules in section 3401(d)(1) and (2). Accordingly, control of the payment of wages would not be relevant for determining whether an entity is the employer for section 4960 purposes. Further, the proposed regulations provided that a person or governmental entity does not avoid status as an employer of an employee by using a third-party payor to pay remuneration to that employee. Thirdparty payors include a payroll agent, an agent under section 3504, a common paymaster, a statutory employer under section 3401(d)(1), or a certified professional employer organization under section 7705 (which is an ‘‘employer’’ only for purposes of subtitle E:\FR\FM\19JAR12.SGM 19JAR12 6198 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations C of the Code). Similarly, consistent with existing principles for determining the employer, under certain facts and circumstances, a management company may also be acting as a third-party payor for the employees of its ATEO client, rather than as the common law employer of the employees. Thus, the proposed regulations provided that remuneration that is paid to an individual by a separate organization for services the individual performed as an employee of the ATEO would be remuneration paid by the ATEO to its employee for purposes of section 4960, whether or not the separate organization is related to the ATEO. In addition, the proposed regulations provided that the sole owner of an entity that is disregarded as separate from its owner under § 301.7701–2(c)(2)(i) would be treated as the employer of any employee of the disregarded entity, notwithstanding that the entity is regarded for subtitle C purposes under § 301.7701–2(c)(2)(iv). No comments were received on these provisions of the proposed regulations, and these final regulations adopt them without change. khammond on DSKJM1Z7X2PROD with RULES12 E. Covered Employee 1. In General Section 4960(c)(2) defines ‘‘covered employee’’ as any individual who is one of the five highest-compensated employees of the ATEO for a taxable year or was a covered employee of the ATEO (or any predecessor) for any preceding taxable year beginning after December 31, 2016. Thus, once an employee is a covered employee of an ATEO, the employee continues to be a covered employee for all subsequent taxable years of that ATEO. The proposed regulations provided that whether an employee is one of the five highest-compensated employees of an ATEO is determined separately for each ATEO and not for an entire group of related organizations. As a result, a group of related ATEOs could have more than five ‘‘five highestcompensated employees’’ for a taxable year. Similarly, an employee could be a covered employee of more than one ATEO in a related group of organizations for a taxable year. No comments were received on these provisions of the proposed regulations, and these final regulations adopt them without change. 2. Aggregation of Remuneration Paid by the ATEO and Its Related Organizations for Purposes of Determining the Five Highest-Compensated Employees For purposes of determining whether an employee is one of an ATEO’s five VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 highest-compensated employees for a taxable year, the proposed regulations provided that remuneration paid by the ATEO during the ATEO’s applicable year is aggregated with remuneration paid by any related organization during the ATEO’s applicable year, including remuneration paid by a related taxable organization or governmental entity, for services performed as an employee of that related organization. Remuneration for which a deduction is disallowed under section 162(m) generally is not considered for purposes of determining whether excess remuneration is paid for a taxable year, but that remuneration is considered for purposes of determining an ATEO’s five highest-compensated employees. One commenter suggested that, for purposes of determining an ATEO’s five highest-compensated employees, these final regulations should consider only remuneration paid (directly or indirectly) by an ATEO for services provided by an employee to the ATEO, rather than aggregating all remuneration paid to the individual for services the individual provides as an employee of the ATEO and as an employee of any related organization, including a related non-ATEO (for example, a taxable organization). The commenter reasoned that aggregating remuneration for purposes of determining covered employee status is not required by the statutory text and is unnecessary to comply with Congressional intent to achieve parity between ATEOs and publicly held corporations that are subject to the section 162(m) deduction disallowance for compensation paid to a covered employee in excess of $1 million. The commenter also reasoned that because only an ATEO can have a ‘‘covered employee’’ under section 4960(c)(2), the reference to the ‘‘five highest-compensated employees of the organization’’ (emphasis in comment) in section 4960(c)(2)(A) should be read to include only compensation paid by the ATEO, directly or indirectly (for example, by reimbursing another entity), for services provided by the employee to the ATEO, regardless of the payor. The commenter asserted that the language in section 4960(c)(4)(A), which provides that ‘‘remuneration of a covered employee by an [ATEO] shall include any remuneration paid with respect to employment of such employee by any related person or governmental entity’’ (emphasis in comment) should not override a plain reading of section 4960(c)(2), which refers only to employment with the ATEO. The commenter further reasoned that section 4960(c)(4)(A) applies after a PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 determination of the ATEO’s covered employees has already been made, and thus it is circular to read section 4960(c)(4)(A) as requiring inclusion of remuneration paid to a covered employee of an ATEO by a related person or governmental entity for purposes of determining an ATEO’s highest-compensated employees (and, thus, its covered employees). While the Treasury Department and the IRS acknowledge that alternative interpretations as to whether sections 4960(c)(2) and (c)(4)(A) take into account remuneration paid by a related organization for purposes of determining an ATEO’s covered employees may be reasonable, for the reasons set forth below, these final regulations adopt the relevant provisions of the proposed regulations without change and do not adopt the commenter’s recommendation. Section 4960 does not define the ‘‘five highestcompensated employees’’ of an ATEO. The ambiguity in this term is highlighted by the fact that the only provision in the statute that references ‘‘compensation’’ is section 4960(c)(2), which defines ‘‘covered employee’’ as one of the ‘‘5 highest compensated employees’’; the statute otherwise uses the defined terms ‘‘remuneration’’ and ‘‘parachute payment’’ for purposes of determining the excise tax imposed by section 4960. In addition, there is no discussion in the legislative history describing how Congress intended an ATEO to determine its five highestcompensated employees. The Treasury Department and the IRS have concluded that the commenter’s suggested interpretation—that only remuneration paid by the ATEO for services performed for the ATEO should be considered for purposes of determining who is a covered employee—would raise significant tax administration issues and the potential for abuse in circumstances in which an individual provides services to, and receives compensation from, the ATEO and one or more related organizations during the applicable year. In these cases, it may be difficult to determine the proper allocation of the compensation among the organizations to which the individual provides the services and whether the allocation was properly based on the value of the services provided. Due to the highly factual nature of this analysis and the potential for differing conclusions on one or more of these issues, the commenter’s suggested rule would result in an unpredictable standard to be applied by taxpayers and the IRS and would raise the potential for abusive E:\FR\FM\19JAR12.SGM 19JAR12 khammond on DSKJM1Z7X2PROD with RULES12 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations mischaracterizations of the nature of the services and compensation provided. The commenter further asserted that the requirement to aggregate compensation paid by the ATEO and all related organizations is not required to ensure parity with the rules for identifying covered employees under section 162(m). Under §§ 1.162– 27(c)(2)(ii) and 1.162–33(c)(1)(ii)(B), the amount of compensation used to identify the covered employees who are the three most highly compensated executive officers (other than the principal executive officer and the principal financial officer) for the taxable year is determined pursuant to the executive compensation disclosure rules under the Securities Exchange Act of 1934. Under 17 CFR 229.402(a)(2), the amount of compensation paid to an employee by a publicly held corporation is measured by reference to remuneration paid by the registrant and remuneration paid by the registrant’s subsidiaries, and is not limited to remuneration for services provided to the registrant. Although the provisions of sections 4960 and 162(m) are similar in many respects, there is no indication in the legislative history that sections 162(m) and 4960 are intended to apply in the same manner in all situations. Further, the section 162(m) and section 4960 statutory language and the application of the rules differ significantly in many respects that would not allow that strict parity. Regardless of the conclusion that the sections 162(m) and 4960 rules do not allow for strict parity, the Treasury Department and the IRS have concluded that the aggregation of compensation paid by all related entities in identifying covered employees is more analogous to the rules under section 162(m) than considering only remuneration for services provided to the ATEO. Thus, while the Treasury Department and the IRS considered several alternatives for determining the ATEO’s five highest-compensated employees, including the alternative proposed by the commenter, the Treasury Department and the IRS ultimately concluded that including remuneration paid by all related organizations is appropriate and that it is more administrable to use a single standard for identifying covered employees and computing the excise tax, if any, imposed by section 4960(a)(1). However, to mitigate the effect of requiring the aggregation of remuneration paid by an ATEO and all related organizations for purposes of determining the ATEO’s covered employees, these final regulations retain the limited hours, nonexempt funds, VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 and limited services exceptions (discussed in section II.E.5. of this Summary of Comments and Explanation of Revisions, titled ‘‘Volunteer Services and Other Exceptions’’). 3. Remuneration for Medical Services Consistent with section 4960(c)(3)(B) and the proposed regulations, these final regulations provide that for purposes of identifying an ATEO’s five highest-compensated employees for a taxable year, remuneration paid during the applicable year for medical services is not taken into account. For a discussion of the rules for determining the remuneration paid for medical or veterinary services and for allocating remuneration to medical and nonmedical services, see section II.F. of this Summary of Comments and Explanation of Revisions, titled ‘‘Medical Services.’’ 4. Covered Employee Status Continues for All Subsequent Taxable Years In accordance with section 4960(c)(2), the proposed regulations provided that a covered employee includes any employee (including any former employee) of an ATEO who was a covered employee of the organization (or a predecessor) for any preceding taxable year beginning after December 31, 2016. In response to the proposed regulations, one commenter suggested that the Treasury Department and the IRS reconsider the rule that an individual who is a covered employee of an ATEO (or of a predecessor ATEO) for one taxable year remains a covered employee of that ATEO (and any successor ATEOs) for all subsequent taxable years. The commenter suggested that an ATEO should be relieved of the burden of continuing to include an employee among its covered employees when a consolidation or restructuring of a tax-exempt organization results in changes to the employee’s job responsibilities and compensation, if it no longer furthers the purpose of the statute to include the employee among its covered employees. The commenter asserted that the requirement that an individual remain a covered employee for all subsequent years, even after the employment relationship has ended, creates a potentially excessive administrative burden for the ATEO. These final regulations do not adopt this suggestion because that rule would be inconsistent with the statutory language. 5. Volunteer Services and Other Exceptions The proposed regulations provided certain exceptions to the definition of ‘‘covered employee’’ and the rules for identifying the five highest- PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 6199 compensated employees of an ATEO. Several commenters supported the inclusion of the exceptions provided in Prop. § 53.4960–1(d)(2)(ii), (iii), and (iv). These final regulations adopt these exceptions with certain modifications in response to comments as discussed later in this section. The exceptions to the definition of ‘‘covered employee’’ in the proposed regulations were provided in response to comments on Notice 2019–09 expressing concern that the rules for identifying an ATEO’s five highestcompensated employees in the notice would subject a non-ATEO to the excise tax on remuneration it pays to an employee who performs limited or temporary services for a related ATEO and who typically receives remuneration only from the non-ATEO. The exceptions were intended to ensure that certain employees of a related nonATEO providing services as an employee of an ATEO are not treated as one of the five highest-compensated employees of the ATEO, and thus considered a covered employee, if certain conditions related to the individuals’ remuneration or hours of service are met. To avoid manipulation of the rules through the deferral of compensation, in determining whether an employee is one of the five highestcompensated employees, the proposed regulations provided that a grant of a legally binding right to vested remuneration is considered to be remuneration paid, and any grant of a legally binding right to nonvested remuneration by the ATEO (or a related ATEO), for example under a deferred compensation plan or arrangement, disqualifies the ATEO from claiming a relevant exception. No comments were received on those proposed rules, and these final regulations adopt those rules without change. a. No Remuneration and NonEmployment Exceptions The proposed regulations provided that the remuneration paid to an individual who is never an employee of an ATEO is not considered for purposes of section 4960. For example, an individual who, under all the facts and circumstances, performs services for an ATEO solely as a bona fide independent contractor is not an employee of the ATEO, and thus is not considered for purposes of determining the ATEO’s five highest-compensated employees. Similarly, an individual who, under all the facts and circumstances, performs services solely as a bona fide employee of a related organization, including a related organization that provides services to the ATEO, is not an E:\FR\FM\19JAR12.SGM 19JAR12 khammond on DSKJM1Z7X2PROD with RULES12 6200 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations employee of the ATEO, and thus is not considered for purposes of determining the ATEO’s five highest-compensated employees. No comments were received on those provisions of the proposed regulations, and these final regulations adopt them without change. The proposed regulations further provided that, for purposes of determining an ATEO’s five highestcompensated employees for a taxable year, an employee is disregarded if neither the ATEO nor any related organization pays remuneration or grants a legally binding right to nonvested remuneration for services the individual performed as an employee of the ATEO or any related organization. Thus, if none of an ATEO’s employees received remuneration from the ATEO or from a related organization, then the ATEO has no covered employees. Benefits excluded from gross income are not considered remuneration, including expense allowances and reimbursements under an accountable plan (see § 1.62–2) and most insurance for liability arising from service with an ATEO, such as directors and officers liability insurance (see § 1.132–5(r)(3)). These final regulations adopt these provisions of the proposed regulations without change. In section II.E.2. of the Explanation of Provisions of the proposed regulations, titled ‘‘Volunteer Services and Similar Exceptions,’’ the Treasury Department and the IRS requested comments on whether certain taxable benefits, such as employer-provided parking in excess of the value excluded under section 132, should be disregarded for purposes of determining whether an individual receives remuneration for services and what standards should apply to identify those benefits. No comments were received on this issue. Because taxable fringe benefits that are wages within the meaning of section 3401(a) are included in the statutory definition of remuneration, these final regulations adopt the provisions of the proposed regulations providing that these amounts are considered for purposes of determining an ATEO’s five highestcompensated employees and for purposes of applying the exceptions from covered employee status. For a discussion of comments received on the exclusion of taxable fringe benefits from the definition of remuneration for purposes other than the determination of the five highest-compensated employees, see section III.A. of this Summary of Comments and Explanation of Revisions, titled ‘‘In General’’ under ‘‘Remuneration.’’ VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 b. Limited Hours Exception These final regulations adopt the ‘‘limited hours’’ exception as provided in the proposed regulations for purposes of determining an ATEO’s five highestcompensated employees. Under this exception, an employee of an ATEO is disregarded for purposes of determining the ATEO’s five highest-compensated employees for a taxable year if neither the ATEO nor any related ATEO pays remuneration or grants a legally binding right to nonvested remuneration to the employee for services performed for the ATEO and the employee performs only limited hours of service for the ATEO. For purposes of this exception, an ATEO is not treated as paying an amount paid to an individual by a related organization that employs the individual, so long as the ATEO does not reimburse the payor. An employee qualifies for this exception only if the hours of service the employee performs as an employee of the ATEO and all related ATEOs comprise 10 percent or less of the employee’s total hours of service for the ATEO and all related organizations during the applicable year. For purposes of this rule, an employee who performs fewer than 100 hours of service as an employee of an ATEO (and all related ATEOs) during an applicable year is treated as having worked no more than 10 percent of the employee’s total hours for the ATEO (and all related ATEOs). One commenter recommended that these final regulations replace the 10 percent hours of service threshold in the limited hours exception with the 50 percent hours of service threshold that is used for the nonexempt funds exception (discussed later in this section) because the 10 percent threshold fails to capture many common arrangements between ATEOs and taxable related organizations controlled by the ATEO (‘‘controlled taxable related organizations’’) that are not structured to avoid the excise tax imposed by section 4960. These final regulations do not adopt this suggestion because the limited hours exception was intended to address arrangements in which services are sufficiently limited so that the arrangements resemble volunteer arrangements. This exception therefore has a much lower hours of service threshold than the nonexempt funds exception but may be used by a broader group of ATEOs. Further, the Treasury Department and the IRS have concluded that adopting the commenter’s suggestion would be inconsistent with the legislative intent of section 4960. As explained in section II.E.2 of the Explanation of Provisions of PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 the proposed regulations, titled ‘‘Volunteer Services and Similar Exceptions,’’ the legislative history indicates that Congress intended to tax excessive compensation paid to covered employees from tax-exempt funds.1 Consistent with this intent, the proposed regulations provided a nonexempt funds exception, which applies if certain criteria are satisfied, but does not apply if an ATEO’s controlled taxable related organization pays remuneration to an employee of the ATEO. The Treasury Department and the IRS reasoned that a controlled taxable related organization that pays remuneration to an employee for services provided to an ATEO uses the ATEO’s funds to do so, either because the controlled taxable related organization’s assets are, effectively, the ATEO’s assets, or because the payment reduces the related organization’s assets, which in turn reduces the value of the ATEO’s interest in the related organization. The Treasury Department and the IRS consider the funds of an ATEO’s controlled taxable related organization as, in substance, equivalent to tax-exempt funds, and thus the use of such funds to compensate an individual for services provided to an ATEO is in substance the use of tax-exempt funds.2 One commenter expressed concern about the ‘‘cliff’’ nature of the proposed limited hours exception (as well as the nonexempt funds and limited services exceptions), noting that exceeding the thresholds even slightly may result in the employee being a covered employee for the applicable year and all subsequent applicable years. The commenter recommended that these final regulations allow a 3-year (or longer) measurement period to qualify for the limited hours exception or the other exceptions, primarily to prevent the ATEO from inadvertently failing to satisfy the exception. A 3-year measurement period would reduce the potential for inadvertent failures for an employer intending to be at or below the threshold for every applicable year. However, for an employer that intends to meet the limited hours exception during only one applicable year, the suggested 3-year standard would effectively raise the 10 percent hours of service limit to 30 percent and create a new ‘‘cliff’’ at that 1 H. Rep. 115–409, 115th Cong., 1st Sess. 333 (Nov. 13, 2017). 2 In a similar context, § 53.4958–4(a)(2) treats excessive compensation paid to a disqualified person with respect to an applicable tax-exempt organization by a controlled entity of the organization as excessive compensation paid by the organization, and thus as an excess benefit transaction. E:\FR\FM\19JAR12.SGM 19JAR12 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES12 30 percent threshold. In addition, permitting a 3-year measurement period would create additional complexity and burdens for taxpayer compliance and tax administration. For these reasons, the Treasury Department and the IRS do not adopt this suggestion. However, the modification to the nonexempt funds exception described later in this section, expanding the measurement period to two applicable years, is intended to address some of the commenter’s concerns with respect to inadvertent failures to meet the requirements of the nonexempt funds exception. Another commenter recommended that Example 5 in the provisions of the proposed regulations, which illustrated the application of the limited hours exception (Prop. § 53.4960–1(d)(3)(v)), be modified to eliminate from the facts that ATEO 5 does not control CORP 3, as control of another corporation by an ATEO is irrelevant for purposes determining whether the requirements of this exception are met, and thus irrelevant to the conclusion in that example. The commenter further suggested that this fact be moved to Example 8 in the proposed regulations, which illustrated the application of the separate nonexempt funds exception (Prop. § 53.4960–1(d)(3)(viii)), since control of another corporation by an ATEO is relevant for determining whether the requirements of that exception are met, and thus relevant to the conclusion in that example. The Treasury Department and the IRS agree with the commenter’s suggestion, and modified Example 5 in these final regulations describing the limited hours exception (§ 53.4960–1(d)(3)(v)) accordingly. However, because of changes to the nonexempt funds exception as described later in this Summary of Comments and Explanation of Revisions, these final regulations replace Example 8 (§ 53.4960– 1(d)(3)(viii)) with a new example. c. Nonexempt Funds Exception As previously discussed, the proposed regulations also provided a ‘‘nonexempt funds’’ exception for employees of a related non-ATEO organization who may perform a large portion of their overall services as an employee of the ATEO under certain circumstances. Under the nonexempt funds exception, an employee is disregarded for purposes of determining an ATEO’s five highest-compensated employees for a taxable year provided that none of the ATEO, any related ATEO, or any controlled taxable related organization, pays the employee of the ATEO any remuneration or grants a legally binding right to nonvested VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 remuneration to the employee. When applying these requirements for the nonexempt funds exception, the ATEO is not treated as paying remuneration that is paid by a related organization that also employs the individual, so long as the ATEO does not reimburse the payor. Further, to prevent indirect payment of remuneration by the ATEO, a related ATEO, or controlled taxable related organization, no related organization that paid remuneration to the individual may provide services for a fee to the ATEO, related ATEO, or any controlled taxable related organization. To satisfy the nonexempt funds exception, the proposed regulations also stated that the employee must have provided services primarily to a taxable related organization or other non-ATEO (other than a controlled taxable related organization of the ATEO) during the applicable year. For this purpose, an employee is treated as having provided services primarily to the taxable related organization or other non-ATEO (other than a controlled taxable related organization of the ATEO) only if the employee provided services to the taxable related organization or other non-ATEO for more than 50 percent of the employee’s total hours worked for the ATEO and all related organizations (including ATEOs) during the applicable year. One commenter expressed concern that, for purposes of the nonexempt funds exception, the requirement limiting the employee’s hours worked for the ATEO and all related ATEOs to not more than 50 percent of the total hours worked for the ATEO and all related organizations during an applicable year was too restrictive and may result in inadvertent failures. The Treasury Department and the IRS acknowledge the issues presented by this comment. These final regulations modify the exception by expanding the measurement period from one applicable year to two applicable years (that is, the current applicable year and the preceding applicable year are treated as a single measurement period) for purposes of determining whether an employee provided services to the ATEO and all related ATEOs for not more than 50 percent of the employee’s total hours worked as an employee of the ATEO and all related organizations during the applicable year and the prior applicable year. This modification provides additional flexibility for situations in which an employee ‘‘rotates’’ to an ATEO for a period that extends longer than six months, or when an employee unexpectedly provides services beyond six months in an applicable year. PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 6201 Another commenter recommended that the nonexempt funds exception be modified to prohibit the provision of services for a fee to a taxable entity only if the ATEO actually owns a controlling interest in the taxable entity, as opposed to being attributed the ownership interest under the section 318 attribution principles, which were incorporated into the definitions of a related organization and control. The commenter asserted that the related organizations requirement under the proposed nonexempt funds exception (Prop. § 53.4960–1(d)(2)(iii)(A)(3)), which incorporates the section 318 attribution principles, is unduly restrictive, and would have unintended results, as illustrated by the following example. An individual who is the sole shareholder of two taxable corporations (Corporation 1 and Corporation 2) also controls an ATEO (by having the power to appoint a majority of the ATEO’s board of directors); Corporation 1 provides administrative services for a fee to Corporation 2; employee of Corporation 1 provides services only to Corporation 1 and does not provide any services to the ATEO. Under these facts, Corporation 2 is deemed to be controlled by the ATEO because, for purposes of determining whether an ATEO controls an organization under Prop. § 53.4960–1(i)(2)(vii)(B)(2), if a person controls an ATEO, the ATEO is treated as owning a percentage of the stock owned by that person in accordance with the percentage of directors of the ATEO that are controlled by that person. Because the related organizations requirement prohibits the payment of a fee by a related organization to a controlled taxable related organization for services performed by an employee of the controlled taxable related organization, and because Corporation 1 is providing services for a fee to Corporation 2, which is deemed to be controlled by the ATEO, no employee of Corporation 1 could meet the requirements of the proposed nonexempt funds exception. The commenter suggested that this result is inappropriate because the sharing of services between two taxable corporations in which an ATEO has no actual ownership interest would not circumvent the legislative intent of section 4960. The Treasury Department and the IRS agree with the commenter’s recommendation. Accordingly, these final regulations modify the attribution rules as they apply for purposes of determining eligibility for the nonexempt funds exception by disregarding the application of downward attribution in applying E:\FR\FM\19JAR12.SGM 19JAR12 6202 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations section 318(a)(3) to corporations and other entities and in applying section 318 principles to nonstock organizations. This modification applies only for purposes of applying the nonexempt funds exception and does not apply for purposes of determining whether an organization is a related organization generally. khammond on DSKJM1Z7X2PROD with RULES12 d. Limited Services Exception The proposed regulations provided a ‘‘limited services’’ exception, under which an employee is not considered for purposes of determining an ATEO’s five highest-compensated employees for a taxable year if, during the applicable year, the ATEO paid less than 10 percent of the employee’s total remuneration during the applicable year for services performed as an employee of the ATEO and all related organizations. However, if an employee would not be considered for purposes of determining the five highestcompensated employees of any ATEO in an ATEO’s group of related organizations because no ATEO in the group paid at least 10 percent of the total remuneration paid by the group during the applicable year, then this exception does not apply to the ATEO that paid the employee the most remuneration during that applicable year. No comments were received on that proposed rule, and these final regulations retain that rule without change. F. Medical Services Section 4960(c)(3)(B) provides that remuneration for purposes of section 4960 does not include the portion of any remuneration paid to a licensed medical professional (including a veterinarian) that is for the performance of medical or veterinary services by such professional. Section 4960(c)(5)(C)(iii) provides a substantially similar exception from the definition of ‘‘parachute payment.’’ The proposed regulations provided rules relating to medical services and licensed medical professionals. No comments were received on those rules in the proposed regulations, and these final regulations adopt the rules in the proposed regulations without change. For further discussion of these rules, see section II.F. of the Explanation of Provisions of the proposed regulations, titled ‘‘Medical Services.’’ These final regulations also adopt the rule in the proposed regulations that a ‘‘licensed medical professional’’ is an individual who is licensed under state or local law to perform medical services. In addition to doctors, nurses, and veterinarians, a licensed medical professional generally would include VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 dentists and nurse practitioners and may include other medical professionals, depending on the applicable state or local law. For a discussion of other issues related to remuneration for medical or veterinary services, including a rule for allocating remuneration received for a combination of medical and nonmedical services, see section III.B. of this Summary of Comments and Explanation of Revisions, titled ‘‘Remuneration Related to Medical Services.’’ G. Predecessor Organization Section 4960(c)(2)(B) provides that a covered employee includes any employee who was a covered employee of the ATEO (or any predecessor) for any preceding taxable year beginning after December 31, 2016. Because a covered employee, under section 4960(c)(2), must be (or have been) an employee of an ATEO, the predecessor must also have been an ATEO at the time the individual was employed by the predecessor to be a covered employee. Thus, an individual who is a covered employee of an ATEO (or of an ATEO predecessor of an ATEO) for one taxable year remains a covered employee of that ATEO (and any successor ATEOs) for subsequent taxable years. The proposed regulations defined ‘‘predecessor’’ by reference to several enumerated categories of organizational changes, including acquisitions, mergers, other reorganizations, and changes in tax-exempt status. A predecessor ATEO ordinarily is an ATEO that has transferred, by any of several legal means, its assets and operations to another pre-existing or newly created ATEO (the successor of the predecessor ATEO). No comments were received with respect to the proposed rules. These final regulations adopt the definition of predecessor as provided in the proposed regulations without change. For further information concerning these rules, see section II.G. of the Explanation of Provisions of the proposed regulations, titled ‘‘Predecessor Organization.’’ H. Related Organization Section 4960(c)(4)(A) provides that remuneration paid to a covered employee by an ATEO includes any remuneration paid with respect to employment of the employee by any related person or governmental entity,3 and includes in the definition of 3 The proposed and final regulations refer to related persons and governmental entities collectively as related organizations. PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 ‘‘remuneration’’ any remuneration paid by the employer ATEO, related ATEOs, and related non-ATEOs (including taxable entities, nonprofit entities that are not ATEOs, and governmental entities that are not ATEOs). Section 4960(c)(4)(B) defines a ‘‘related organization’’ of an ATEO as a person or governmental entity that controls, or is controlled by, the ATEO; is controlled by one or more persons that control the ATEO; is a supported organization or a supporting organization (as defined in sections 509(f)(3) and 509(a)(3), respectively) during the taxable year of the ATEO, or, in the case of an ATEO that is a voluntary employees’ beneficiary association described in section 501(c)(9) (VEBA), establishes, maintains, or makes contribution to the VEBA. Section 4960(c)(4) does not define ‘‘control’’ for purposes of identifying related organizations. To determine which persons are related organizations under section 4960(c)(4)(B), the proposed regulations generally adopted the definition of ‘‘control’’ set forth in section 512(b)(13)(D) and § 1.512(b)– 1(l)(4). Section II.H. of the Explanation of Provisions of the proposed regulations, titled ‘‘Related Organization,’’ explained that this standard (and its ‘‘greater than 50 percent’’ threshold) was intended to align the definition of ‘‘related organization’’ for purposes of section 4960 with the definition of ‘‘related organization’’ for purposes of the annual reporting requirements on Form 990, ‘‘Return of Organization Exempt From Income Tax,’’ and with other exempt organization control tests. One commenter recommended that these final regulations instead define ‘‘control’’ based on the controlled group rules in section 414(b) and (c) and the regulations thereunder, which include an 80 percent control test. The commenter suggested that the section 414(b) and (c) controlled group test was more appropriate for a number of reasons: The purpose of section 414(b) and (c) is to treat related parties as a single employer (the same purpose as section 4960(c)(4)(C)), whereas the purpose of section 512(b)(13) is to tax abusive transactions; the regulations under section 512(b)(13) do not reflect statutory revisions; the control definition under section 512(b)(13) is overinclusive; and using the Form 990 test for control does not reduce administrative burdens because the Form 990 rules for identifying an ATEO’s highest-compensated employees and calculating compensation differ significantly from the section 4960 rules. E:\FR\FM\19JAR12.SGM 19JAR12 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES12 These final regulations do not adopt the suggestion in this comment. Instead, these final regulations adopt the rules in the proposed regulations, which align the definition of control with the definition in the Form 990 instructions, which, in turn, is generally based on the section 512(b)(13) standards. The Treasury Department and the IRS have concluded that this definition of control is more appropriate and administrable because the Form 990 control definition and the section 512(b)(13) rules are familiar to and used by exempt organizations. Similarly, an 80 percent control threshold, while used in section 414(b) and (c), as well as in regulations under section 162(m), generally is not a standard used for purposes of tax administration related to exempt organizations, whereas the 50 percent control threshold is a control test familiar to exempt organizations. See, for example, the instructions to Form 990; §§ 1.509(a)–4(g)(1)(i); 1.509(a)– 4(j)(1); 56.4911–7(b); 53.4941(d)–1(b)(5); 53.4943–3(b)(3)(ii); 53.4958– 4(a)(2)(ii)(B); and 53.4968–3(b). In addition, section 509(a)(3) supporting organizations and their section 509(f)(3) supported organizations are defined as related organizations under section 4960(c)(4)(B); the adoption of an 80 percent control threshold would be incongruous with the lower standards of control for such organizations under § 1.509(a)–4 (particularly in the case of Type III supporting organizations, for which control is not required). Further, the legislative history states that the purpose for enacting section 4960 is to deter ‘‘excessive compensation,’’ 4 indicating an intent to deter arguably abusive practices, and the Treasury Department and the IRS have determined that use of a higher control threshold would allow potentially abusive compensation arrangements among organizations that are related to a lesser degree.5 For these reasons, and the reasons set forth in section II.H. of the Explanation of Provisions of the proposed regulations, titled ‘‘Related Organization,’’ these final regulations adopt the rules regarding the overall definition of ‘‘control’’ in the proposed regulations without change. To determine control of a nonstock organization, the proposed regulations 4 H. Rep. 115–409, supra, at 333. imposition of excise tax under section 4960 is not determinative as to whether the remuneration paid to the covered employee is excessive or unreasonable compensation for purposes of sections 4941 or 4958. Similarly, there is no presumption, inference, or basis for concluding that remuneration paid to a covered employee that is not subject to excise tax under section 4960 is reasonable compensation for purposes of determining liability for excise tax under sections 4941 or 4958. 5 The VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 provided rules similar to other regulations dealing with control of taxexempt organizations (§§ 1.512(b)– 1(l)(4)(i)(b), 53.4958–4(a)(2)(ii)(B)(1)(iii), and 1.414(c)–5(b)) 6 that provide that a person is considered to control a nonstock organization under either a ‘‘removal power’’ test or a ‘‘representative’’ test. No comments were received addressing the ‘‘removal power’’ test, and the final regulations adopt these rules from the proposed regulations without change. Comments were received on the ‘‘representative’’ test, and in particular the manner in which the proposed regulations would address certain situations involving ‘‘accidental control.’’ Under the representative test, a person or governmental entity generally controls a nonstock organization if more than 50 percent of the nonstock organization’s directors or trustees are also trustees, directors, officers, agents, or employees of the person or governmental entity. Unlike the representative test in §§ 1.512(b)– 1(l)(4)(i)(b), 53.4958–4(a)(2)(ii)(B)(1)(iii), and 1.414(c)–5(b), the proposed regulations expressly included an officer of the person or governmental entity as a representative for purposes of determining control of a nonstock organization. In response to Notice 2019–09, a commenter raised the issue of ‘‘accidental control’’ presented by the representative test in which, for example, control of an organization by an employer may be found because a few lower-level employees of the employer serve on the board of directors of the organization. The proposed regulations addressed this issue by permitting a nonstock organization (or its putative controlling person or governmental entity) to qualify for an exception from control status if the employees of the person or governmental entity that are directors or trustees of the nonstock organization are not trustees, directors, officers, or employees with the powers of a director or officer, of the person or governmental entity and are not acting as representatives of the person or governmental entity in their service with the nonstock organization. A nonstock organization that relies on this exception must report its reliance on this exception on the applicable Form 990 and provide supporting details. Another commenter on the proposed regulations stated that compliance with this exception to avoid ‘‘accidental 6 See also the representative test in section 4911(f)(2)(B)(i) for determining affiliated organizations. PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 6203 control’’ under the representative test places additional reporting burdens on exempt organizations and recommended that these final regulations remove ‘‘employees’’ altogether from the list of deemed representatives and instead focus the representative test on the actual decision-makers in the organization. The commenter suggested that an expansive list of deemed representatives, including employees, is more justifiable with an 80 percent control threshold. These final regulations do not adopt the commenter’s suggestions. The Treasury Department and the IRS have concluded that a rule that treats as non-officers any employees not defined as officers under the organization’s organizing documents may be subject to abuse because employees frequently function as officers, even if they do not have that title. Further, a rule that treats any employee without the title of officer as a non-officer would be inconsistent with other Code provisions addressing exempt organizations, which generally treat as an officer any person with similar powers. See, for example, sections 4946(b)(1), 4955(f)(2)(A), 4958(f)(2), 4965(d)(1), and 4966(d)(3)(A). In addition, an employee of an organization (such as a department head) may serve ex officio on the board of another organization, and, in substance, serve in a representative capacity. Similarly, the facts of other arrangements in which an employee serves on another organization’s board may demonstrate that the employee is serving as a representative of the employer. Finally, the percentage threshold of control is not necessarily relevant to the determination of whether the individual is serving in a representative capacity—an employer with less than a specific threshold percentage may still have reasons to have an employee represent its interests on another organization’s board of directors. For these reasons, these final regulations adopt without change the representative rules in the proposed regulations. The proposed regulations also addressed the status of foreign organizations as ATEOs, excluding them from ATEO status if described in section 4948(b) and the regulations thereunder. The Treasury Department and the IRS requested comments on whether a foreign related organization described in section 4948(b) should be exempt from tax imposed by section 4960(c)(4)(C) and, if so, whether remuneration paid by such an organization should nonetheless be taken into account for purposes of determining excess E:\FR\FM\19JAR12.SGM 19JAR12 khammond on DSKJM1Z7X2PROD with RULES12 6204 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations remuneration and allocating liability among the ATEO and related organizations that are subject to the excise tax imposed by section 4960. No comments were received on these issues. However, the Treasury Department and the IRS have concluded that it is appropriate to address these issues in these final regulations. Chapter 42 of the Code applies generally to private foundations and other tax-exempt organizations and the excise taxes in chapter 42 generally are payable by exempt organizations and in some cases by persons associated with them. However, under section 4948(b), sections 507 and 508 and chapter 42 do not apply to a foreign organization that has not received substantial support (other than gross investment income) from United States sources. Section 509(d) defines support for purposes of chapter 42 as including gifts, gross receipts from an activity that is not an unrelated trade or business under section 513, net income from unrelated business activities, gross investment income, tax revenues levied for the benefit of the organization, and the value of services or facilities furnished by a governmental unit without charge—a breadth of items that support a tax-exempt organization. Section 4948(b) is thus concerned with foreign private foundations (including entities treated as private foundations for purposes of chapter 42) and other taxexempt organizations that have received sufficient support from United States sources to warrant subjection to taxation and various prohibitions under chapter 42. Therefore, the Treasury Department and the IRS have determined that it is appropriate to exclude from taxation under section 4960 as a related organization any foreign organization that is both described in section 4948(b) and is either exempt from tax under section 501(a) 7 or a taxable private foundation.8 Such organizations excluded from the excise tax imposed by section 4960 are referred to as ‘‘section 4948(b) related organizations.’’ While chapter 42 taxes are inapplicable to section 4948(b) related organizations, those organizations’ activities that otherwise would have resulted in chapter 42 taxes may have other consequences. For example, section 4948(c) in certain circumstances imposes loss of exemption on an exempt 7 Some types of exempt organizations are limited to domestic organizations, such as section 501(c)(10) fraternal organizations. 8 A private foundation that loses its exemption under section 501(c)(3) remains a taxable private foundation until its private foundation status is terminated under section 507. See sections 509(b) and 4940(b). VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 organization described in section 4948(b) that engages in activities that would result in chapter 42 taxes for domestic organizations. Therefore, the Treasury Department and the IRS have determined that the remuneration paid to a covered employee of an ATEO by a section 4948(b) related organization must be taken into account by the ATEO and any related organizations subject to the excise tax imposed by section 4960 for purposes of determining an ATEO’s (and related organizations’) liability under section 4960 and the ATEO’s five highest-compensated employees, even though the section 4948(b) related organization is not subject to the excise tax imposed by section 4960 on the excess remuneration that is otherwise allocable to that organization. These final regulations also clarify that for purposes of applying the exclusion from status as an ATEO or a related organization, whether the foreign organization meets the requirements of section 4948(b) is determined at the end of the organization’s taxable year. III. Remuneration A. In General Consistent with section 4960(c)(3)(A), the proposed regulations defined ‘‘remuneration’’ as wages under section 3401(a) (meaning generally amounts subject to Federal income tax withholding), but excluding designated Roth contributions under section 402A(c) and including amounts required to be included in gross income under section 457(f). Remuneration does not include certain retirement benefits, including payments that are contributions to or distributions from a trust described in section 401(a); payments under or to an annuity plan described in section 403(a) at the time of payment; payments described in section 402(h)(1) and (2) if, at the time of the payment, it is reasonable to believe that the employee will be entitled to an exclusion under that section for the payment; payments under an arrangement to which section 408(p) applies; or payments under or to an eligible deferred compensation plan described in section 457(b) and maintained by an eligible employer described in section 457(e)(1)(A) (governmental employer) at the time of payment. See section 3401(a)(12). Remuneration includes a parachute payment, but excess remuneration does not include a parachute payment that is an excess parachute payment. These final regulations adopt these rules provided in the proposed regulations without change. PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 One commenter recommended that, for purposes of computing the excise tax, section 4960(c)(4)(A) should be interpreted to include only remuneration related to the employment of an employee by an ATEO, which would include remuneration paid by a related person or related governmental entity with respect to an ATEO or by any other third party, but only if the payment related to the employee’s employment by the ATEO. The commenter stated that this suggested interpretation would ensure that all remuneration with respect to a covered employee’s employment by an ATEO, including remuneration paid by a related organization of an ATEO with respect to services performed for the ATEO, would be included in computing the tax under section 4960(a). The commenter asserted that the suggested interpretation would avoid the unintended result, caused by the proposed regulations, of subjecting to the excise tax remuneration that is paid by persons who are not ATEOs for an individual’s services that are unrelated to an ATEO. The Treasury Department and the IRS have concluded that the more natural reading of the statute is that remuneration paid to a covered employee of an ATEO includes remuneration paid by a related organization with respect to services performed as an employee for the related organization. In addition, adoption of the commenter’s suggestion could raise the potential for abuse because it relies on an ability to identify the specific recipient of services that an employee provides to multiple entities and determine the relative value of the services or allocate the compensation to the entities under a reasonable allocation method. Specifically, given the facts and circumstances analysis that in many cases may be difficult and burdensome to administer, adoption of the suggestion could provide an opening for related taxpayers to coordinate their activities to mischaracterize the employer of an individual with respect to some or all services provided to a related organization, or to misallocate portions of the total remuneration paid by the related taxpayers to the individual as paid for services provided as an employee of a related organization, so that all the related entities avoid any liability under section 4960 while still providing what would otherwise be excess remuneration to the individual as an employee of an ATEO. While this type of identification and allocation may be needed for other tax purposes, including in some cases the E:\FR\FM\19JAR12.SGM 19JAR12 khammond on DSKJM1Z7X2PROD with RULES12 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations allocation of liability under section 4960, those applications do not involve a situation such as this in which all the entities may benefit from the mischaracterizations through the avoidance of the potential liability. Thus, the interpretation provided in these final regulations also is consistent with the exercise of authority in section 4960(d) to prevent avoidance of the tax imposed by section 4960 by providing compensation through a third party. Further, adoption of the commenter’s suggestion could raise issues regarding the role of section 4960(c)(6), the statutory provision coordinating the application of section 162(m) and section 4960, given the impact that adoption of the suggestion would have on the scope of circumstances to which that provision may apply. For these reasons, these final regulations do not limit the application of section 4960(c)(4)(A) to remuneration paid solely with respect to employment by an ATEO or for services provided to an ATEO, as suggested by the commenter. The commenter also suggested that these final regulations not treat remuneration paid by a related organization as paid by the ATEO if a covered employee is not employed by an ATEO at any time during an applicable year. For example, in circumstances in which a covered employee of an ATEO performs services for a related non-ATEO but provides no services for the ATEO during an applicable year, the commenter suggested that compensation for those services not be treated as remuneration under section 4960. These final regulations do not adopt this suggestion. Section 4960(c)(2)(B) provides that once an individual is a covered employee of an ATEO (or any predecessor), the employee remains a covered employee for all subsequent years. Section 4960(c)(4)(A) provides that ‘‘remuneration of a covered employee by an [ATEO]’’ includes ‘‘any remuneration paid with respect to employment of such employee by any related person or governmental entity.’’ The Treasury Department and the IRS have concluded that the better interpretation of section 4960(c)(2)(B) and (c)(4)(A), when read together, is that compensation paid to a covered employee by a related organization during an applicable year is remuneration for purposes of section 4960, even if the covered employee does not perform services as an employee of the ATEO during the applicable year. In addition, the commenter’s suggestion also raises administrability issues similar to those that would arise if only VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 remuneration for services provided to the ATEO were taken into account. If an employee provides services to different members of a group of related organizations from year to year, it may be difficult to determine what remuneration is allocable to services provided to each group member. Therefore, the commenter’s suggestion would be similarly difficult and burdensome to administer and could raise the potential for abuse. The same commenter also suggested that these final regulations apply the substance of the limited hours and nonexempt funds exceptions for purposes of determining remuneration paid. These final regulations do not adopt this suggestion because the Treasury Department and the IRS have concluded that the statute does not provide the authority to apply these exceptions to the definition of remuneration. The statute does not define compensation for purposes of identifying the five highestcompensated employees, and thus the statute permits flexibility in the rules for determining the five highestcompensated employees. In contrast, section 4960(c)(3)(A) defines remuneration as wages within the meaning of section 3401(a) (with certain specified modifications) paid by an ATEO and section 4960(c)(4)(A) provides that ‘‘remuneration of a covered employee by an [ATEO] shall include any remuneration paid with respect to employment of such employee by any related person or governmental entity.’’ These statutory provisions do not provide the flexibility to adopt the commenter’s suggestion to include the exceptions applicable to the determination of a covered employee in the definition of remuneration. Another commenter requested that these final regulations limit the scope of the definition of remuneration to include only regular employee wages, as defined in section 3401(a), and to exclude taxable fringe benefits from the section 4960 definition of remuneration. The commenter asserted that certain taxable fringe benefits, such as paid parking above the excludable limit and reimbursement of childcare expenses, are not the type of remuneration that was intended to be taxed under section 4960. The commenter further suggested that the inclusion of taxable fringe benefits in remuneration would have an adverse effect on certain employers’ ability to attract and retain key employees. These final regulations do not adopt this commenter’s suggestion because it would be inconsistent with the statutory provisions. Section 4960(c)(3)(A) defines remuneration as PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 6205 amounts that are ‘‘wages’’ within the meaning of section 3401(a). Section 3401(a) defines ‘‘wages’’ as all remuneration for services performed by an employee for his employer, including the cash value of all remuneration (including benefits) paid in any medium other than cash, with certain specific exclusions. Taxable fringe benefits, including parking above the excludable limit and reimbursement of childcare expenses, are not excluded from wages under section 3401(a). In addition, section 4960(c)(3) specifically excludes other type of wages, such as designated Roth contributions and remuneration for medical services, indicating a legislative intent for all other types of wages to be included. For these reasons, the Treasury Department and the IRS have determined that providing further exclusions such as those suggested would be inconsistent with the statute and these final regulations do not adopt this suggestion. The proposed regulations clarified that remuneration includes any amount includible in gross income as compensation under section 7872 and the regulations thereunder. For example, under § 1.7872–15(e)(1)(i), a below-market split-dollar loan between an employer and employee generally is treated as a compensation-related loan, and thus any imputed transfer from the employer to the employee generally is a payment of compensation. Although section 7872(f)(9) provides that no amount shall be withheld under chapter 24 of the Code with respect to any amount treated as transferred or retransferred under section 7872(a) or received under section 7872(b), those amounts are ‘‘remuneration . . . for services performed by an employee for his employer’’ within the meaning of section 3401(a) and are not specifically excluded from wages under section 3401(a). Thus, those amounts are remuneration as defined in section 4960(c)(3)(A). ATEOs that are private foundations or section 509(a)(3) supporting organizations should consider, before entering into these arrangements, that loans (including transactions treated as loans for Federal tax purposes, such as split-dollar arrangements) to certain employees may constitute an act of self-dealing under section 4941 or an excess benefit transaction under section 4958(c)(3). A commenter recommended that these final regulations, or alternatively the preamble to these final regulations, confirm that remuneration does not include amounts that are not includible in gross income pursuant to the $10,000 de minimis exception under section 7872(c)(3). Under that exception, the E:\FR\FM\19JAR12.SGM 19JAR12 6206 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES12 foregone interest attributable to any day on which the aggregate outstanding amount of loans between the borrower and lender does not exceed $10,000 is not includible in gross income. These final regulations adopt the commenter’s suggestion and clarify that, in accordance with section 7872, these de minimis amounts are not remuneration for purposes of section 4960. Other than this comment that resulted in this clarification, no further comments were received on those provisions of the proposed regulations, and these final regulations adopt them without further changes. B. Remuneration Related to Medical Services Remuneration that is paid to a licensed medical professional for medical services is excluded from the definition of ‘‘remuneration’’ for purposes of section 4960. (See section II.F. of the Summary of Comments and Explanation of Revisions, titled ‘‘Medical Services,’’ for a further discussion of the scope of this exception.) When an employer pays remuneration to an employee for both medical services (including related services, such as medical recordkeeping) and other services, the employer must allocate that remuneration between remuneration paid for medical services or for other services. These final regulations adopt the proposed regulations, with minor clarifications, and permit taxpayers to use a reasonable, good faith method to allocate remuneration between these two categories of services. For this purpose, taxpayers may rely on a reasonable allocation set forth in an employment agreement allocating remuneration between medical services and other services. If some or all of the remuneration is not reasonably allocated in an employment agreement, taxpayers must use another reasonable method of allocation. For example, allocating remuneration to medical services based on the portion of the total hours the employee worked for the employer providing medical services (determined based on records such as patient, insurance, Medicare/Medicaid billing records, or internal time reporting mechanisms) would be a reasonable method. In section III.B. of the Explanation of Provisions of the proposed regulations, titled ‘‘Remuneration Related to Medical Services,’’ the Treasury Department and the IRS requested comments on other reasonable methods of allocating remuneration between medical services and other services. One commenter recommended that an employer be VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 permitted to make a reasonable, good faith allocation between remuneration for providing medical services and remuneration for providing nonmedical services, not only with respect to current remuneration but also with respect to contributions and earnings under a deferred compensation plan. These final regulations adopt this recommendation and clarify that an employer may make a reasonable, good faith allocation between remuneration for medical and nonmedical services, regardless of the form of compensation, and that an employer may apply the same principles with respect to contributions and earnings under a deferred compensation plan. C. When Remuneration Is Treated as Paid The proposed regulations addressed when remuneration is treated as paid for purposes of section 4960. The flush language at the end of section 4960(a) provides that, for purposes of section 4960(a), remuneration is treated as paid when there is no substantial risk of forfeiture of the rights to the remuneration within the meaning of section 457(f)(3)(B). Although section 4960(a) cross-references the definition of ‘‘substantial risk of forfeiture’’ in section 457(f)(3)(B), the rule under section 4960(a) providing that remuneration is treated as paid when there is no substantial risk of forfeiture of the rights to the remuneration is neither limited to remuneration that is otherwise subject to section 457(f) nor limited to amounts paid pursuant to a nonqualified deferred compensation arrangement. The proposed regulations provided that, for purposes of section 4960(a), all forms of remuneration except for ‘‘regular wages’’ as described in the next paragraph are treated as paid when the remuneration is not subject to a substantial risk of forfeiture. These final regulations adopt this payment timing rule provided in the proposed regulations with certain modifications, as discussed in further detail in this section. To clarify when remuneration that is never subject to a substantial risk of forfeiture is treated as paid, the proposed regulations provided that remuneration that is a ‘‘regular wage’’ within the meaning of § 31.3402(g)– 1(a)(ii) is treated as paid at the time of actual or constructive payment. A ‘‘regular wage’’ is defined in § 31.3402(g)–1(a)(ii) as remuneration ‘‘paid at a regular hourly, daily, or similar periodic rate (and not an overtime rate) for the current payroll period or at a predetermined fixed determinable amount for the current PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 payroll period.’’ These final regulations adopt these rules provided in the proposed regulations without change. Because the final regulations provide that remuneration that is a regular wage within the meaning of § 31.3402(g)– 1(a)(1)(ii) is treated as paid when actually or constructively paid, an employer will not need to determine amounts of regular wages that vested in the preceding year for purposes of section 4960. For example, if a pay period begins December 25, 2022, and ends January 7, 2023, and the salary for that period is not actually paid until January 14, 2023, then the salary for the pay period is treated as paid in 2023, and the employer need not treat any amount as remuneration paid in 2022 due to vesting in 2022. The proposed regulations treated an amount that is not regular wages as paid when it is no longer subject to a substantial risk of forfeiture within the meaning of section 457(f)(3)(B) and referred to such an amount as ‘‘vested.’’ The Treasury Department and the IRS issued proposed regulations under section 457(f) in 2016 (81 FR 40548 (June 22, 2016)), upon which taxpayers may rely for periods before the applicability date of the final section 457(f) regulations. Under Prop. § 1.457– 12(e)(1), an amount of compensation is subject to a substantial risk of forfeiture only if entitlement to the amount is conditioned on the future performance of substantial services, or upon the occurrence of a condition that is related to a purpose of the compensation if the possibility of forfeiture is substantial. See Prop. § 1.457–12(e)(3) for examples of the rules relating to substantial risk forfeiture. These final regulations adopt the rules provided in the proposed regulations, including the definition of ‘‘substantial risk of forfeiture’’ in Prop. § 1.457–12(e)(1). Any changes to the proposed regulations under section 457(f) when finalized will be considered for purposes of section 4960, and further guidance may be issued, if appropriate, including any transition guidance that may be needed to take into account periods before and after the applicability date of the definition of substantial risk of forfeiture under the final section 457(f) regulations. In section III.C. of the Explanation of Provisions of the proposed regulations, titled ‘‘When Remuneration Is Treated as Paid,’’ the Treasury Department and the IRS invited comments regarding any burdens that could be avoided through a short-term deferral rule and how such a rule could be designed to avoid permitting inappropriate avoidance of the tax. One commenter recommended that these final regulations extend the E:\FR\FM\19JAR12.SGM 19JAR12 khammond on DSKJM1Z7X2PROD with RULES12 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations rule for ‘‘regular wages’’ as defined in § 31.3402(g)–1(a) to amounts that are not treated as deferred compensation under § 1.409A–1(b)(4) or Prop. § 1.457– 12(d)(2) because such amounts are paid within the ‘‘short-term deferral’’ period. The commenter suggested that other remuneration that falls outside the definition of ‘‘regular wages’’ be treated as remuneration when actually or constructively paid, including benefits under bona fide severance pay plans and death and disability plans, as well as annual bonuses, long-term incentive pay, business expense reimbursements, and noncash fringe benefits. The commenter noted that such amounts are treated as wages for other reporting purposes, including Federal Insurance Contributions Act (FICA) wage reporting, when actually or constructively paid, and thus the rules under the proposed regulations result in a timing mismatch. The commenter asserted that this recommendation would substantially reduce the administrative burden and potential for errors created by the broad timing rule in the proposed regulations, yet affect a limited range of remuneration. Another commenter recommended that these final regulations provide that the short-term deferral exception to the definition of deferred compensation for section 457(f) apply to section 4960 such that the year of inclusion for income tax purposes matches the year of inclusion for section 4960 purposes. The commenter interpreted the statutory reference to wages under section 3401(a) and amounts included in income under section 457(f) as providing not only a substantive rule but also a timing rule, meaning the amount must either be wages within the meaning of section 3401(a) paid during that year or be an amount included in income under section 457(f) during that year in order to be treated as remuneration paid in that year. According to the commenter, since amounts that meet the definition of a short-term deferral for purposes of section 457(f) are neither wages under section 3401(a) nor includible in income under section 457(f) in the year of vesting, those amounts should be treated as remuneration for purposes of section 4960 only in the year actually paid. Further, the commenter noted that applying a short-term deferral rule would simplify administration for employers because the determination of remuneration would more closely track the determination of wages for Form W– 2, ‘‘Wage and Tax Statement,’’ reporting. The commenter acknowledged the concern stated in section III.C. of the Explanation of Provisions of the VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 proposed regulations, titled ‘‘When Remuneration Is Treated as Paid,’’ that a short-term deferral rule would permit an ATEO to select the year in which remuneration would be subject to tax under section 4960, but observed that an individual may become a covered employee during the section 457(f) short-term deferral period after the year of vesting, and thus the proposed rule could actually result in amounts not being subject to the excise tax. The commenter also observed that treating short-term deferrals as remuneration in the year of vesting requires that those amounts be present-valued and that earnings be included in remuneration in the subsequent year, resulting in additional complexity for ATEOs. Finally, the commenter suggested that an employer be permitted to include an amount in remuneration in the year of vesting or include the amount in the year of payment, as is permitted for FICA tax purposes under § 31.3121(v)(2)–1(b)(3)(iii), and require that employers apply consistent treatment of amounts with respect to its selection of the timing of FICA taxation of short-term deferrals and timing of the treatment as remuneration for purposes of section 4960. These final regulations do not adopt the commenter’s suggestions to apply a ‘‘short-term deferral’’ rule. Rather, these final regulations adopt the applicable provisions of the proposed regulations without change. Under section 4960(c)(3), an amount must either be wages under section 3401(a) or be includible in income under section 457(f) in order to be remuneration under section 4960. However, the rules under section 4960(c)(3) determine whether an amount is remuneration, not when the remuneration is considered to be paid. The flush language at the end of section 4960(a) provides that, for purposes of section 4960(a), remuneration is treated as paid when there is no substantial risk of forfeiture, as defined in section 457(f)(3)(B), of the rights to the remuneration. Section 3401(a) primarily focuses on whether, not when, amounts are includible in wages; the basic timing rule for wage inclusion appears in regulations under section 3402(a), not section 3401(a). Specifically, § 31.3402(a)–1(b) provides that wages are paid when actually or constructively paid and explains what it means for an amount to be constructively paid. Thus, the cross-reference to section 3401(a) (and not section 3402(a)) in section 4960(c)(3) establishes the scope of the term ‘‘remuneration’’ without regard to timing, but the flush language in section 4960(a) establishes the timing rule that PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 6207 applies to all forms of remuneration. In addition to being inconsistent with the statutory language addressing the timing of the payment of remuneration, allowing a short-term deferral rule similar to the rule in § 1.409A–1(b)(4) and Prop. § 1.457–12(d)(2) could permit an employer to determine the taxable year in which the amount is treated as paid, which could be used not only to manipulate the application of section 4960(a) to the remuneration paid, but also to manipulate the identification of covered employees. This application of the statutory language results in circumstances in which the amount of remuneration paid for purposes of section 4960 is not the same as the amount reported in any box on Form W–2 for an applicable year. However, as described later in this section, these final regulations address the administrative burden of calculating the present value of vested but unpaid amounts by expanding the ability to include at vesting the full amount that is to be paid in circumstances in which there is a short delay between vesting and payment. These final regulations adopt the rule set forth in the proposed regulations that provided that an amount of remuneration treated as paid generally is the present value of the remuneration on the date on which the covered employee vests in the right to payment of the remuneration. The employer must determine the present value using reasonable actuarial assumptions regarding the amount, time, and probability that the payment will be made. These final regulations do not provide rules for the determination of present value. However, an employer may determine the present value using the rules set forth in Prop. § 1.457– 12(c)(1). The Treasury Department and the IRS anticipate that final regulations addressing the determination of present value for purposes of section 4960 will be issued when final regulations under section 457(f) are issued. Until actually or constructively paid or otherwise includible in gross income of the employee, any amount treated as paid at vesting is referred to as ‘‘previously paid remuneration.’’ To reduce the administrative burden of determining the present value of remuneration in certain circumstances that would involve minimal discounting, these final regulations adopt the rule provided in the proposed regulations that the employer may treat the entire amount to be paid on a future date (without making a present valuation determination) as the present value on the date of vesting. However, these final regulations do not limit the E:\FR\FM\19JAR12.SGM 19JAR12 6208 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES12 application of this rule to amounts that are paid under a nonaccount balance plan described in § 1.409A–1(c)(2)(i)(C), but instead this rule applies to any vested amount that is scheduled to be paid within 90 days. For example, an employer is not required to discount an annual bonus of $10,000 that vests on December 31, 2022, and is scheduled to be paid on February 15, 2023, to reflect the delay in actual payment, but instead may treat $10,000 as remuneration paid in 2022. D. Earnings and Losses These final regulations generally adopt the proposed regulations and provide specific rules for the treatment of earnings and losses on previously paid remuneration. In general, these rules are intended to minimize administrative burdens in determining the amount of earnings and losses treated as paid for an applicable year, as well as in determining the amount of earnings and losses across multiple compensation arrangements. The proposed regulations provided that net earnings on previously paid remuneration are treated as vested (and therefore paid) on the last day of the applicable year in which they are accrued unless otherwise actually or constructively paid before that date. For example, the present value of vested remuneration accrued to an employee’s account under an account balance plan described in § 1.409A–1(c)(2)(i)(A) (under which the earnings and losses attributed to the account are based solely on a predetermined actual investment or a reasonable market interest rate) is treated as paid on the date accrued to the employee’s account and, until subsequently actually or constructively paid, is treated as previously paid remuneration. In addition, at the end of each applicable year in which there is previously paid remuneration remaining in the covered employee’s account balance, the present value of any net earnings accrued on that previously paid remuneration (the increase in present value due to the application of a predetermined actual investment or a reasonable market interest rate) is treated as remuneration paid in that applicable year. This remuneration is then treated as previously paid remuneration for subsequent applicable years until actually or constructively paid. Similarly, the proposed regulations provided that the present value of a vested, fixed amount of remuneration under a nonaccount balance plan described in § 1.409A–1(c)(2)(i)(C) is treated as paid on the date of vesting and subsequently treated as previously VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 paid remuneration until actually or constructively paid. In addition, at the end of each applicable year in which previously paid remuneration remains as part of the covered employee’s benefit under the plan, the net increase in the present value of that amount during the year due solely to the passage of time constitutes earnings and is treated as remuneration paid. For this purpose, earnings and losses from one plan or arrangement are aggregated with earnings and losses from any other plan or arrangement in which the employee participates that is provided by the same employer (but not across arrangements provided by related but separate employers). For purposes of determining earnings and losses, previously paid remuneration under a plan or arrangement is reduced by the amount actually or constructively paid under the plan or arrangement. These final regulations further illustrate the operation of these rules through examples. One commenter recommended that these final regulations permit, but not require, related employers to determine net earnings on previously paid remuneration on an aggregate basis by treating all earnings and losses on the previously paid remuneration of related employers as paid by the ATEO. The commenter explained that in groups of related taxable and tax-exempt organizations, related organizations often provide separate deferred compensation plans to their employees. Therefore, an individual employee who works (or has worked) for multiple related employers might have several deferred compensation plans, which often differ considerably, with some being nonaccount balance plans and others being account balance plans that may offer very different investment options. As a result, an individual employee might accrue significant earnings in a year under some deferred compensation plans but incur significant losses in others. The commenter therefore suggested that these final regulations permit aggregation of losses with earnings among related employers to avoid the inappropriate inflation of remuneration in certain circumstances. Any concerns about manipulation due to permitting aggregation could be addressed by requiring employers to aggregate (or not aggregate) earnings and losses consistently from year to year, with changes allowed only infrequently—for example, every 3 years—unless in response to changes in the composition of the group of related organizations. These final regulations do not adopt the commenter’s suggestion to permit PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 the aggregation of earnings and losses among related organizations. The commenter’s suggestions would be feasible among related organizations only if they agreed to either aggregate or disaggregate arrangements as to all employees and also to coordinate and integrate their remuneration calculations across the separate plans and arrangements that each employer established to permit timely and accurate calculations for each covered employee (and employees that may become covered employees) who participated in more than one employer arrangement. Even if this was feasible for a particular year, the regulatory framework would need to account for the entry and departure of members of the group of related organizations and how the aggregation or disaggregation would account for those events. This regime would be complex and burdensome for taxpayers and the IRS to administer and is not warranted due to the limited potential benefits. In addition, the aggregation of earnings and losses across related employers would implicate the statutory allocation of the liability for the tax on excess remuneration under section 4960(c)(4)(C), since the aggregation of earnings and losses would impact the relative remuneration paid by the separate employers. E. Request for a Grandfathering Rule One commenter suggested that these final regulations provide for grandfathering of employee remuneration contracts executed on or before November 2, 2017, so that amounts paid under such contracts would not be treated as remuneration for purposes of section 4960. The commenter reasoned that the grandfathering of employee remuneration contracts executed on or before November 2, 2017, would help certain employers in overcoming challenges in hiring executives, and that the legislative history of the TCJA failed to consider the differences between taxexempt employers and their taxable counterparts. The final regulations do not adopt the commenter’s suggested rule. Section 13602(c) of TCJA, which added section 4960 to the Code, did not provide for a grandfathering rule and there is no indication in the legislative history that Congress intended that one be adopted by regulation. In contrast, section 13601 of TCJA amended section 162(m) of the Code and provided an explicit grandfathering rule. Under these circumstances, the Treasury Department and the IRS do not find it appropriate to provide a grandfathering rule. However, these final regulations E:\FR\FM\19JAR12.SGM 19JAR12 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES12 provide rules that have the effect of grandfathering remuneration that vested before the taxpayer’s first taxable year beginning after December 31, 2017. Section III.E. of the Explanation of Provisions of the proposed regulations, titled ‘‘Request for a Grandfather Rule,’’ explained that one of the consequences of treating remuneration as paid at the time the remuneration vests is that any remuneration that vested prior to the first day of the first taxable year of the ATEO beginning after December 31, 2017, is not considered remuneration for purposes of section 4960. One commenter recommended that the Treasury Department and the IRS explicitly reflect this rule in these final regulations. In response to this comment, these final regulations provide that any vested remuneration, including vested but unpaid earnings accrued on deferred amounts, that is treated as paid before the effective date of section 4960 (January 1, 2018, for a calendar year employer) is not subject to the excise tax imposed under section 4960(a)(1). All earnings on those vested amounts that accrue or vest after the effective date, however, are treated as remuneration paid for purposes of section 4960(a)(1). Similarly, for an employee who has vested compensation from years prior to the taxable year in which the employee first became a covered employee, these final regulations adopt the rule in the proposed regulations providing that vested remuneration (including vested but unpaid earnings) that would have been treated as remuneration paid for a taxable year before the taxable year in which an employee first became a covered employee under section 4960 is not remuneration subject to the excise tax imposed by section 4960(a)(1) for the first taxable year in which the employee becomes a covered employee or any subsequent year. However, subsequent earnings that accrue on those vested amounts when the employee is a covered employee are treated as remuneration paid for purposes of section 4960(a)(1). F. Remuneration Paid to a Covered Employee for Which a Deduction Is Disallowed Under Section 162(m) Section 4960(c)(6) provides that remuneration for which a deduction is disallowed under section 162(m) is not taken into account for purposes of section 4960. Thus, remuneration that is paid to a covered employee of an ATEO who is also a covered employee of a related ‘‘publicly held corporation’’ or an applicable individual of a related ‘‘covered health insurance provider’’ (as defined in section 162(m)(2) and VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 (m)(6)(C), respectively), for which a deduction is disallowed under section 162(m), generally is not treated as remuneration for purposes of determining whether remuneration has been paid. However, that remuneration is taken into account for purposes of determining the ATEO’s five highestcompensated employees. See section II.E. of this Summary of Comments and Explanation of Revisions, titled ‘‘Covered Employee.’’ As discussed in section III.F. of the Explanation of Provisions of the proposed regulations, titled ‘‘Remuneration Paid to a Covered Employee for Which a Deduction Is Disallowed Under Section 162(m),’’ the application of this provision raises significant issues stemming largely from the difference in timing between the payment of remuneration under section 4960 (when the right to the amount vests), and the availability of a deduction that may be restricted by section 162(m) (generally when the amount is paid). Section III.F. of the Explanation of Provisions of the proposed regulations, titled ‘‘Remuneration Paid to a Covered Employee for Which a Deduction Is Disallowed Under Section 162(m),’’ described two possible approaches for addressing these circumstances and requested comments on those approaches. The Treasury Department and the IRS continue to consider the issues raised by this provision in section 4960(c)(6) requiring coordination with section 162(m), including the comments submitted, but have not yet determined the appropriate manner of implementation. Accordingly, these final regulations do not address the coordination of sections 4960 and 162(m) in these circumstances, but instead reserve a section of these final regulations as a place for future guidance. Until that future guidance is issued, taxpayers may use a reasonable, good faith approach with respect to the coordination of sections 4960 and 162(m) in circumstances in which it is not known whether a deduction for the remuneration will be disallowed under section 162(m) by the due date (including any extension) of the relevant Form 4720. For this purpose, a reasonable, good faith approach must have a reasonable basis for anticipating that the compensation that a particular employee will be paid in the future may be subject to the deduction limitations of section 162(m). For example, it is not reasonable for this purpose to anticipate that an ATEO may become a public corporation by the date the compensation will be paid absent facts PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 6209 indicating that is a realistic potentiality. Additionally, until further guidance is issued, the two approaches regarding deferred compensation described in section III.F. of the Explanation of Provisions of the proposed regulations, titled ‘‘Remuneration Paid to a Covered Employee for Which a Deduction Is Disallowed Under Section 162(m),’’ will be treated as reasonable, good faith approaches. However, a third approach suggested by a commenter, under which section 162(m) would not disallow a taxpayer’s deduction for remuneration that the taxpayer treated as excess remuneration under section 4960 in a previous taxable year, will not be treated as a reasonable, good faith approach, because such an approach would be inconsistent with section 162(m) and the regulations thereunder. IV. Excess Remuneration In general, the excise tax imposed under section 4960(a)(1) is based on the remuneration paid (other than any excess parachute payment) by an ATEO for the taxable year with respect to employment of any covered employee in excess of $1 million. Consistent with the proposed regulations, these final regulations refer to this amount as ‘‘excess remuneration.’’ The $1 million threshold provided in section 4960(a)(1) is not adjusted for inflation, and an amount subject to tax under section 4960(a)(2) as an excess parachute payment is not subject to tax under section 4960(a)(1) as excess remuneration. As provided in section 4960(c)(4)(C), if an individual performs services as an employee for two or more related organizations during an applicable year, one or more of which is an ATEO, each employer is liable for its proportionate share of the excise tax. These final regulations adopt the rules provided in the proposed regulations for allocating liability for the excise tax among the employers. For this purpose, remuneration that is paid by a separate organization (whether related to the ATEO or not) for services performed as an employee of the ATEO is treated as remuneration paid by the ATEO. For a further discussion of when amounts are treated as paid by an ATEO, see section VI of this Summary of Comments and Explanation of Revisions, titled ‘‘Calculation, Reporting, and Payment of the Tax.’’ V. Excess Parachute Payments A. In General The proposed regulations set forth rules with respect to excess parachute payments under section 4960. No E:\FR\FM\19JAR12.SGM 19JAR12 6210 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations comments were received on these rules, and these final regulations adopt them without change. Section 4960(a)(2) imposes an excise tax on any excess parachute payment. Section 4960(c)(5)(A) provides that ‘‘excess parachute payment’’ means an amount equal to the excess of any parachute payment over the portion of the base amount allocated to such payment. Section 4960(c)(5)(B) provides that ‘‘parachute payment’’ means any payment in the nature of compensation to (or for the benefit of) a covered employee if the payment is contingent on the employee’s separation from employment with the employer and the aggregate present value of the payments in the nature of compensation to (or for the benefit of) the individual that are contingent on the separation equals or exceeds an amount equal to 3-times the base amount. Under section 4960(c)(5)(C), certain retirement plan payments, certain payments to licensed medical professionals, and payments to an individual who is not a ‘‘highly compensated employee’’ (HCE) as defined in section 414(q) are not excess parachute payments.9 The excess parachute payment rules under section 4960 are modeled after section 280G, but section 4960(c)(5)(B) defines ‘‘parachute payment’’ differently than section 280G(b)(2). The section 4960 definition refers to payments contingent on an employee’s separation from employment, whereas the section 280G definition refers to payments contingent on a change in the ownership or effective control of a corporation (or in the ownership of a substantial portion of the assets of the corporation). While these final regulations incorporate many of the concepts found in the rules under § 1.280G–1, with modifications to reflect the statutory differences between sections 280G and 4960, they do not incorporate other rules under § 1.280G– 1 because those rules address issues that do not arise under section 4960. In addition, many provisions in these final regulations do not have parallel rules under § 1.280G–1 because they address khammond on DSKJM1Z7X2PROD with RULES12 9 Under section 414(q), a ‘‘highly compensated employee’’ generally is defined as any employee who was a five-percent owner at any time during the year or the preceding year or who had compensation from the employer in the preceding year in excess of an inflation-adjusted amount. Notice 2019–59 (2019–47 I.R.B. 1091) and Notice 2020–79 (2020–46 I.R.B 1014), provide that the inflation-adjusted amounts for 2020 and 2021 are $130,000 and $130,000, respectively. See section 414(q) and the regulations thereunder for additional rules, including the availability of an election to treat no more than the top 20 percent of an employer’s employees as highly compensated employees by reason of their compensation. VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 issues that arise under section 4960, but not under section 280G. The following sections provide a general overview of these final regulations for purposes of calculating the excise tax imposed under section 4960(a)(2), noting certain similarities and differences between these final regulations and the rules under § 1.280G–1. For more information concerning these rules, including additional similarities and differences with the rules under section 280G, see section V of the Explanation of Provisions of the proposed regulations, titled ‘‘Excess Parachute Payments.’’ B. Definitions Related to Excess Parachute Payments These final regulations define ‘‘excess parachute payment’’ and the term ‘‘parachute payment’’ for purposes of section 4960. Any payment in the nature of compensation made by an ATEO (or any predecessor or related organization) to a covered employee that is contingent on the employee’s separation from employment is taken into account for purposes of the parachute payment calculation, assuming no exclusion applies. Those combined payments constitute a parachute payment if the aggregate present value of all such payments made to an individual equals or exceeds 3-times the individual’s base amount. A parachute payment is an excess parachute payment to the extent it exceeds one-times the individual’s base amount allocated to the payment. These final regulations define a ‘‘payment in the nature of compensation’’ based on § 1.280G–1, Q/ A–11 and Q/A–14. In general, any payment arising out of an employment relationship is a payment in the nature of compensation. A payment in the nature of compensation is reduced, however, by any consideration paid by the covered employee in exchange for the payment. C. Payments Contingent on a Separation From Employment 1. In General Although section 4960 does not define what it means for a payment to be contingent on a separation from employment, these final regulations generally treat a payment as contingent on an employee’s separation from employment only if there is an involuntary separation from employment. If the payment is subject to a substantial risk of forfeiture (defined in a manner consistent with section 457(f)) that lapses upon an involuntary separation from PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 employment, and the separation causes the risk of forfeiture to lapse, the payment is contingent on separation from employment. 2. Requirement of Involuntary Separation From Employment Separation from employment (whether voluntary or involuntary) often is used in compensation arrangements as a trigger to pay vested compensation. For example, it is typical for a nonqualified deferred compensation plan to provide that a payment or a series of payments will be made or begin upon a separation from employment, including separation from employment resulting from death or disability. The vested amounts that are to be paid after a separation from employment generally are not treated as contingent on a separation from employment because the amounts will never be subject to forfeiture or otherwise not paid (even if an employee does not voluntarily or involuntarily terminate employment during the employee’s lifetime, the payments will be made upon the employee’s death). In these cases, the separation from employment functions only as a payment timing event and is neither a contingent event that may not occur nor a precondition to entitlement to the payment. 3. Definition of ‘‘Involuntary Separation From Employment’’ If an amount is payable solely upon an involuntary separation from employment, then it is a payment contingent on an event that may not occur and that is a precondition to entitlement to the payment. The definition of an ‘‘involuntary separation from employment’’ set forth in these final regulations is modeled after the definition of an ‘‘involuntary separation from service’’ in § 1.409A–1(n)(1), which also was the model for the definition of an ‘‘involuntary severance from employment’’ under Prop. § 1.457– 11(d)(2). A separation from employment for good reason is treated as an involuntary separation from employment for purposes of section 4960 if certain conditions are met. For this purpose, these regulations generally adopt the standards set forth in § 1.409A–1(n)(2) and Prop. § 1.457– 11(d)(2)(ii). These final regulations generally adopt the standards of the section 409A regulations for purposes of determining whether there has been a separation from employment, except that for purposes of section 4960 a bona fide change from employee to independent contractor status is treated as a E:\FR\FM\19JAR12.SGM 19JAR12 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES12 separation from employment. Because the section 409A regulations do not provide a standard for determining when an involuntary change of status from employee to independent contractor results in a separation from employment, in section V.C.3. of the Explanation of Provisions of the proposed regulations, titled ‘‘Definition of ‘Involuntary Separation from Employment,’ ’’ the Treasury Department and the IRS requested comments on whether additional guidance is needed on this issue. No comments were received in response to that request. Consistent with the proposed regulations, these final regulations provide that a separation from employment occurs in the case of a bona fide and involuntary change of status from employee to independent contractor in circumstances in which the change in status otherwise meets the requirements for an involuntary separation from employment. With respect to when an employee otherwise has terminated employment, these final regulations adopt rules based on the section 409A regulations. Specifically, these regulations adopt the standards of § 1.409A–1(h)(1)(ii), providing that an anticipated reduction in the level of services of more than 80 percent is treated as a separation from employment, an anticipated reduction in the level of services of less than 50 percent is not treated as a separation from employment, and the treatment of an anticipated reduction between these two levels will depend on the facts and circumstances. The measurement of the anticipated reduction in the level of services is based on the average level of bona fide services performed over the immediately preceding 3 years (or shorter period for an employee employed for less than 3 full prior years). However, these regulations do not adopt the rule in § 1.409A– 1(h)(1)(ii), under which an employer may modify the level of the anticipated reduction in future services that will be considered to result in a separation from employment. 4. When a Payment Is Contingent on Separation From Employment In defining when a payment is contingent on separation from employment, these final regulations do not focus solely on whether the payment would not have been made but for a separation from employment, but also take into consideration whether the separation from employment accelerates the right to payment or the lapse of a substantial risk of forfeiture with respect to the right to payment. Generally, if the payment or the lapse of a substantial VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 risk of forfeiture is accelerated as a result of an involuntary separation from employment (such as a payment that otherwise would have vested and been paid had the employee remained employed for a subsequent period), then the value of any accelerated payment plus the value of any lapse of the substantial risk of forfeiture is treated as contingent on a separation from employment (since the employer would not have provided the increased value in the absence of an involuntary separation from employment). However, if the lapse of the substantial risk of forfeiture is dependent on an event other than the performance of services, such as the attainment of a performance goal, and if that event does not occur prior to the employee’s separation from employment, but the payment vests due to the employee’s involuntary separation from employment, then the full amount of the payment is treated as contingent on the separation from employment. As discussed in section V.C.4. of the Explanation of Provisions of the proposed regulations, titled ‘‘When a Payment Is Contingent on Separation from Employment,’’ a payment the right to which is not subject to a substantial risk of forfeiture within the meaning of section 457(f)(3)(B) at the time of an involuntary separation from employment generally is not contingent on a separation from employment (since the right to the payment is not triggered by the separation from employment). However, the increased value of a payment accelerated due to the involuntary separation from employment, and the value of accelerated vesting due to the involuntary separation from employment, each generally are treated as a payment contingent on a separation from employment. In addition, a payment for damages due to the breach of an employment agreement that is related to an involuntary separation from employment generally constitutes a payment contingent on a separation from employment, and a payment for compliance with a noncompetition agreement or similar arrangement may, in certain situations, constitute a payment contingent on a separation from employment. Actual or constructive payment of an amount that was previously includible in gross income is not a payment contingent on a separation from employment. For example, a payment of deferred compensation after an involuntary separation from employment that vested based on years of service completed before the PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 6211 involuntary separation from employment generally is not a payment that is contingent on a separation from employment because the separation from employment may affect the time of, but not the right to, the payment (although the value of an acceleration of the payment may be contingent on a separation from employment). Unlike Q/A–25 and Q/A–26 of § 1.280G–1, these regulations do not provide a presumption that a payment made pursuant to an agreement entered into or modified within 12 months of a separation from employment is a payment that is contingent on a separation from employment. However, as discussed later in this section, if the facts and circumstances demonstrate that either the vesting or the payment of an amount would not have occurred but for the involuntary nature of the separation from employment, the amount will be treated as a payment contingent on a separation from employment. In addition, these final regulations do not provide a rule similar to § 1.280G– 1, Q/A–9 (exempting reasonable compensation for services rendered on or after a change in ownership or control from the definition of ‘‘parachute payment’’), which would exclude reasonable compensation for services provided after a separation from employment. In most cases, the issue of whether payments made after a separation from employment are reasonable compensation for services will not arise because the employee will not provide services after the separation from employment. However, if the employee continues to provide services (including as a bona fide independent contractor) after an involuntary separation from employment, payments for those services are not contingent on the involuntary separation from employment to the extent those payments are reasonable and are not made due to the involuntary nature of the separation from employment. Notwithstanding the foregoing, if the facts and circumstances demonstrate that either vesting or payment of an amount (whether before or after an involuntary separation from employment) would not have occurred but for the involuntary nature of the separation from employment, the amount will be treated as contingent on a separation from employment. For example, an employer’s exercise of discretion to accelerate vesting of an amount shortly before an involuntary separation from employment may indicate that the acceleration of vesting was due to the involuntary nature of the separation from employment and was E:\FR\FM\19JAR12.SGM 19JAR12 6212 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES12 therefore contingent on the employee’s separation from employment. In section V.C.4. of the Explanation of Provisions of the proposed regulations, titled ‘‘When a Payment Is Contingent on Separation from Employment,’’ the Treasury Department and the IRS requested comments on whether there are additional types of payments made in connection with separation from employment and the extent to which these final regulations under section 4960 should be modified to ensure appropriate classification of those payments as contingent or not contingent on separation from employment. No comments were received in response to this request, and no modifications have been made in the final regulations. D. Three-Times-Base-Amount Test Section 4960(c)(5) provides rules for determining the tax on any excess parachute payment imposed under section 4960(a)(2). Section 4960(c)(5)(B) provides that a payment is a parachute payment only if the aggregate present value of the payments in the nature of compensation to (or for the benefit of) an individual that are contingent on a separation from employment equals or exceeds an amount equal to 3-times the base amount. Section 4960(c)(5)(D) provides that rules similar to the rules of section 280G(b)(3) apply for purposes of determining the base amount, and section 4960(c)(5)(E) provides that rules similar to the rules of section 280G(d)(3) and (4) apply for purposes of present value determinations. Section 280G(b)(3) provides that ‘‘base amount’’ means an individual’s annualized includible compensation for the base period. Section 280G(d)(2) defines ‘‘base period’’ as the period consisting of the 5 most-recent taxable years of the service provider ending before the date on which the change in ownership or control occurs or the portion of such period during which the individual performed personal services for the corporation. These final regulations provide that the ‘‘base amount’’ is the average annual compensation as an employee of the ATEO (including services performed as an employee of a predecessor or related organization) for the taxable years in the ‘‘base period.’’ The base period is the 5 most-recent taxable years during which the individual was an employee of the ATEO (or predecessor or related organization) or the portion of the 5-year period during which the employee was an employee of the ATEO (or predecessor or related organization). These final regulations provide rules for determining whether a payment is VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 an excess parachute payment, including rules for applying the 3-times-baseamount test. The rules for determining the base amount, base period, and present value, including determining the present value of payments that are contingent on uncertain future events, are based on the rules under § 1.280G– 1, Q/A–30 through Q/A–36 (substituting an involuntary separation from employment for a change in control). These final regulations describe when a payment in the nature of compensation is considered made for purposes of section 4960(a)(2), based on the rules in § 1.280G–1, Q/A–11 through Q/A–14. Consistent with the rules provided under § 1.280G–1, Q/A–12(a), these final regulations provide that the transfer of section 83 property generally is considered a payment made in the taxable year in which the fair market value of the property would be includible in the gross income of the covered employee under section 83, disregarding any election made by the employee under section 83(b) or (i). In addition, similar to the rules provided under § 1.280G–1, Q/A–13(a), these regulations generally provide that stock options are treated as property transferred on the date of vesting (regardless of whether the option has a ‘‘readily ascertainable value’’ as defined in § 1.83–7(b)). For purposes of determining the timing and amount of any payment related to an option, the principles of § 1.280G–1, Q/A–13 and Rev. Proc. 2003–68 (2003–2 C.B. 398) apply. E. Computation of Excess Parachute Payments Consistent with section 4960(c)(5)(A), these final regulations provide that an ‘‘excess parachute payment’’ is an amount equal to the excess of any parachute payment over the portion of the base amount allocated to the payment. The portion of the base amount allocated to any parachute payment is the amount that bears the same ratio to the base amount as the present value of the parachute payment bears to the aggregate present value of all parachute payments to be made to the covered employee. The rules on allocation of the base amount in these regulations are based on § 1.280G–1, Q/ A–38. VI. Calculation, Reporting, and Payment of the Tax ATEOs (and any related non-ATEO organizations) are liable for the excise tax imposed by section 4960 only if they pay a covered employee sufficient remuneration to trigger the tax. An ATEO is not subject to the excise tax PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 under section 4960(a)(1) unless the ATEO (together with any related organizations) pays more than $1 million of remuneration to a covered employee for a taxable year. An ATEO cannot make an excess parachute payment subject to the excise tax under section 4960(a)(2) if the employer does not have any HCEs under section 414(q) 10 for the taxable year. If both of these situations apply to an ATEO, the ATEO is not liable for any excise tax under section 4960 for that taxable year. These final regulations generally adopt the proposed rules regarding the entity that is liable for the excise tax under section 4960 and how that excise tax is calculated. These regulations provide that the employer, as determined under section 3401(d), without regard to paragraph (d)(1) or (d)(2), is liable for the excise tax imposed under section 4960. Further, as authorized by section 4960(d), a payment by the employer may be treated as remuneration or a parachute payment if, based on the facts and circumstances, the payment is structured such that it has the effect of avoiding the tax applicable under section 4960. For example, the excise tax under section 4960 would apply with respect to an individual who is an employee of an ATEO or related organization but who is incorrectly classified as an independent contractor. Similarly, the excise tax under section 4960 would apply to an amount paid to a limited liability company or other entity owned all or in part by an employee (or owned by another entity unrelated to the ATEO or related organization) for services performed by an employee of the ATEO or related organization if the arrangement would otherwise have the effect of avoiding the tax applicable under section 4960. For a further discussion of the definition of ‘‘employer’’ see section II.D. of this Summary of Comments and Explanation of Revisions, titled ‘‘Employer.’’ A. Calculation of Tax on Excess Remuneration An individual may perform services as an employee of an ATEO and as an employee of one or more related organizations during the same applicable year, in which case remuneration paid for the taxable year is aggregated for purposes of determining whether excess remuneration has been paid. To address these cases, these final regulations adopt the proposed rules for allocating liability for the excise tax among the related employers. As provided in 10 See E:\FR\FM\19JAR12.SGM footnote 9. 19JAR12 khammond on DSKJM1Z7X2PROD with RULES12 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations section 4960(c)(4)(C), in any case in which an ATEO includes remuneration from one or more related organizations as separate employers of the individual in determining the excise tax imposed by section 4960(a), each employer is liable for its proportionate share of the excise tax. In contrast, a payment to an individual for performing services as an employee of an ATEO that is made by a third-party payor (whether the payor is related to the ATEO or not) is remuneration paid by the ATEO for section 4960 purposes and thus is included with any remuneration paid directly by the ATEO (and the related liability is not allocated to the other organization). If a covered employee is employed by one employer when the legally binding right to the remuneration is granted and by a different employer at vesting, then the covered employee’s employer at vesting is treated as paying the remuneration, provided the employment relationship is bona fide and not a means to avoid tax under section 4960. A related organization may become (or cease to be) related during the applicable year, in which case only remuneration the related organization pays (or is treated as paying due to vesting) to the ATEO’s covered employee during the portion of the applicable year that it is a related organization is treated as paid by the ATEO for the taxable year, as provided in section 4960(c)(4)(A). If an employee is a covered employee of more than one ATEO, these final regulations provide that each ATEO calculates its liability under section 4960(a)(1), taking into account remuneration paid to the employee by the organizations to which it is related. These regulations also provide that, rather than owing tax as both an ATEO and a related organization for the same remuneration paid to a covered employee, each employer is liable only for the greater of the excise tax for which it would be liable as an ATEO or the excise tax it would be liable for as a related organization with respect to that covered employee (and if there is more than one related group of organizations, then for the group that results in the greatest amount of tax). These regulations provide that these same allocation principles apply in the case of the allocation of liability in situations involving an ATEO or related organization with a short taxable year, and should be applied in a manner that avoids, to the extent possible, duplicative taxation of remuneration paid to the same individual. Because the application of the allocation rules may prove complicated in situations VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 involving short taxable years, especially if those situations also involve multiple short taxable years or differing taxable years among the group constituting the ATEO and its related organizations, the regulations further provide that the Commissioner may prescribe guidance of general applicability addressing how the allocation rules apply in particular circumstances involving short taxable years. Under section 4960(b) and (c)(4)(C), the employer or employers are liable for the excise tax imposed by section 4960. Related organizations must obtain information from each other on remuneration paid to covered employees in order to calculate the tax and their share of the liability. One commenter noted that there may be situations in which an employer is unable to obtain complete information on the remuneration and benefits paid by other employers. The commenter requested guidance on relief from penalties or interest for an error if the employer made a bona fide attempt to obtain the necessary information when it became aware of the error and requested guidance on what would be a bona fide attempt for this purpose. If an ATEO or related organization fails to pay tax it is liable for due to failure to obtain information on remuneration paid by other organizations within the related group, it may be liable for a civil penalty under section 6651 (and in some cases, criminal penalties). Section 6651 includes an exception for reasonable cause. Guidance as to reasonable cause for penalty relief, and therefore the guidance requested by this commenter, is beyond the scope of these final regulations, and therefore is not addressed in these final regulations. B. Calculation of Tax on an Excess Parachute Payment These final regulations adopt the proposed regulations with respect to the rules for the calculation of tax on an excess parachute payment. With respect to the calculation of, and liability for, the tax on excess parachute payments, the proposed regulations differed in one respect from the guidance provided in Q/A–1 of Notice 2019–09. Notice 2019– 09 provided that an ATEO or related organization may be liable for the tax on an excess parachute payment based on the aggregate parachute payments made by the ATEO and its related organizations, including parachute payments based on separation from employment from a related organization. As in the proposed regulations, these final regulations provide that only an excess parachute payment paid by an ATEO is subject to PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 6213 the excise tax on excess parachute payments. However, consistent with the provision in section 4960(c)(5)(D) that rules similar to section 280G(b)(3) apply for purposes of determining the base amount under section 4960, payments from all related organizations (including payments from non-ATEOs) are considered for purposes of determining the base amount and total payments in the nature of compensation that are contingent on the covered employee’s separation from employment with the employer. See § 1.280G–1, Q/A–34. Generally, this means that a covered employee’s base amount calculation includes remuneration from the ATEO and all related organizations, and that a covered employee’s parachute payment calculation includes all payments (made by the ATEO and all related organizations) that are contingent on the employee’s involuntary separation from employment. However, only an ATEO is subject to the excise tax on excess parachute payments it makes to a covered employee. A non-ATEO that pays an amount that would otherwise be an excess parachute payment is not subject to the excise tax. These regulations further provide that, based on the facts and circumstances, the Commissioner may reallocate excess parachute payments to an ATEO if it is determined that excess parachute payments were made by a non-ATEO for the purpose of avoiding the tax under section 4960. Step by step instructions for calculating the tax on excess parachute payments were provided in section VI.B. of the Explanation of Provisions of the proposed regulations, titled ‘‘Calculation of Tax on an Excess Parachute Payment.’’ C. Reporting and Payment of the Tax These final regulations adopt without change the rules provided in the proposed regulations relating to the reporting and payment of the excise tax. Under §§ 53.6011–1 and 53.6071–1, the excise tax under section 4960 is reported on Form 4720, ‘‘Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code,’’ which is the form generally used for reporting and paying chapter 42 taxes. The reporting and payment of any applicable taxes are due when payments of chapter 42 taxes are ordinarily due (the 15th day of the 5th month after the end of the taxpayer’s taxable year—May 15 for a calendar year employer), subject to an extension of time for filing returns and making payments 11 that generally 11 The tentative tax, an estimate, must be paid by the due date of Form 4720 without extensions and E:\FR\FM\19JAR12.SGM Continued 19JAR12 6214 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations applies. Because section 6655 has not been amended to include section 4960, no quarterly payments of estimated excise tax imposed by section 4960 are required under section 6655. These final regulations require that the excise tax imposed by section 4960 be reported and paid in the form and manner prescribed by the Commissioner, and § 53.6011–1 requires that every person (including a governmental entity) liable for the excise tax imposed by section 4960 shall file Form 4720, ‘‘Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code.’’ Notice 2019–09, Q/A–33(a) required each employer liable for the excise tax imposed by section 4960 to file a separate Form 4720 to report its share of liability. Two commenters recommended allowing related employers to file a joint Form 4720, as has been permitted in § 53.6011–1(c) for private foundations and their disqualified persons and foundation managers. In addition to being beyond the scope of these regulations, permitting joint filing of Form 4720 is incompatible with electronic filing of Form 4720 that is required for certain tax-exempt organizations under the Taxpayer First Act, Public Law 116–25. See Notice 2021–01. These final regulations also provide that an employer may elect to prepay the excise tax imposed under section 4960(a)(2) for excess parachute payments in the year of separation from employment or any taxable year prior to the year in which the parachute payment is actually paid. This prepayment rule for the tax applicable to excess parachute payments is similar to the rule in § 1.280G–1, Q/A–11(c), under which a disqualified employee may elect to prepay the excise tax under section 4999 based on the present value of the excise tax that would be owed by the employee when the parachute payments are actually made. khammond on DSKJM1Z7X2PROD with RULES12 VII. Applicability Date These final regulations were proposed to apply to taxable years beginning after December 31 of the calendar year in which the Treasury decision adopting these rules as final regulations is published in the Federal Register. The Treasury Department and the IRS requested comments on the burdens anticipated and the timeframe expected to be necessary to implement these final regulations (taking into account that the may be paid with Form 8868, ‘‘Application for Automatic Extension of Time To File an Exempt Organization Return.’’ VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 statutory provisions are already effective). One commenter recommended that these final regulations apply to taxable years beginning after December 31 of the calendar year that ends at least six months after the date on which these final regulations are published in the Federal Register in order for ATEOs and related organization to have sufficient time to understand and apply these final regulations. The Treasury Department and the IRS agree with this recommendation, and therefore these final regulations apply to taxable years beginning after December 31, 2021 (with the first applicable year generally being the 2022 calendar year). The guidance provided in these final regulations and the proposed regulations generally is consistent with the guidance provided in Notice 2019– 09. Until the applicability date of these final regulations, taxpayers may rely on the guidance provided in Notice 2019– 09 in its entirety or on the proposed regulations in their entirety. Alternatively, taxpayers may choose to apply these final regulations to taxable years beginning after December 31, 2017, and on or before December 31, 2021, provided they apply the final regulations in their entirety and in a consistent manner. Until the applicability date of these final regulations, taxpayers may also base their positions upon a reasonable, good faith interpretation of the statute that includes consideration of any relevant legislative history. Whether a taxpayer’s position that is inconsistent with Notice 2019–09, the proposed regulations, or these final regulations constitutes a reasonable, good faith interpretation of the statute generally will be determined based upon all of the relevant facts and circumstances, including whether the taxpayer has applied the position consistently and the extent to which the taxpayer has resolved interpretive issues based on consistent principles and in a consistent manner. Notwithstanding the previous sentence, the preamble to Notice 2019– 09 describes certain positions that the Treasury Department and the IRS have concluded are not consistent with a reasonable, good faith interpretation of the statutory language, and the proposed regulations and these final regulations reflect this view. For a description of each of these positions, see section VII of the Explanation of Provisions of the proposed regulations, titled ‘‘Proposed Applicability Date.’’ PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 Special Analyses I. Regulatory Planning and Review Executive Orders 13771, 13563, and 12866 direct agencies to assess costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. The Executive Order 13771 designation for this rule is ‘‘regulatory.’’ The regulations have been designated as subject to review under Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Treasury Department and the Office of Management and Budget (OMB) regarding review of tax regulations. The Office of Information and Regulatory Affairs (OIRA) has designated the rulemaking as significant under section 1(c) of the Memorandum of Agreement. Accordingly, OMB has reviewed the regulations. A. Background 1. The Excise Tax Under Section 4960 Section 4960 was added to the Code by TCJA. Section 4960(a) subjects excess remuneration above $1 million and excess parachute payments that an ATEO pays to a covered employee to an excise tax equal to the rate of tax imposed on corporations under section 11 (21 percent for 2020). Before TCJA, compensation paid by tax-exempt organizations was not subject to an excise tax, although section 4958 applies an excise tax to penalize excess benefit transactions in which an ‘‘applicable tax-exempt organization’’ (as defined in section 4958) provides a benefit to a disqualified person that exceeds the reasonable fair market value of the services received. Section 4960 defines an ‘‘ATEO’’ as any organization which is exempt from taxation under section 501(a), is a farmers’ cooperative organization described in section 521(b)(1), has income excluded from taxation under section 115(1), or is a political organization described in section 527(e)(1). Covered employees of an ATEO include the five highestcompensated employees of the organization for the taxable year and any employee or former employee who was a covered employee of the organization (or predecessor) for any E:\FR\FM\19JAR12.SGM 19JAR12 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES12 preceding taxable year beginning after December 31, 2016. ‘‘Remuneration’’ means ‘‘wages’’ as defined in section 3401(a) (excluding designated Roth contributions) and includes amounts required to be included in gross income under section 457(f). Section 4960 excludes from remuneration any amount paid to a licensed medical professional for medical or veterinary services provided. Remuneration also includes payments with respect to employment of a covered employee by any person or government entity related to the ATEO. A person or governmental entity is treated as related to the ATEO if that person or governmental entity controls, or is controlled by, the ATEO, is controlled by one or more persons which control the ATEO, is a ‘‘supported organization’’ (as defined in section 509(f)(3)) during the taxable year with respect to the ATEO, is a supporting organization described in section 509(a)(3) during the taxable year with respect to the ATEO, or in the case of an organization which is a voluntary employees’ beneficiary association (VEBA) under section 501(c)(9), established, maintains, or makes contribution to such VEBA. 2. Notice 2019–09 and the Proposed and Final Regulations Notice 2019–09 provided taxpayers with initial guidance on the application of section 4960, including that taxpayers may base their positions on a reasonable, good faith interpretation of the statute until further guidance is issued. On June 11, 2020, the Treasury Department and the IRS published proposed regulations on section 4960 in the Federal Register (REG–122345–18, 85 FR 35746) (the proposed regulations). The Treasury Department and the IRS received comments responding to the proposed regulations, which were considered in these final regulations, published here. The comments primarily discussed the treatment of employees of a related organization who also provide services to the ATEO, suggesting various exceptions for these situations. Comments also addressed the possibility of a grandfather rule for compensation to be paid under arrangements in place prior to the effective date of section 4960, treatment of deferred compensation as remuneration, the definition of ‘‘control,’’ and which organizations are ATEOs. B. Baseline The Treasury Department and the IRS have assessed the benefits and costs of the final regulations relative to a no- VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 action baseline reflecting anticipated Federal income tax-related behavior in the absence of these regulations. C. Affected Entities The final regulations affect an estimated 261,000 ATEOs and 77,000 non-ATEO related organizations of ATEOs that in historical filings report substantial executive compensation.12 Of the roughly 261,000 such ATEOs based on filings for tax year 2017, 239,000 are section 501(a) exempt organizations (including 23,000 private foundations), 19,000 are section 115 state and local instrumentalities, 2,000 are section 527 political organizations, 600 are exempt farmers’ cooperative organizations described in section 521(b)(1), and 200 are federal instrumentalities (although the Treasury Department and the IRS will continue to consider whether federal instrumentalities are ATEOs). D. Economic Analysis This section describes the key economic effects of the provisions of these final regulations. 1. Clarifications Most provisions of these final regulations clarify aspects of the excise tax imposed by section 4960, minimizing the burdens entities bear to comply with section 4960, and have little other economic impact. Clarifications reduce uncertainty, lowering the effort required to infer which organizations, employees, and payments are subject to the excise tax and the potential for conflict if entities and tax administrators interpret provisions differently. Examples of provisions of these final regulations that are primarily clarifications include the definition of ‘‘control,’’ treatment of deferred compensation and vesting, and which organizations are ATEOs. 2. ‘‘Volunteer’’ Exceptions Several commenters expressed concern that highly-paid employees of a non-ATEO performing services for a related ATEO without receiving compensation from the ATEO may be subject to the excise tax. To avoid the excise tax, individuals might cease performing such services, or ATEOs might dissolve their relationships with related non-ATEOs, reducing donations from related non-ATEOs. The final regulations include exceptions to the definitions of ‘‘employee’’ and ‘‘covered employees’’ (specifically to the rules for determining 12 The methods and data used to estimate the number of affected entities are discussed in detail in the Paperwork Reduction Act special analysis. PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 6215 the five highest compensated employees for purposes of identifying covered employees) to address such situations. With respect to the first exception, the regulations define ‘‘employee’’ consistent with section 3401(c), in particular adopting the rule that a director is not an employee in the capacity as a director and an officer performing minor or no services and not receiving any remuneration for those services is not an employee. The general rule provides that employees of a related non-ATEO are not considered for purposes of determining the five highestcompensated employees if they are never employees of the ATEO. In addition, individuals who receive no remuneration (or grant of a legally binding right to remuneration) from the ATEO or a related organization cannot be among the ATEO’s five highestcompensated employees. Under the exceptions, an ATEO’s five highest-compensated employees also exclude an employee of the ATEO who receives no remuneration from the ATEO and performs only limited hours of service for the ATEO, which means that no more than 10 percent of total annual hours worked for the ATEO and related organizations are for services performed for the ATEO. An employee who performs fewer than 100 hours of services as an employee of an ATEO and its related ATEOs is treated as having worked less than 10 percent of total hours for the ATEO and related ATEOs. An employee who is not compensated by an ATEO, related ATEO, or any taxable related organization controlled by the ATEO and who primarily (more than 50 percent of total hours worked) provides services to a related non-ATEO is also disregarded. In response to comments on the proposed regulations expressing concern that this exception did not provide sufficient flexibility for situations in which an employee of a non-ATEO performs services for a related ATEO as a temporary assignment, these final regulations provide that the 50 percent of total hours worked threshold can be computed over a period of two consecutive years, rather than a single year. This modification expands the exception to provide additional flexibility. An employee is also disregarded if an ATEO paid less than 10 percent of the employee’s total remuneration for services performed for the ATEO and all related organizations, and the ATEO had at least one related ATEO during the applicable year. Additionally, if neither the ATEO nor any related ATEO paid more than 10 percent of the employee’s total E:\FR\FM\19JAR12.SGM 19JAR12 khammond on DSKJM1Z7X2PROD with RULES12 6216 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations remuneration, then the ATEO that paid the highest percent of remuneration does not meet this exception. Consider, for example, a corporate employee making $2 million per year who spends 5 percent of her time (roughly one day each month) working for the corporation’s foundation, a related ATEO, without receiving compensation from the ATEO and who would be a covered employee of the ATEO absent the exceptions. Without the exceptions, her compensation in excess of $1 million from the corporation, which is a related party of the foundation, is subject to a 21 percent excise tax, or $210,000 in excise tax liability. The exceptions (either of the first two could apply here) remove that liability and the incentive it provides to stop providing such services or to dissolve the relationship between the ATEO and the related organization. The exceptions support a transfer of substantial value (5 percent of the employee’s salary, or $100,000) that might otherwise not take place. Commenters on the proposed regulations suggested other ways in which the exceptions could be expanded. The Treasury Department and the IRS considered these suggested expansions of the exceptions and concluded that the suggestions were inconsistent with the statute and legislative history or would enable organizations to circumvent the excise tax in situations where an individual performs services for an ATEO on more than a volunteer basis, creating the potential for abuse and increasing the costs of administering the excise tax. Therefore, these final regulations do not adopt the suggested expansions of the exceptions. The exceptions in these final regulations may have a substantial impact on donations relative to a noaction baseline, although the magnitude of the potential impact depends on how often the exceptions apply and on how responsive organizations and employees are to the excise tax, both of which are uncertain. The exceptions apply only in particular circumstances: For example, the employee must be employed by a related organization (typically an organization that controls or is controlled by the ATEO), the employee must be highly compensated, and the employee’s work for the ATEO must be sufficiently minimal. Historically, many ATEOs report employees with compensation from related organizations. An estimated 8,500 ATEOs filing Form 990 in tax year 2017 reported both compensation of $500,000 or more for any person and any VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 compensation from related organizations. These ATEOs are estimated to have an average of 18 nonATEO related organizations based on information reported on Form 990 Schedule R, yielding an estimated 154,000 non-ATEO related organizations, of which half, or 77,000, are estimated to employ a covered employee of the ATEO. The fraction of the 154,000 non-ATEO related organizations with employees to whom the exceptions apply (and who are thus not covered employees of the ATEO) is uncertain, but perhaps half the related organizations, or 77,000, have such an employee. This entity count omits a substantial number of private foundations which may have employees who receive no compensation from the ATEO but who are highly compensated by related organizations, because while the ATEO count used in these estimates includes approximately 100 private foundations that have historically reported employee compensation of $500,000 or more on Form 990–PF, Form 990–PF (unlike Form 990) does not include information on employee compensation received from related organizations. The exceptions are particularly likely to apply to donations to foundations related to non-ATEO businesses, as companies are highly likely to be related organizations of a company’s foundation, many family foundations are controlled by the same family that controls a private business, and executives of the related business often provide services to the foundation without payment from the foundation. Because of these facts, looking at preTCJA tax forms may underestimate the number of entities potentially affected by the exceptions. In the U.S. in 2015, there were about 2,000 company foundations responsible for $5.5 billion in giving, and 42,000 family foundations.13 It is reasonable to assume that about half of these foundations, or 22,000, have a related business with an employee to whom the exceptions apply. Under reasonable assumptions about the response of donated services to the excise tax, the exceptions may restore substantial donations (transfers) of services that the excise tax could potentially otherwise eliminate. Totaling both private foundations and other ATEOs, roughly 99,000 related organizations are estimated to have employees to whom the exceptions apply. If the excise tax would have reduced services that are donated under the exceptions by an average of just over 13 http://data.foundationcenter.org/. PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 $5,000 per related organization, the total transfer reduction exceeds $500 million. Absent the exceptions, organizations may also avoid the excise tax by dissolving the relationship between the ATEO and non-ATEO, which may affect donations of money as well as services. Considering only corporate foundations and setting aside other ATEOs, if such dissolutions would lead to a two percent reduction in the $5.5 billion in corporate giving that would otherwise take place through related foundations, the reduction exceeds $100 million. The Treasury Department and the IRS requested but did not receive comments on the impact of the exceptions on the dissolution of relationships between ATEOs and related organizations. It is plausible that these final regulations restore substantial economic activity relative to regulatory alternatives, under which the excise tax would discourage highly-compensated employees of related non-ATEOs from providing services to a related ATEO without compensation from the ATEO and discourage relationships between ATEOs and non-ATEOs. 3. Summary This analysis suggests that these final regulations will reduce compliance burden on affected entities by providing clarifications and, through the exceptions, increase services provided to ATEOs without compensation from the ATEO by a small but potentially economically significant amount ($100 million or more), relative to regulatory alternatives. The Treasury Department and the IRS requested but did not receive comments on the economic impact of these proposed regulations (in particular, comments providing data, other evidence, or models that provide insight). II. Paperwork Reduction Act The collections of information in these final regulations are in § 53.4960– 1(d), (h), and (i); § 53.4960–2(a), (c) and (d); and § 53.4960–4(a) and (d). This information is required to determine an ATEO’s ‘‘covered employees’’ as defined in section 4960(c)(2); to calculate remuneration in excess of $1 million as described in section 4960(c)(3); to determine remuneration from related organizations and allocation of liability as described in section 4960(c)(4); and to determine any excess parachute payments to covered employees described in section 4960(c)(5). The IRS intends that the burden of the collections of information will be reflected in the burden associated with Form 4720, under OMB approval E:\FR\FM\19JAR12.SGM 19JAR12 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations number 1545–0047. The burden associated with Form 4720 is included in the aggregated burden estimates for OMB control number 1545–0047, which represents a total estimated burden time for all forms and schedules of 52.450 million hours and total estimated burden in dollars of $1.497 billion (estimated for fiscal year 2021). The overall burden estimates provided for 1545–0047 are aggregate amounts that relate to all information collections associated with that OMB control number. This estimate is therefore unrelated to the future calculations needed to assess the burden imposed by these regulations. To guard against overcounting the burden imposed, the Treasury Department and the IRS urge readers to recognize that these burden estimates are aggregates for the applicable types of filers. For purposes of the Paperwork Reduction Act, the Treasury Department and the IRS have not estimated the burden, including that Form Type of filer Form 4720 ......... Tax-exempt organizations and their related organizations, including for-profit and government entities. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget. Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and return information are confidential, as required by 26 U.S.C. 6103. khammond on DSKJM1Z7X2PROD with RULES12 of any new information collections, related to the requirements under these final regulations. Future burden estimates under OMB control number 1545–0047 would capture changes made by TCJA and changes that arise out of discretionary authority exercised in the regulations. The expected burden associated with section 4960 compliance (including Form 4720 preparation and filing) for ATEOs as described in section 4960(c)(1) and related organizations as described in section 4960(c)(4)(B) is listed below: Estimated number of respondents: 337,888. Estimated average annual burden hours per response: 0.20 hours. Estimated total annual burden: $3,569,632 (2020). Estimated frequency of collection: Annual. In the proposed regulations, the Treasury Department and the IRS III. Regulatory Flexibility Act Pursuant to the Regulatory Flexibility Act (RFA) (5 U.S.C. chapter 6), it is hereby certified that these final regulations will not have a significant economic impact on a substantial number of small entities. In the proposed regulations, the Treasury Department and the IRS invited comments on the impact this rule would have on small entities. The Treasury Department and the IRS did not receive any comments on this issue. The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) generally defines a ‘‘small entity’’ as (1) a proprietary firm meeting the size standards of the Small Business Administration (SBA) (13 CFR 121.201), (2) a nonprofit organization that is not dominant in its field, or (3) a small government jurisdiction with a VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 requested comments on all aspects of information collection burdens related to the proposed regulations, including estimates for how much time it would take to comply with the paperwork burdens previously described in this section for each relevant form and ways for the IRS to minimize the paperwork burden. The Treasury Department and the IRS did not receive any comments on these issues. Revisions (if any) to these forms that reflect the information collections included in these final regulations will be made available for public comment at https://apps.irs.gov/ app/picklist/list/draftTaxForms.html and will not be finalized until after these forms have been approved by OMB under the PRA. Comments on these forms can be submitted at https:// www.irs.gov/forms-pubs/comment-ontax-forms-and-publications. The current status of the PRA submissions related to section 4960 are provided in the following table. OMB No.(s) 1545–0047 6217 Status Published in the Federal Register on 11/12/20. Public comment period closes on 1/11/21. population of less than 50,000. (States and individuals are not included in the definition of ‘‘small entity.’’) The Treasury Department and the IRS estimate that these final regulations will affect 324,000 small entities, 73,000 of which are proprietary firms meeting the size standards of the SBA and 251,000 of which are nonprofit organizations that are not dominant in their fields or small government jurisdictions with a population of less than 50,000. The Treasury Department and the IRS estimated the number of ATEOs, based primarily on Form 990 data for filers with at least one employee (and thus having a burden, at a minimum, of maintaining annual lists of covered employees), as 261,118, and the number of non-ATEO related organizations employing at least one covered employee of an ATEO as 76,770, for a total of 337,888 affected entities. The SBA defines a small business as an independent business having fewer than 500 employees. (See A Guide for Government Agencies, How to Comply with the Regulatory Flexibility Act, Appendix B 14). Tax data available to the Treasury Department and the IRS include employee counts for only half the affected entities, as employee counts are included on Form 990, but not on other forms including Form 990–EZ and 990–PF. An examination of tax data from 2016 shows that for filers for whom employee counts were available and who had at least one employee, 96.5 percent had fewer than 500 employees. Similarly, there are no bright lines in the available data to distinguish small nonprofit organizations that are not dominant in their field. An examination of non-tax data shows that a similar proportion, approximately 96 percent, of all incorporated cities, towns, and villages in 2014 had a population of less than 50,000, which may serve as a proxy for small government jurisdictions generally.15 By applying the 96 percent estimate to all entities affected by section 4960, the Treasury Department and the IRS estimate that 324,000 small entities are affected by these regulations. However, the Treasury Department and the IRS have determined that the rules regarding an ATEO’s covered employees will not have a significant economic impact on affected small entities as described later in this discussion of the RFA. Section 4960 imposes the excise tax on ATEOs and their related organizations to the extent they pay certain compensation to a covered employee. Because covered employee 14 https://advocacy.sba.gov/2017/08/31/a-guidefor-government-agencies-how-to-comply-with-theregulatory-flexibility-act/. 15 See https://www.statista.com/statistics/241695/ number-of-us-cities-towns-villages-by-populationsize/. PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 E:\FR\FM\19JAR12.SGM 19JAR12 6218 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations status is permanent, every ATEO must determine its five highest-compensated employees for the taxable year—even if the ATEO is not subject to the tax for that taxable year—and maintain a list of covered employees. Accordingly, these final rules likely will affect a substantial number of small entities, especially nonprofit entities that are not dominant in their fields. The Treasury Department and the IRS estimate that the vast majority of ATEOs, particularly small ATEOs, can determine their five highestcompensated employees for the taxable year under the method provided in these final rules very quickly and at negligible cost using information already collected in the normal course of business. The time necessary to determine an ATEO’s five highestcompensated employees is positively correlated with the size of the entity (that is, the smaller the entity, the less time such a determination should take). Larger ATEOs may need more time, but it is estimated that this determination will take less than seven hours. The burden for making this determination is estimated to fall on the small number of larger ATEOs. Putting these two groups together, the total estimated cost for all 261,118 ATEOs to make these determinations is $1,255,760 per year, averaging $4.81 per ATEO. Thus, it is hereby certified that these final regulations will not have a significant economic impact on a substantial number of small entities within the meaning of section 601(6) of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA). Pursuant to section 7805(f) of the Code, the proposed regulations preceding these final regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small entities and no comments were received. khammond on DSKJM1Z7X2PROD with RULES12 IV. Unfunded Mandates Reform Act Section 202 of the Unfunded Mandates Reform Act of 1995 requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a state, local, or tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. This final rule does not include any Federal mandate that may result in expenditures by state, local, or tribal governments, or by the private sector in excess of that threshold. VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 V. Executive Order 13132: Federalism Executive Order 13132 (titled ‘‘Federalism’’) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on state and local governments, and is not required by statute, or preempts state law, unless the agency meets the consultation and funding requirements of section 6 of the Executive Order. This final rule does not have federalism implications that are not required by the statute and does not impose substantial direct compliance costs on state and local governments or preempt state law within the meaning of the Executive Order. VI. Congressional Review Act The Administrator of OIRA has determined that this is a major rule for purposes of the Congressional Review Act (5 U.S.C. 801 et seq.) (CRA). Under section 801(3) of the CRA, a major rule takes effect 60 days after the rule is published in the Federal Register. Notwithstanding this requirement, section 808(2) of the CRA allows agencies to dispense with the requirements of section 801 when the agency for good cause finds that such procedure would be impracticable, unnecessary, or contrary to the public interest and the rule shall take effect at such time as the agency promulgating the rule determines. Pursuant to section 808(2) of the CRA, the Treasury Department and the IRS find, for good cause, that a 60-day delay in the effective date is unnecessary and contrary to the public interest. Following the addition of section 4960 to the Code by TCJA, the Treasury Department and the IRS published the proposed regulations setting forth guidance on all aspects of the law, including certain exceptions to the definition of ‘‘employee’’ and ‘‘covered employee’’ for purposes of identifying covered employees. The majority of comments received in response to the proposed regulations requested additional clarifications or modifications of the rules for these exceptions. In response, these final regulations include certain clarifications and modifications to the proposed rules. The clarifications and modifications in these final regulations reduce both uncertainty and the burden associated with application of these rules. In response to certain commenter requests that the applicability date of the final regulations be delayed after publication of the regulations as final in the Federal Register so that ATEOs and related organizations have sufficient PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 time to understand and apply these final regulations, these final regulations apply to taxable years beginning after December 31, 2021. However, until the applicability date, taxpayers may choose to apply these final regulations to taxable years beginning after December 31, 2017, and on or before December 31, 2021, provided the taxpayer applies them in their entirety and in a consistent manner. Therefore, ATEOs and related organizations that wish to apply these regulations prior to the applicability date will need to know that these final regulations are effective before incurring necessary costs to timely comply with these final regulations. In particular, certainty that these rules are effective is essential to taxpayers so that they can determine whether and to what extent the excise tax imposed by section 4960 applies to an organization and which employees are covered employees, given that taxpayers will begin preparing their 2020 tax returns in early 2021. Further, for these potentially affected taxpayers, certainty with respect to these rules is necessary for them to proceed with several aspects of their operations, including employee hiring and retention, designing of compensatory arrangements, recordkeeping, and maintaining relationships between related non-ATEOs and ATEOs— including with respect to donating of services. Further, the COVID–19 pandemic has affected many ATEOs, and providing additional clarification regarding these rules, in particular with respect to the exceptions for purposes of determining covered employees, will better enable ATEOs and related organizations to perform financial and operational planning tasks for the tax year as they anticipate the easing of restrictions that have severely impacted their operations during the COVID–19 pandemic. Consistent with Executive Order 13924 (May 19, 2020), the Treasury Department and the IRS have therefore determined that an expedited effective date of these final regulations will provide critical guidance on what the law requires for taxpayers to determine whether the excise tax imposed by section 4960 applies, which employees may be considered to be covered employees, and what actions are required under the law as a result. Accordingly, the Treasury Department and the IRS have determined that the rules in this Treasury decision will take effect on the date of filing for public inspection in the Federal Register. E:\FR\FM\19JAR12.SGM 19JAR12 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations Statutory Authority The regulations are adopted pursuant to the authority contained in sections 7805 and 4960. Drafting Information The principal authors of the regulations are William McNally and Patrick Sternal of the Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes). However, other personnel from the Treasury Department and the IRS participated in the development of the regulations. Statement of Availability IRS Revenue Procedures, Revenue Rulings, Notices, and other guidance cited in this preamble are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at https://www.irs.gov. PART 53—FOUNDATION AND SIMILAR EXCISE TAXES Par. 3. The authority citation for part 53 is revised to read in part as follows: ■ Authority: 26 U.S.C. 7805; 4960. * * * * * Par. 4. Sections 53.4960–0 through 53.4960–6 are added to read as follows: * * * * * ■ Income taxes, Reporting and recordkeeping requirements. 53.4960–0 Table of contents. 53.4960–1 Scope and definitions. 53.4960–2 Determination of remuneration paid for a taxable year. 53.4960–3 Determination of whether there is a parachute payment. 53.4960–4 Liability for tax on excess remuneration and excess parachute payments. 53.4960–5 Coordination with section 162(m) [reserved]. 53.4960–6 Applicability date. 26 CFR Part 53 * Excise taxes, Foundations, Investments, Lobbying, Reporting and recordkeeping requirements. § 53.4960–0 Table of contents. § 53.4960–1 Scope and definitions. (a) Scope. (b) Applicable tax-exempt organization. (1) In general. (i) Section 501(a) organization. (ii) Section 521 farmers’ cooperative. (iii) Section 115(1) organization. (iv) Section 527 political organization. (2) Certain foreign organizations. (3) Organization described in section 501(c)(1)(A)(i) for which the enabling act provides for exemption from all current and future Federal taxes. (c) Applicable year. (1) In general. (2) Examples. (3) Short applicable years. (i) In general. (ii) Initial year of ATEO status. (iii) Year of termination of ATEO status. (A) Termination on or before the close of the calendar year ending with or within the taxable year of termination. (B) Termination after the close of the calendar year ending in the taxable year of termination. (4) Examples. (d) Covered employee. (1) In general. (2) Five highest-compensated employees. (i) In general. (ii) Limited hours exception. (A) In general. (1) Remuneration requirement. (2) Hours of service requirement. (B) Certain payments disregarded. (C) Safe harbor. List of Subjects 26 CFR Part 1 Amendments to the Regulations Accordingly, the Department of the Treasury and the Internal Revenue Service amend 26 CFR parts 1 and 53 as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read in part as follows: ■ Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.338–1 is amended by revising paragraph (b)(2)(i) to read as follows: ■ § 1.338–1 General principles; status of old target and new target. * khammond on DSKJM1Z7X2PROD with RULES12 419, 419A, 512(a)(3), and 4976), voluntary employees’ beneficiary associations (section 501(c)(9) and the regulations thereunder), and tax on excess tax-exempt organization executive compensation (section 4960) and the regulations in part 53 under section 4960; * * * * * * * * * (b) * * * (2) * * * (i) The rules applicable to employee benefit plans (including those plans described in sections 79, 104, 105, 106, 125, 127, 129, 132, 137, and 220), qualified pension, profit-sharing, stock bonus and annuity plans (sections 401(a) and 403(a)), simplified employee pensions (section 408(k)), tax qualified stock option plans (sections 422 and 423), welfare benefit funds (sections VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 PO 00000 * * Frm 00025 * Fmt 4701 * Sfmt 4700 6219 (iii) Nonexempt funds exception. (A) In general. (1) Remuneration requirement. (2) Hours of service requirement. (3) Related organizations requirement. (B) Certain payments disregarded. (iv) Limited services exception. (A) Remuneration requirement. (B) Related ATEO requirement. (1) Ten percent remuneration condition. (2) Less remuneration condition. (3) Examples. (e) Employee. (1) In general. (2) Directors. (3) Trustees. (f) Employer. (1) In general. (2) Disregarded entities. (g) Medical services. (1) Medical and veterinary services. (i) In general. (ii) Examples. (2) Definition of licensed medical professional. (h) Predecessor. (1) Asset acquisitions. (2) Corporate reorganizations. (3) Predecessor change of form or of place of organization. (4) ATEO that becomes a non-ATEO. (i) General rule. (ii) Intervening changes or entities. (5) Predecessor of a predecessor. (6) Elections under sections 336(e) and 338. (7) Date of transaction. (i) Related organization. (1) In general. (i) Controls or controlled by test. (ii) Controlled by same persons test. (iii) Supported organization test. (iv) Supporting organization test. (v) VEBA test. (2) Control. (i) In general. (ii) Stock corporation. (iii) Partnership. (iv) Trust. (v) Nonstock organization. (A) In general. (B) Control of a trustee or director of a nonstock organization. (C) Representatives. (vi) Brother-sister related organizations. (vii) Section 318 principles. (A) In general. (B) Nonstock organizations. (1) Attribution of ownership interest from a nonstock organization to a controlling person. (2) Attribution of ownership interest from a controlling person to a nonstock organization. (3) Indirect control of a nonstock organization through another nonstock organization. (4) Attribution of control of nonstock organization to family member. (3) Examples. § 53.4960–2 Determination of remuneration paid for a taxable year. (a) Remuneration. (1) In general. (2) Exclusion of remuneration for medical services. E:\FR\FM\19JAR12.SGM 19JAR12 khammond on DSKJM1Z7X2PROD with RULES12 6220 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations (i) In general. (ii) Allocation of remuneration for medical services and non-medical services. (iii) Examples. (b) Source of payment. (1) Remuneration paid by third parties for employment by an employer. (2) Remuneration paid by a related organization for employment by the related organization. (c) Applicable year in which remuneration is treated as paid. (1) In general. (2) Vested remuneration. (3) Change in related status during the year. (d) Amount of remuneration treated as paid. (1) In general. (2) Earnings and losses on previously paid remuneration. (i) In general. (ii) Previously paid remuneration. (A) New covered employee. (B) Existing covered employee. (iii) Earnings. (iv) Losses. (v) Net earnings. (vi) Net losses. (3) Remuneration paid for a taxable year before the employee becomes a covered employee. (i) In general. (ii) Examples. (e) Calculation of present value. (1) In general. (2) Treatment of future payment amount as present value for certain amounts. (f) Examples. § 53.4960–3 Determination of whether there is a parachute payment. (a) Parachute payment. (1) In general. (2) Exclusions. (i) Certain qualified plans. (ii) Certain annuity contracts. (iii) Compensation for medical services. (iv) Payments to non-HCEs. (3) Determination of HCEs for purposes of the exclusion from parachute payments. (b) Payment in the nature of compensation. (1) In general. (2) Consideration paid by covered employee. (c) When payment is considered to be made. (1) In general. (2) Transfers of section 83 property. (3) Stock options. (d) Payment contingent on an employee’s separation from employment. (1) In general. (2) Employment agreements. (i) In general. (ii) Example. (3) Noncompetition agreements. (4) Payment of amounts previously included in income or excess remuneration. (5) Window programs. (6) Anti-abuse provision. (e) Involuntary separation from employment. (1) In general. (2) Separation from employment for good reason. (i) In general. VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 (ii) Material negative change required. (iii) Deemed material negative change. (A) Material diminution of compensation. (B) Material diminution of responsibility. (C) Material diminution of authority of a supervisor. (D) Material diminution of a location. (E) Material change of location. (F) Other material breach. (3) Separation from employment. (f) Accelerated payment or accelerated vesting resulting from an involuntary separation from employment. (1) In general. (2) Nonvested payments subject to a nonservice vesting condition. (3) Vested payments. (4) Nonvested payments subject to a service vesting condition. (i) In general. (A) Vesting trigger. (B) Vesting condition. (C) Services condition. (ii) Value of the lapse of the obligation to continue to perform services. (iii) Accelerated vesting of equity compensation. (5) Application to benefits under a nonqualified deferred compensation plan. (6) Present value. (7) Examples. (g) Three-times-base-amount test for parachute payments. (1) In general. (2) Examples. (h) Calculating present value. (1) In general. (2) Deferred payments. (3) Health care. (i) Discount rate. (j) Present value of a payment to be made in the future that is contingent on an uncertain future event or condition. (1) Treatment based on the estimated probability of payment. (2) Correction of incorrect estimates. (3) Initial option value estimate. (4) Examples. (k) Base amount. (1) In general. (2) Short or incomplete taxable years. (3) Excludable fringe benefits. (4) Section 83(b) income. (l) Base period. (1) In general. (2) Determination of base amount if employee separates from employment in the year hired. (3) Examples. § 53.4960–4 Liability for tax on excess remuneration and excess parachute payments. (a) Liability, reporting, and payment of excise taxes. (1) Liability. (2) Reporting and payment. (3) Arrangements between an ATEO and a related organization. (4) Certain foreign related organizations. (5) [Reserved] (b) Amounts subject to tax. (1) Excess remuneration. (i) In general. (ii) Exclusion for excess parachute payments. (2) Excess parachute payment. PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 (c) Calculation of liability for tax on excess remuneration. (1) In general. (2) Calculation if liability is allocated from more than one ATEO with respect to an individual. (3) Calculation if liability is allocated from an ATEO with a short applicable year. (4) Examples. (d) Calculation of liability for excess parachute payments. (1) In general. (2) Computation of excess parachute payments. (3) Reallocation when the payment is disproportionate to base amount. (4) Election to prepay tax. (5) Liability after a redetermination of total parachute payments. (6) Examples. § 53.4960–5 [Reserved] § 53.4960–6 Applicability date. (a) General applicability date. (b) [Reserved] § 53.4960–1 Scope and definitions. (a) Scope. This section provides definitions for purposes of section 4960, this section, and §§ 53.4960–2 through 53.4960–6. Section 53.4960–2 provides definitions and rules for determining the amount of remuneration paid for a taxable year. Section 53.4960–3 provides definitions and rules for determining whether a parachute payment is paid. Section 53.4960–4 provides definitions and rules for calculating the amount of excess remuneration paid for a taxable year, excess parachute payments paid in a taxable year, and liability for the excise tax. Section 53.4960–5 is reserved for rules on the coordination of sections 4960 and 162(m). Section 53.4960–6 provides rules regarding the applicability date for the regulations in §§ 53.4960–1 through 53.4960–5. The rules and definitions provided in this section through § 53.4960–6 apply solely for purposes of section 4960 unless specified otherwise. (b) Applicable tax-exempt organization—(1) In general. Applicable tax-exempt organization or ATEO means any organization that is one of the following types of organizations: (i) Section 501(a) organization. The organization is exempt from taxation under section 501(a) (except as provided in paragraph (b)(2) or (b)(3) of this section); (ii) Section 521 farmers’ cooperative. The organization is a farmers’ cooperative organization described in section 521(b)(1); (iii) Section 115(1) organization. The organization has income excluded from taxation under section 115(1); or (iv) Section 527 political organization. The organization is a political E:\FR\FM\19JAR12.SGM 19JAR12 khammond on DSKJM1Z7X2PROD with RULES12 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations organization described in section 527(e)(1). (2) Certain foreign organizations. Any foreign organization described in section 4948(b) that either is exempt from tax under section 501(a) or is a taxable private foundation (section 4948(b) organization) is not an ATEO. A foreign organization is an organization not created or organized in the United States or in any possession thereof, or under the law of the United States, any State, the District of Columbia, or any possession of the United States. See section 4948(b) and § 53.4948–1. For purposes of this paragraph (b)(2) and the application of section 4960 to a taxable year, an organization’s status as a section 4948(b) organization is determined at the end of its taxable year. (c) Applicable year—(1) In general. Applicable year means the calendar year ending with or within the ATEO’s taxable year. See § 53.4960–4 regarding how an ATEO’s applicable year affects the liability of related organizations. (2) Examples. The following examples illustrate the rules of paragraph (c)(1) of this section. (i) Example 1 (Calendar year taxpayer)—(A) Facts. ATEO 1 uses the calendar year as its taxable year and became an ATEO before 2022. (B) Conclusion. ATEO 1’s applicable year for its 2022 taxable year is the period from January 1, 2022, through December 31, 2022 (that is, the 2022 calendar year). (ii) Example 2 (Fiscal year taxpayer)— (A) Facts. ATEO 2 uses a taxable year that starts July 1 and ends June 30 and became an ATEO before 2022. (B) Conclusion. ATEO 2’s applicable year for the taxable year beginning July 1, 2022, and ending June 30, 2023, is the 2022 calendar year. (3) Short applicable years—(i) In general. An ATEO may have an applicable year that does not span the entire calendar year for the initial taxable year that the organization is an ATEO or for the taxable year in which the taxpayer ceases to be an ATEO. The beginning and end dates of the applicable year in the case of an ATEO’s change in status depend on when the change in status occurs. (ii) Initial year of ATEO status. For the taxable year in which an ATEO first becomes an ATEO, applicable year means the period beginning on the date the ATEO first becomes an ATEO and ending on the last day of the calendar year ending with or within such taxable year (or, if earlier, the date of termination of ATEO status, as described in paragraph (c)(3)(ii)(A) of this section). If the taxable year in VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 which an ATEO first becomes an ATEO ends before the end of the calendar year in which the ATEO first becomes an ATEO, then there is no applicable year for the ATEO’s first taxable year; however, for the ATEO’s next taxable year, applicable year means the period beginning on the date the ATEO first becomes an ATEO and ending on December 31 of the calendar year (or, if earlier, the date of termination of ATEO status, as described in paragraph (c)(3)(ii)(A) of this section). (iii) Year of termination of ATEO status—(A) Termination on or before the close of the calendar year ending with or within the taxable year of termination. If an ATEO has a termination of ATEO status during the taxable year and the termination of ATEO status occurs on or before the close of the calendar year ending with or within such taxable year, then, for the taxable year of termination of ATEO status, applicable year means the period starting January 1 of the calendar year of the termination of ATEO status and ending on the date of the termination of ATEO status. (B) Termination after the close of the calendar year ending in the taxable year of termination. If an ATEO has a termination of ATEO status during the taxable year and the termination of ATEO status occurs after the close of the calendar year ending within such taxable year, then, for the taxable year of the termination of ATEO status, applicable year means both the calendar year ending within such taxable year and the period beginning January 1 of the calendar year of the termination of ATEO status and ending on the date of the termination of ATEO status. Both such applicable years are treated as separate applicable years. See § 53.4960–4(b)(2)(ii) for rules regarding calculation of the tax in the event there are multiple applicable years associated with a taxable year. (4) Examples. The following examples illustrate the rules of paragraph (c)(3) of this section. For purposes of these examples, assume any entity referred to as ‘‘ATEO’’ is an ATEO and any entity referred to as ‘‘CORP’’ is not an ATEO. (i) Example 1 (Taxable year of formation ending after December 31)— (A) Facts. ATEO 1, ATEO 2, and CORP 1 are related organizations that all use a taxable year that starts July 1 and ends June 30. ATEO 1 is recognized as a section 501(c)(3) organization by the IRS on May 8, 2023, effective as of October 1, 2022. ATEO 2 became an ATEO in 2017. (B) Conclusion (ATEO 1). ATEO 1’s applicable year for the taxable year beginning October 1, 2022, and ending PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 6221 June 30, 2023, is the period beginning October 1, 2022, and ending December 31, 2022. For purposes of determining the amount of remuneration paid by ATEO 1 and all related organizations for ATEO 1’s taxable year beginning October 1, 2022, and ending June 30, 2023, (including for purposes of determining ATEO 1’s covered employees), only remuneration paid between October 1, 2022, and December 31, 2022, is taken into account. Thus, any remuneration paid by ATEO 1, ATEO 2, and CORP 1 before October 1, 2022, is disregarded for purposes of ATEO 1’s applicable year associated with its initial taxable year. (C) Conclusion (ATEO 2). ATEO 2’s applicable year for its taxable year beginning July 1, 2022, and ending June 30, 2023, is the 2022 calendar year. Thus, any remuneration paid by ATEO 1, ATEO 2, and CORP 1 during the 2022 calendar year is taken into account for purposes of determining ATEO 2’s covered employees and remuneration paid for ATEO 2’s taxable year ending June 30, 2023. (ii) Example 2 (Taxable year of formation ending before December 31)— (A) Facts. Assume the same facts as in paragraph (c)(4)(i)(A) of this section (Example 1), except that ATEO 1 is recognized as a section 501(c)(3) organization effective as of March 15, 2023. (B) Conclusion. ATEO 1 has no applicable year for the taxable year starting March 15, 2023, and ending June 30, 2023, because no calendar year ends (or termination of ATEO status occurs) with or within the taxable year. ATEO 1’s applicable year for the taxable year ending June 30, 2024, is the period beginning March 15, 2023, and ending December 31, 2023. For purposes of determining the amount of remuneration paid by ATEO 1 and all related organizations for ATEO 1’s taxable year ending June 30, 2024 (including for purposes of determining ATEO 1’s covered employees), only remuneration paid between March 15, 2023, and December 31, 2023, is taken into account. The conclusion for ATEO 2 is the same as in paragraph (c)(4)(i)(C) of this section (Example 1). (iii) Example 3 (Termination before the close of the calendar year ending in the taxable year of termination)—(A) Facts. Assume the same facts as in paragraph (c)(4)(i)(A) of this section (Example 1). In addition, ATEO 1 has a termination of ATEO status on September 30, 2024. (B) Conclusion. For ATEO 1’s taxable year beginning July 1, 2024, and ending September 30, 2024, ATEO 1’s applicable year is the period beginning E:\FR\FM\19JAR12.SGM 19JAR12 khammond on DSKJM1Z7X2PROD with RULES12 6222 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations January 1, 2024, and ending September 30, 2024. (iv) Example 4 (Termination after the close of the calendar year ending in the taxable year of termination)—(A) Facts. Assume the same facts as in paragraph (c)(4)(i)(A) of this section (Example 1). In addition, ATEO 1 has a termination of ATEO status on March 31, 2025. (B) Conclusion. For ATEO 1’s taxable year beginning July 1, 2024, and ending March 31, 2025, ATEO 1 has two applicable years: the 2024 calendar year, and the period beginning on January 1, 2025, and ending on March 31, 2025. (d) Covered employee—(1) In general. For each taxable year, covered employee means any individual who is one of the five highest-compensated employees of the ATEO for the taxable year or was a covered employee of the ATEO (or any predecessor) for any preceding taxable year beginning after December 31, 2016. (2) Five highest-compensated employees—(i) In general. Except as otherwise provided in this paragraph (d)(2), an individual is one of an ATEO’s five highest- compensated employees for the taxable year if the individual is among the five employees of the ATEO with the highest amount of remuneration paid during the applicable year, as determined under § 53.4960–2. However, remuneration for which the deduction is disallowed by reason of section 162(m) is taken into account for purposes of determining an ATEO’s five highest-compensated employees. The five highest-compensated employees of an ATEO for the taxable year are identified on the basis of the total remuneration paid during the applicable year to the employee for services performed as an employee of the ATEO or any related organization. An ATEO may have fewer than five highestcompensated employees for a taxable year if it has fewer than five employees other than employees who are disregarded under paragraphs (d)(2)(ii) through (iv) of this section. For purposes of this paragraph (d)(2), a grant of a legally binding right (within the meaning of § 1.409A–1(b)) to vested remuneration is considered to be remuneration paid as of the date of grant, as described in § 53.4960–2(c)(2), and a person or governmental entity is considered to grant a legally binding right to nonvested remuneration if the person or governmental entity grants a legally binding right to remuneration that is not vested within the meaning of § 53.4960–2(c)(2). An employee is disregarded for purposes of determining an ATEO’s five highest-compensated employees for a taxable year if, during the applicable year, neither the ATEO nor any related organization paid VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 remuneration or granted a legally binding right to nonvested remuneration to the individual for services the individual performed as an employee of the ATEO or any related organization. (ii) Limited hours exception—(A) In general. An individual is disregarded for purposes of determining an ATEO’s five highest-compensated employees for a taxable year if all of the following requirements are met: (1) Remuneration requirement. Neither the ATEO nor any related ATEO paid remuneration or granted a legally binding right to nonvested remuneration to the individual for services the individual performed as an employee of the ATEO during the applicable year; and (2) Hours of service requirement. The individual performed services as an employee of the ATEO and all related ATEOs for no more than 10 percent of the total hours the individual worked as an employee of the ATEO and any related organizations during the applicable year. An ATEO may instead make this determination based on the total days the individual worked as an employee of the ATEO and all related ATEOs as a percentage of the total days worked as an employee of the ATEO and all related organizations, provided that for purposes of the calculation, any day that the individual worked at least one hour as an employee of the ATEO or a related ATEO is treated as a day worked as an employee of the ATEO and not for any other organization. (B) Certain payments disregarded. For purposes of paragraph (d)(2)(ii)(A)(1) of this section, a payment of remuneration made to the individual by a related organization that is an employer of the individual and for which the related organization is neither entitled to reimbursement by the ATEO nor entitled to any other consideration from the ATEO is not considered remuneration paid by the ATEO under § 53.4960–2(b)(1), and a payment of remuneration made to the individual by a related organization is not treated as remuneration paid by the ATEO under § 53.4960–2(b)(2). (C) Safe harbor. For purposes of paragraph (d)(2)(ii)(A)(2) of this section, an individual is treated as having performed services as an employee of the ATEO and all related ATEOs for no more than 10 percent of the total hours the individual worked as an employee of the ATEO and all related organizations during the applicable year if the employee performed no more than 100 hours of service as an employee of the ATEO and all related ATEOs during the applicable year. PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 (iii) Nonexempt funds exception—(A) In general. An individual is disregarded for purposes of determining an ATEO’s five highest-compensated employees for a taxable year if all the following requirements are met: (1) Remuneration requirement. Neither the ATEO, nor any related ATEO, nor any taxable related organization controlled by the ATEO, or by one or more related ATEOs, either alone or together with the ATEO, paid remuneration or granted a legally binding right to nonvested remuneration to the individual for services the individual performed as an employee of an ATEO during the applicable year and the preceding applicable year. For this purpose, whether a taxable related organization is controlled by the ATEO (or one or more related ATEOs) is determined without regard to paragraph (i)(2)(vii)(B)(2) of this section and without regard to section 318(a)(3) for purposes of applying paragraph (i)(2)(vii)(A) of this section, so that an interest in a corporation or nonstock entity is not attributed downward in determining control of the corporation or nonstock entity; (2) Hours of service requirement. The individual performed services as an employee of the ATEO and any related ATEOs for not more than 50 percent of the total hours worked as an employee of the ATEO and any related organizations during the applicable year and the preceding applicable year. An ATEO may instead make this determination based on the total days the individual worked as an employee of the ATEO and all related ATEOs as a percentage of the total days worked as an employee of the ATEO and all related organizations, provided that for purposes of the calculation, any day that the individual worked at least one hour as an employee of the ATEO or a related ATEO is treated as a day worked as an employee of the ATEO and not for any other organization; and (3) Related organizations requirement. No related organization that paid remuneration or granted a legally binding right to nonvested remuneration to the individual during the applicable year and the preceding applicable year provided services for a fee to the ATEO, to any related ATEO, or to any taxable related organization controlled by the ATEO or by one or more related ATEOs, either alone or together with the ATEO, during the applicable year and the preceding applicable year. For purposes of this paragraph (d)(2)(iii)(A)(3), whether a taxable related organization is controlled by the ATEO (or one or more related ATEOs) is determined without regard to paragraph (i)(2)(vii)(B)(2) of E:\FR\FM\19JAR12.SGM 19JAR12 khammond on DSKJM1Z7X2PROD with RULES12 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations this section and without regard to section 318(a)(3) for purposes of applying paragraph (i)(2)(vii)(A) of this section, so that an interest in a corporation or nonstock entity is not attributed downward in determining control of the corporation or nonstock entity. (B) Certain payments disregarded. For purposes of paragraph (d)(2)(iii)(A)(1) of this section, a payment of remuneration made to an individual by a related organization that is an employer of the individual and for which the related organization is neither entitled to reimbursement by the ATEO nor entitled to any other consideration from the ATEO is not considered remuneration paid by the ATEO under § 53.4960–2(b)(1) and a payment of remuneration made to the individual by a related organization is not treated as paid by the ATEO under § 53.4960– 2(b)(2). (iv) Limited services exception. An individual is disregarded for purposes of determining an ATEO’s five highestcompensated employees for a taxable year even though the ATEO paid remuneration to the individual if, disregarding § 53.4960–2(b)(2), all of the following requirements are met: (A) Remuneration requirement. The ATEO did not pay 10 percent or more of the individual’s total remuneration for services performed as an employee of the ATEO and all related organizations during the applicable year; and (B) Related ATEO requirement. The ATEO had at least one related ATEO during the applicable year and one of the following conditions applies: (1) Ten percent remuneration condition. A related ATEO paid at least 10 percent of the remuneration paid by the ATEO and any related organizations during the applicable year; or (2) Less remuneration condition. No related ATEO paid at least 10 percent of the total remuneration paid by the ATEO and any related organizations and the ATEO paid less remuneration to the individual than at least one related ATEO during the applicable year. (3) Examples. The following examples illustrate the rules of this paragraph (d). For purposes of these examples, assume any entity referred to as ‘‘ATEO’’ is an ATEO, any entity referred to as ‘‘CORP’’ is not an ATEO and is not a publicly held company within the meaning of section 162(m)(2) unless otherwise stated, and each taxpayer uses the calendar year as its taxable year. (i) Example 1 (Employee of two related ATEOs)—(A) Facts. ATEO 1 and ATEO 2 are related organizations and have no other related organizations. VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 Both employ Employee A during calendar year 2022 and pay remuneration to Employee A for Employee A’s services. During 2022, Employee A performed services for 1,000 hours as an employee of ATEO 1 and 1,000 hours as an employee of ATEO 2. (B) Conclusion. Employee A may be a covered employee of both ATEO 1 and ATEO 2 as one of the five highestcompensated employees for taxable year 2022 under paragraph (d)(2)(i) of this section because the exceptions in paragraphs (d)(2)(ii) through (iv) of this section do not apply. Because they are related organizations, ATEO 1 and ATEO 2 must each include the remuneration paid to Employee A by the other during each of their applicable years in determining their respective five highest-compensated employees for taxable year 2022. (ii) Example 2 (Employee of an ATEO and a related non-ATEO)—(A) Facts. Assume the same facts as in paragraph (d)(3)(i) of this section (Example 1), except that ATEO 1 is instead CORP 1. (B) Conclusion (CORP 1). For taxable year 2022, CORP 1 is not an ATEO and therefore does not need to identify covered employees. (C) Conclusion (ATEO 2). Employee A may be a covered employee of ATEO 2 as one of its five highest-compensated employees for taxable year 2022 under paragraph (d)(2)(i) of this section because no exception in paragraphs (d)(2)(ii) through (iv) of this section applies. ATEO 2 must include the remuneration paid to Employee A by CORP 1 during its applicable year in determining ATEO 2’s five highestcompensated employees for taxable year 2022. (iii) Example 3 (Amounts for which a deduction is disallowed under section 162(m) are taken into account for purposes of determining the five highest-compensated employees)—(A) Facts. CORP 2 is a publicly held corporation within the meaning of section 162(m)(2) and is a related organization of ATEO 3. ATEO 3 is a corporation that is part of CORP 2’s affiliated group (as defined in section 1504, without regard to section 1504(b)) and has no other related organizations. Employee B is a covered employee (as defined in section 162(m)(3)) of CORP 2 and an employee of ATEO 3. In 2022, CORP 2 paid Employee B $8 million of remuneration for services provided as an employee of CORP 2 and ATEO 3 paid Employee B $500,000 of remuneration for services provided as an employee of ATEO 3. $7.5 million of the remuneration is compensation for PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 6223 which a deduction is disallowed pursuant to section 162(m)(1). (B) Conclusion. The $7.5 million of remuneration for which a deduction is disallowed under section 162(m)(1) is taken into account for purposes of determining ATEO 3’s five highestcompensated employees. Thus, ATEO 3 is treated as paying Employee B $8.5 million of remuneration for purposes of determining its five highestcompensated employees. (iv) Example 4 (Employee disregarded due to receiving no remuneration)—(A) Facts. Employee C is an officer of ATEO 4 who performs more than minor services for ATEO 4. In 2022, neither ATEO 4 nor any related organization paid remuneration or granted a legally binding right to any nonvested remuneration to Employee C. ATEO 4 paid premiums for insurance for liability arising from Employee C’s service with ATEO 4, which is properly treated as a working condition fringe benefit excluded from gross income under § 1.132–5. (B) Conclusion. Even though Employee C is an employee of ATEO 4, Employee C is disregarded for purposes of determining ATEO 4’s five highestcompensated employees for taxable year 2022 under paragraph (d)(2)(i) of this section because neither ATEO 4 nor any related organization paid Employee C any remuneration (nor did they grant a legally binding right to nonvested remuneration) in applicable year 2022. The working condition fringe benefit is not wages within the meaning of section 3401(a), as provided in section 3401(a)(19), and thus is not remuneration within the meaning of § 53.4960–2(a). (v) Example 5 (Limited hours exception)—(A) Facts. ATEO 5 and CORP 3 are related organizations. ATEO 5 has no other related organizations. Employee D is an employee of CORP 3. As part of Employee D’s duties at CORP 3, Employee D serves as an officer of ATEO 5. Only CORP 3 paid remuneration (or granted a legally binding right to nonvested remuneration) to Employee D and ATEO 5 did not reimburse CORP 3 for any portion of Employee D’s remuneration in any manner. During 2022, Employee D provided services as an employee for 2,000 hours to CORP 3 and 200 hours to ATEO 5. (B) Conclusion. Even though Employee D is an employee of ATEO 5 because Employee D provided more than minor services as an officer, Employee D is disregarded for purposes of determining ATEO 5’s five highestcompensated employees for taxable year 2022. Employee D is disregarded under E:\FR\FM\19JAR12.SGM 19JAR12 khammond on DSKJM1Z7X2PROD with RULES12 6224 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations paragraph (d)(2)(ii) of this section because only CORP 3 paid Employee D any remuneration or granted a legally binding right to nonvested remuneration in applicable year 2022 and Employee D provided services as an employee of ATEO 5 for 200 hours, which is not more than ten percent of the 2,200 total hours (2,000 + 200 = 2,200) worked as an employee of ATEO 5 and all related organizations. (vi) Example 6 (Limited hours exception)—(A) Facts. Assume the same facts as in paragraph (d)(3)(v) of this section (Example 5), except that ATEO 5 also provides a reasonable allowance for expenses incurred by Employee D in executing Employee D’s duties as an officer of ATEO 5, which is properly excluded from gross income under an accountable plan described in § 1.62–2. (B) Conclusion. The conclusion is the same as in paragraph (d)(3)(v)(B) of this section (Example 5). Specifically, even though Employee D is an employee of ATEO 5 because Employee D provided more than minor services for ATEO 5, Employee D is disregarded for purposes of determining ATEO 5’s five highestcompensated employees for taxable year 2022 under paragraph (d)(2)(ii) of this section because the expense allowance under the accountable plan is excluded from wages within the meaning of section 3401(a), as provided in § 31.3401(a)-4, and thus is not remuneration within the meaning of § 53.4960–2(a). (vii) Example 7 (No exception applies due to source of payment)—(A) Facts. Assume the same facts as in paragraph (d)(3)(v) of this section (Example 5), except that ATEO 5 has a contractual arrangement with CORP 3 to reimburse CORP 3 for the hours of service Employee D provides to ATEO 5 during applicable year 2022 by paying an amount equal to the total remuneration received by Employee D from both ATEO 5 and CORP 3, multiplied by a fraction equal to the hours of service Employee D provided ATEO 5 over Employee D’s total hours of service to both ATEO 5 and CORP 3. (B) Conclusion. Employee D may be one of ATEO 5’s five highestcompensated employees for taxable year 2022 under paragraph (d)(2)(i) of this section because the exceptions in paragraphs (d)(2)(ii) through (iv) of this section do not apply. Pursuant to the contractual arrangement between CORP 3 and ATEO 5, ATEO 5 reimburses CORP 3 for a portion of Employee D’s remuneration during applicable year 2022; thus, the exceptions under paragraphs (d)(2)(ii) and (iii) of this section do not apply. Further, while ATEO 5 paid Employee D less than 10 VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 percent of the total remuneration from ATEO 5 and all related organizations (200 hours of service to ATEO 5/2,200 hours of service to ATEO 5 and all related organizations = 9 percent), it had no related ATEO; thus, the limited services exception under paragraph (d)(2)(iv) of this section does not apply. (viii) Example 8 (Nonexempt funds exception for part-time services)—(A) Facts. ATEO 6 and CORP 4 are related organizations. ATEO 6 has no other related organizations and does not control CORP 4. During applicable year 2022, Employee E provided 2,000 hours of services as an employee of CORP 4 and 0 hours of services as an employee of ATEO 6; during applicable year 2023, Employee E provided 1,100 hours of services as an employee of CORP 4 and 900 hours of services as an employee of ATEO 6; during applicable year 2024, Employee E provided 1,100 hours of services as an employee of CORP 4 and 900 hours of services as an employee of ATEO 6. ATEO 6 neither paid any remuneration to Employee E nor paid a fee for services to CORP 4 during any applicable year. No exception under paragraphs (d)(2)(i), (ii), or (iv) applies to Employee E. (B) Conclusion (2023). Employee E is disregarded for purposes of determining ATEO 6’s five highest-compensated employees for taxable year 2023 under paragraph (d)(2)(iii) of this section because for applicable years 2022 and 2023, Employee E provided services as an employee of ATEO 6 for not more than 50 percent of the total hours Employee E provided services as an employee of ATEO 6 and CORP 4 (900 hours/4,000 hours), and ATEO 6 neither paid any remuneration to Employee E nor paid a fee for services to CORP 4 during applicable years 2022 and 2023. (C) Conclusion (2024). Employee E is disregarded for purposes of determining ATEO 6’s five highest-compensated employees for taxable year 2024 under paragraph (d)(2)(iii) of this section because for applicable years 2023 and 2024, Employee E provided services as an employee of ATEO 6 for not more than 50 percent of the total hours Employee E provided services as an employee of ATEO 6 and CORP 4 (1,800 hours/4,000 hours), and ATEO 6 neither paid any remuneration to Employee E nor paid a fee for services to CORP 4 during applicable years 2023 and 2024. (ix) Example 9 (Nonexempt funds for full-time services in one applicable year)—(A) Facts. Assume the same facts as in paragraph (d)(3)(viii) of this section (Example 8), except that during applicable year 2022, Employee E provided services as an employee for 2,000 hours to CORP 4 and for 0 hours PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 to ATEO 6; during applicable year 2023, Employee E provided services as an employee for 0 hours to CORP 4 and 2,000 hours to ATEO 6; and during applicable year 2024, Employee E resumes employment with CORP 4 so that Employee E provided services as an employee for 2,000 hours to CORP 4 and 0 hours to ATEO 6. (B) Conclusion (2023). Employee E is disregarded for purposes of determining ATEO 6’s five highest-compensated employees for taxable year 2023 under paragraph (d)(2)(iii) of this section because for applicable years 2022 and 2023, Employee E provided services as an employee of ATEO 6 for not more than 50 percent of the total hours Employee E provided services as an employee of ATEO 6 and CORP 4 (2,000 hours/4,000 hours), and ATEO 6 neither paid any remuneration to Employee E nor paid a fee for services to CORP 4 during applicable years 2022 and 2023. (C) Conclusion (2024). Employee E is disregarded for purposes of determining ATEO 6’s five highest-compensated employees for taxable year 2024 under paragraph (d)(2)(iii) of this section because for applicable years 2023 and 2024, Employee E provided services as an employee of ATEO 6 for not more than 50 percent of the total hours Employee E provided services as an employee of ATEO 6 and CORP 4 (2,000 hours/4,000 hours for ATEO 6 and CORP 4), and ATEO 6 neither paid any remuneration to Employee E nor paid a fee for services to CORP 4 during applicable years 2023 and 2024. (x) Example 10 (Nonexempt funds exception for full-time services across two applicable years)—(A) Facts. Assume the same facts as in paragraph (d)(3)(viii)(A) of this section (Example 8), except that during applicable year 2022, Employee E provided services as an employee for 2,000 hours to CORP 4 and for 0 hours to ATEO 6; during applicable year 2023, Employee E provided services as an employee for 600 hours to CORP 4 and for 1,400 hours to ATEO 6; and during applicable year 2024, Employee E provided services as an employee for 1,400 hours to CORP 4 and for 600 hours to ATEO 6. (B) Conclusion (2023). Employee E is disregarded for purposes of determining ATEO 6’s five highest-compensated employees for taxable year 2023 under paragraph (d)(2)(iii) of this section because for applicable years 2022 and 2023, Employee E provided services as an employee of ATEO 6 for not more than 50 percent of the total hours Employee E provided services as an employee of ATEO 6 and CORP 4 (1,400 hours/4,000 hours), and ATEO 6 neither E:\FR\FM\19JAR12.SGM 19JAR12 khammond on DSKJM1Z7X2PROD with RULES12 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations paid any remuneration to Employee E, nor paid a fee for services to CORP 4 during applicable years 2022 and 2023. (C) Conclusion (2024). Employee E is disregarded for purposes of determining ATEO 6’s five highest-compensated employees for taxable year 2024 under paragraph (d)(2)(iii) of this section because for applicable years 2023 and 2024, Employee E provided services as an employee of ATEO 6 for not more than 50 percent of the total hours Employee E provided services as an employee of ATEO 6 and CORP 4 (2,000 hours/4,000 hours), and ATEO 6 neither paid any remuneration to Employee E, nor paid a fee for services to CORP 4 during applicable years 2023 and 2024. (xi) Example 11 (Failure under the nonexempt funds exception)—(A) Facts. Assume the same facts as in paragraph (d)(3)(viii)(A) of this section (Example 8), except that during applicable year 2022, Employee E provided services as an employee for 2,000 hours to CORP 4 and for 0 hours to ATEO 6; during applicable year 2023, Employee E provided services as an employee for 600 hours to CORP 4 and for 1,400 hours to ATEO 6; and during applicable year 2024, Employee E provided services as an employee for 1,300 hours to CORP 4 and for 700 hours to ATEO 6. (B) Conclusion (2023). Employee E is disregarded for purposes of determining ATEO 6’s five highest-compensated employees for taxable year 2023 under paragraph (d)(2)(iii) of this section because for applicable years 2022 and 2023, Employee E provided services as an employee of ATEO 6 for less than 50 percent of the total hours Employee E provided services as an employee of ATEO 6 and CORP 4 (1,400 hours/4,000 hours), and ATEO 6 neither paid any remuneration to Employee E, nor paid a fee for services to CORP 4 during applicable years 2022 and 2023. (C) Conclusion (2024). Employee E may be a covered employee of ATEO 6 as one of its five highest-compensated employees for taxable year 2024 because the requirements under paragraph (d)(2)(iii) are not met and no other exception applies. For applicable years 2023 and 2024, Employee E provided services as an employee of ATEO 6 for more than 50 percent of the total hours Employee E provided services as an employee of ATEO 6 and CORP 4 (2,100 hours/4,000 hours). (xii) Example 12 (Limited services exception)—(A) Facts. ATEO 7, ATEO 8, ATEO 9, and ATEO 10 are a group of related organizations, none of which have any other related organizations. During 2022, Employee F is an employee of ATEO 7, ATEO 8, ATEO 9, VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 and ATEO 10. During applicable year 2022, ATEO 7 paid 5 percent of Employee F’s remuneration, ATEO 8 paid 10 percent of Employee F’s remuneration, ATEO 9 paid 25 percent of Employee F’s remuneration, and ATEO 10 paid 60 percent of Employee F’s remuneration. No exception under paragraph (d)(2)(i), (ii), or (iii) applies to Employee F for any of ATEO 7, ATEO 8, ATEO 9, or ATEO 10. (B) Conclusion (ATEO 7). Employee F is disregarded for purposes of determining ATEO 7’s five highestcompensated employees for taxable year 2022 under paragraph (d)(2)(iv) of this section because ATEO 7 paid less than 10 percent of Employee F’s total remuneration from ATEO 7 and all related organizations during applicable year 2022, and another related ATEO paid at least 10 percent of that total remuneration. (C) Conclusion (ATEO 8, ATEO 9, and ATEO 10). Employee F may be a covered employee of ATEO 8, ATEO 9, and ATEO 10 as one of their respective five highest-compensated employees for their taxable years 2022 because each of those ATEOs paid 10 percent or more of Employee F’s remuneration during the 2022 applicable year. Thus, the limited services exception under paragraph (d)(2)(iv) of this section does not apply. (xiii) Example 13 (Limited services exception if no ATEO paid at least 10 percent of remuneration)—(A) Facts. Assume the same facts as in paragraph (d)(3)(xii) of this section (Example 12), except that for applicable year 2022, ATEO 7 paid 6 percent of F’s remuneration, ATEO 8, ATEO 9, and ATEO 10 each paid 5 percent of Employee F’s remuneration, and Employee F also works as an employee of CORP 5, a related organization of ATEO 7, ATEO 8, ATEO 9, and ATEO 10 that paid 79 percent of Employee F’s remuneration for applicable year 2022. (B) Conclusion (ATEO 7). Employee F may be one of ATEO 7’s five highestcompensated employees for taxable year 2022. Although ATEO 7 did not pay Employee F 10 percent or more of the total remuneration paid by ATEO 7 and all of its related organizations, no related ATEO paid more than 10 percent of Employee F’s remuneration, and ATEO 7 did not pay less remuneration to Employee F than at least one related ATEO. Thus, the limited services exception under paragraph (d)(2)(iv) of this section does not apply, and Employee F may be one of ATEO 7’s five highest-compensated employees because ATEO 7 paid Employee F more remuneration than any other related ATEO. PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 6225 (C) Conclusion (ATEO 8, ATEO 9, and ATEO 10). Employee F is disregarded for purposes of determining the five highest-compensated employees of ATEO 8, ATEO 9, and ATEO 10 for taxable year 2022 under paragraph (d)(2)(iv) of this section because none paid 10 percent or more of Employee F’s total remuneration, each had no related ATEO that paid at least 10 percent of Employee F’s total remuneration, and each paid less remuneration than at least one related ATEO (ATEO 7). (e) Employee—(1) In general. Employee means an employee as defined in section 3401(c) and § 31.3401(c)–1. Section 31.3401(c)–1 generally defines an employee as any individual performing services if the relationship between the individual and the person for whom the individual performs services is the legal relationship of employer and employee. As set forth in § 31.3401(c)–1, this includes common law employees, as well as officers and employees of government entities, whether or not elected. An employee generally also includes an officer of a corporation, but an officer of a corporation who as such does not perform any services or performs only minor services and who neither receives, nor is entitled to receive, any remuneration is not considered to be an employee of the corporation solely due to the individual’s status as an officer of the corporation. Whether an individual is an employee depends on the facts and circumstances. (2) Directors. A director of a corporation (or an individual holding a substantially similar position in a corporation or other entity) in the individual’s capacity as such is not an employee of the corporation. See § 31.3401(c)–1(f). (3) Trustees. The principles of paragraph (e)(2) of this section apply by analogy to a trustee of any arrangement classified as a trust for Federal tax purposes in § 301.7701–4(a). (f) Employer—(1) In general. Employer means an employer within the meaning of section 3401(d), without regard to section 3401(d)(1) or (2), meaning generally the person or governmental entity for whom the services were performed as an employee. Whether a person or governmental entity is the employer depends on the facts and circumstances, but a person does not cease to be the employer through use of a payroll agent under section 3504, a common paymaster under section 3121(s), a person described in section 3401(d)(1) or (2), a certified professional employer E:\FR\FM\19JAR12.SGM 19JAR12 khammond on DSKJM1Z7X2PROD with RULES12 6226 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations organization under section 7705, or any similar arrangement. (2) Disregarded entities. In the case of a disregarded entity described in § 301.7701–3, § 301.7701–2(c)(2)(iv) does not apply; thus, the sole owner of the disregarded entity is treated as the employer of any individual performing services as an employee of the disregarded entity. (g) Medical services—(1) Medical and veterinary services—(i) In general. Medical services means services directly performed by a licensed medical professional (as defined in paragraph (g)(2) of this section) for the diagnosis, cure, mitigation, treatment, or prevention of disease in humans or animals; services provided for the purpose of affecting any structure or function of the human or animal body; and other services integral to providing such medical services. For purposes of section 4960, teaching and research services are not medical services except to the extent that they involve the services performed to directly diagnose, cure, mitigate, treat, or prevent disease or affect a structure or function of the body. Administrative services may be integral to directly providing medical services. For example, documenting the care and condition of a patient is integral to providing medical services, as is accompanying another licensed professional as a supervisor while that medical professional provides medical services. However, managing an organization’s operations, including scheduling, staffing, appraising employee performance, and other similar functions that may relate to a particular medical professional or professionals who perform medical services, is not integral to providing medical services. See § 53.4960– 2(a)(2)(ii) for rules regarding allocating remuneration paid to a medical professional who performs both medical services and other services. (ii) Examples. The following examples illustrate the rules of this paragraph (g): (A) Example 1 (Administrative tasks that are integral to providing medical services)—(1) Facts. Employee A is a doctor who is licensed to practice medicine in the state in which Employee A’s place of employment is located. In the course of Employee A’s practice, Employee A treats patients and performs some closely-related administrative tasks, such as examining and updating patient records. (2) Conclusion. Employee A’s administrative tasks are integral to providing medical services and thus are medical services. VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 (B) Example 2 (Administrative tasks that are not integral to providing medical services)—(1) Facts. Assume the same facts as in paragraph (g)(1)(ii)(A)(1) of this section (Example 1), except that Employee A also performs additional administrative tasks such as analyzing the budget, authorizing capital expenditures, and managing human resources for the organization by which Employee A is employed. (2) Conclusion. Employee A’s additional administrative tasks are not integral to providing medical services and thus are not medical services. (C) Example 3 (Teaching duties that are and are not medical services)—(1) Facts. Employee B is a medical doctor who is licensed to practice medicine in the state in which her place of employment, a university hospital, is located. Employee B’s duties include overseeing and teaching a group of resident physicians who have restricted licenses to practice medicine. Those duties include supervising and instructing the resident physicians while they treat patients and instruction in a classroom setting. (2) Conclusion. Employee B’s supervision and instruction of resident physicians during the course of patient treatment are necessary for the treatment, and thus are medical services. Employee B’s classroom instruction is not necessary for patient treatment, and thus is not medical services. (D) Example 4 (Research services that are and are not medical services)—(1) Facts. Employee C is a licensed medical doctor who is employed to work on a research trial. Employee C provides an experimental treatment to patients afflicted by a disease and performs certain closely-related administrative tasks that ordinarily are performed by a medical professional in a course of patient treatment. As part of the research trial, Employee C also compiles and analyzes patient results and prepares reports and articles that would not ordinarily be prepared by a medical professional in the course of patient treatment. (2) Conclusion. Employee C’s services that are ordinarily performed by a medical professional in a course of treatment, including closely-related administrative tasks, are medical services. Because the compilation and analysis of patient results and the formulation of reports and articles are neither services ordinarily performed by a medical professional in a course of treatment nor necessary for such treatment, these services are not medical services. PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 (2) Definition of licensed medical professional. Licensed medical professional means an individual who is licensed under applicable state or local law to perform medical services, including as a doctor, nurse, nurse practitioner, dentist, veterinarian, or other licensed medical professional. (h) Predecessor—(1) Asset acquisitions. If an ATEO (acquiror) acquires at least 80 percent of the operating assets or total assets (determined by fair market value on the date of acquisition) of another ATEO (target), then the target is a predecessor of the acquiror. For an acquisition of assets that occurs over time, only assets acquired within a 12-month period are taken into account to determine whether at least 80 percent of the target’s operating assets or total assets were acquired. However, this 12-month period is extended to include any continuous period that ends or begins on any day during which the acquiror has an arrangement to acquire directly or indirectly, assets of the target. Additions to the assets of target made as part of a plan or arrangement to avoid the application of this subsection to acquiror’s purchase of target’s assets are disregarded in applying this paragraph. This paragraph (h)(1) applies for purposes of determining whether an employee is a covered employee under paragraph (d)(1) of this section only with respect to a covered employee of the target who commences the performance of services for the acquiror (or a related organization with respect to the acquiror) within the period beginning 12 months before and ending 12 months after the date of the transaction as defined in paragraph (h)(7) of this section. (2) Corporate reorganizations. A predecessor of an ATEO includes another separate ATEO the stock or assets of which are acquired in a corporate reorganization as defined in section 368(a)(1)(A), (C), (D), (E), (F), or (G) (including by reason of section 368(a)(2)). (3) Predecessor change of form or of place of organization. An ATEO that restructured by changing its organizational form or place of organization (or both) is a predecessor of the restructured ATEO. (4) ATEO that becomes a non-ATEO— (i) General rule. An organization is a predecessor of an ATEO if it ceases to be an ATEO and then again becomes an ATEO effective on or before the predecessor end date. The predecessor end date is the date that is 36 months following the date that the organization’s Federal information return under section 6033 (or, for an E:\FR\FM\19JAR12.SGM 19JAR12 khammond on DSKJM1Z7X2PROD with RULES12 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations ATEO described in paragraph (b)(1)(ii) or (iii) of this section, its Federal income tax return under section 6011(a)) is due (or would be due if the organization were required to file), excluding any extension, for the last taxable year for which the organization previously was an ATEO. If the organization becomes an ATEO again effective after the predecessor end date, then the former ATEO is treated as a separate organization that is not a predecessor of the current ATEO. (ii) Intervening changes or entities. If an ATEO that ceases to be an ATEO (former ATEO) would be treated as a predecessor to an organization that becomes an ATEO before the predecessor end date (successor ATEO), and if the former ATEO would be treated as a predecessor to each intervening entity (if such intervening entities had been ATEOs) under the rules of this paragraph (h), then the former ATEO is a predecessor of the successor ATEO. For example, if ATEO 1 loses its tax-exempt status and then merges into Corporation X, Corporation X then merges into Corporation Y, and Corporation Y becomes an ATEO before the predecessor end date, then ATEO 1 is a predecessor of Corporation Y. (5) Predecessor of a predecessor. A reference to a predecessor includes any predecessor or predecessors of such predecessor, as determined under these rules. (6) Elections under sections 336(e) and 338. For purposes of this paragraph (h), when an ATEO organized as a corporation makes an election to treat as an asset purchase either the sale, exchange, or distribution of stock pursuant to regulations under section 336(e) or the purchase of stock pursuant to regulations under section 338, the corporation that issued the stock is treated as the same corporation both before and after such transaction. (7) Date of transaction. For purposes of this paragraph (h), the date that a transaction is treated as having occurred is the date on which all events necessary to complete the transaction described in the relevant provision have occurred. (i) Related organization—(1) In general. Related organization means any person or governmental entity, domestic or foreign, that meets any of the following tests: (i) Controls or controlled by test. The person or governmental entity controls, or is controlled by, the ATEO; (ii) Controlled by same persons test. The person or governmental entity is controlled by one or more persons that control the ATEO; VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 (iii) Supported organization test. The person or governmental entity is a supported organization (as defined in section 509(f)(3)) with respect to the ATEO; (iv) Supporting organization test. The person or governmental entity is a supporting organization described in section 509(a)(3) with respect to the ATEO; or (v) VEBA test. With regard to an ATEO that is a voluntary employees’ beneficiary association (VEBA) described in section 501(c)(9), the person or governmental entity establishes, maintains, or makes contributions to such VEBA. (2) Control—(i) In general. Control may be direct or indirect. For rules concerning application of the principles of section 318 in applying this paragraph (i)(2), see paragraph (i)(2)(vii) of this section. (ii) Stock corporation. A person or governmental entity controls a stock corporation if it owns (by vote or value) more than 50 percent of the stock in the stock corporation. (iii) Partnership. A person or governmental entity controls a partnership if it owns more than 50 percent of the profits interests or capital interests in the partnership, determined in accordance with the rules and principles of § 1.706–1(b)(4)(ii) for a partner’s interest in the profits of a partnership and § 1.706–1(b)(4)(iii) for a partner’s interest in the capital of a partnership. (iv) Trust. A person or governmental entity controls a trust if it owns more than 50 percent of the beneficial interests in the trust, determined by actuarial value. (v) Nonstock organization—(A) In general. A person or governmental entity controls a nonstock organization if more than 50 percent of the trustees or directors of the nonstock organization are either representatives of, or directly or indirectly controlled by, the person or governmental entity. A nonstock organization is a nonprofit organization or other organization without owners and includes a governmental entity. (B) Control of a trustee or director of a nonstock organization. A person or governmental entity controls a trustee or director of the nonstock organization if the person or governmental entity has the power (either at will or at regular intervals) to remove such trustee or director and designate a new one. (C) Representatives. Trustees, directors, officers, employees, or agents of a person or governmental entity are deemed representatives of the person or governmental entity. However, an employee of a person or governmental PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 6227 entity (other than a trustee, director, or officer, or an employee who possesses at least the authority commonly exercised by an officer) who is a director or trustee of a nonstock organization (or acting in that capacity) will not be treated as a representative of the person or governmental entity if the employee does not act as a representative of the person or governmental entity and that fact is reported in the form and manner prescribed by the Commissioner in forms and instructions. (vi) Brother-sister related organizations. Under paragraph (i)(1)(ii) of this section, an organization is a related organization with respect to an ATEO if one or more persons control both the ATEO and the other organization. In the case of control by multiple persons, the control tests described in this paragraph (i)(2) of this section apply to the persons as a group. For example, if 1,000 individuals who are members of both ATEO 1 and ATEO 2 elect a majority of the board members of each organization, then ATEO 1 and ATEO 2 are related to each other because the same group of 1,000 persons controls both ATEO 1 and ATEO 2. (vii) Section 318 principles—(A) In general. Section 318 (relating to constructive ownership of stock) applies in determining ownership of stock in a corporation. The principles of section 318 also apply for purposes of determining ownership of interests in a partnership or in a trust with beneficial interests. For example, applying the principles of section 318(a)(1)(A), an individual is considered to own the partnership interest or trust interest owned, directly or indirectly, by or for the family members specified in such section. (B) Nonstock organizations—(1) Attribution of ownership interest from a nonstock organization to a controlling person. If a person or governmental entity controls a nonstock organization, the person or governmental entity is treated as owning a percentage of the stock (or partnership interest or beneficial interest in a trust) owned by the nonstock organization in accordance with the percentage of trustees or directors of the nonstock organization that are representatives of, or directly or indirectly controlled by, the person or governmental entity. (2) Attribution of ownership interest from a controlling person to a nonstock organization. If a person or governmental entity controls a nonstock organization, the nonstock organization is treated as owning a percentage of the stock (or partnership interest or beneficial interest in a trust) owned by the person or governmental entity in E:\FR\FM\19JAR12.SGM 19JAR12 khammond on DSKJM1Z7X2PROD with RULES12 6228 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations accordance with the percentage of trustees or directors of the nonstock organization that are representatives of, or directly or indirectly controlled by, the person or governmental entity. (3) Indirect control of a nonstock organization through another nonstock organization. If a person or governmental entity controls one nonstock organization that controls a second nonstock organization, the person or governmental entity is treated as controlling the second nonstock organization if the product of the percentage of trustees or directors of the first nonstock organization that are representatives of, or directly or indirectly controlled by, the person or governmental entity, multiplied by the percentage of trustees or directors of the second nonstock organization that are representatives of, or directly or indirectly controlled by, the person or governmental entity or first nonstock organization, exceeds 50 percent. Similar principles apply to successive tiers of nonstock organizations. (4) Attribution of control of nonstock organization to family member. An individual’s control of a nonstock organization or of a trustee or director of a nonstock organization is attributed to the members of the individual’s family (as set forth in section 318(a)(1) and the regulations thereunder), subject to the limitation of section 318(a)(5)(B) and the regulations thereunder. (3) Examples. The following examples illustrate the principles of this paragraph (i). For purposes of these examples, assume any entity referred to as ‘‘ATEO’’ is an ATEO and any entity referred to as ‘‘CORP’’ is not an ATEO. (i) Example 1 (Related through a chain of control)—(A) Facts. ATEO 1, ATEO 2, and ATEO 3 are nonstock organizations. ATEO 3 owns 80 percent of the stock (by value) of corporation CORP 1. Eighty percent of ATEO 2’s directors are representatives of ATEO 1. In addition, 80 percent of ATEO 3’s directors are representatives of ATEO 1. (B) Conclusion. ATEO 1 is a related organization with respect to ATEO 2 (and vice versa) because more than 50 percent of ATEO 2’s directors are representatives of ATEO 1; thus, ATEO 1 controls ATEO 2. Based on the same analysis, ATEO 1 is also a related organization with respect to ATEO 3 (and vice versa). CORP 1 is a related organization with respect to ATEO 3 because, as the owner of more than 50 percent of CORP 1’s stock, ATEO 3 controls CORP 1. Applying the principles of section 318, ATEO 1 is deemed to own 64 percent of the stock of CORP 1 (80 percent of ATEO 3’s stock in CORP 1). Thus, CORP 1 is a related VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 organization with respect to ATEO 1 because ATEO 1 controls CORP 1. ATEO 2 is a related organization with respect to ATEO 3, ATEO 3 is a related organization with respect to ATEO 2, and CORP 1 is a related organization with respect to ATEO 2 because ATEO 2, ATEO 3, and CORP 1 are all controlled by the same person (ATEO 1). (ii) Example 2 (Not related through a chain of control)—(A) Facts. ATEO 4, ATEO 5, and ATEO 6 are nonstock organizations. Sixty percent of ATEO 5’s directors are representatives of ATEO 4. In addition, 60 percent of ATEO 6’s directors are representatives of ATEO 5, but none are representatives of ATEO 4. (B) Conclusion. ATEO 4 is a related organization with respect to ATEO 5 (and vice versa) because more than 50 percent of ATEO 5’s directors are representatives of ATEO 4; thus, ATEO 4 controls ATEO 5. Based on the same analysis, ATEO 6 is a related organization with respect to ATEO 5 (and vice versa). Applying the principles of section 318, ATEO 4 is deemed to control 36 percent of ATEO 6’s directors (60 percent of ATEO 5’s 60 percent control over ATEO 6). Because less than 50 percent of ATEO 6’s directors are representatives of ATEO 4, and absent any facts suggesting that ATEO 4 directly or indirectly controls ATEO 6, ATEO 4 and ATEO 6 are not related organizations with respect to each other. § 53.4960–2 Determination of remuneration paid for a taxable year. (a) Remuneration—(1) In general. For purposes of section 4960, remuneration means any amount that is wages as defined in section 3401(a), excluding any designated Roth contribution (as defined in section 402A(c)) and including any amount required to be included in gross income under section 457(f). Remuneration includes amounts includible in gross income as compensation for services as an employee pursuant to a below-market loan described in section 7872(c)(1)(B)(i) (compensation-related loans) but does not include amounts excepted by section 7872(c)(3) ($10,000 de minimis exception). For example, see § 1.7872–15(e)(1)(i). Director’s fees paid by a corporation to a director of the corporation are not remuneration, provided that if the director is also an employee of the corporation, the director’s fees are excluded from remuneration only to the extent that they do not exceed fees paid to a director who is not an employee of the corporation or any related organization or, if there is no such director, they do PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 not exceed reasonable director’s fees. Remuneration does not include any amount that vested or was paid by a taxpayer before the start of the taxpayer’s first taxable year that began on or after January 1, 2018. (2) Exclusion of remuneration for medical services—(i) In general. Remuneration does not include the portion of any remuneration paid to a licensed medical professional that is for the performance of medical services by such professional. (ii) Allocation of remuneration for medical services and non-medical services. If, during an applicable year, an employer pays a covered employee remuneration for providing both medical services and non-medical services, the employer must make a reasonable, good faith allocation between the remuneration for medical services and the remuneration for nonmedical services. For example, if a medical doctor receives current remuneration (or vests in remuneration under a deferred compensation plan) for providing medical services and administrative or management services, the employer must make a reasonable, good faith allocation between the remuneration for the medical services and the remuneration for the administrative or management services. For this purpose, if an employment agreement or similar written arrangement sets forth the remuneration to be paid for particular services, that allocation of remuneration applies unless the facts and circumstances demonstrate that the amount allocated to medical services is unreasonable for those services or that the allocation was established for purposes of avoiding application of the excise tax under section 4960. If some or all of the remuneration is not reasonably allocated in an employment agreement or similar arrangement, an employer may use any reasonable allocation method. For example, an employer may use a representative sample of records, such as patient, insurance, and Medicare/Medicaid billing records or internal time reporting mechanisms to determine the time spent providing medical services, and then allocate remuneration to medical services in the proportion such time bears to the total hours the employee worked for the employer (and any related employer) for purposes of making a reasonable allocation of remuneration. Similarly, if some or all of the remuneration is not reasonably allocated in an employment agreement or other similar arrangement, an employer may use salaries or other remuneration paid by the employer or similarly situated employers for duties E:\FR\FM\19JAR12.SGM 19JAR12 khammond on DSKJM1Z7X2PROD with RULES12 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations comparable to those the employee performs (for example, hospital administrator and physician) for purposes of making a reasonable allocation between remuneration for providing medical services and for providing non-medical services. (iii) Examples. The following examples illustrate the rules of this paragraph (a)(2). For purposes of these examples, assume any entity referred to as ‘‘ATEO’’ is an ATEO. (A) Example 1 (Allocation based on employment agreement)—(1) Facts. Employee A is a covered employee of ATEO 1. Employee A is a licensed medical professional who provides patient care services for ATEO 1 and also provides management and administrative services to ATEO 1 as the manager of a medical practice group within ATEO 1. The employment agreement between ATEO 1 and Employee A specifies that of Employee A’s salary, 30 percent is allocable to Employee A’s services as manager of the medical practice group and 70 percent is allocable to Employee A’s services as a medical professional providing patient care services. The facts regarding Employee A’s employment indicate the employment agreement provides a reasonable allocation and that the allocation was not established for purposes of avoiding application of the excise tax. (2) Conclusion. Consistent with Employee A’s employment agreement, ATEO 1 must allocate 30 percent of Employee A’s salary to the provision of non-medical services and 70 percent of Employee A’s salary to the provision of medical services. Accordingly, only the 30 percent portion of Employee A’s salary allocated to the other, nonmedical services is remuneration for purposes of paragraph (a) of this section. (B) Example 2 (Allocation based on billing records)—(1) Facts. Assume the same facts as in paragraph (a)(2)(iii)(A) of this section (Example 1), except that the employment agreement does not allocate Employee A’s salary between medical and non-medical services performed by Employee A. Based on a representative sample of insurance and Medicare billing records, as well as time reports that Employee A submits to ATEO 1, ATEO 1 determines that Employee A spends 50 percent of her work hours providing patient care and 50 percent of her work hours performing administrative and management services. ATEO 1 allocates 50 percent of Employee A’s remuneration to medical services. (2) Conclusion. ATEO 1’s allocation of Employee A’s salary is a reasonable, good faith allocation. Accordingly, only VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 the 50 percent portion of Employee A’s remuneration allocated to the nonmedical services is remuneration for purposes of paragraph (a) of this section. (b) Source of payment. For purposes of this section, the determination of the source of a payment of remuneration may involve the application of one or both of two separate rules described in this paragraph (b). Paragraph (b)(1) of this section addresses payments by a third party for services performed as an employee of a separate employer entity, while paragraph (b)(2) of this section addresses the application of section 4960(c)(4)(A) to treat certain remuneration paid by a related organization (after application of paragraph (b)(1) of this section, if applicable) as paid by the ATEO. (1) Remuneration paid by a third party for employment by an employer. Remuneration paid (or a grant of a legally binding right to nonvested remuneration) by a third-party payor (whether a related organization, payroll agent, agent designated under section 3504, certified professional employer organization under section 7705, or other entity) during an applicable year for services performed as an employee of an employer is remuneration paid (or payable) by the employer, except as otherwise provided in § 53.4960– 1(d)(2)(ii) and (iii). (2) Remuneration paid by a related organization for employment by the related organization. Pursuant to section 4960(c)(4)(A), remuneration paid (or a grant of a legally binding right to nonvested remuneration) by a related organization to an ATEO’s employee during an applicable year for services performed as an employee of the related organization is treated as remuneration paid (or payable) by the ATEO, except as otherwise provided in § 53.4960– 1(d)(2)(ii) and (iii). (c) Applicable year in which remuneration is treated as paid—(1) In general. Remuneration that is a regular wage within the meaning of § 31.3402(g)–1(a)(1)(ii) is treated as paid on the date it is actually or constructively paid and all other remuneration is treated as paid on the first date on which the remuneration is vested. (2) Vested remuneration. Remuneration is vested if it is not subject to a substantial risk of forfeiture within the meaning of section 457(f)(3)(B) (regardless of whether the arrangement under which the remuneration is to be paid is deferred compensation described in section 457(f) or 409A). In general, an amount is subject to a substantial risk of forfeiture if entitlement to the amount is PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 6229 conditioned on the future performance of substantial services or upon the occurrence of a condition that is related to a purpose of the remuneration if the possibility of forfeiture is substantial. Except as provided in paragraph (c)(1) of this section, remuneration that is never subject to a substantial risk of forfeiture is considered paid on the first date the service provider has a legally binding right to the payment. For purposes of this section, a plan means a plan within the meaning of § 1.409A– 1(c), an account balance plan means an account balance plan within the meaning of § 1.409A–1(c)(2)(i)(A), and a nonaccount balance plan means a nonaccount balance plan within the meaning of § 1.409A–1(c)(2)(i)(C). Net earnings on previously paid remuneration (described in paragraph (d)(2) of this section) that are not subject to a substantial risk of forfeiture are vested (and, thus, treated as paid) at the earlier of the date actually or constructively paid to the employee or the close of the applicable year in which they accrue. For example, the present value of a principal amount accrued to an employee’s account under an account balance plan (under which the earnings and losses attributed to the account are based solely on a predetermined actual investment as determined under § 31.3121(v)(2)– 1(d)(2)(i)(B) or a reasonable market interest rate) is treated as paid on the date vested, but the present value of any net earnings subsequently accrued on that amount (the increase in value due to the predetermined actual investment or a reasonable market interest rate) is treated as paid at the close of the applicable year in which they accrue. Similarly, while the present value of an amount accrued under a nonaccount balance (including earnings that accrued while the amount was nonvested) is treated as paid on the date it is first vested, the present value of the net earnings on that amount (the increase in the present value) is treated as paid at the close of the applicable year in which they accrue. (3) Change in related status during the year. If a taxpayer becomes or ceases to be a related organization with respect to an ATEO during an applicable year, then only the remuneration paid by the taxpayer to an employee with respect to services performed as an employee of the related organization during the portion of the applicable year during which the employer is a related organization is treated as paid by the ATEO. If an amount is treated as paid due to vesting in the year the taxpayer becomes or ceases to be a related E:\FR\FM\19JAR12.SGM 19JAR12 khammond on DSKJM1Z7X2PROD with RULES12 6230 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations organization with respect to the ATEO, then the amount is treated as paid by the ATEO only if the amount becomes vested during the portion of the applicable year that the taxpayer is a related organization with respect to the ATEO. (d) Amount of remuneration treated as paid—(1) In general. For each applicable year, the amount of remuneration treated as paid by the employer to a covered employee is the sum of regular wages within the meaning of § 31.3402(g)–1(a)(1)(ii) actually or constructively paid during the applicable year and the present value (as determined under paragraph (e) of this section) of all other remuneration that vested during the applicable year. The amount of remuneration that vests during an applicable year is determined on an employer-by-employer basis with respect to each covered employee. (2) Earnings and losses on previously paid remuneration—(i) In general. The amount of net earnings or losses on previously paid remuneration paid by an employer is determined on an employee-by-employee basis, such that amounts accrued with regard to one employee do not affect amounts accrued with regard to a different employee. Similarly, losses accrued on previously paid remuneration from one employer do not offset earnings accrued on previously paid remuneration from another employer. The amount of net earnings or losses on previously paid remuneration paid by the employer is determined on a net aggregate basis for all plans maintained by the employer in which the employee participates for each applicable year. For example, losses under an account balance plan may offset earnings under a nonaccount balance plan for the same applicable year maintained by the same employer for the same employee. (ii) Previously paid remuneration— (A) New covered employee. For an individual who was not a covered employee for any prior applicable year, previously paid remuneration means, for the applicable year for which the individual becomes a covered employee, the present value of vested remuneration that was not actually or constructively paid or otherwise includible in the employee’s gross income before the start of the applicable year plus any remuneration that vested during the applicable year but that is not actually or constructively paid or otherwise includible in the employee’s gross income before the close of the applicable year. (B) Existing covered employee. For an individual who was a covered employee VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 for any prior applicable year, previously paid remuneration means, for each applicable year, the amount of remuneration that the employer treated as paid in the applicable year or for a prior applicable year but that is not actually or constructively paid or otherwise includible in the employee’s gross income before the close of the applicable year. Actual or constructive payment or another event causing an amount of previously paid remuneration to be includible in the employee’s gross income thus reduces the amount of previously paid remuneration. (iii) Earnings. Earnings means any increase in the vested present value of previously paid remuneration as of the close of the applicable year, regardless of whether the plan denominates the increase as earnings. For example, an increase in the vested account balance of a nonqualified deferred compensation plan based solely on the investment return of a predetermined actual investment (and disregarding any additional contributions) constitutes earnings. Similarly, an increase in the vested present value of a benefit under a nonqualified nonaccount balance plan due solely to the passage of time (and disregarding any additional benefit accruals) constitutes earnings. However, an increase in an account balance of a nonqualified deferred compensation plan due to a salary reduction contribution or an employer contribution does not constitute earnings (and therefore may not be offset with losses). Likewise, an increase in the benefit under a nonaccount balance plan due to an additional year of service or an increase in compensation that is reflected in a benefit formula does not constitute earnings. (iv) Losses. Losses means any decrease in the vested present value of previously paid remuneration as of the close of the applicable year, regardless of whether the plan denominates that decrease as losses. (v) Net earnings. Net earnings means, for each applicable year, the amount (if any) by which the earnings accrued for the applicable year on previously paid remuneration exceeds the sum of the losses accrued on previously paid remuneration for the applicable year and any net losses carried forward from a previous taxable year. (vi) Net losses. Net losses means, for each applicable year, the amount (if any) by which the sum of the losses accrued on previously paid remuneration for the applicable year and any net losses carried forward from a previous taxable year exceed the earnings accrued for the applicable year PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 on previously paid remuneration. Losses may only be used to offset earnings and thus do not reduce the remuneration treated as paid for an applicable year except to the extent of the earnings accrued for that applicable year. However, with regard to a covered employee, an employer may carry net losses forward to the next applicable year and offset vested earnings for purposes of determining net earnings or losses for that subsequent applicable year. For example, if a covered employee who participates in a nonaccount balance plan and an account balance plan vests in an amount of earnings under the nonaccount balance plan and has losses under the account balance plan that exceed the vested earnings treated as remuneration under the nonaccount balance plan, those excess losses are carried forward to the next applicable year and offset vested earnings for purposes of determining net earnings or losses for that applicable year. If, for the next applicable year, there are not sufficient earnings to offset the entire amount of losses carried forward from the previous year (and any additional losses), the offset process repeats for each subsequent applicable year until there are sufficient earnings for the applicable year to offset any remaining losses carried forward. (3) Remuneration paid for a taxable year before the employee becomes a covered employee—(i) In general. In accordance with the payment timing rules of paragraph (c) of this section, any remuneration that is vested but is not actually or constructively paid or otherwise includible in an employee’s gross income as of the close of the applicable year for the taxable year immediately preceding the taxable year in which the employee first becomes a covered employee of an ATEO is treated as previously paid remuneration for the taxable year in which the employee first becomes a covered employee. Net losses on this previously paid remuneration from any preceding applicable year do not carry forward to subsequent applicable years. However, net earnings and losses that vest on such previously paid remuneration in subsequent applicable years are treated as remuneration paid for a taxable year for which the employee is a covered employee. (ii) Examples. The following examples illustrate the rules of this paragraph (d)(3). For purposes of these examples, assume any organization described as ‘‘ATEO’’ is an ATEO. (A) Example 1 (Earnings on precovered employee remuneration)—(1) Facts. ATEO 1 uses a taxable year E:\FR\FM\19JAR12.SGM 19JAR12 khammond on DSKJM1Z7X2PROD with RULES12 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations beginning July 1 and ending June 30. Employee A becomes a covered employee of ATEO 1 for the taxable year beginning July 1, 2023, and ending June 30, 2024. During the 2022 applicable year, Employee A vests in $1 million of nonqualified deferred compensation. As of December 31, 2022, the present value of the amount deferred under the plan is $1.1 million. During the 2023 applicable year, ATEO 1 pays Employee A $1 million in regular wages. The present value as of December 31, 2023, of Employee A’s nonqualified deferred compensation is $1.3 million. (2) Conclusion (Taxable year beginning July 1, 2022, and ending June 30, 2023). ATEO 1 pays Employee A $1.1 million of remuneration in the 2022 applicable year. This is comprised of $1 million of vested nonqualified deferred compensation, and $100,000 of earnings, all of which is treated as paid for the taxable year beginning July 1, 2022, and ending June 30, 2023. (3) Conclusion (Taxable year beginning July 1, 2023, and ending June 30, 2024). ATEO 1 pays Employee A $1.2 million of remuneration in the 2023 applicable year. This is comprised of $1 million regular wages and $200,000 of earnings ($1.3 million present value as of December 31, 2023, minus $1.1 million previously paid remuneration as of December 31, 2022). (B) Example 2 (Losses on pre-covered employee remuneration)—(1) Facts. Assume the same facts as in paragraph (d)(3)(ii)(A) of this section (Example 1), except that the present value of the nonqualified deferred compensation as of December 31, 2022, is $900,000. (2) Conclusion (Taxable year beginning July 1, 2022, and ending June 30, 2023). ATEO 1 pays Employee A $1 million of remuneration in the 2022 applicable year. This is comprised of $1 million of vested nonqualified deferred compensation. The present value of all vested deferred compensation as of December 31 of the 2022 applicable year ($900,000) is treated as previously paid remuneration for the next applicable year (as Employee A is a covered employee for the next taxable year). The $100,000 of losses accrued while Employee A was not a covered employee do not carry forward to the next applicable year. (3) Conclusion (Taxable year beginning July 1, 2023, and ending June 30, 2024). ATEO 1 pays Employee A $1.4 million of remuneration in the 2023 applicable year. This is comprised of $1 million cash and $400,000 of earnings ($1.3 million present value as of December 31, 2023, minus $900,000 previously paid remuneration). VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 (e) Calculation of present value—(1) In general. The employer must determine present value using reasonable actuarial assumptions regarding the amount, time, and probability that a payment will be made. For this purpose, a discount for the probability that an employee will die before commencement of benefit payments is permitted, but only to the extent that benefits will be forfeited upon death. The present value may not be discounted for the probability that payments will not be made (or will be reduced) because of the unfunded status of the plan; the risk associated with any deemed or actual investment of amounts deferred under the plan; the risk that the employer, the trustee, or another party will be unwilling or unable to pay; the possibility of future plan amendments; the possibility of a future change in the law; or similar risks or contingencies. The present value of the right to future payments as of the vesting date includes any earnings that have accrued as of the vesting date that are not previously paid remuneration. (2) Treatment of future payment amount as present value for certain amounts. For purposes of determining the present value of remuneration that is scheduled to be actually or constructively paid within 90 days of vesting, the employer may treat the future amount that is to be paid as the present value at vesting. (f) Examples. The following examples illustrate the rules of this section. For purposes of these examples, assume any entity referred to as ‘‘ATEO’’ is an ATEO, any entity referred to as ‘‘CORP’’ is not an ATEO, and all taxpayers use the calendar year as their taxable year. (1) Example 1 (Account balance plan)—(i) Facts. Employee A is a covered employee of ATEO 1. Employee A participates in a nonqualified deferred compensation plan (the NQDC plan) in which the account balance is adjusted based on the investment returns on predetermined actual investments. On January 1, 2022, ATEO 1 credits $100,000 to Employee A’s account under the plan, subject to the requirement that Employee A remain employed through June 30, 2024. On June 30, 2024, the vested account balance is $110,000. Due to earnings or losses on the account balance, the closing account balance on each of the following dates is: $115,000 on December 31, 2024, $120,000 on December 31, 2025, $100,000 on December 31, 2026, and $110,000 on December 31, 2027. During 2028, Employee A defers an additional $10,000 under the plan, all of which is vested at the time of deferral. On PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 6231 December 31, 2028, the closing account balance is $125,000. In 2029, ATEO 1 pays $10,000 to Employee A under the plan. On December 31, 2029, the closing account balance is $135,000 due to earnings on the account balance. (ii) Conclusion (2022 and 2023 applicable years—nonvested amounts). For 2022 and 2023, ATEO 1 is not treated as paying Employee A any remuneration attributable to Employee A’s participation in the NQDC plan because the amount deferred under the plan remains subject to a substantial risk of forfeiture within the meaning of section 457(f)(3)(B). (iii) Conclusion (2024 applicable year—amounts in year of vesting). For 2024, ATEO 1 is treated as paying Employee A $115,000 of remuneration attributable to Employee A’s participation in the NQDC plan, including $110,000 of remuneration on June 30, 2024, when the amount becomes vested, and an additional $5,000 of remuneration on December 31, 2024, which is earnings on the previously paid remuneration ($110,000). (iv) Conclusion (2025 applicable year—earnings). For 2025, ATEO 1 is treated as paying Employee A $5,000 of remuneration attributable to Employee A’s participation in the NQDC plan, which is the additional earnings on the previously paid remuneration ($115,000) as of December 31, 2025. (v) Conclusion (2026 applicable year—losses). For 2026, ATEO 1 is not treated as paying Employee A any remuneration attributable to Employee A’s participation in the NQDC plan because the present value of the previously paid remuneration ($120,000) decreased to $100,000 as of December 31, 2026. The $20,000 loss for 2026 does not reduce any amount previously treated as remuneration but is available for carryover to subsequent taxable years to offset earnings. (vi) Conclusion (2027 applicable year—recovery of losses). For 2027, ATEO 1 is not treated as paying Employee A any remuneration attributable to Employee A’s participation in the NQDC plan because the present value of the previously paid remuneration ($120,000) was $110,000 as of December 31, 2027. Due to increases on the account balance, ATEO 1 recovers $10,000 of the $20,000 of losses carried over from 2026. The net losses as of December 31, 2027, are $10,000, and none of the $10,000 in earnings during 2027 is treated as remuneration paid in 2027. (vii) Conclusion (2028 applicable year—no recovery of losses against additional deferrals of compensation). E:\FR\FM\19JAR12.SGM 19JAR12 khammond on DSKJM1Z7X2PROD with RULES12 6232 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations For 2028, ATEO 1 is treated as paying Employee A $10,000 of remuneration attributable to Employee A’s participation in the NQDC plan. The additional $10,000 deferral is vested and thus is treated as remuneration paid on the date credited to Employee A’s account. This credit increases the amount of previously paid remuneration from $120,000 to $130,000. Additionally, due to earnings, ATEO 1 recovers $5,000 of the $10,000 loss carried over from 2027, none of which was remuneration paid for 2026, so that as of December 31, 2028, the net loss available for carryover to 2029 is $5,000. (viii) Conclusion (2029 applicable year—distributions, recovery of remainder of losses through earnings and additional earnings). For 2029, ATEO 1 is treated as paying Employee A $15,000 of remuneration attributable to Employee A’s participation in the NQDC plan. The $10,000 payment reduces the amount of previously paid remuneration (from $130,000 to $120,000) and the account balance (from $125,000 to $115,000). The present value of the vested account balance increases by $20,000 (from $115,000 to $135,000) as of December 31, 2029. Therefore, due to earnings, ATEO 1 recovers the remaining $5,000 loss carried over from 2028 (the difference between the $120,000 previously paid remuneration before earnings and the $115,000 account balance before earnings) and is treated as paying Employee A an additional $15,000 of remuneration as earnings (the difference between the $135,000 account balance after earnings and the $120,000 previously paid remuneration after loss recovery). (2) Example 2 (Nonaccount balance plan with earnings)—(i) Facts. ATEO 2 and CORP 2 are related organizations. Employee B is a covered employee of ATEO 2 and is also employed by CORP 2. On January 1, 2022, CORP 2 and Employee B enter into an agreement under which CORP 2 will pay Employee B $100,000 on December 31, 2025, if B remains employed by CORP 2 through January 1, 2024. Employee B remains employed by CORP 2 through January 1, 2024. On January 1, 2024, the present value based on reasonable actuarial assumptions of the $100,000 to be paid on December 31, 2025, is $75,000. On December 31, 2024, the present value of the $100,000 future payment increases to $85,000 due solely to the passage of time. On December 31, 2025, CORP 2 pays Employee B $100,000. (ii) Conclusion (2022 and 2023 applicable years—nonvested amounts). For 2022 and 2023, CORP 2 is not treated as paying Employee B any VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 remuneration attributable to the agreement because the amount deferred under the agreement remains subject to a substantial risk of forfeiture within the meaning of section 457(f)(3)(B). (iii) Conclusion (2024 applicable year—amounts in year of vesting). For 2024, CORP 2 is treated as paying Employee B $75,000 of remuneration attributable to the agreement on January 1, 2024, which is the present value on that date of the $100,000 payable on December 31, 2025. In addition, CORP 2 is treated as paying Employee B $10,000 of remuneration attributable to the agreement on December 31, 2024, which is earnings based on the increase in the present value of the previously paid remuneration (from $75,000 to $85,000) as of December 31, 2024. (iv) Conclusion (2025 applicable year—earnings and distribution of previously paid remuneration). For 2025, CORP 2 is treated as paying Employee B $15,000 in remuneration attributable to the agreement on December 31, 2025, which is earnings based on the increase in the present value of the previously paid remuneration (from $85,000 to $100,000) as of December 31, 2025. In addition, the $100,000 payment is treated as reducing the amount of previously paid remuneration ($100,000) to zero. (3) Example 3 (Treatment of amount payable as present value at vesting)—(i) Facts. Employee C is a covered employee of ATEO 3. Under an agreement between ATEO 3 and Employee C, ATEO 3 agrees to pay Employee C $100,000 two months after the date Employee C meets a specified performance goal that is a substantial risk of forfeiture within the meaning of section 457(f)(3)(B). Employee C meets the performance goal on November 30, 2022, and ATEO 3 pays Employee C $100,000 on January 31, 2023. In accordance with § 53.4960–2(e)(2), because the payment is to be made within 90 days of vesting, ATEO 3 elects to treat the full payment amount as the amount of remuneration paid at vesting. (ii) Conclusion (2022 applicable year—election to treat amount payable within 90 days as paid at vesting). For taxable year 2022, ATEO 3 is treated as paying Employee C $100,000 of remuneration attributable to the agreement. Employee C vests in the $100,000 payment in 2022 upon meeting the performance goal. Under the general rule, ATEO 3 would be treated as paying for the taxable year 2022 the present value as of November 30, 2022, of $100,000 payable on January 31, 2023 (two months after the date of vesting), with adjustments to the PO 00000 Frm 00038 Fmt 4701 Sfmt 4700 present value as of the end of the year. However, because ATEO 3 elected to treat the full $100,000 amount payable within 90 days of vesting as the remuneration paid, the $100,000 payable to Employee C in 2023 is treated as remuneration paid in 2022 (and no additional amount related to the $100,000 paid on January 31, 2023, is treated as remuneration paid in 2023). (4) Example 4 (Aggregation of remuneration from related organizations)—(i) Facts. Employee D is a covered employee of ATEO 4 and also an employee of CORP 4 and CORP 5. ATEO 4, CORP 4, and CORP 5 are related organizations. ATEO 4, CORP 4, and CORP 5 each pay Employee D $200,000 of salary during 2022 and 2023. On January 1, 2022, ATEO 4 promises to pay Employee D $120,000 on December 31, 2023, under a nonaccount balance plan, the right to which is vested and the present value of which is $100,000 on January 1, 2022. On January 1, 2022, CORP 4 and CORP 5 each contribute $100,000 on Employee D’s behalf to account balance plans of CORP 4 and CORP 5, respectively, under which all amounts deferred are vested. On December 31, 2022, the present value of the amounts deferred under the ATEO 4 plan is $110,000, the present value of the amounts deferred under the CORP 4 plan is $120,000, and the present value of the amounts deferred under the CORP 5 plan maintained is $90,000. On December 31, 2023, the present value of the amounts deferred under the ATEO 4 plan is $120,000, the present value of the amounts deferred under the CORP 4 plan is $130,000, and the present value of the amounts deferred under the CORP 5 plan is $110,000. (ii) Conclusion (2022 applicable year). For 2022, before aggregation of remuneration paid by related organizations, ATEO 4 is treated as paying Employee D $310,000 of remuneration ($200,000 salary + $100,000 upon vesting of deferred amounts + $10,000 net earnings on vested deferred amounts). CORP 4 is treated as paying Employee D $320,000 of remuneration ($200,000 salary + $100,000 upon vesting of deferred amounts + $20,000 net earnings on vested deferred amounts). CORP 5 is treated as paying Employee D $300,000 of remuneration ($200,000 salary + $100,000 upon vesting of deferred amounts) and has $10,000 of net losses on vested deferred amounts, which are carried forward to 2023. Thus, ATEO 4 is treated as paying $930,000 of remuneration to Employee D for the applicable year. E:\FR\FM\19JAR12.SGM 19JAR12 khammond on DSKJM1Z7X2PROD with RULES12 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations (iii) Conclusion (2023 applicable year). For 2023, before aggregation of remuneration paid by related organizations, ATEO 4 is treated as paying Employee D $210,000 of remuneration ($200,000 salary + $10,000 earnings on previously paid remuneration). CORP 4 is treated as paying Employee D $210,000 of remuneration ($200,000 salary + $10,000 net earnings on previously paid remuneration). CORP 5 is treated as paying Employee D $210,000 of remuneration ($200,000 salary + $10,000 net earnings on previously paid remuneration after taking into account the loss carryforward). Thus, ATEO 4 is treated as paying $630,000 of remuneration to Employee D for the applicable year. (5) Example 5 (Treatment of regular wages for a pay period spanning applicable years)—(i) Facts. ATEO 5 pays its employees’ salaries in accordance with a two-week payroll period that begins Sunday of the first week and ends Saturday of the second week. Payment occurs the Friday following the end of the payroll period. The last payroll period of 2023 ends on December 31, 2023. For the last payroll period, Employee E earns $8,000 of salary. In addition, ATEO 5 awards Employee E a $10,000 bonus that vests on December 31, 2023. ATEO 5 pays Employee E $18,000 on Friday, January 5, 2024, reflecting Employee E’s salary for the last payroll period of 2023 and the bonus, the right to which vested on December 31, 2023. (ii) Conclusion (Regular wages). The $8,000 of salary is regular wages within the meaning of § 31.3402(g)–1(a)(1)(ii) because it is an amount paid at a periodic rate for the current payroll period. Thus, $8,000 is treated as remuneration paid on January 5, 2024 (when it is actually or constructively paid), and, therefore, is treated as remuneration paid in ATEO 5’s 2024 applicable year. (iii) Conclusion (Amounts other than regular wages). The $10,000 bonus is not regular wages within the meaning of § 31.3402(g)–1(a)(1)(ii) because it is not an amount paid at a periodic rate for the current payroll period. Thus, $10,000 is treated as remuneration paid on December 31, 2023 (when it is vested) and, therefore, is treated as remuneration paid in ATEO 5’s 2023 applicable year. § 53.4960–3 Determination of whether there is a parachute payment. (a) Parachute payment—(1) In general. Except as otherwise provided in paragraph (a)(2) of this section (relating to payments excluded from the VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 definition of a parachute payment), parachute payment means any payment in the nature of compensation made by an ATEO (or a predecessor of the ATEO) or a related organization to (or for the benefit of) a covered employee if the payment is contingent on the employee’s separation from employment with the employer, and the aggregate present value of the payments in the nature of compensation to (or for the benefit of) the individual that are contingent on the separation equals or exceeds an amount equal to 3-times the base amount. (2) Exclusions. The following payments are not parachute payments: (i) Certain qualified plans. A payment that is a contribution to or a distribution from a plan described in section 401(a) that includes a trust exempt from tax under section 501(a), an annuity plan described in section 403(a), a simplified employee pension (as defined in section 408(k)), or a simple retirement account described in section 408(p); (ii) Certain annuity contracts. A payment made under or to an annuity contract described in section 403(b) or a plan described in section 457(b); (iii) Compensation for medical services. A payment made to a licensed medical professional for the performance of medical services performed by such professional; and (iv) Payments to non-HCEs. A payment made to an individual who is not a highly compensated employee (HCE) as defined in paragraph (a)(3) of this section. (3) Determination of HCEs for purposes of the exclusion from parachute payments. For purposes of this section, highly compensated employee or HCE means, with regard to an ATEO that maintains a qualified retirement plan or other employee benefit plan described in § 1.414(q)–1T, Q/A–1, any person who is a highly compensated employee within the meaning of section 414(q) and, with regard to an ATEO that does not maintain such a plan, any person who would be a highly compensated employee within the meaning of section 414(q) if the ATEO did maintain such a plan. For purposes of determining the group of highly compensated employees for a determination year, consistent with § 1.414(q)–1T, Q/A–14(a)(1), the determination year calculation is made on the basis of the applicable plan year under § 1.414(q)–1T, Q/A–14(a)(2) of the plan or other entity for which a determination is made, and the lookback year calculation is made on the basis of the 12-month period immediately preceding that year. For an ATEO that does not maintain a plan PO 00000 Frm 00039 Fmt 4701 Sfmt 4700 6233 described in § 1.414(q)–1T, Q/A–1, the rules are applied by analogy, substituting the calendar year for the plan year. Thus, for example, in 2022, an ATEO that does not maintain such a plan must use its employees’ 2021 annual compensation (as defined in § 1.414(q)–1T, Q/A–13, including any of the safe harbor definitions if applied consistently to all employees) to determine which employees are HCEs for 2022, if any, for purposes of section 4960. If an employee is an HCE at the time of separation from employment, then for purposes of section 4960 any parachute payment that is contingent on the separation from employment (as defined in paragraph (d) of this section) is treated as paid to an HCE so that the exception from the term parachute payment under paragraph (a)(2)(iv) of this section does not apply, even if the payment occurs during one or more later taxable years (that is, taxable years after the taxable year during which the employee separated from employment). (b) Payment in the nature of compensation—(1) In general. Any payment—in whatever form—is a payment in the nature of compensation if the payment arises out of an employment relationship, including holding oneself out as available to perform services and refraining from performing services. Thus, for example, a payment made under a covenant not to compete or a similar arrangement is a payment in the nature of compensation. A payment in the nature of compensation includes (but is not limited to) wages and salary, bonuses, severance pay, fringe benefits, life insurance, pension benefits, and other deferred compensation (including any amount characterized by the parties as interest or earnings thereon). A payment in the nature of compensation also includes cash when paid, the value of the right to receive cash, the value of accelerated vesting, or a transfer of property. The vesting of an option, stock appreciation right, or similar form of compensation as a result of a covered employee’s separation from employment is a payment in the nature of compensation. However, a payment in the nature of compensation does not include attorney’s fees or court costs paid or incurred in connection with the payment of any parachute payment or a reasonable rate of interest accrued on any amount during the period the parties contest whether a parachute payment will be made. (2) Consideration paid by covered employee. Any payment in the nature of compensation is reduced by the amount of any money or the fair market value of any property (owned by the covered E:\FR\FM\19JAR12.SGM 19JAR12 khammond on DSKJM1Z7X2PROD with RULES12 6234 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations employee without restriction) that is (or will be) transferred by the covered employee in exchange for the payment. (c) When payment is considered to be made—(1) In general. A payment in the nature of compensation is considered made in the taxable year in which it is includible in the covered employee’s gross income or, in the case of fringe benefits and other benefits that are excludable from income, in the taxable year the benefits are received. In the case of taxable non-cash fringe benefits provided in a calendar year, payment is considered made on the date or dates the employer chooses, but no later than December 31 of the calendar year in which the benefits are provided, except that when the fringe benefit is the transfer of personal property (either tangible or intangible) of a kind normally held for investment or the transfer of real property, payment is considered made on the actual date of transfer. If the fringe benefit is neither a transfer of personal property nor a transfer of real property, the employer may, in its discretion, treat the value of the benefit actually provided during the last two months of the calendar year as paid during the subsequent calendar year. However, an employer that treats the value of a benefit paid during the last two months of a calendar year as paid during the subsequent calendar year under this rule must treat the value of that fringe benefit as paid during the subsequent calendar year with respect to all employees who receive it. (2) Transfers of section 83 property. A transfer of property in connection with the performance of services that is subject to section 83 is considered a payment made in the taxable year in which the property is transferred or would be includible in the gross income of the covered employee under section 83, disregarding any election made by the employee under section 83(b) or (i). Thus, in general, such a payment is considered made at the later of the date the property is transferred (as defined in § 1.83–3(a)) to the covered employee or the date the property becomes substantially vested (as defined in § 1.83–3(b) and (j)). The amount of the payment is the compensation as determined under section 83, disregarding any amount includible in income pursuant to an election made by an employee under section 83(b). (3) Stock options. An option (including an option to which section 421 applies) is treated as property that is transferred when the option becomes vested (regardless of whether the option has a readily ascertainable fair market value as defined in § 1.83–7(b)). For purposes of determining the timing and VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 amount of any payment related to the option, the principles of § 1.280G–1, Q/ A–13 and any method prescribed by the Commissioner in published guidance of general applicability under § 601.601(d)(2) apply. (d) Payment contingent on an employee’s separation from employment—(1) In general. A payment is contingent on an employee’s separation from employment if the facts and circumstances indicate that the employer would not make the payment in the absence of the employee’s involuntary separation from employment. A payment generally would be made in the absence of the employee’s involuntary separation from employment if it is substantially certain at the time of the involuntary separation from employment that the payment would be made whether or not the involuntary separation occurred. A payment the right to which is not subject to a substantial risk of forfeiture within the meaning of section 457(f)(3)(B) at the time of an involuntary separation from employment generally is a payment that would have been made in the absence of an involuntary separation from employment (and is therefore not contingent on a separation from employment), except that the increased value of an accelerated payment of a vested amount described in paragraph (f)(3) of this section resulting from an involuntary separation from employment is not treated as a payment that would have been made in the absence of an involuntary separation from employment. A payment the right to which is no longer subject to a substantial risk of forfeiture within the meaning of section 457(f)(3)(B) as a result of an involuntary separation from employment, including a payment the vesting of which is accelerated due to the separation from employment as described in paragraph (f)(3) of this section, is not treated as a payment that would have been made in the absence of an involuntary separation from employment (and thus is contingent on a separation from employment). A payment does not fail to be contingent on a separation from employment merely because the payment is conditioned upon the execution of a release of claims, noncompetition or nondisclosure provisions, or other similar requirements. See paragraph (d)(3) of this section for the treatment of a payment made pursuant to a covenant not to compete. If, after an involuntary separation from employment, the former employee continues to provide certain services as a nonemployee, payments for services rendered as a nonemployee PO 00000 Frm 00040 Fmt 4701 Sfmt 4700 are not payments that are contingent on a separation from employment to the extent those payments are reasonable and are not made on account of the involuntary separation from employment. Whether services are performed as an employee or nonemployee depends upon all the facts and circumstances. See § 53.4960–1(e). For rules on determining whether payments are reasonable compensation for services, the rules of § 1.280G–1, Q/ A–40 through Q/A–42 (excluding Q/A– 40(b) and Q/A–42(b)), and Q/A–44 are applied by analogy (substituting involuntary separation from employment for change in ownership or control). (2) Employment agreements—(i) In general. If a covered employee involuntarily separates from employment before the end of a contract term and is paid damages for breach of contract pursuant to an employment agreement, the payment of damages is treated as a payment that is contingent on a separation from employment. An employment agreement is an agreement between an employee and employer that describes, among other things, the amount of compensation or remuneration payable to the employee for services performed during the term of the agreement. (ii) Example. The following example illustrates the rules of this paragraph (d)(2). For purposes of this example, assume any entity referred to as ‘‘ATEO’’ is an ATEO. (A) Example—(1) Facts. Employee A, a covered employee, has a 3-year employment agreement with ATEO 1. Under the agreement, Employee A will receive a salary of $200,000 for the first year and, for each succeeding year, an annual salary that is $100,000 more than the previous year. The agreement provides that, in the event of A’s involuntary separation from employment without cause, Employee A will receive the remaining salary due under the agreement. At the beginning of the second year of the agreement, ATEO 1 involuntarily terminates Employee A’s employment without cause and pays Employee A $700,000 representing the remaining salary due under the employment agreement ($300,000 for the second year of the agreement plus $400,000 for the third year of the agreement). (2) Conclusion. The $700,000 payment is treated as a payment that is contingent on a separation from employment. (3) Noncompetition agreements. A payment under an agreement requiring a covered employee to refrain from performing services (for example, a E:\FR\FM\19JAR12.SGM 19JAR12 khammond on DSKJM1Z7X2PROD with RULES12 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations covenant not to compete) is a payment that is contingent on a separation from employment if the payment would not have been made in the absence of an involuntary separation from employment. For example, a payment contingent on compliance in whole or in part with a covenant not to compete negotiated as part of a severance arrangement arising from an involuntary separation from employment is contingent on a separation from employment. Similarly, one or more payments contingent on compliance in whole or in part with a covenant not to compete not negotiated as part of a severance arrangement arising from an involuntary separation from employment but that provides for a payment specific to an involuntary separation from employment (and not voluntary separation from employment) is contingent on a separation from employment. Payments made under an agreement requiring a covered employee to refrain from performing services that are contingent on separation from employment are not treated as paid in exchange for the performance of services and are not excluded from parachute payments. (4) Payment of amounts previously included in income or excess remuneration. Actual or constructive payment of an amount that was previously included in gross income of the employee is not a payment contingent on a separation from employment. For example, payment of an amount included in income under section 457(f)(1)(A) due to the lapsing of a substantial risk of forfeiture on a date before the separation from employment generally is not a payment that is contingent on a separation from employment, even if the amount is paid in cash or otherwise to the employee because of the separation from employment. In addition, actual or constructive receipt of an amount treated as excess remuneration under § 53.4960–4(b)(1) is not a payment that is contingent on a separation from employment (and thus is not a parachute payment), even if the amount is paid to the employee because of the separation from employment. (5) Window programs. A payment under a window program is contingent on a separation from employment. A window program is a program established by an employer in connection with an impending separation from employment to provide separation pay if the program is made available by the employer for a limited period of time (no longer than 12 months) to employees who separate from employment during that period or VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 to employees who separate from service during that period under specified circumstances. A payment made under a window program is treated as a payment that is contingent on an employee’s separation from employment notwithstanding that the employee may not have had an involuntary separation from employment. (6) Anti-abuse provision. Notwithstanding paragraphs (d)(1) through (5) of this section, if the facts and circumstances demonstrate that either the vesting or the payment of an amount (whether before or after an employee’s involuntary separation from employment) would not have occurred but for the involuntary nature of the separation from employment, the payment of the amount is contingent on a separation from employment. For example, an employer’s exercise of discretion to accelerate vesting of an amount shortly before an involuntary separation from employment may indicate that the acceleration of vesting was due to the involuntary nature of the separation from employment and was therefore contingent on the employee’s separation from employment. Similarly, payment of an amount in excess of an amount otherwise payable (for example, increased salary), shortly before or after an involuntary separation from employment, may indicate that the amount was paid because the separation was involuntary and was therefore contingent on the employee’s separation from employment. If an ATEO becomes a predecessor as a result of a reorganization or other transaction described in § 53.4960–1(h), any payment to an employee by a successor organization that is contingent on the employee’s separation from employment with the predecessor ATEO is treated as paid by the predecessor ATEO. (e) Involuntary separation from employment—(1) In general. Involuntary separation from employment means a separation from employment due to the independent exercise of the employer’s unilateral authority to terminate the employee’s services, other than due to the employee’s implicit or explicit request, if the employee was willing and able to continue performing services as an employee. An involuntary separation from employment may include an employer’s failure to renew a contract at the time the contract expires, provided that the employee was willing and able to execute a new contract providing terms and conditions substantially similar to those in the expiring contract and to continue providing services. The PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 6235 determination of whether a separation from employment is involuntary is based on all the facts and circumstances. (2) Separation from employment for good reason—(i) In general. Notwithstanding paragraph (e)(1) of this section, an employee’s voluntary separation from employment is treated as an involuntary separation from employment if the separation occurs under certain bona fide conditions (referred to herein as a separation from employment for good reason). (ii) Material negative change required. A separation from employment for good reason is treated as an involuntary separation from employment if the relevant facts and circumstances demonstrate that it was the result of unilateral employer action that caused a material negative change to the employee’s relationship with the employer. Factors that may provide evidence of such a material negative change include a material reduction in the duties to be performed, a material negative change in the conditions under which the duties are to be performed, or a material reduction in the compensation to be received for performing such services. (iii) Deemed material negative change. An involuntary separation from employment due to a material negative change is deemed to occur if the separation from employment occurs within 2 years following the initial existence of one or more of the following conditions arising without the consent of the employee: (A) Material diminution of compensation. A material diminution in the employee’s base compensation; (B) Material diminution of responsibility. A material diminution in the employee’s authority, duties, or responsibilities; (C) Material diminution of authority of supervisor. A material diminution in the authority, duties, or responsibilities of the supervisor to whom the employee is required to report, including a requirement that an employee report to a corporate officer or employee instead of reporting directly to the board of directors (or similar governing body) of an organization; (D) Material diminution of budget. A material diminution in the budget over which the employee retains authority; (E) Material change of location. A material change in the geographic location at which the employee must perform services; or (F) Other material breach. Any other action or inaction that constitutes a material breach by the employer of the E:\FR\FM\19JAR12.SGM 19JAR12 khammond on DSKJM1Z7X2PROD with RULES12 6236 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations agreement under which the employee provides services. (3) Separation from employment. Except as otherwise provided in this paragraph, separation from employment has the same meaning as separation from service as defined in § 1.409A– 1(h). Pursuant to § 1.409A–1(h), an employee generally separates from employment with the employer if the employee dies, retires, or otherwise has a termination of employment with the employer or experiences a sufficient reduction in the level of services provided to the employer. For purposes of applying the rules regarding reductions in the level of services set forth in the definition of termination of employment in § 1.409A–1(h)(1)(ii), the rules are modified for purposes of this paragraph such that an employer may not set the level of the anticipated reduction in future services that will give rise to a separation from employment, meaning that the default percentages set forth in § 1.409A– 1(h)(1)(ii) apply in all circumstances. Thus, an anticipated reduction of the level of service of less than 50 percent is not treated as a separation from employment, an anticipated reduction of more than 80 percent is treated as a separation from employment, and the treatment of an anticipated reduction between those two levels is determined based on the facts and circumstances. The measurement of the anticipated reduction of the level of service is based on the average level of service for the prior 36 months (or shorter period for an employee employed for less than 36 months). In addition, an employee’s separation from employment is determined without regard to § 1.409A– 1(h)(2) and (5) (application to independent contractors), since, for purposes of this section, only an employee may have a separation from employment, and a change from bona fide employee status to bona fide independent contractor status is also a separation from employment. See § 53.4960–2(a)(1) regarding the treatment of an employee who also serves as a director of a corporation (or in a substantially similar position). The definition of separation from employment also incorporates the rules under § 1.409A–1(h)(1)(i) (addressing leaves of absence, including military leaves of absence), § 1.409A–1(h)(4) (addressing asset purchase transactions), and § 1.409A–1(h)(6) (addressing employees participating in collectively bargained plans covering multiple employers). The definition further incorporates the rules of § 1.409A– 1(h)(3), under which an employee VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 separates from employment only if the employee has a separation from employment with the employer and all employers that would be considered a single employer under section 414(b) and (c), except that the ‘‘at least 80 percent’’ rule under section 414(b) and (c) is used, rather than replacing it with ‘‘at least 50 percent.’’ However, for purposes of determining whether there has been a separation from employment, a purported ongoing employment relationship between a covered employee and an ATEO or a related organization is disregarded if the facts and circumstances demonstrate that the purported employment relationship is not bona fide, or the primary purpose of the establishment or continuation of the relationship is avoidance of the application of section 4960. (f) Accelerated payment or accelerated vesting resulting from an involuntary separation from employment—(1) In general. If a payment or the lapse of a substantial risk of forfeiture is accelerated as a result of an involuntary separation from employment, generally only the value due to the acceleration of payment or vesting is treated as contingent on a separation from employment, as described in paragraphs (f)(3) and (4) of this section, except as otherwise provided in this paragraph (f). For purposes of this paragraph (f), the terms vested and substantial risk of forfeiture have the same meaning as provided in § 53.4960–2(c)(2). (2) Nonvested payments subject to a non-service vesting condition. If (without regard to a separation from employment) vesting of a payment would depend on an event other than the performance of services, such as the attainment of a performance goal, and that vesting event does not occur prior to the employee’s separation from employment and the payment vests due to the employee’s involuntary separation from employment, the full amount of the payment is treated as contingent on the separation from employment. (3) Vested payments. If an involuntary separation from employment accelerates actual or constructive payment of an amount that previously vested without regard to the separation, the portion of the payment, if any, that is contingent on the separation from employment is the amount by which the present value of the accelerated payment exceeds the present value of the payment absent the acceleration. The payment of an amount otherwise due upon a separation from employment (whether voluntary or involuntary) is not treated as an acceleration of the payment unless the PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 payment timing was accelerated due to the involuntary nature of the separation from employment. If the value of the payment absent the acceleration is not reasonably ascertainable, and the acceleration of the payment does not significantly increase the present value of the payment absent the acceleration, the present value of the payment absent the acceleration is the amount of the accelerated payment (so the amount contingent on the separation from employment is zero). If the present value of the payment absent the acceleration is not reasonably ascertainable but the acceleration significantly increases the present value of the payment, the future value of the payment contingent on the separation from employment is treated as equal to the amount of the accelerated payment. For purposes of this paragraph (f)(3), the acceleration of a payment by 90 days or less is not treated as significantly increasing the present value of the payment. For rules on determining present value, see paragraph (f)(6) and paragraphs (h), (i) and (j) of this section. (4) Nonvested payments subject to a service vesting condition—(i) In general. If an involuntary separation from employment accelerates vesting of a payment, the portion of the payment that is contingent on separation from employment is the amount described in paragraph (f)(3) of this section (if any) plus the value of the lapse of the obligation to continue to perform services described in paragraph (f)(4)(ii) of this section (but the amount cannot exceed the amount of the accelerated payment, or, if the payment is not accelerated, the present value of the payment), to the extent that all of the following conditions are satisfied with respect to the payment: (A) Vesting trigger. The payment vests as a result of an involuntary separation from employment; (B) Vesting condition. Disregarding the involuntary separation from employment, the vesting of the payment was contingent only on the continued performance of services for the employer for a specified period of time; and (C) Services condition. The payment is attributable, at least in part, to the performance of services before the date the payment is made or becomes certain to be made. (ii) Value of the lapse of the obligation to continue to perform services. The value of the lapse of the obligation to continue to perform services is one percent of the amount of the accelerated payment multiplied by the number of full months between the date that the employee’s right to receive the payment E:\FR\FM\19JAR12.SGM 19JAR12 khammond on DSKJM1Z7X2PROD with RULES12 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations is vested and the date that, absent the acceleration, the payment would have been vested. This paragraph (f)(4)(ii) applies to the accelerated vesting of a payment in the nature of compensation even if the time when the payment is made is not accelerated. In that case, the value of the lapse of the obligation to continue to perform services is one percent of the present value of the future payment multiplied by the number of full months between the date that the individual’s right to receive the payment is vested and the date that, absent the acceleration, the payment would have been vested. (iii) Accelerated vesting of equity compensation. For purposes of this paragraph (f)(4), the acceleration of the vesting of a stock option or stock appreciation right (or similar arrangement) or the lapse of a restriction on restricted stock or a restricted stock unit (or a similar arrangement) is considered to significantly increase the value of the payment. (5) Application to benefits under a nonqualified deferred compensation plan. In the case of a payment of benefits under a nonqualified deferred compensation plan, paragraph (f)(3) of this section applies to the extent benefits under the plan are vested without regard to the involuntary separation from employment, but the payment of benefits is accelerated due to the involuntary separation from employment. Paragraph (f)(4) of this section applies to the extent benefits under the plan are subject to the conditions described in paragraph (f)(4)(i) of this section. For any other payment of benefits under a nonqualified deferred compensation plan (such as a contribution made due to the employee’s involuntary separation from employment), the full amount of the payment is contingent on the employee’s separation from employment. (6) Present value. For purposes of this paragraph (f), the present value of a payment is determined based on the payment date absent the acceleration and the date on which the accelerated payment is scheduled to be made. The amount that is treated as contingent on the separation from employment is the amount by which the present value of the accelerated payment exceeds the present value of the payment absent the acceleration. (7) Examples. See § 1.280G Q/A–24(f) for examples that may be applied by analogy to illustrate the rules of this paragraph (f). (g) Three-times-base-amount test for parachute payments—(1) In general. To determine whether payments in the VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 nature of compensation made to a covered employee that are contingent on the covered employee separating from employment with the ATEO are parachute payments, the aggregate present value of the payments must be compared to the individual’s base amount. To do this, the aggregate present value of all payments in the nature of compensation that are made or to be made to (or for the benefit of) the same covered employee by an ATEO (or any predecessor of the ATEO) or related organization and that are contingent on the separation from employment must be determined. If this aggregate present value equals or exceeds the amount equal to 3-times the individual’s base amount, the payments are parachute payments. If this aggregate present value is less than the amount equal to 3-times the individual’s base amount, the payments are not parachute payments. See paragraphs (f)(6), (h), (i), and (j) of this section for rules on determining present value. (2) Examples. The following examples illustrate the rules of this paragraph (g). For purposes of these examples, assume any entity referred to as ‘‘ATEO’’ is an ATEO. (i) Example 1 (Parachute payment)— (A) Facts. Employee A is a covered employee and an HCE of ATEO 1. Employee A’s base amount is $200,000. Payments in the nature of compensation that are contingent on a separation from employment with ATEO 1 totaling $800,000 are made to Employee A on the date of Employee A’s separation from employment. (B) Conclusion. The payments are parachute payments because they have an aggregate present value at the time of the separation from employment of $800,000, which is at least equal to 3times Employee A’s base amount of $200,000 (3 × $200,000 = $600,000). (ii) Example 2 (No parachute payment)—(A) Facts. Assume the same facts as in paragraph (g)(2)(i) of this section (Example 1), except that the payments contingent on Employee A’s separation from employment total $580,000. (B) Conclusion. Because the aggregate present value of the payments ($580,000) is not at least equal to 3times Employee A’s base amount ($600,000), the payments are not parachute payments. (h) Calculating present value—(1) In general. Except as otherwise provided in this paragraph (h), for purposes of determining if a payment contingent on a separation from employment exceeds 3-times the base amount, the present value of a payment is determined as of the date of the separation from PO 00000 Frm 00043 Fmt 4701 Sfmt 4700 6237 employment or, if the payment is made prior to that date, the date on which the payment is made. (2) Deferred payments. For purposes of determining whether a payment is a parachute payment, if a payment in the nature of compensation is the right to receive payments in a year (or years) subsequent to the year of the separation from employment, the value of the payment is the present value of the payment (or payments) calculated on the basis of reasonable actuarial assumptions and using the applicable discount rate for the present value calculation that is determined in accordance with paragraph (i) of this section. (3) Health care. If the payment in the nature of compensation is an obligation to provide health care (including an obligation to purchase or provide health insurance), then, for purposes of this paragraph (h) and for applying the 3times-base-amount test under paragraph (g) of this section, the present value of the obligation is calculated in accordance with generally accepted accounting principles. For purposes of paragraph (g) of this section and this paragraph (h), the obligation to provide health care is permitted to be measured by projecting the cost of premiums for health care insurance, even if no health care insurance is actually purchased. If the obligation to provide health care is made in coordination with a health care plan that the employer makes available to a group, then the premiums used for purposes of this paragraph (h)(3) may be the allocable portion of group premiums. (i) Discount rate. Present value generally is determined by using a discount rate equal to 120 percent of the applicable Federal rate (determined under section 1274(d) and the regulations in part 1 under section 1274(d)), compounded semiannually. The applicable Federal rate to be used is the Federal rate that is in effect on the date as of which the present value is determined, using the period until the payment is expected to be made as the term of the debt instrument under section 1274(d). See paragraph (h) of this section for rules with respect to the date as of which the present value is determined. However, for any payment, the employer and the covered employee may elect to use the applicable Federal rate that is in effect on the date on which the parties entered into the contract that provides for the payment if that election is set forth in writing in the contract. (j) Present value of a payment to be made in the future that is contingent on an uncertain future event or condition— E:\FR\FM\19JAR12.SGM 19JAR12 khammond on DSKJM1Z7X2PROD with RULES12 6238 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations (1) Treatment based on the estimated probability of payment. In certain cases, it may be necessary to apply the 3times-base-amount test to a payment that is contingent on separation from employment at a time when the aggregate present value of all the payments is uncertain because the time, amount, or right to receive one or more of the payments is also contingent on the occurrence of an uncertain future event or condition. In that case, the employer must reasonably estimate whether it will make the payment. If the employer reasonably estimates there is a 50-percent or greater probability that it will make the payment, the full amount of the payment is considered for purposes of the 3-times-base-amount test and the allocation of the base amount. If the employer reasonably estimates there is a less than 50-percent probability that the payment will be made, the payment is not considered for either purpose. (2) Correction of incorrect estimates. If an ATEO later determines that an estimate it made under paragraph (j)(1) of this section was incorrect, it must reapply the 3-times-base-amount test to reflect the actual time and amount of the payment. In reapplying the 3-timesbase-amount test (and, if necessary, reallocating the base amount), the ATEO must determine the aggregate present value of payments paid or to be paid as of the date described in paragraph (h) of this section using the discount rate described in paragraph (i) of this section. This redetermination may affect the amount of any excess parachute payment for a prior taxable year. However, if, based on the application of the 3-times-base-amount test without regard to the payment described in this paragraph (j), an ATEO has determined it will pay an employee an excess parachute payment or payments, then the 3-times-base-amount test does not have to be reapplied when a payment described in this paragraph (j) is made (or becomes certain to be made) if no base amount is allocated to that payment under § 53.4960–4(d)(5). (3) Initial option value estimate. To the extent provided in published guidance of general applicability under § 601.601(d)(2), an initial estimate of the value of an option subject to paragraph (c) of this section is permitted to be made, with the valuation subsequently redetermined and the 3-times-baseamount test reapplied. Until guidance is published under section 4960, published guidance of general applicability described in § 601.601(d)(2) that is issued under section 280G applies by analogy. VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 (4) Examples. See § 1.280G–1, Q/A– 33(d) for examples that may be applied by analogy to illustrate the rules of this paragraph (j). (k) Base amount—(1) In general. A covered employee’s base amount is the average annual compensation for services performed as an employee of the ATEO (including compensation for services performed for a predecessor of the ATEO), and/or, if applicable, a related organization, with respect to which there has been a separation from employment, if the compensation was includible in the gross income of the individual for taxable years in the base period (including amounts that were excluded under section 911) or that would have been includible in the individual’s gross income if the individual had been a United States citizen or resident. See paragraph (l) of this section for the definition of base period and for examples of base amount computations. (2) Short or incomplete taxable years. If the base period of a covered employee includes a short taxable year or less than all of a taxable year of the employee, compensation for the short or incomplete taxable year must be annualized before determining the average annual compensation for the base period. In annualizing compensation, the frequency with which payments are expected to be made over an annual period must be taken into account. Thus, any amount of compensation for a short or incomplete taxable year that represents a payment that will not be made more often than once per year is not annualized. (3) Excludable fringe benefits. Because the base amount includes only compensation that is includible in gross income, the base amount does not include certain items that may constitute parachute payments. For example, payments in the form of excludable fringe benefits or excludable health care benefits are not included in the base amount but may be treated as parachute payments. (4) Section 83(b) income. The base amount includes the amount of compensation included in income under section 83(b) during the base period. (l) Base period—(1) In general. The base period of a covered employee is the covered employee’s 5 most-recent taxable years ending before the date on which the separation from employment occurs. However, if the covered employee was not an employee of the ATEO for this entire 5-year period, the individual’s base period is the portion of the 5-year period during which the covered employee performed services PO 00000 Frm 00044 Fmt 4701 Sfmt 4700 for the ATEO, a predecessor, or a related organization. (2) Determination of base amount if employee separates from employment in the year hired. If a covered employee commences services as an employee and experiences a separation from employment in the same taxable year, the covered employee’s base amount is the annualized compensation for services performed for the ATEO (or a predecessor or related organization) that was not contingent on the separation from employment and either was includible in the employee’s gross income for that portion of the employee’s taxable year prior to the employee’s separation from employment (including amounts that were excluded under section 911) or would have been includible in the employee’s gross income if the employee had been a United States citizen or resident. (3) Examples. The following examples illustrate the rules of paragraph (k) of this section and this paragraph (l). For purposes of these examples, assume any entity referred to as ‘‘ATEO’’ is an ATEO, any entity referred to as ‘‘CORP’’ is not an ATEO, and all employees are HCEs of their respective employers. (i) Example 1 (Calculation with salary deferrals)—(A) Facts. Employee A, a covered employee of ATEO 1, receives an annual salary of $500,000 per year during the 5-year base period. Employee A defers $100,000 of salary each year under a nonqualified deferred compensation plan (none of which is includible in Employee A’s income until paid in cash to Employee A). (B) Conclusion. Employee A’s base amount is $400,000 (($400,000 × 5)/5). (ii) Example 2 (Calculation for lessthan-5-year base period)—(A) Facts. Employee B, a covered employee of ATEO 1, was employed by ATEO 1 for 2 years and 4 months preceding the year in which Employee B separates from employment. Employee B’s compensation includible in gross income was $100,000 for the 4-month period, $420,000 for the first full year, and $450,000 for the second full year. (B) Conclusion. Employee B’s base amount is $390,000 (((3 × $100,000) + $420,000 + $450,000)/3). Any compensation Employee B receives in the year of separation from employment is not included in the base amount calculation. (iii) Example 3 (Calculation for lessthan-5-year base period with signing bonus)—(A) Facts. Assume the same facts as in paragraph (l)(3)(ii)(A) of this section (Example 2), except that Employee B also received a $60,000 signing bonus when Employee B’s E:\FR\FM\19JAR12.SGM 19JAR12 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations employment with ATEO 1 commenced at the beginning of the 4-month period. (B) Conclusion. Employee B’s base amount is $410,000 ((($60,000 + (3 × $100,000)) + $420,000 + $450,000)/3). Pursuant to paragraph (k)(2) of this section, because the bonus is a payment that will not be paid more often than once per year, the bonus is not taken into account in annualizing Employee B’s compensation for the 4-month period. (iv) Example 4 (Effect of nonemployee compensation)—(A) Facts. Employee C, a covered employee of ATEO 1, was not an employee of ATEO 1 for the full 5-year base period. In 2024 and 2025, Employee C is only a director of ATEO 1 and receives $30,000 per year for services as a director. On January 1, 2026, Employee C becomes an officer and covered employee of ATEO 1. Employee C’s includible compensation for services as an officer of ATEO 1 is $250,000 for each of 2026 and 2027, and $300,000 for 2028. In 2028, Employee C separates from employment with ATEO 1. (B) Conclusion. Employee C’s base amount is $250,000 ((2 × $250,000)/2). The $30,000 of director’s fees paid to Employee C in each of 2024 and 2025 is not included in Employee C’s base amount calculation because it was not for services performed as an employee of ATEO 1. khammond on DSKJM1Z7X2PROD with RULES12 § 53.4960–4 Liability for tax on excess remuneration and excess parachute payments. (a) Liability, reporting, and payment of excise taxes—(1) Liability. For each taxable year, with respect to each covered employee, the taxpayer is liable for tax at the rate imposed under section 11 on the sum of the excess remuneration allocated to the taxpayer under paragraph (c) of this section and, if the taxpayer is an ATEO, any excess parachute payment paid by the taxpayer or a predecessor during the taxable year. (2) Reporting and payment. The excise tax imposed by section 4960 is reported as provided in §§ 53.6011–1(b) and 53.6071–1(i) and paid in the form and manner prescribed by the Commissioner. (3) Arrangements between an ATEO and a related organization. Calculation of, and liability for, the excise tax imposed by section 4960 is separate from, and unaffected by, any arrangement that an ATEO and any related organization may have for bearing the cost of any liability for the excise tax imposed by section 4960. (4) Certain foreign related organizations. A related organization that is a foreign organization described VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 in section 4948(b) that either is exempt from tax under section 501(a) or is a taxable private foundation (section 4948(b) related organization) is not liable for the excise tax imposed by section 4960. A foreign organization is an organization not created or organized in the United States or in any possession thereof, or under the law of the United States, any State, the District of Columbia, or any possession of the United States. See section 4948(b) and § 53.4948–1. For purposes of this paragraph (a)(4) and the application of section 4960 to a taxable year, an organization’s status as a section 4948(b) related organization is determined at the end of its taxable year. However, remuneration that the section 4948(b) related organization pays to a covered employee of an ATEO must be taken into account by the ATEO and other related organizations for purposes of section 4960 generally, including for purposes of determining the five highest-compensated employees and the total remuneration paid to a covered employee. For example, if an ATEO and its related organization that is a section 4948(b) related organization each paid $600,000 remuneration to a covered employee during the applicable year, then the related organization would not be liable for the tax that would otherwise be allocable to it, and the ATEO would be liable for tax on $100,000 (50 percent of the $200,000 excess remuneration paid to the employee). (5) [Reserved] (b) Amounts subject to tax—(1) Excess remuneration—(i) In general. Excess remuneration means the amount of remuneration paid by an ATEO to any covered employee during an applicable year in excess of $1 million, as determined under § 53.4960–2. (ii) Exclusion for excess parachute payments. Excess remuneration does not include any amount that is an excess parachute payment as defined in paragraph (b)(2) of this section. (2) Excess parachute payment. Excess parachute payment means an amount equal to the excess (if any) of the amount of any parachute payment paid by an ATEO, a predecessor of the ATEO, or a related organization, or on behalf of any such person, during the taxable year over the portion of the base amount allocated to such payment. (c) Calculation of liability for tax on excess remuneration—(1) In general. For each taxable year, an employer is liable for the tax on excess remuneration paid in the applicable year ending with or within the employer’s taxable year. If, for the taxable year, remuneration paid during an applicable year by an ATEO PO 00000 Frm 00045 Fmt 4701 Sfmt 4700 6239 or one or more related organizations to a covered employee is taken into account in determining the tax imposed on excess remuneration for that taxable year, then each employer is liable for the tax in an amount that bears the same ratio to the total tax determined under section 4960(a) as the amount of remuneration paid by the employer to the covered employee (including remuneration paid by the employer as described in § 53.4960–2(b)(1), but disregarding remuneration treated as paid by the employer under § 53.4960– 2(b)(2)), bears to the total amount of remuneration paid by the ATEO under § 53.4960–2 (including remuneration treated as paid by the ATEO under § 53.4960–2(b)(2)). (2) Calculation if liability is allocated from more than one ATEO with regard to an individual. If liability for the tax on excess remuneration is allocated to an employer from more than one ATEO in a taxable year with regard to an individual that is a covered employee of each ATEO, then the employer is liable for the tax only in the capacity in which it is liable for the greatest amount of the tax with respect to that individual for the taxable year. For example, assume ATEO 1 is a related organization to both ATEO 2 and ATEO 3 and pays excess remuneration to Employee D, and Employee D is a covered employee of ATEO 1, ATEO 2, and ATEO 3. In this case, ATEO 1’s liability for the tax on excess remuneration to Employee D is the highest of its liability as an ATEO, as a related organization to ATEO 2, or as a related organization to ATEO 3. (3) Calculation if liability is allocated from an ATEO with a short applicable year. If liability for the tax on excess remuneration paid to an individual is allocated to an employer from an ATEO with a short applicable year under § 53.4960–1(c)(3), then the liability with respect to the excess remuneration paid to that individual is allocated in accordance with the principles of this paragraph (c) adjusted as necessary to avoid, to the extent possible, duplication of application of the excise tax. The Commissioner may provide additional guidance of general applicability, published in the Internal Revenue Bulletin (see § 601.601(d)(2) of this chapter), on the application of this paragraph (c)(3) to particular circumstances, including circumstances involving an ATEO with a short applicable year that has one or more related organizations and the ATEO’s short applicable year and the preceding applicable year both end with or within the related organization’s taxable year, such that the ATEO and related organizations are liable for the tax for E:\FR\FM\19JAR12.SGM 19JAR12 khammond on DSKJM1Z7X2PROD with RULES12 6240 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations multiple applicable years ending with or within the employer’s taxable year. (4) Examples. The following examples illustrate the rules of this paragraph (c). For purposes of these examples, assume that the rate of excise tax under section 4960 is 21 percent, that any entity that is referred to as ‘‘ATEO’’ is an ATEO, that any entity referred to as ‘‘CORP’’ is not an ATEO and is not a publicly held corporation within the meaning of section 162(m)(2) or a covered health insurance provider within the meaning of section 162(m)(6)(C), that no related organization is a section 4948(b) related organization, all taxpayers use the calendar year as their taxable year unless otherwise stated, and that no parachute payments are made in any of the years at issue. (i) Example 1 (Remuneration from multiple employers)—(A) Facts. ATEO 1 and CORP 1 are related organizations. Employee A is a covered employee of ATEO 1 and an employee of CORP 1. In the 2022 applicable year, ATEO 1 pays Employee A $1.2 million of remuneration, and CORP 1 pays A $800,000 of remuneration. Remuneration paid by each employer is for services performed by Employee A solely as an employee of that employer. (B) Conclusion. For the 2022 taxable year, ATEO 1 is treated as paying Employee A $2 million of remuneration, $1 million of which is excess remuneration. The total excise tax is $210,000 (21 percent × $1 million). ATEO 1 paid 3⁄5 of Employee A’s total remuneration ($1.2 million/$2 million); thus, ATEO 1 is liable for 3⁄5 of the excise tax, which is $126,000. CORP 1 paid 2⁄5 of Employee A’s total remuneration ($800,000/$2 million); thus, CORP 1 is liable for 2⁄5 of the excise tax, which is $84,000. (ii) Example 2 (Application when taxpayers have different taxable years)—(A) Facts. Assume the same facts as in paragraph (c)(4)(i) of this section (Example 1), except that CORP 2 uses a taxable year beginning July 1 and ending June 30. (B) Conclusion. The conclusion is the same as the conclusion in paragraph (c)(4)(i) of this section (Example 1), except that ATEO 1 is liable for the tax for its taxable year starting January 1, 2022, and ending December 31, 2022, and CORP 1 is liable for the tax for its taxable year beginning July 1, 2022, and ending June 30, 2023 (the taxable year with or within which ATEO 1’s 2022 applicable year ends). (iii) Example 3 (Multiple liabilities for same applicable year due to multiple ATEOs)—(A) Facts. The following facts are all with respect to the 2023 applicable year: ATEO 5 owns 60 VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 percent of the stock of CORP 2. Sixty percent of ATEO 4’s directors are representatives of ATEO 3. In addition, 60 percent of ATEO 5’s directors are representatives of ATEO 4, but none are representatives of ATEO 3. Employee B is a covered employee of ATEO 3, ATEO 4, and ATEO 5 and is an employee of CORP 2. ATEO 3, ATEO 4, ATEO 5, and CORP 2 each pay Employee B $1.2 million of remuneration in the applicable year. ATEO 4’s related organizations are ATEO 3 and ATEO 5. ATEO 3’s only related organization is ATEO 4. ATEO 5’s related organizations are ATEO 4 and CORP 2. (B) Calculation (ATEO 3). Under ATEO 3’s calculation as an ATEO for the 2023 applicable year, ATEO 3 is treated as paying Employee B a total of $2.4 million in remuneration ($1.2 million from ATEO 3 + $1.2 million from ATEO 4). The total excise tax is $294,000 (21 percent × $1.4 million). ATEO 3 and ATEO 4 each paid 1⁄2 of Employee B’s total remuneration ($1.2 million/$2.4 million); thus, under ATEO 3’s calculation, ATEO 3 and ATEO 4 each would be liable for 1⁄2 of the excise tax, which is $147,000. (C) Calculation (ATEO 4). Under ATEO 4’s calculation as an ATEO for the 2023 applicable year, ATEO 4 is treated as paying Employee B a total of $3.6 million in remuneration for the 2022 applicable year ($1.2 million from ATEO 3 + $1.2 million from ATEO 4 + $1.2 million from ATEO 5). The total excise tax is $546,000 (21 percent × $2.6 million). ATEO 3, ATEO 4, and ATEO 5 each paid 1⁄3 of the total remuneration to Employee B ($1.2 million/$3.6 million); thus, under ATEO 4’s calculation, ATEO 3, ATEO 4, and ATEO 5 each would be liable for 1⁄3 of the excise tax, which is $182,000. (D) Calculation (ATEO 5). Under ATEO 5’s calculation as an ATEO for the 2023 applicable year, ATEO 5 is treated as paying Employee B a total of $3.6 million in remuneration ($1.2 million from ATEO 4 + $1.2 million from ATEO 5 + $1.2 million from CORP 2). The total excise tax is $546,000 (21 percent × $2.6 million). ATEO 4, ATEO 5, and CORP 2 each paid 1⁄3 of the total remuneration to Employee B ($1.2 million/$3.6 million); thus, under ATEO 5’s calculation, ATEO 4, ATEO 5, and CORP 2 each would be liable for 1⁄3 of the excise tax, which is $182,000. (E) Conclusion (Liability of ATEO 3). For the 2023 applicable year, ATEO 3 is liable for $182,000 of excise tax as a related organization under ATEO 4’s calculation, which is greater than the $147,000 of excise tax under ATEO 3’s own calculation. Thus, ATEO 3’s excise PO 00000 Frm 00046 Fmt 4701 Sfmt 4700 tax liability with respect to Employee B is $182,000 for its 2023 taxable year. (F) Conclusion (Liability of ATEO 4). For the 2023 applicable year, ATEO 4 is liable as a related organization for $147,000 of excise tax according to ATEO 3’s calculation, for $182,000 according to ATEO 4’s own calculation, and for $182,000 according to ATEO 5’s calculation. Thus, ATEO 4’s excise tax liability with respect to Employee B is $182,000 for its 2023 taxable year. (G) Conclusion (Liability of ATEO 5). For the 2023 applicable year, ATEO 5 is liable as a related organization for $182,000 of excise tax under ATEO 4’s calculation, and is liable for $182,000 of excise tax under ATEO 5’s own calculation. Thus, ATEO 5’s excise tax liability with respect to Employee B is $182,000 for its 2023 taxable year. (H) Conclusion (Liability of CORP 2). For the 2023 applicable year, CORP 2 is liable as a related organization for $182,000 of excise tax according to ATEO 5’s calculation only. Thus, CORP 2’s excise tax liability with respect to Employee B is $182,000 for its 2023 taxable year. (d) Calculation of liability for excess parachute payments—(1) In general. Except as provided in paragraph (d)(3) of this section, only excess parachute payments made by or on behalf of an ATEO are subject to tax under this section. However, parachute payments made by related organizations that are not made by or on behalf of an ATEO are taken into account for purposes of determining the total amount of excess parachute payments. (2) Computation of excess parachute payments—(i) Calculation. The amount of an excess parachute payment is the excess of the amount of any parachute payment made by an ATEO, a predecessor of the ATEO, or a related organization, or on behalf of any such person, over the portion of the covered employee’s base amount that is allocated to the payment. The portion of the base amount allocated to any parachute payment is the amount that bears the same ratio to the base amount as the present value of the parachute payment bears to the aggregate present value of all parachute payments made or to be made to (or for the benefit of) the same covered employee. Thus, the portion of the base amount allocated to any parachute payment is determined by multiplying the base amount by a fraction, the numerator of which is the present value of the parachute payment and the denominator of which is the aggregate present value of all parachute payments. (ii) Examples. The following examples illustrate the rules of this E:\FR\FM\19JAR12.SGM 19JAR12 khammond on DSKJM1Z7X2PROD with RULES12 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations paragraph (d)(2). For purposes of these examples, assume any entity referred to as ‘‘ATEO’’ is an ATEO and all employees are HCEs of their respective employers. (A) Example 1 (Compensation from related organizations)—(1) Facts. ATEO 1 and ATEO 2 are related organizations. Employee A is a covered employee of ATEO 1 and an employee of ATEO 2 who has an involuntary separation from employment with ATEO 1 and ATEO 2. Employee A’s base amount is $200,000 with respect to ATEO 1 and $400,000 with respect to ATEO 2. A receives $1 million from ATEO 1 contingent upon Employee A’s involuntary separation from employment from ATEO 1 and $1 million from ATEO 2 contingent upon Employee A’s involuntary separation from employment from ATEO 2. (2) Conclusion. Employee A has a base amount of $600,000 ($200,000 + $400,000). The two $1 million payments are parachute payments because their aggregate present value is at least 3times Employee A’s base amount (3 × $600,000 = $1.8 million). The portion of the base amount allocated to each parachute payment is $300,000 (($1 million/$2 million) × $600,000). Thus, the amount of each excess parachute payment is $700,000 ($1 million¥$300,000). (B) Example 2 (Multiple parachute payments)—(1) Facts. Employee B is a covered employee of ATEO 3 with a base amount of $200,000 who is entitled to receive two parachute payments: One of $200,000 and the other of $900,000. The $200,000 payment is made upon separation from employment, and the $900,000 payment is to be made on a date in a future taxable year. The present value of the $900,000 payment is $800,000 as of the date of the separation from employment. (2) Conclusion. The portion of the base amount allocated to the first payment is $40,000 (($200,000 present value of the parachute payment/$1 million present value of all parachute payments) × $200,000 total base amount) and the portion of the base amount allocated to the second payment is $160,000 (($800,000 present value of the parachute payment/$1 million present value of all parachute payments) × $200,000 total base amount). Thus, the amount of the first excess parachute payment is $160,000 ($200,000¥$40,000) and that the amount of the second excess parachute payment is $740,000 ($900,000¥$160,000). (3) Reallocation when the payment is disproportionate to base amount. In accordance with section 4960(d), the Commissioner may treat a parachute VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 payment as paid by an ATEO if the facts and circumstances indicate that the ATEO and other payors of parachute payments structured the payments in a manner primarily to avoid liability under section 4960. For example, if an ATEO would otherwise be treated as paying a portion of an excess parachute payment in an amount that is materially lower in proportion to the total excess parachute payment than the proportion that the amount of average annual compensation paid by the ATEO (or any predecessor) during the base period bears to the total average annual compensation paid by the ATEO (or any predecessor) and any related organization (or organizations), and the lower amount is offset by payments from a non-ATEO or an unrelated ATEO, this may indicate that that the parachute payments were structured in a manner primarily to avoid liability under section 4960. (4) Election to prepay tax. An ATEO may prepay the excise tax under paragraph (a)(1) of this section on any excess parachute payment for the taxable year of the separation from employment or any later taxable year before the taxable year in which the parachute payment is actually or constructively paid. However, an employer may not prepay the excise tax on a payment to be made in cash if the present value of the payment is not reasonably ascertainable under § 31.3121(v)(2)–1(e)(4) or on a payment related to health coverage. Any prepayment must be based on the present value of the excise tax that would be due for the taxable year in which the employer will pay the excess parachute payment, and be calculated using the discount rate equal to 120 percent of the applicable Federal rate (determined under section 1274(d) and the regulations in part 1 under section 1274) and the tax rate in effect under section 11 for the year in which the excise tax is paid. For purposes of projecting the future value of a payment that provides for interest to be credited at a variable interest rate, the employer may make a reasonable assumption regarding the variable rate. An employer is not required to adjust the excise tax paid merely because the actual future interest rates are not the same as the rate used for purposes of projecting the future value of the payment. (5) Liability after a redetermination of total parachute payments. If an ATEO determines that an estimate made under § 53.4960–3(j)(1) was incorrect, it must reapply the 3-times-base-amount test to reflect the actual time and amount of the payment. In reapplying the 3-timesbase-amount test (and, if necessary, PO 00000 Frm 00047 Fmt 4701 Sfmt 4700 6241 reallocating the base amount), the ATEO must determine the correct base amount allocable to any parachute payment paid in the taxable year. See § 1.280G–1, Q/ A–33(d) for examples that may be applied by analogy to illustrate the rules of this paragraph (d)(5). (6) Examples. The following examples illustrate the rules of this paragraph (d). For purposes of these examples, assume any entity referred to as ‘‘ATEO’’ is an ATEO, any entity referred to as ‘‘CORP’’ is not an ATEO, and all employees are HCEs of their respective employers. (i) Example 1 (Excess parachute payment paid by a non-ATEO)—(A) Facts. ATEO 1 and CORP 1 are related organizations that are treated as the same employer for purposes of § 53.4960–3(e)(3) (defining separation from employment) and are both calendar year taxpayers. For 2022 through 2026, ATEO 1 and CORP 1 each pay Employee A $250,000 of compensation per year for services performed as an employee of each organization ($500,000 total per year). In 2027, ATEO 1 and CORP 1 each pay Employee A $1 million payment ($2 million total) that is contingent on Employee A’s separation from employment with both ATEO 1 and CORP 1, all of which is remuneration, and no other compensation. Employee A is a covered employee of ATEO 1 in 2027. (B) Conclusion. Employee A’s base amount in 2027 is $500,000 (Employee A’s average annual compensation from both ATEO 1 and CORP 1 for the previous 5 years). ATEO 1 makes a parachute payment of $2 million in 2027, the amount paid by both ATEO 1 and CORP 1 that is contingent on Employee A’s separation from employment with ATEO 1 and all organizations that are treated as the same employer under § 53.4960–3(e)(3). Employee A’s $2 million payment exceeds 3-times the base amount ($1.5 million). ATEO 1 makes a $1.5 million excess parachute payment (the amount by which $2 million exceeds the $500,000 base amount). However, ATEO 1 is liable for tax only on the excess parachute payment paid by ATEO 1 ($1 million parachute payment¥$250,000 base amount = $750,000) that is subject to tax under § 53.4960–4(a). CORP 1 is not liable for tax under § 53.4960–4(a) in 2027. (ii) Example 2 (Election to prepay tax on excess parachute payments and effect on excess remuneration)—(A) Facts. Employee B is a covered employee of ATEO 2 with a base amount of $200,000 who is entitled to receive two parachute payments from ATEO 2, one of $200,000 and the other E:\FR\FM\19JAR12.SGM 19JAR12 6242 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES12 of $900,000. The $200,000 payment is made upon separation from employment, and the $900,000 payment is to be made on a date in a future taxable year. The present value of the $900,000 payment is $800,000 as of the date of the separation from employment. ATEO 2 elects to prepay the excise tax on the $900,000 future parachute payment (of which $740,000 is an excess parachute payment). The tax rate under section 11 is 21 percent for the taxable year the excise tax is paid and, using a discount rate determined under § 53.4960–3(i), the present value of the $155,400 ($740,000 × 21 percent) excise tax on the $740,000 future excess parachute payment is $140,000. (B) Conclusion. The excess parachute payment is thus $800,000 ($200,000 plus $800,000 present value of the $900,000 future payment, less $200,000 base amount), with $40,000 of the base amount allocable to the $200,000 payment and $160,000 of the base VerDate Sep<11>2014 21:42 Jan 17, 2021 Jkt 253001 amount allocable to the $900,000 payment. To prepay the excise tax on the $740,000 future excess parachute payment, the employer must satisfy its $140,000 obligation under section 4960 with respect to the future payment, in addition to the $33,600 excise tax ($160,000 × 21 percent) on the $160,000 excess parachute payment made upon separation from employment. For purposes of determining the amount of excess remuneration (if any) under section 4960(a)(1), the amount of remuneration paid by the employer to the covered employee for the taxable year of the separation from employment is reduced by the $900,000 of total excess parachute payments ($160,000 + $740,000). § 53.4960–5 [Reserved] § 53.4960–6 Applicability date. apply to taxable years beginning after December 31, 2021. Taxpayers may choose to apply §§ 53.4960–0 through 53.4960–4 to taxable years beginning after December 31, 2017, and on or before December 31, 2021, provided the taxpayer applies §§ 53.4960–0 through 53.4960–4 in their entirety and in a consistent manner. (b) [Reserved] Sunita Lough, Deputy Commissioner for Services and Enforcement. Approved: January 9, 2021. David J. Kautter, Assistant Secretary of the Treasury (Tax Policy). [FR Doc. 2021–00772 Filed 1–15–21; 4:15 pm] BILLING CODE 4830–01–P (a) General applicability date. Sections 53.4960–0 through 53.4960–4 PO 00000 Frm 00048 Fmt 4701 Sfmt 9990 E:\FR\FM\19JAR12.SGM 19JAR12

Agencies

[Federal Register Volume 86, Number 11 (Tuesday, January 19, 2021)]
[Rules and Regulations]
[Pages 6196-6242]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-00772]



[[Page 6195]]

Vol. 86

Tuesday,

No. 11

January 19, 2021

Part XII





Department of the Treasury





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Internal Revenue Service





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26 CFR Parts 1 and 53





Tax on Excess Tax-Exempt Organization Executive Compensation; Final 
Rule

Federal Register / Vol. 86 , No. 11 / Tuesday, January 19, 2021 / 
Rules and Regulations

[[Page 6196]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 53

[TD 9938]
RIN 1545-BO99


Tax on Excess Tax-Exempt Organization Executive Compensation

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document sets forth final regulations under section 4960 
of the Internal Revenue Code (Code), which imposes an excise tax on 
remuneration in excess of $1,000,000 and any excess parachute payment 
paid by an applicable tax-exempt organization to any covered employee. 
The regulations affect certain tax-exempt organizations and certain 
entities that are treated as related to those organizations.

DATES: Effective Date: These final regulations are effective on January 
15, 2021.
    Applicability Dates: For dates of applicability, see Sec.  53.4960-
6.

FOR FURTHER INFORMATION CONTACT: William McNally at (202) 317-5600 or 
Patrick Sternal at (202) 317-5800 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Background

    This document amends the Foundation and Similar Excise Tax 
Regulations (26 CFR part 53) by adding final regulations under section 
4960. Section 4960 was added to the Code by section 13602 of the Tax 
Cuts and Jobs Act, Public Law 115-97, 131 Stat. 2054, 2157 (TCJA). 
Section 4960(a) generally provides that an applicable tax-exempt 
organization (ATEO) that pays to a covered employee remuneration in 
excess of $1 million for a taxable year or any excess parachute payment 
is subject to an excise tax on the amount of the excess remuneration 
(as described in section IV of the Summary of Comments and Explanation 
of Revisions, titled ``Excess Remuneration'') plus excess parachute 
payments paid during that taxable year at a rate equal to the rate of 
tax imposed on corporations under section 11 (currently 21 percent). 
Section 4960 is effective for taxable years beginning after December 
31, 2017.
    An ATEO is defined in section 4960(c)(1) as any organization that 
for the taxable year is exempt from taxation under section 501(a) as 
well as certain other tax-exempt organizations. A covered employee is 
defined in section 4960(c)(2) as any employee (including any former 
employee) of an ATEO if the employee is one of the five highest-
compensated employees of the organization for the taxable year or any 
preceding taxable year beginning after December 31, 2016. Section 
4960(c)(4)(A) provides that remuneration paid to a covered employee by 
an ATEO includes any remuneration paid with respect to employment of 
such employee by any related person or governmental entity. Section 
4960(c)(4)(B) defines a related person or governmental entity as an 
entity that controls, or is controlled by, the ATEO; is controlled by 
one or more persons that control the ATEO; or is a supported or 
supporting organization as described in sections 509(f)(3) and 
509(a)(3), respectively. An excess parachute payment is defined in 
section 4960(c)(5)(A) as an amount equal to the excess of any parachute 
payment over the portion of the base amount (as described in section 
V.D. of the Summary of Comments and Explanation of Revisions, titled 
``Three-Times-Base-Amount Test'') allocated to such payment; section 
4960(c)(5)(B) defines a parachute payment as any payment in the nature 
of compensation to a covered employee if the payment is contingent on 
the employee's separation from employment with the employer and the 
aggregate present value of such payments exceeds 3-times the base 
amount.
    On December 31, 2018, the Department of the Treasury (Treasury 
Department) and the Internal Revenue Service (IRS) issued Notice 2019-
09 (2019-04 I.R.B. 403), setting forth initial guidance on the 
application of section 4960. On June 11, 2020, the Treasury Department 
and the IRS published proposed regulations on section 4960 in the 
Federal Register (REG-122345-18, 85 FR 35746) (the proposed 
regulations). The statutory provisions and the initial guidance 
provided by Notice 2019-09 are described in detail in the proposed 
regulations.
    The Treasury Department and the IRS received written comments on 
the proposed regulations. No public hearing was requested or held. All 
written comments received in response to the proposed regulations are 
available at www.regulations.gov or upon request. Comments received 
that are outside of the scope of the proposed regulations generally are 
not addressed in this preamble but may be considered in connection with 
future guidance projects. After consideration of the relevant comments 
received, the proposed regulations under section 4960 are adopted as 
final regulations as modified by this Treasury Decision. The major 
areas of comment and the revisions to the proposed regulations are 
discussed in the Summary of Comments and Explanation of Revisions. With 
respect to provisions in the proposed regulations on which no comments 
were received or for which comments were received prior to the issuance 
of the proposed regulations, the preamble to the proposed regulations 
may provide additional information.

Summary of Comments and Explanation of Revisions

    These final regulations provide guidance on the excise tax imposed 
by section 4960 and the entities that are subject to the tax.

I. Scope of Final Regulations

    These final regulations retain the basic approach and structure of 
the proposed regulations, with certain revisions. These final 
regulations restate certain statutory definitions and define various 
terms set forth in section 4960. These final regulations also provide 
rules for determining: The amount of remuneration paid for a taxable 
year for purposes of identifying covered employees and calculating the 
excise tax; whether excess remuneration has been paid and in what 
amount; whether a parachute payment has been paid and in what amount; 
the allocation of liability for the excise tax among related 
organizations; and the date of applicability of these final 
regulations. These definitions and rules apply solely for purposes of 
section 4960.

II. Definitions

A. Applicable Tax-Exempt Organization

    These final regulations adopt the definition of ``applicable tax-
exempt organization'' or ``ATEO'' as set forth in the proposed 
regulations. Consistent with section 4960(c)(1), the proposed 
regulations provided that an ``applicable tax-exempt organization'' or 
``ATEO'' includes an organization that is exempt from tax under section 
501(a); is a farmers' cooperative organization described in section 
521(b)(1); has income excluded from taxation under section 115(1); or 
is a political organization described in section 527(e)(1).
    In response to comments on Notice 2019-09 regarding the 
applicability of the excise tax imposed by section 4960 to certain 
Federal instrumentalities, section II.A. of the Explanation of 
Provisions of the proposed regulations, titled ``Applicable Tax-Exempt 
Organization,'' stated that the Treasury

[[Page 6197]]

Department and the IRS consider all Federal instrumentalities described 
in section 501(c)(1) to be included in the statutory ATEO definition as 
an organization exempt from tax under section 501(a) and thus subject 
to section 4960. However, the Treasury Department and the IRS requested 
comments regarding the application of section 4960 to Federal 
instrumentalities. One commenter requested that these final regulations 
confirm that Federal instrumentalities described under section 
501(c)(1)(A)(i), for which the enabling acts provide for exemption from 
all current and future Federal taxes are not subject to tax under 
section 4960. These final regulations do not address this issue but 
reserve Sec.  53.4960-1(b)(3) and Sec.  53.4960-4(a)(5) for future 
rules to address these Federal instrumentalities. The Treasury 
Department and the IRS will continue to consider whether section 4960 
should apply to Federal instrumentalities for which the enabling acts 
provide for exemption from all current and future Federal taxes. Until 
further guidance is issued, a Federal instrumentality for which an 
enabling act provides for exemption from all current and future Federal 
taxes may treat itself as not subject to tax under section 4960 as an 
ATEO or related organization. However, if that Federal instrumentality 
is a related organization of an ATEO, remuneration it pays must be 
taken into account by that ATEO.

B. Applicable Year

    Section 4960(a)(1) refers to remuneration paid ``for the taxable 
year,'' but does not specify which taxpayer's taxable year is 
referenced, what it means for remuneration to be paid ``for'' a taxable 
year, or how to measure remuneration if an ATEO and a related 
organization have different taxable years. The proposed regulations 
provided that remuneration is treated as paid for a taxable year if it 
is paid during the applicable year, and that the applicable year is 
defined as the calendar year ending with or within an ATEO's taxable 
year. The proposed regulations provided rules for determining the 
applicable year of an organization with respect to the taxable year in 
which the organization becomes an ATEO or ceases to be an ATEO, 
including rules addressing short applicable years that may arise in 
these situations and rules addressing related organizations with 
different taxable years. No comments were received on those proposed 
rules, and these final regulations adopt those rules without change.

C. Employee

    Section 4960(a) imposes a tax on excess remuneration and any excess 
parachute payment paid by an ATEO for the taxable year with respect to 
employment of a covered employee. Section 4960(c)(2) defines a 
``covered employee'' as an employee (including any former employee) of 
the ATEO who meets certain other conditions. Accordingly, the excise 
tax imposed by section 4960(a) applies only with respect to a current 
or former employee of the ATEO.
    The proposed regulations defined ``employee'' by reference to the 
definition of ``employee'' for purposes of Federal income tax 
withholding in section 3401(c) and the regulations thereunder. 
Specifically, the proposed regulations cross-referenced the definition 
of ``employee'' in Sec.  31.3401(c)-1, which includes common-law 
employees, officers or elected or appointed officials of governments, 
or agencies or instrumentalities thereof, and certain officers of 
corporations. The proposed regulations restated certain rules from 
Sec.  31.3401(c)-1 that are particularly relevant to section 4960, 
including the rules that a member of a board of directors of a 
corporation is not an employee of the corporation (in the member's 
capacity as a director), and that an officer is an employee of the 
entity for which the officer serves as an officer (unless the officer 
performs no services or only minor services and neither receives, nor 
is entitled to receive, any remuneration for such services). For 
further discussion, see section II.E. of this Summary of Comments and 
Explanation of Revisions, titled ``Covered Employee.'' No comments were 
received on those proposed rules, and these final regulations adopt 
those provisions of the proposed regulations without change.
    One commenter requested clarification regarding the source of the 
remuneration that is considered for purposes of applying the minor 
services exception to the rule that treats a corporation's officer as 
an employee. The minor services exception in Prop. Sec.  53.4960-
1(e)(1) incorporated the standard in Sec.  31.3401(c)-1 and provided 
that ``an officer of a corporation who as such does not perform any 
services or performs only minor services and who neither receives, nor 
is entitled to receive, any remuneration is not considered to be an 
employee of the corporation solely due to the individual's status as an 
officer of the corporation.'' The commenter stated that it is unclear 
whether an individual qualifies for the exception if he or she receives 
remuneration from a related person or governmental entity for services 
performed for an organization other than the ATEO and also volunteers 
his or her time as an officer of the ATEO (and performs no services or 
only minor services for the ATEO). The commenter recommended that these 
final regulations clarify that the relevant remuneration for purposes 
of meeting the minor services exception is only remuneration paid by 
the ATEO. The minor services exception applies if an individual is not 
paid (nor is entitled to be paid) remuneration based ``solely'' on the 
individual's status as an officer. Thus, the source of the remuneration 
is not relevant, but rather the standard is whether the individual 
received any remuneration for the minor services as an officer 
regardless of the source of the remuneration. Therefore, the Treasury 
Department and the IRS have concluded that this clarification of the 
minor services exception in these final regulations is unnecessary.
    For a discussion of how this definition of ``employee'' and other 
rules address employees of non-ATEO related organizations performing 
limited or temporary services for the related ATEO (in particular, 
while also receiving compensation from the non-ATEO related 
organization), see section II.E.5. of this Summary of Comments and 
Explanation of Revisions, titled ``Volunteer Services and Other 
Exceptions.''

D. Employer

    Section 4960(b) provides that the employer is liable for the tax 
imposed under section 4960(a). Similar to the definition of 
``employee,'' the proposed regulations defined ``employer'' by 
reference to the definition of ``employer'' for purposes of Federal 
income tax withholding in section 3401(d) and the regulations 
thereunder, without regard to the special rules in section 3401(d)(1) 
and (2). Accordingly, control of the payment of wages would not be 
relevant for determining whether an entity is the employer for section 
4960 purposes. Further, the proposed regulations provided that a person 
or governmental entity does not avoid status as an employer of an 
employee by using a third-party payor to pay remuneration to that 
employee. Third-party payors include a payroll agent, an agent under 
section 3504, a common paymaster, a statutory employer under section 
3401(d)(1), or a certified professional employer organization under 
section 7705 (which is an ``employer'' only for purposes of subtitle

[[Page 6198]]

C of the Code). Similarly, consistent with existing principles for 
determining the employer, under certain facts and circumstances, a 
management company may also be acting as a third-party payor for the 
employees of its ATEO client, rather than as the common law employer of 
the employees. Thus, the proposed regulations provided that 
remuneration that is paid to an individual by a separate organization 
for services the individual performed as an employee of the ATEO would 
be remuneration paid by the ATEO to its employee for purposes of 
section 4960, whether or not the separate organization is related to 
the ATEO. In addition, the proposed regulations provided that the sole 
owner of an entity that is disregarded as separate from its owner under 
Sec.  301.7701-2(c)(2)(i) would be treated as the employer of any 
employee of the disregarded entity, notwithstanding that the entity is 
regarded for subtitle C purposes under Sec.  301.7701-2(c)(2)(iv). No 
comments were received on these provisions of the proposed regulations, 
and these final regulations adopt them without change.

E. Covered Employee

1. In General
    Section 4960(c)(2) defines ``covered employee'' as any individual 
who is one of the five highest-compensated employees of the ATEO for a 
taxable year or was a covered employee of the ATEO (or any predecessor) 
for any preceding taxable year beginning after December 31, 2016. Thus, 
once an employee is a covered employee of an ATEO, the employee 
continues to be a covered employee for all subsequent taxable years of 
that ATEO. The proposed regulations provided that whether an employee 
is one of the five highest-compensated employees of an ATEO is 
determined separately for each ATEO and not for an entire group of 
related organizations. As a result, a group of related ATEOs could have 
more than five ``five highest-compensated employees'' for a taxable 
year. Similarly, an employee could be a covered employee of more than 
one ATEO in a related group of organizations for a taxable year. No 
comments were received on these provisions of the proposed regulations, 
and these final regulations adopt them without change.
2. Aggregation of Remuneration Paid by the ATEO and Its Related 
Organizations for Purposes of Determining the Five Highest-Compensated 
Employees
    For purposes of determining whether an employee is one of an ATEO's 
five highest-compensated employees for a taxable year, the proposed 
regulations provided that remuneration paid by the ATEO during the 
ATEO's applicable year is aggregated with remuneration paid by any 
related organization during the ATEO's applicable year, including 
remuneration paid by a related taxable organization or governmental 
entity, for services performed as an employee of that related 
organization. Remuneration for which a deduction is disallowed under 
section 162(m) generally is not considered for purposes of determining 
whether excess remuneration is paid for a taxable year, but that 
remuneration is considered for purposes of determining an ATEO's five 
highest-compensated employees.
    One commenter suggested that, for purposes of determining an ATEO's 
five highest-compensated employees, these final regulations should 
consider only remuneration paid (directly or indirectly) by an ATEO for 
services provided by an employee to the ATEO, rather than aggregating 
all remuneration paid to the individual for services the individual 
provides as an employee of the ATEO and as an employee of any related 
organization, including a related non-ATEO (for example, a taxable 
organization). The commenter reasoned that aggregating remuneration for 
purposes of determining covered employee status is not required by the 
statutory text and is unnecessary to comply with Congressional intent 
to achieve parity between ATEOs and publicly held corporations that are 
subject to the section 162(m) deduction disallowance for compensation 
paid to a covered employee in excess of $1 million. The commenter also 
reasoned that because only an ATEO can have a ``covered employee'' 
under section 4960(c)(2), the reference to the ``five highest-
compensated employees of the organization'' (emphasis in comment) in 
section 4960(c)(2)(A) should be read to include only compensation paid 
by the ATEO, directly or indirectly (for example, by reimbursing 
another entity), for services provided by the employee to the ATEO, 
regardless of the payor. The commenter asserted that the language in 
section 4960(c)(4)(A), which provides that ``remuneration of a covered 
employee by an [ATEO] shall include any remuneration paid with respect 
to employment of such employee by any related person or governmental 
entity'' (emphasis in comment) should not override a plain reading of 
section 4960(c)(2), which refers only to employment with the ATEO. The 
commenter further reasoned that section 4960(c)(4)(A) applies after a 
determination of the ATEO's covered employees has already been made, 
and thus it is circular to read section 4960(c)(4)(A) as requiring 
inclusion of remuneration paid to a covered employee of an ATEO by a 
related person or governmental entity for purposes of determining an 
ATEO's highest-compensated employees (and, thus, its covered 
employees).
    While the Treasury Department and the IRS acknowledge that 
alternative interpretations as to whether sections 4960(c)(2) and 
(c)(4)(A) take into account remuneration paid by a related organization 
for purposes of determining an ATEO's covered employees may be 
reasonable, for the reasons set forth below, these final regulations 
adopt the relevant provisions of the proposed regulations without 
change and do not adopt the commenter's recommendation. Section 4960 
does not define the ``five highest-compensated employees'' of an ATEO. 
The ambiguity in this term is highlighted by the fact that the only 
provision in the statute that references ``compensation'' is section 
4960(c)(2), which defines ``covered employee'' as one of the ``5 
highest compensated employees''; the statute otherwise uses the defined 
terms ``remuneration'' and ``parachute payment'' for purposes of 
determining the excise tax imposed by section 4960. In addition, there 
is no discussion in the legislative history describing how Congress 
intended an ATEO to determine its five highest-compensated employees. 
The Treasury Department and the IRS have concluded that the commenter's 
suggested interpretation--that only remuneration paid by the ATEO for 
services performed for the ATEO should be considered for purposes of 
determining who is a covered employee--would raise significant tax 
administration issues and the potential for abuse in circumstances in 
which an individual provides services to, and receives compensation 
from, the ATEO and one or more related organizations during the 
applicable year. In these cases, it may be difficult to determine the 
proper allocation of the compensation among the organizations to which 
the individual provides the services and whether the allocation was 
properly based on the value of the services provided. Due to the highly 
factual nature of this analysis and the potential for differing 
conclusions on one or more of these issues, the commenter's suggested 
rule would result in an unpredictable standard to be applied by 
taxpayers and the IRS and would raise the potential for abusive

[[Page 6199]]

mischaracterizations of the nature of the services and compensation 
provided.
    The commenter further asserted that the requirement to aggregate 
compensation paid by the ATEO and all related organizations is not 
required to ensure parity with the rules for identifying covered 
employees under section 162(m). Under Sec. Sec.  1.162-27(c)(2)(ii) and 
1.162-33(c)(1)(ii)(B), the amount of compensation used to identify the 
covered employees who are the three most highly compensated executive 
officers (other than the principal executive officer and the principal 
financial officer) for the taxable year is determined pursuant to the 
executive compensation disclosure rules under the Securities Exchange 
Act of 1934. Under 17 CFR 229.402(a)(2), the amount of compensation 
paid to an employee by a publicly held corporation is measured by 
reference to remuneration paid by the registrant and remuneration paid 
by the registrant's subsidiaries, and is not limited to remuneration 
for services provided to the registrant. Although the provisions of 
sections 4960 and 162(m) are similar in many respects, there is no 
indication in the legislative history that sections 162(m) and 4960 are 
intended to apply in the same manner in all situations. Further, the 
section 162(m) and section 4960 statutory language and the application 
of the rules differ significantly in many respects that would not allow 
that strict parity. Regardless of the conclusion that the sections 
162(m) and 4960 rules do not allow for strict parity, the Treasury 
Department and the IRS have concluded that the aggregation of 
compensation paid by all related entities in identifying covered 
employees is more analogous to the rules under section 162(m) than 
considering only remuneration for services provided to the ATEO.
    Thus, while the Treasury Department and the IRS considered several 
alternatives for determining the ATEO's five highest-compensated 
employees, including the alternative proposed by the commenter, the 
Treasury Department and the IRS ultimately concluded that including 
remuneration paid by all related organizations is appropriate and that 
it is more administrable to use a single standard for identifying 
covered employees and computing the excise tax, if any, imposed by 
section 4960(a)(1). However, to mitigate the effect of requiring the 
aggregation of remuneration paid by an ATEO and all related 
organizations for purposes of determining the ATEO's covered employees, 
these final regulations retain the limited hours, nonexempt funds, and 
limited services exceptions (discussed in section II.E.5. of this 
Summary of Comments and Explanation of Revisions, titled ``Volunteer 
Services and Other Exceptions'').
3. Remuneration for Medical Services
    Consistent with section 4960(c)(3)(B) and the proposed regulations, 
these final regulations provide that for purposes of identifying an 
ATEO's five highest-compensated employees for a taxable year, 
remuneration paid during the applicable year for medical services is 
not taken into account. For a discussion of the rules for determining 
the remuneration paid for medical or veterinary services and for 
allocating remuneration to medical and non-medical services, see 
section II.F. of this Summary of Comments and Explanation of Revisions, 
titled ``Medical Services.''
4. Covered Employee Status Continues for All Subsequent Taxable Years
    In accordance with section 4960(c)(2), the proposed regulations 
provided that a covered employee includes any employee (including any 
former employee) of an ATEO who was a covered employee of the 
organization (or a predecessor) for any preceding taxable year 
beginning after December 31, 2016. In response to the proposed 
regulations, one commenter suggested that the Treasury Department and 
the IRS reconsider the rule that an individual who is a covered 
employee of an ATEO (or of a predecessor ATEO) for one taxable year 
remains a covered employee of that ATEO (and any successor ATEOs) for 
all subsequent taxable years. The commenter suggested that an ATEO 
should be relieved of the burden of continuing to include an employee 
among its covered employees when a consolidation or restructuring of a 
tax-exempt organization results in changes to the employee's job 
responsibilities and compensation, if it no longer furthers the purpose 
of the statute to include the employee among its covered employees. The 
commenter asserted that the requirement that an individual remain a 
covered employee for all subsequent years, even after the employment 
relationship has ended, creates a potentially excessive administrative 
burden for the ATEO. These final regulations do not adopt this 
suggestion because that rule would be inconsistent with the statutory 
language.
5. Volunteer Services and Other Exceptions
    The proposed regulations provided certain exceptions to the 
definition of ``covered employee'' and the rules for identifying the 
five highest-compensated employees of an ATEO. Several commenters 
supported the inclusion of the exceptions provided in Prop. Sec.  
53.4960-1(d)(2)(ii), (iii), and (iv). These final regulations adopt 
these exceptions with certain modifications in response to comments as 
discussed later in this section.
    The exceptions to the definition of ``covered employee'' in the 
proposed regulations were provided in response to comments on Notice 
2019-09 expressing concern that the rules for identifying an ATEO's 
five highest-compensated employees in the notice would subject a non-
ATEO to the excise tax on remuneration it pays to an employee who 
performs limited or temporary services for a related ATEO and who 
typically receives remuneration only from the non-ATEO. The exceptions 
were intended to ensure that certain employees of a related non-ATEO 
providing services as an employee of an ATEO are not treated as one of 
the five highest-compensated employees of the ATEO, and thus considered 
a covered employee, if certain conditions related to the individuals' 
remuneration or hours of service are met. To avoid manipulation of the 
rules through the deferral of compensation, in determining whether an 
employee is one of the five highest-compensated employees, the proposed 
regulations provided that a grant of a legally binding right to vested 
remuneration is considered to be remuneration paid, and any grant of a 
legally binding right to nonvested remuneration by the ATEO (or a 
related ATEO), for example under a deferred compensation plan or 
arrangement, disqualifies the ATEO from claiming a relevant exception. 
No comments were received on those proposed rules, and these final 
regulations adopt those rules without change.
a. No Remuneration and Non-Employment Exceptions
    The proposed regulations provided that the remuneration paid to an 
individual who is never an employee of an ATEO is not considered for 
purposes of section 4960. For example, an individual who, under all the 
facts and circumstances, performs services for an ATEO solely as a bona 
fide independent contractor is not an employee of the ATEO, and thus is 
not considered for purposes of determining the ATEO's five highest-
compensated employees. Similarly, an individual who, under all the 
facts and circumstances, performs services solely as a bona fide 
employee of a related organization, including a related organization 
that provides services to the ATEO, is not an

[[Page 6200]]

employee of the ATEO, and thus is not considered for purposes of 
determining the ATEO's five highest-compensated employees. No comments 
were received on those provisions of the proposed regulations, and 
these final regulations adopt them without change.
    The proposed regulations further provided that, for purposes of 
determining an ATEO's five highest-compensated employees for a taxable 
year, an employee is disregarded if neither the ATEO nor any related 
organization pays remuneration or grants a legally binding right to 
nonvested remuneration for services the individual performed as an 
employee of the ATEO or any related organization. Thus, if none of an 
ATEO's employees received remuneration from the ATEO or from a related 
organization, then the ATEO has no covered employees. Benefits excluded 
from gross income are not considered remuneration, including expense 
allowances and reimbursements under an accountable plan (see Sec.  
1.62-2) and most insurance for liability arising from service with an 
ATEO, such as directors and officers liability insurance (see Sec.  
1.132-5(r)(3)). These final regulations adopt these provisions of the 
proposed regulations without change.
    In section II.E.2. of the Explanation of Provisions of the proposed 
regulations, titled ``Volunteer Services and Similar Exceptions,'' the 
Treasury Department and the IRS requested comments on whether certain 
taxable benefits, such as employer-provided parking in excess of the 
value excluded under section 132, should be disregarded for purposes of 
determining whether an individual receives remuneration for services 
and what standards should apply to identify those benefits. No comments 
were received on this issue. Because taxable fringe benefits that are 
wages within the meaning of section 3401(a) are included in the 
statutory definition of remuneration, these final regulations adopt the 
provisions of the proposed regulations providing that these amounts are 
considered for purposes of determining an ATEO's five highest-
compensated employees and for purposes of applying the exceptions from 
covered employee status. For a discussion of comments received on the 
exclusion of taxable fringe benefits from the definition of 
remuneration for purposes other than the determination of the five 
highest-compensated employees, see section III.A. of this Summary of 
Comments and Explanation of Revisions, titled ``In General'' under 
``Remuneration.''
b. Limited Hours Exception
    These final regulations adopt the ``limited hours'' exception as 
provided in the proposed regulations for purposes of determining an 
ATEO's five highest-compensated employees. Under this exception, an 
employee of an ATEO is disregarded for purposes of determining the 
ATEO's five highest-compensated employees for a taxable year if neither 
the ATEO nor any related ATEO pays remuneration or grants a legally 
binding right to nonvested remuneration to the employee for services 
performed for the ATEO and the employee performs only limited hours of 
service for the ATEO. For purposes of this exception, an ATEO is not 
treated as paying an amount paid to an individual by a related 
organization that employs the individual, so long as the ATEO does not 
reimburse the payor. An employee qualifies for this exception only if 
the hours of service the employee performs as an employee of the ATEO 
and all related ATEOs comprise 10 percent or less of the employee's 
total hours of service for the ATEO and all related organizations 
during the applicable year. For purposes of this rule, an employee who 
performs fewer than 100 hours of service as an employee of an ATEO (and 
all related ATEOs) during an applicable year is treated as having 
worked no more than 10 percent of the employee's total hours for the 
ATEO (and all related ATEOs).
    One commenter recommended that these final regulations replace the 
10 percent hours of service threshold in the limited hours exception 
with the 50 percent hours of service threshold that is used for the 
nonexempt funds exception (discussed later in this section) because the 
10 percent threshold fails to capture many common arrangements between 
ATEOs and taxable related organizations controlled by the ATEO 
(``controlled taxable related organizations'') that are not structured 
to avoid the excise tax imposed by section 4960. These final 
regulations do not adopt this suggestion because the limited hours 
exception was intended to address arrangements in which services are 
sufficiently limited so that the arrangements resemble volunteer 
arrangements. This exception therefore has a much lower hours of 
service threshold than the nonexempt funds exception but may be used by 
a broader group of ATEOs. Further, the Treasury Department and the IRS 
have concluded that adopting the commenter's suggestion would be 
inconsistent with the legislative intent of section 4960. As explained 
in section II.E.2 of the Explanation of Provisions of the proposed 
regulations, titled ``Volunteer Services and Similar Exceptions,'' the 
legislative history indicates that Congress intended to tax excessive 
compensation paid to covered employees from tax-exempt funds.\1\ 
Consistent with this intent, the proposed regulations provided a 
nonexempt funds exception, which applies if certain criteria are 
satisfied, but does not apply if an ATEO's controlled taxable related 
organization pays remuneration to an employee of the ATEO. The Treasury 
Department and the IRS reasoned that a controlled taxable related 
organization that pays remuneration to an employee for services 
provided to an ATEO uses the ATEO's funds to do so, either because the 
controlled taxable related organization's assets are, effectively, the 
ATEO's assets, or because the payment reduces the related 
organization's assets, which in turn reduces the value of the ATEO's 
interest in the related organization. The Treasury Department and the 
IRS consider the funds of an ATEO's controlled taxable related 
organization as, in substance, equivalent to tax-exempt funds, and thus 
the use of such funds to compensate an individual for services provided 
to an ATEO is in substance the use of tax-exempt funds.\2\
---------------------------------------------------------------------------

    \1\ H. Rep. 115-409, 115th Cong., 1st Sess. 333 (Nov. 13, 2017).
    \2\ In a similar context, Sec.  53.4958-4(a)(2) treats excessive 
compensation paid to a disqualified person with respect to an 
applicable tax-exempt organization by a controlled entity of the 
organization as excessive compensation paid by the organization, and 
thus as an excess benefit transaction.
---------------------------------------------------------------------------

    One commenter expressed concern about the ``cliff'' nature of the 
proposed limited hours exception (as well as the nonexempt funds and 
limited services exceptions), noting that exceeding the thresholds even 
slightly may result in the employee being a covered employee for the 
applicable year and all subsequent applicable years. The commenter 
recommended that these final regulations allow a 3-year (or longer) 
measurement period to qualify for the limited hours exception or the 
other exceptions, primarily to prevent the ATEO from inadvertently 
failing to satisfy the exception.
    A 3-year measurement period would reduce the potential for 
inadvertent failures for an employer intending to be at or below the 
threshold for every applicable year. However, for an employer that 
intends to meet the limited hours exception during only one applicable 
year, the suggested 3-year standard would effectively raise the 10 
percent hours of service limit to 30 percent and create a new ``cliff'' 
at that

[[Page 6201]]

30 percent threshold. In addition, permitting a 3-year measurement 
period would create additional complexity and burdens for taxpayer 
compliance and tax administration. For these reasons, the Treasury 
Department and the IRS do not adopt this suggestion. However, the 
modification to the nonexempt funds exception described later in this 
section, expanding the measurement period to two applicable years, is 
intended to address some of the commenter's concerns with respect to 
inadvertent failures to meet the requirements of the nonexempt funds 
exception.
    Another commenter recommended that Example 5 in the provisions of 
the proposed regulations, which illustrated the application of the 
limited hours exception (Prop. Sec.  53.4960-1(d)(3)(v)), be modified 
to eliminate from the facts that ATEO 5 does not control CORP 3, as 
control of another corporation by an ATEO is irrelevant for purposes 
determining whether the requirements of this exception are met, and 
thus irrelevant to the conclusion in that example. The commenter 
further suggested that this fact be moved to Example 8 in the proposed 
regulations, which illustrated the application of the separate 
nonexempt funds exception (Prop. Sec.  53.4960-1(d)(3)(viii)), since 
control of another corporation by an ATEO is relevant for determining 
whether the requirements of that exception are met, and thus relevant 
to the conclusion in that example. The Treasury Department and the IRS 
agree with the commenter's suggestion, and modified Example 5 in these 
final regulations describing the limited hours exception (Sec.  
53.4960-1(d)(3)(v)) accordingly. However, because of changes to the 
nonexempt funds exception as described later in this Summary of 
Comments and Explanation of Revisions, these final regulations replace 
Example 8 (Sec.  53.4960-1(d)(3)(viii)) with a new example.
c. Nonexempt Funds Exception
    As previously discussed, the proposed regulations also provided a 
``nonexempt funds'' exception for employees of a related non-ATEO 
organization who may perform a large portion of their overall services 
as an employee of the ATEO under certain circumstances. Under the 
nonexempt funds exception, an employee is disregarded for purposes of 
determining an ATEO's five highest-compensated employees for a taxable 
year provided that none of the ATEO, any related ATEO, or any 
controlled taxable related organization, pays the employee of the ATEO 
any remuneration or grants a legally binding right to nonvested 
remuneration to the employee. When applying these requirements for the 
nonexempt funds exception, the ATEO is not treated as paying 
remuneration that is paid by a related organization that also employs 
the individual, so long as the ATEO does not reimburse the payor. 
Further, to prevent indirect payment of remuneration by the ATEO, a 
related ATEO, or controlled taxable related organization, no related 
organization that paid remuneration to the individual may provide 
services for a fee to the ATEO, related ATEO, or any controlled taxable 
related organization.
    To satisfy the nonexempt funds exception, the proposed regulations 
also stated that the employee must have provided services primarily to 
a taxable related organization or other non-ATEO (other than a 
controlled taxable related organization of the ATEO) during the 
applicable year. For this purpose, an employee is treated as having 
provided services primarily to the taxable related organization or 
other non-ATEO (other than a controlled taxable related organization of 
the ATEO) only if the employee provided services to the taxable related 
organization or other non-ATEO for more than 50 percent of the 
employee's total hours worked for the ATEO and all related 
organizations (including ATEOs) during the applicable year.
    One commenter expressed concern that, for purposes of the nonexempt 
funds exception, the requirement limiting the employee's hours worked 
for the ATEO and all related ATEOs to not more than 50 percent of the 
total hours worked for the ATEO and all related organizations during an 
applicable year was too restrictive and may result in inadvertent 
failures. The Treasury Department and the IRS acknowledge the issues 
presented by this comment. These final regulations modify the exception 
by expanding the measurement period from one applicable year to two 
applicable years (that is, the current applicable year and the 
preceding applicable year are treated as a single measurement period) 
for purposes of determining whether an employee provided services to 
the ATEO and all related ATEOs for not more than 50 percent of the 
employee's total hours worked as an employee of the ATEO and all 
related organizations during the applicable year and the prior 
applicable year. This modification provides additional flexibility for 
situations in which an employee ``rotates'' to an ATEO for a period 
that extends longer than six months, or when an employee unexpectedly 
provides services beyond six months in an applicable year.
    Another commenter recommended that the nonexempt funds exception be 
modified to prohibit the provision of services for a fee to a taxable 
entity only if the ATEO actually owns a controlling interest in the 
taxable entity, as opposed to being attributed the ownership interest 
under the section 318 attribution principles, which were incorporated 
into the definitions of a related organization and control. The 
commenter asserted that the related organizations requirement under the 
proposed nonexempt funds exception (Prop. Sec.  53.4960-
1(d)(2)(iii)(A)(3)), which incorporates the section 318 attribution 
principles, is unduly restrictive, and would have unintended results, 
as illustrated by the following example. An individual who is the sole 
shareholder of two taxable corporations (Corporation 1 and Corporation 
2) also controls an ATEO (by having the power to appoint a majority of 
the ATEO's board of directors); Corporation 1 provides administrative 
services for a fee to Corporation 2; employee of Corporation 1 provides 
services only to Corporation 1 and does not provide any services to the 
ATEO. Under these facts, Corporation 2 is deemed to be controlled by 
the ATEO because, for purposes of determining whether an ATEO controls 
an organization under Prop. Sec.  53.4960-1(i)(2)(vii)(B)(2), if a 
person controls an ATEO, the ATEO is treated as owning a percentage of 
the stock owned by that person in accordance with the percentage of 
directors of the ATEO that are controlled by that person. Because the 
related organizations requirement prohibits the payment of a fee by a 
related organization to a controlled taxable related organization for 
services performed by an employee of the controlled taxable related 
organization, and because Corporation 1 is providing services for a fee 
to Corporation 2, which is deemed to be controlled by the ATEO, no 
employee of Corporation 1 could meet the requirements of the proposed 
nonexempt funds exception. The commenter suggested that this result is 
inappropriate because the sharing of services between two taxable 
corporations in which an ATEO has no actual ownership interest would 
not circumvent the legislative intent of section 4960. The Treasury 
Department and the IRS agree with the commenter's recommendation. 
Accordingly, these final regulations modify the attribution rules as 
they apply for purposes of determining eligibility for the nonexempt 
funds exception by disregarding the application of downward attribution 
in applying

[[Page 6202]]

section 318(a)(3) to corporations and other entities and in applying 
section 318 principles to nonstock organizations. This modification 
applies only for purposes of applying the nonexempt funds exception and 
does not apply for purposes of determining whether an organization is a 
related organization generally.
d. Limited Services Exception
    The proposed regulations provided a ``limited services'' exception, 
under which an employee is not considered for purposes of determining 
an ATEO's five highest-compensated employees for a taxable year if, 
during the applicable year, the ATEO paid less than 10 percent of the 
employee's total remuneration during the applicable year for services 
performed as an employee of the ATEO and all related organizations. 
However, if an employee would not be considered for purposes of 
determining the five highest-compensated employees of any ATEO in an 
ATEO's group of related organizations because no ATEO in the group paid 
at least 10 percent of the total remuneration paid by the group during 
the applicable year, then this exception does not apply to the ATEO 
that paid the employee the most remuneration during that applicable 
year. No comments were received on that proposed rule, and these final 
regulations retain that rule without change.

F. Medical Services

    Section 4960(c)(3)(B) provides that remuneration for purposes of 
section 4960 does not include the portion of any remuneration paid to a 
licensed medical professional (including a veterinarian) that is for 
the performance of medical or veterinary services by such professional. 
Section 4960(c)(5)(C)(iii) provides a substantially similar exception 
from the definition of ``parachute payment.'' The proposed regulations 
provided rules relating to medical services and licensed medical 
professionals. No comments were received on those rules in the proposed 
regulations, and these final regulations adopt the rules in the 
proposed regulations without change. For further discussion of these 
rules, see section II.F. of the Explanation of Provisions of the 
proposed regulations, titled ``Medical Services.''
    These final regulations also adopt the rule in the proposed 
regulations that a ``licensed medical professional'' is an individual 
who is licensed under state or local law to perform medical services. 
In addition to doctors, nurses, and veterinarians, a licensed medical 
professional generally would include dentists and nurse practitioners 
and may include other medical professionals, depending on the 
applicable state or local law. For a discussion of other issues related 
to remuneration for medical or veterinary services, including a rule 
for allocating remuneration received for a combination of medical and 
non-medical services, see section III.B. of this Summary of Comments 
and Explanation of Revisions, titled ``Remuneration Related to Medical 
Services.''

G. Predecessor Organization

    Section 4960(c)(2)(B) provides that a covered employee includes any 
employee who was a covered employee of the ATEO (or any predecessor) 
for any preceding taxable year beginning after December 31, 2016. 
Because a covered employee, under section 4960(c)(2), must be (or have 
been) an employee of an ATEO, the predecessor must also have been an 
ATEO at the time the individual was employed by the predecessor to be a 
covered employee. Thus, an individual who is a covered employee of an 
ATEO (or of an ATEO predecessor of an ATEO) for one taxable year 
remains a covered employee of that ATEO (and any successor ATEOs) for 
subsequent taxable years.
    The proposed regulations defined ``predecessor'' by reference to 
several enumerated categories of organizational changes, including 
acquisitions, mergers, other reorganizations, and changes in tax-exempt 
status. A predecessor ATEO ordinarily is an ATEO that has transferred, 
by any of several legal means, its assets and operations to another 
pre-existing or newly created ATEO (the successor of the predecessor 
ATEO). No comments were received with respect to the proposed rules. 
These final regulations adopt the definition of predecessor as provided 
in the proposed regulations without change. For further information 
concerning these rules, see section II.G. of the Explanation of 
Provisions of the proposed regulations, titled ``Predecessor 
Organization.''

H. Related Organization

    Section 4960(c)(4)(A) provides that remuneration paid to a covered 
employee by an ATEO includes any remuneration paid with respect to 
employment of the employee by any related person or governmental 
entity,\3\ and includes in the definition of ``remuneration'' any 
remuneration paid by the employer ATEO, related ATEOs, and related non-
ATEOs (including taxable entities, nonprofit entities that are not 
ATEOs, and governmental entities that are not ATEOs). Section 
4960(c)(4)(B) defines a ``related organization'' of an ATEO as a person 
or governmental entity that controls, or is controlled by, the ATEO; is 
controlled by one or more persons that control the ATEO; is a supported 
organization or a supporting organization (as defined in sections 
509(f)(3) and 509(a)(3), respectively) during the taxable year of the 
ATEO, or, in the case of an ATEO that is a voluntary employees' 
beneficiary association described in section 501(c)(9) (VEBA), 
establishes, maintains, or makes contribution to the VEBA.
---------------------------------------------------------------------------

    \3\ The proposed and final regulations refer to related persons 
and governmental entities collectively as related organizations.
---------------------------------------------------------------------------

    Section 4960(c)(4) does not define ``control'' for purposes of 
identifying related organizations. To determine which persons are 
related organizations under section 4960(c)(4)(B), the proposed 
regulations generally adopted the definition of ``control'' set forth 
in section 512(b)(13)(D) and Sec.  1.512(b)-1(l)(4). Section II.H. of 
the Explanation of Provisions of the proposed regulations, titled 
``Related Organization,'' explained that this standard (and its 
``greater than 50 percent'' threshold) was intended to align the 
definition of ``related organization'' for purposes of section 4960 
with the definition of ``related organization'' for purposes of the 
annual reporting requirements on Form 990, ``Return of Organization 
Exempt From Income Tax,'' and with other exempt organization control 
tests.
    One commenter recommended that these final regulations instead 
define ``control'' based on the controlled group rules in section 
414(b) and (c) and the regulations thereunder, which include an 80 
percent control test. The commenter suggested that the section 414(b) 
and (c) controlled group test was more appropriate for a number of 
reasons: The purpose of section 414(b) and (c) is to treat related 
parties as a single employer (the same purpose as section 
4960(c)(4)(C)), whereas the purpose of section 512(b)(13) is to tax 
abusive transactions; the regulations under section 512(b)(13) do not 
reflect statutory revisions; the control definition under section 
512(b)(13) is overinclusive; and using the Form 990 test for control 
does not reduce administrative burdens because the Form 990 rules for 
identifying an ATEO's highest-compensated employees and calculating 
compensation differ significantly from the section 4960 rules.

[[Page 6203]]

    These final regulations do not adopt the suggestion in this 
comment. Instead, these final regulations adopt the rules in the 
proposed regulations, which align the definition of control with the 
definition in the Form 990 instructions, which, in turn, is generally 
based on the section 512(b)(13) standards. The Treasury Department and 
the IRS have concluded that this definition of control is more 
appropriate and administrable because the Form 990 control definition 
and the section 512(b)(13) rules are familiar to and used by exempt 
organizations. Similarly, an 80 percent control threshold, while used 
in section 414(b) and (c), as well as in regulations under section 
162(m), generally is not a standard used for purposes of tax 
administration related to exempt organizations, whereas the 50 percent 
control threshold is a control test familiar to exempt organizations. 
See, for example, the instructions to Form 990; Sec. Sec.  1.509(a)-
4(g)(1)(i); 1.509(a)-4(j)(1); 56.4911-7(b); 53.4941(d)-1(b)(5); 
53.4943-3(b)(3)(ii); 53.4958-4(a)(2)(ii)(B); and 53.4968-3(b). In 
addition, section 509(a)(3) supporting organizations and their section 
509(f)(3) supported organizations are defined as related organizations 
under section 4960(c)(4)(B); the adoption of an 80 percent control 
threshold would be incongruous with the lower standards of control for 
such organizations under Sec.  1.509(a)-4 (particularly in the case of 
Type III supporting organizations, for which control is not required). 
Further, the legislative history states that the purpose for enacting 
section 4960 is to deter ``excessive compensation,'' \4\ indicating an 
intent to deter arguably abusive practices, and the Treasury Department 
and the IRS have determined that use of a higher control threshold 
would allow potentially abusive compensation arrangements among 
organizations that are related to a lesser degree.\5\ For these 
reasons, and the reasons set forth in section II.H. of the Explanation 
of Provisions of the proposed regulations, titled ``Related 
Organization,'' these final regulations adopt the rules regarding the 
overall definition of ``control'' in the proposed regulations without 
change.
---------------------------------------------------------------------------

    \4\ H. Rep. 115-409, supra, at 333.
    \5\ The imposition of excise tax under section 4960 is not 
determinative as to whether the remuneration paid to the covered 
employee is excessive or unreasonable compensation for purposes of 
sections 4941 or 4958. Similarly, there is no presumption, 
inference, or basis for concluding that remuneration paid to a 
covered employee that is not subject to excise tax under section 
4960 is reasonable compensation for purposes of determining 
liability for excise tax under sections 4941 or 4958.
---------------------------------------------------------------------------

    To determine control of a nonstock organization, the proposed 
regulations provided rules similar to other regulations dealing with 
control of tax-exempt organizations (Sec. Sec.  1.512(b)-1(l)(4)(i)(b), 
53.4958-4(a)(2)(ii)(B)(1)(iii), and 1.414(c)-5(b)) \6\ that provide 
that a person is considered to control a nonstock organization under 
either a ``removal power'' test or a ``representative'' test. No 
comments were received addressing the ``removal power'' test, and the 
final regulations adopt these rules from the proposed regulations 
without change. Comments were received on the ``representative'' test, 
and in particular the manner in which the proposed regulations would 
address certain situations involving ``accidental control.''
---------------------------------------------------------------------------

    \6\ See also the representative test in section 4911(f)(2)(B)(i) 
for determining affiliated organizations.
---------------------------------------------------------------------------

    Under the representative test, a person or governmental entity 
generally controls a nonstock organization if more than 50 percent of 
the nonstock organization's directors or trustees are also trustees, 
directors, officers, agents, or employees of the person or governmental 
entity. Unlike the representative test in Sec. Sec.  1.512(b)-
1(l)(4)(i)(b), 53.4958-4(a)(2)(ii)(B)(1)(iii), and 1.414(c)-5(b), the 
proposed regulations expressly included an officer of the person or 
governmental entity as a representative for purposes of determining 
control of a nonstock organization.
    In response to Notice 2019-09, a commenter raised the issue of 
``accidental control'' presented by the representative test in which, 
for example, control of an organization by an employer may be found 
because a few lower-level employees of the employer serve on the board 
of directors of the organization. The proposed regulations addressed 
this issue by permitting a nonstock organization (or its putative 
controlling person or governmental entity) to qualify for an exception 
from control status if the employees of the person or governmental 
entity that are directors or trustees of the nonstock organization are 
not trustees, directors, officers, or employees with the powers of a 
director or officer, of the person or governmental entity and are not 
acting as representatives of the person or governmental entity in their 
service with the nonstock organization. A nonstock organization that 
relies on this exception must report its reliance on this exception on 
the applicable Form 990 and provide supporting details.
    Another commenter on the proposed regulations stated that 
compliance with this exception to avoid ``accidental control'' under 
the representative test places additional reporting burdens on exempt 
organizations and recommended that these final regulations remove 
``employees'' altogether from the list of deemed representatives and 
instead focus the representative test on the actual decision-makers in 
the organization. The commenter suggested that an expansive list of 
deemed representatives, including employees, is more justifiable with 
an 80 percent control threshold. These final regulations do not adopt 
the commenter's suggestions. The Treasury Department and the IRS have 
concluded that a rule that treats as non-officers any employees not 
defined as officers under the organization's organizing documents may 
be subject to abuse because employees frequently function as officers, 
even if they do not have that title. Further, a rule that treats any 
employee without the title of officer as a non-officer would be 
inconsistent with other Code provisions addressing exempt 
organizations, which generally treat as an officer any person with 
similar powers. See, for example, sections 4946(b)(1), 4955(f)(2)(A), 
4958(f)(2), 4965(d)(1), and 4966(d)(3)(A). In addition, an employee of 
an organization (such as a department head) may serve ex officio on the 
board of another organization, and, in substance, serve in a 
representative capacity. Similarly, the facts of other arrangements in 
which an employee serves on another organization's board may 
demonstrate that the employee is serving as a representative of the 
employer. Finally, the percentage threshold of control is not 
necessarily relevant to the determination of whether the individual is 
serving in a representative capacity--an employer with less than a 
specific threshold percentage may still have reasons to have an 
employee represent its interests on another organization's board of 
directors. For these reasons, these final regulations adopt without 
change the representative rules in the proposed regulations.
    The proposed regulations also addressed the status of foreign 
organizations as ATEOs, excluding them from ATEO status if described in 
section 4948(b) and the regulations thereunder. The Treasury Department 
and the IRS requested comments on whether a foreign related 
organization described in section 4948(b) should be exempt from tax 
imposed by section 4960(c)(4)(C) and, if so, whether remuneration paid 
by such an organization should nonetheless be taken into account for 
purposes of determining excess

[[Page 6204]]

remuneration and allocating liability among the ATEO and related 
organizations that are subject to the excise tax imposed by section 
4960. No comments were received on these issues. However, the Treasury 
Department and the IRS have concluded that it is appropriate to address 
these issues in these final regulations.
    Chapter 42 of the Code applies generally to private foundations and 
other tax-exempt organizations and the excise taxes in chapter 42 
generally are payable by exempt organizations and in some cases by 
persons associated with them. However, under section 4948(b), sections 
507 and 508 and chapter 42 do not apply to a foreign organization that 
has not received substantial support (other than gross investment 
income) from United States sources. Section 509(d) defines support for 
purposes of chapter 42 as including gifts, gross receipts from an 
activity that is not an unrelated trade or business under section 513, 
net income from unrelated business activities, gross investment income, 
tax revenues levied for the benefit of the organization, and the value 
of services or facilities furnished by a governmental unit without 
charge--a breadth of items that support a tax-exempt organization. 
Section 4948(b) is thus concerned with foreign private foundations 
(including entities treated as private foundations for purposes of 
chapter 42) and other tax-exempt organizations that have received 
sufficient support from United States sources to warrant subjection to 
taxation and various prohibitions under chapter 42. Therefore, the 
Treasury Department and the IRS have determined that it is appropriate 
to exclude from taxation under section 4960 as a related organization 
any foreign organization that is both described in section 4948(b) and 
is either exempt from tax under section 501(a) \7\ or a taxable private 
foundation.\8\ Such organizations excluded from the excise tax imposed 
by section 4960 are referred to as ``section 4948(b) related 
organizations.''
---------------------------------------------------------------------------

    \7\ Some types of exempt organizations are limited to domestic 
organizations, such as section 501(c)(10) fraternal organizations.
    \8\ A private foundation that loses its exemption under section 
501(c)(3) remains a taxable private foundation until its private 
foundation status is terminated under section 507. See sections 
509(b) and 4940(b).
---------------------------------------------------------------------------

    While chapter 42 taxes are inapplicable to section 4948(b) related 
organizations, those organizations' activities that otherwise would 
have resulted in chapter 42 taxes may have other consequences. For 
example, section 4948(c) in certain circumstances imposes loss of 
exemption on an exempt organization described in section 4948(b) that 
engages in activities that would result in chapter 42 taxes for 
domestic organizations. Therefore, the Treasury Department and the IRS 
have determined that the remuneration paid to a covered employee of an 
ATEO by a section 4948(b) related organization must be taken into 
account by the ATEO and any related organizations subject to the excise 
tax imposed by section 4960 for purposes of determining an ATEO's (and 
related organizations') liability under section 4960 and the ATEO's 
five highest-compensated employees, even though the section 4948(b) 
related organization is not subject to the excise tax imposed by 
section 4960 on the excess remuneration that is otherwise allocable to 
that organization. These final regulations also clarify that for 
purposes of applying the exclusion from status as an ATEO or a related 
organization, whether the foreign organization meets the requirements 
of section 4948(b) is determined at the end of the organization's 
taxable year.

III. Remuneration

A. In General

    Consistent with section 4960(c)(3)(A), the proposed regulations 
defined ``remuneration'' as wages under section 3401(a) (meaning 
generally amounts subject to Federal income tax withholding), but 
excluding designated Roth contributions under section 402A(c) and 
including amounts required to be included in gross income under section 
457(f). Remuneration does not include certain retirement benefits, 
including payments that are contributions to or distributions from a 
trust described in section 401(a); payments under or to an annuity plan 
described in section 403(a) at the time of payment; payments described 
in section 402(h)(1) and (2) if, at the time of the payment, it is 
reasonable to believe that the employee will be entitled to an 
exclusion under that section for the payment; payments under an 
arrangement to which section 408(p) applies; or payments under or to an 
eligible deferred compensation plan described in section 457(b) and 
maintained by an eligible employer described in section 457(e)(1)(A) 
(governmental employer) at the time of payment. See section 
3401(a)(12). Remuneration includes a parachute payment, but excess 
remuneration does not include a parachute payment that is an excess 
parachute payment. These final regulations adopt these rules provided 
in the proposed regulations without change.
    One commenter recommended that, for purposes of computing the 
excise tax, section 4960(c)(4)(A) should be interpreted to include only 
remuneration related to the employment of an employee by an ATEO, which 
would include remuneration paid by a related person or related 
governmental entity with respect to an ATEO or by any other third 
party, but only if the payment related to the employee's employment by 
the ATEO. The commenter stated that this suggested interpretation would 
ensure that all remuneration with respect to a covered employee's 
employment by an ATEO, including remuneration paid by a related 
organization of an ATEO with respect to services performed for the 
ATEO, would be included in computing the tax under section 4960(a). The 
commenter asserted that the suggested interpretation would avoid the 
unintended result, caused by the proposed regulations, of subjecting to 
the excise tax remuneration that is paid by persons who are not ATEOs 
for an individual's services that are unrelated to an ATEO.
    The Treasury Department and the IRS have concluded that the more 
natural reading of the statute is that remuneration paid to a covered 
employee of an ATEO includes remuneration paid by a related 
organization with respect to services performed as an employee for the 
related organization. In addition, adoption of the commenter's 
suggestion could raise the potential for abuse because it relies on an 
ability to identify the specific recipient of services that an employee 
provides to multiple entities and determine the relative value of the 
services or allocate the compensation to the entities under a 
reasonable allocation method. Specifically, given the facts and 
circumstances analysis that in many cases may be difficult and 
burdensome to administer, adoption of the suggestion could provide an 
opening for related taxpayers to coordinate their activities to 
mischaracterize the employer of an individual with respect to some or 
all services provided to a related organization, or to misallocate 
portions of the total remuneration paid by the related taxpayers to the 
individual as paid for services provided as an employee of a related 
organization, so that all the related entities avoid any liability 
under section 4960 while still providing what would otherwise be excess 
remuneration to the individual as an employee of an ATEO. While this 
type of identification and allocation may be needed for other tax 
purposes, including in some cases the

[[Page 6205]]

allocation of liability under section 4960, those applications do not 
involve a situation such as this in which all the entities may benefit 
from the mischaracterizations through the avoidance of the potential 
liability. Thus, the interpretation provided in these final regulations 
also is consistent with the exercise of authority in section 4960(d) to 
prevent avoidance of the tax imposed by section 4960 by providing 
compensation through a third party. Further, adoption of the 
commenter's suggestion could raise issues regarding the role of section 
4960(c)(6), the statutory provision coordinating the application of 
section 162(m) and section 4960, given the impact that adoption of the 
suggestion would have on the scope of circumstances to which that 
provision may apply. For these reasons, these final regulations do not 
limit the application of section 4960(c)(4)(A) to remuneration paid 
solely with respect to employment by an ATEO or for services provided 
to an ATEO, as suggested by the commenter.
    The commenter also suggested that these final regulations not treat 
remuneration paid by a related organization as paid by the ATEO if a 
covered employee is not employed by an ATEO at any time during an 
applicable year. For example, in circumstances in which a covered 
employee of an ATEO performs services for a related non-ATEO but 
provides no services for the ATEO during an applicable year, the 
commenter suggested that compensation for those services not be treated 
as remuneration under section 4960. These final regulations do not 
adopt this suggestion. Section 4960(c)(2)(B) provides that once an 
individual is a covered employee of an ATEO (or any predecessor), the 
employee remains a covered employee for all subsequent years. Section 
4960(c)(4)(A) provides that ``remuneration of a covered employee by an 
[ATEO]'' includes ``any remuneration paid with respect to employment of 
such employee by any related person or governmental entity.'' The 
Treasury Department and the IRS have concluded that the better 
interpretation of section 4960(c)(2)(B) and (c)(4)(A), when read 
together, is that compensation paid to a covered employee by a related 
organization during an applicable year is remuneration for purposes of 
section 4960, even if the covered employee does not perform services as 
an employee of the ATEO during the applicable year. In addition, the 
commenter's suggestion also raises administrability issues similar to 
those that would arise if only remuneration for services provided to 
the ATEO were taken into account. If an employee provides services to 
different members of a group of related organizations from year to 
year, it may be difficult to determine what remuneration is allocable 
to services provided to each group member. Therefore, the commenter's 
suggestion would be similarly difficult and burdensome to administer 
and could raise the potential for abuse.
    The same commenter also suggested that these final regulations 
apply the substance of the limited hours and nonexempt funds exceptions 
for purposes of determining remuneration paid. These final regulations 
do not adopt this suggestion because the Treasury Department and the 
IRS have concluded that the statute does not provide the authority to 
apply these exceptions to the definition of remuneration. The statute 
does not define compensation for purposes of identifying the five 
highest-compensated employees, and thus the statute permits flexibility 
in the rules for determining the five highest-compensated employees. In 
contrast, section 4960(c)(3)(A) defines remuneration as wages within 
the meaning of section 3401(a) (with certain specified modifications) 
paid by an ATEO and section 4960(c)(4)(A) provides that ``remuneration 
of a covered employee by an [ATEO] shall include any remuneration paid 
with respect to employment of such employee by any related person or 
governmental entity.'' These statutory provisions do not provide the 
flexibility to adopt the commenter's suggestion to include the 
exceptions applicable to the determination of a covered employee in the 
definition of remuneration.
    Another commenter requested that these final regulations limit the 
scope of the definition of remuneration to include only regular 
employee wages, as defined in section 3401(a), and to exclude taxable 
fringe benefits from the section 4960 definition of remuneration. The 
commenter asserted that certain taxable fringe benefits, such as paid 
parking above the excludable limit and reimbursement of childcare 
expenses, are not the type of remuneration that was intended to be 
taxed under section 4960. The commenter further suggested that the 
inclusion of taxable fringe benefits in remuneration would have an 
adverse effect on certain employers' ability to attract and retain key 
employees. These final regulations do not adopt this commenter's 
suggestion because it would be inconsistent with the statutory 
provisions. Section 4960(c)(3)(A) defines remuneration as amounts that 
are ``wages'' within the meaning of section 3401(a). Section 3401(a) 
defines ``wages'' as all remuneration for services performed by an 
employee for his employer, including the cash value of all remuneration 
(including benefits) paid in any medium other than cash, with certain 
specific exclusions. Taxable fringe benefits, including parking above 
the excludable limit and reimbursement of childcare expenses, are not 
excluded from wages under section 3401(a). In addition, section 
4960(c)(3) specifically excludes other type of wages, such as 
designated Roth contributions and remuneration for medical services, 
indicating a legislative intent for all other types of wages to be 
included. For these reasons, the Treasury Department and the IRS have 
determined that providing further exclusions such as those suggested 
would be inconsistent with the statute and these final regulations do 
not adopt this suggestion.
    The proposed regulations clarified that remuneration includes any 
amount includible in gross income as compensation under section 7872 
and the regulations thereunder. For example, under Sec.  1.7872-
15(e)(1)(i), a below-market split-dollar loan between an employer and 
employee generally is treated as a compensation-related loan, and thus 
any imputed transfer from the employer to the employee generally is a 
payment of compensation. Although section 7872(f)(9) provides that no 
amount shall be withheld under chapter 24 of the Code with respect to 
any amount treated as transferred or retransferred under section 
7872(a) or received under section 7872(b), those amounts are 
``remuneration . . . for services performed by an employee for his 
employer'' within the meaning of section 3401(a) and are not 
specifically excluded from wages under section 3401(a). Thus, those 
amounts are remuneration as defined in section 4960(c)(3)(A). ATEOs 
that are private foundations or section 509(a)(3) supporting 
organizations should consider, before entering into these arrangements, 
that loans (including transactions treated as loans for Federal tax 
purposes, such as split-dollar arrangements) to certain employees may 
constitute an act of self-dealing under section 4941 or an excess 
benefit transaction under section 4958(c)(3).
    A commenter recommended that these final regulations, or 
alternatively the preamble to these final regulations, confirm that 
remuneration does not include amounts that are not includible in gross 
income pursuant to the $10,000 de minimis exception under section 
7872(c)(3). Under that exception, the

[[Page 6206]]

foregone interest attributable to any day on which the aggregate 
outstanding amount of loans between the borrower and lender does not 
exceed $10,000 is not includible in gross income. These final 
regulations adopt the commenter's suggestion and clarify that, in 
accordance with section 7872, these de minimis amounts are not 
remuneration for purposes of section 4960. Other than this comment that 
resulted in this clarification, no further comments were received on 
those provisions of the proposed regulations, and these final 
regulations adopt them without further changes.

B. Remuneration Related to Medical Services

    Remuneration that is paid to a licensed medical professional for 
medical services is excluded from the definition of ``remuneration'' 
for purposes of section 4960. (See section II.F. of the Summary of 
Comments and Explanation of Revisions, titled ``Medical Services,'' for 
a further discussion of the scope of this exception.) When an employer 
pays remuneration to an employee for both medical services (including 
related services, such as medical recordkeeping) and other services, 
the employer must allocate that remuneration between remuneration paid 
for medical services or for other services. These final regulations 
adopt the proposed regulations, with minor clarifications, and permit 
taxpayers to use a reasonable, good faith method to allocate 
remuneration between these two categories of services. For this 
purpose, taxpayers may rely on a reasonable allocation set forth in an 
employment agreement allocating remuneration between medical services 
and other services. If some or all of the remuneration is not 
reasonably allocated in an employment agreement, taxpayers must use 
another reasonable method of allocation. For example, allocating 
remuneration to medical services based on the portion of the total 
hours the employee worked for the employer providing medical services 
(determined based on records such as patient, insurance, Medicare/
Medicaid billing records, or internal time reporting mechanisms) would 
be a reasonable method.
    In section III.B. of the Explanation of Provisions of the proposed 
regulations, titled ``Remuneration Related to Medical Services,'' the 
Treasury Department and the IRS requested comments on other reasonable 
methods of allocating remuneration between medical services and other 
services. One commenter recommended that an employer be permitted to 
make a reasonable, good faith allocation between remuneration for 
providing medical services and remuneration for providing nonmedical 
services, not only with respect to current remuneration but also with 
respect to contributions and earnings under a deferred compensation 
plan. These final regulations adopt this recommendation and clarify 
that an employer may make a reasonable, good faith allocation between 
remuneration for medical and nonmedical services, regardless of the 
form of compensation, and that an employer may apply the same 
principles with respect to contributions and earnings under a deferred 
compensation plan.

C. When Remuneration Is Treated as Paid

    The proposed regulations addressed when remuneration is treated as 
paid for purposes of section 4960. The flush language at the end of 
section 4960(a) provides that, for purposes of section 4960(a), 
remuneration is treated as paid when there is no substantial risk of 
forfeiture of the rights to the remuneration within the meaning of 
section 457(f)(3)(B). Although section 4960(a) cross-references the 
definition of ``substantial risk of forfeiture'' in section 
457(f)(3)(B), the rule under section 4960(a) providing that 
remuneration is treated as paid when there is no substantial risk of 
forfeiture of the rights to the remuneration is neither limited to 
remuneration that is otherwise subject to section 457(f) nor limited to 
amounts paid pursuant to a nonqualified deferred compensation 
arrangement. The proposed regulations provided that, for purposes of 
section 4960(a), all forms of remuneration except for ``regular wages'' 
as described in the next paragraph are treated as paid when the 
remuneration is not subject to a substantial risk of forfeiture. These 
final regulations adopt this payment timing rule provided in the 
proposed regulations with certain modifications, as discussed in 
further detail in this section.
    To clarify when remuneration that is never subject to a substantial 
risk of forfeiture is treated as paid, the proposed regulations 
provided that remuneration that is a ``regular wage'' within the 
meaning of Sec.  31.3402(g)-1(a)(ii) is treated as paid at the time of 
actual or constructive payment. A ``regular wage'' is defined in Sec.  
31.3402(g)-1(a)(ii) as remuneration ``paid at a regular hourly, daily, 
or similar periodic rate (and not an overtime rate) for the current 
payroll period or at a predetermined fixed determinable amount for the 
current payroll period.'' These final regulations adopt these rules 
provided in the proposed regulations without change. Because the final 
regulations provide that remuneration that is a regular wage within the 
meaning of Sec.  31.3402(g)-1(a)(1)(ii) is treated as paid when 
actually or constructively paid, an employer will not need to determine 
amounts of regular wages that vested in the preceding year for purposes 
of section 4960. For example, if a pay period begins December 25, 2022, 
and ends January 7, 2023, and the salary for that period is not 
actually paid until January 14, 2023, then the salary for the pay 
period is treated as paid in 2023, and the employer need not treat any 
amount as remuneration paid in 2022 due to vesting in 2022.
    The proposed regulations treated an amount that is not regular 
wages as paid when it is no longer subject to a substantial risk of 
forfeiture within the meaning of section 457(f)(3)(B) and referred to 
such an amount as ``vested.'' The Treasury Department and the IRS 
issued proposed regulations under section 457(f) in 2016 (81 FR 40548 
(June 22, 2016)), upon which taxpayers may rely for periods before the 
applicability date of the final section 457(f) regulations. Under Prop. 
Sec.  1.457-12(e)(1), an amount of compensation is subject to a 
substantial risk of forfeiture only if entitlement to the amount is 
conditioned on the future performance of substantial services, or upon 
the occurrence of a condition that is related to a purpose of the 
compensation if the possibility of forfeiture is substantial. See Prop. 
Sec.  1.457-12(e)(3) for examples of the rules relating to substantial 
risk forfeiture. These final regulations adopt the rules provided in 
the proposed regulations, including the definition of ``substantial 
risk of forfeiture'' in Prop. Sec.  1.457-12(e)(1). Any changes to the 
proposed regulations under section 457(f) when finalized will be 
considered for purposes of section 4960, and further guidance may be 
issued, if appropriate, including any transition guidance that may be 
needed to take into account periods before and after the applicability 
date of the definition of substantial risk of forfeiture under the 
final section 457(f) regulations.
    In section III.C. of the Explanation of Provisions of the proposed 
regulations, titled ``When Remuneration Is Treated as Paid,'' the 
Treasury Department and the IRS invited comments regarding any burdens 
that could be avoided through a short-term deferral rule and how such a 
rule could be designed to avoid permitting inappropriate avoidance of 
the tax. One commenter recommended that these final regulations extend 
the

[[Page 6207]]

rule for ``regular wages'' as defined in Sec.  31.3402(g)-1(a) to 
amounts that are not treated as deferred compensation under Sec.  
1.409A-1(b)(4) or Prop. Sec.  1.457-12(d)(2) because such amounts are 
paid within the ``short-term deferral'' period. The commenter suggested 
that other remuneration that falls outside the definition of ``regular 
wages'' be treated as remuneration when actually or constructively 
paid, including benefits under bona fide severance pay plans and death 
and disability plans, as well as annual bonuses, long-term incentive 
pay, business expense reimbursements, and noncash fringe benefits. The 
commenter noted that such amounts are treated as wages for other 
reporting purposes, including Federal Insurance Contributions Act 
(FICA) wage reporting, when actually or constructively paid, and thus 
the rules under the proposed regulations result in a timing mismatch. 
The commenter asserted that this recommendation would substantially 
reduce the administrative burden and potential for errors created by 
the broad timing rule in the proposed regulations, yet affect a limited 
range of remuneration.
    Another commenter recommended that these final regulations provide 
that the short-term deferral exception to the definition of deferred 
compensation for section 457(f) apply to section 4960 such that the 
year of inclusion for income tax purposes matches the year of inclusion 
for section 4960 purposes. The commenter interpreted the statutory 
reference to wages under section 3401(a) and amounts included in income 
under section 457(f) as providing not only a substantive rule but also 
a timing rule, meaning the amount must either be wages within the 
meaning of section 3401(a) paid during that year or be an amount 
included in income under section 457(f) during that year in order to be 
treated as remuneration paid in that year. According to the commenter, 
since amounts that meet the definition of a short-term deferral for 
purposes of section 457(f) are neither wages under section 3401(a) nor 
includible in income under section 457(f) in the year of vesting, those 
amounts should be treated as remuneration for purposes of section 4960 
only in the year actually paid.
    Further, the commenter noted that applying a short-term deferral 
rule would simplify administration for employers because the 
determination of remuneration would more closely track the 
determination of wages for Form W-2, ``Wage and Tax Statement,'' 
reporting. The commenter acknowledged the concern stated in section 
III.C. of the Explanation of Provisions of the proposed regulations, 
titled ``When Remuneration Is Treated as Paid,'' that a short-term 
deferral rule would permit an ATEO to select the year in which 
remuneration would be subject to tax under section 4960, but observed 
that an individual may become a covered employee during the section 
457(f) short-term deferral period after the year of vesting, and thus 
the proposed rule could actually result in amounts not being subject to 
the excise tax. The commenter also observed that treating short-term 
deferrals as remuneration in the year of vesting requires that those 
amounts be present-valued and that earnings be included in remuneration 
in the subsequent year, resulting in additional complexity for ATEOs. 
Finally, the commenter suggested that an employer be permitted to 
include an amount in remuneration in the year of vesting or include the 
amount in the year of payment, as is permitted for FICA tax purposes 
under Sec.  31.3121(v)(2)-1(b)(3)(iii), and require that employers 
apply consistent treatment of amounts with respect to its selection of 
the timing of FICA taxation of short-term deferrals and timing of the 
treatment as remuneration for purposes of section 4960.
    These final regulations do not adopt the commenter's suggestions to 
apply a ``short-term deferral'' rule. Rather, these final regulations 
adopt the applicable provisions of the proposed regulations without 
change. Under section 4960(c)(3), an amount must either be wages under 
section 3401(a) or be includible in income under section 457(f) in 
order to be remuneration under section 4960. However, the rules under 
section 4960(c)(3) determine whether an amount is remuneration, not 
when the remuneration is considered to be paid. The flush language at 
the end of section 4960(a) provides that, for purposes of section 
4960(a), remuneration is treated as paid when there is no substantial 
risk of forfeiture, as defined in section 457(f)(3)(B), of the rights 
to the remuneration. Section 3401(a) primarily focuses on whether, not 
when, amounts are includible in wages; the basic timing rule for wage 
inclusion appears in regulations under section 3402(a), not section 
3401(a). Specifically, Sec.  31.3402(a)-1(b) provides that wages are 
paid when actually or constructively paid and explains what it means 
for an amount to be constructively paid. Thus, the cross-reference to 
section 3401(a) (and not section 3402(a)) in section 4960(c)(3) 
establishes the scope of the term ``remuneration'' without regard to 
timing, but the flush language in section 4960(a) establishes the 
timing rule that applies to all forms of remuneration. In addition to 
being inconsistent with the statutory language addressing the timing of 
the payment of remuneration, allowing a short-term deferral rule 
similar to the rule in Sec.  1.409A-1(b)(4) and Prop. Sec.  1.457-
12(d)(2) could permit an employer to determine the taxable year in 
which the amount is treated as paid, which could be used not only to 
manipulate the application of section 4960(a) to the remuneration paid, 
but also to manipulate the identification of covered employees.
    This application of the statutory language results in circumstances 
in which the amount of remuneration paid for purposes of section 4960 
is not the same as the amount reported in any box on Form W-2 for an 
applicable year. However, as described later in this section, these 
final regulations address the administrative burden of calculating the 
present value of vested but unpaid amounts by expanding the ability to 
include at vesting the full amount that is to be paid in circumstances 
in which there is a short delay between vesting and payment.
    These final regulations adopt the rule set forth in the proposed 
regulations that provided that an amount of remuneration treated as 
paid generally is the present value of the remuneration on the date on 
which the covered employee vests in the right to payment of the 
remuneration. The employer must determine the present value using 
reasonable actuarial assumptions regarding the amount, time, and 
probability that the payment will be made. These final regulations do 
not provide rules for the determination of present value. However, an 
employer may determine the present value using the rules set forth in 
Prop. Sec.  1.457-12(c)(1). The Treasury Department and the IRS 
anticipate that final regulations addressing the determination of 
present value for purposes of section 4960 will be issued when final 
regulations under section 457(f) are issued. Until actually or 
constructively paid or otherwise includible in gross income of the 
employee, any amount treated as paid at vesting is referred to as 
``previously paid remuneration.''
    To reduce the administrative burden of determining the present 
value of remuneration in certain circumstances that would involve 
minimal discounting, these final regulations adopt the rule provided in 
the proposed regulations that the employer may treat the entire amount 
to be paid on a future date (without making a present valuation 
determination) as the present value on the date of vesting. However, 
these final regulations do not limit the

[[Page 6208]]

application of this rule to amounts that are paid under a nonaccount 
balance plan described in Sec.  1.409A-1(c)(2)(i)(C), but instead this 
rule applies to any vested amount that is scheduled to be paid within 
90 days. For example, an employer is not required to discount an annual 
bonus of $10,000 that vests on December 31, 2022, and is scheduled to 
be paid on February 15, 2023, to reflect the delay in actual payment, 
but instead may treat $10,000 as remuneration paid in 2022.

D. Earnings and Losses

    These final regulations generally adopt the proposed regulations 
and provide specific rules for the treatment of earnings and losses on 
previously paid remuneration. In general, these rules are intended to 
minimize administrative burdens in determining the amount of earnings 
and losses treated as paid for an applicable year, as well as in 
determining the amount of earnings and losses across multiple 
compensation arrangements.
    The proposed regulations provided that net earnings on previously 
paid remuneration are treated as vested (and therefore paid) on the 
last day of the applicable year in which they are accrued unless 
otherwise actually or constructively paid before that date. For 
example, the present value of vested remuneration accrued to an 
employee's account under an account balance plan described in Sec.  
1.409A-1(c)(2)(i)(A) (under which the earnings and losses attributed to 
the account are based solely on a predetermined actual investment or a 
reasonable market interest rate) is treated as paid on the date accrued 
to the employee's account and, until subsequently actually or 
constructively paid, is treated as previously paid remuneration. In 
addition, at the end of each applicable year in which there is 
previously paid remuneration remaining in the covered employee's 
account balance, the present value of any net earnings accrued on that 
previously paid remuneration (the increase in present value due to the 
application of a predetermined actual investment or a reasonable market 
interest rate) is treated as remuneration paid in that applicable year. 
This remuneration is then treated as previously paid remuneration for 
subsequent applicable years until actually or constructively paid.
    Similarly, the proposed regulations provided that the present value 
of a vested, fixed amount of remuneration under a nonaccount balance 
plan described in Sec.  1.409A-1(c)(2)(i)(C) is treated as paid on the 
date of vesting and subsequently treated as previously paid 
remuneration until actually or constructively paid. In addition, at the 
end of each applicable year in which previously paid remuneration 
remains as part of the covered employee's benefit under the plan, the 
net increase in the present value of that amount during the year due 
solely to the passage of time constitutes earnings and is treated as 
remuneration paid. For this purpose, earnings and losses from one plan 
or arrangement are aggregated with earnings and losses from any other 
plan or arrangement in which the employee participates that is provided 
by the same employer (but not across arrangements provided by related 
but separate employers). For purposes of determining earnings and 
losses, previously paid remuneration under a plan or arrangement is 
reduced by the amount actually or constructively paid under the plan or 
arrangement. These final regulations further illustrate the operation 
of these rules through examples.
    One commenter recommended that these final regulations permit, but 
not require, related employers to determine net earnings on previously 
paid remuneration on an aggregate basis by treating all earnings and 
losses on the previously paid remuneration of related employers as paid 
by the ATEO. The commenter explained that in groups of related taxable 
and tax-exempt organizations, related organizations often provide 
separate deferred compensation plans to their employees. Therefore, an 
individual employee who works (or has worked) for multiple related 
employers might have several deferred compensation plans, which often 
differ considerably, with some being nonaccount balance plans and 
others being account balance plans that may offer very different 
investment options. As a result, an individual employee might accrue 
significant earnings in a year under some deferred compensation plans 
but incur significant losses in others. The commenter therefore 
suggested that these final regulations permit aggregation of losses 
with earnings among related employers to avoid the inappropriate 
inflation of remuneration in certain circumstances. Any concerns about 
manipulation due to permitting aggregation could be addressed by 
requiring employers to aggregate (or not aggregate) earnings and losses 
consistently from year to year, with changes allowed only 
infrequently--for example, every 3 years--unless in response to changes 
in the composition of the group of related organizations.
    These final regulations do not adopt the commenter's suggestion to 
permit the aggregation of earnings and losses among related 
organizations. The commenter's suggestions would be feasible among 
related organizations only if they agreed to either aggregate or 
disaggregate arrangements as to all employees and also to coordinate 
and integrate their remuneration calculations across the separate plans 
and arrangements that each employer established to permit timely and 
accurate calculations for each covered employee (and employees that may 
become covered employees) who participated in more than one employer 
arrangement. Even if this was feasible for a particular year, the 
regulatory framework would need to account for the entry and departure 
of members of the group of related organizations and how the 
aggregation or disaggregation would account for those events. This 
regime would be complex and burdensome for taxpayers and the IRS to 
administer and is not warranted due to the limited potential benefits. 
In addition, the aggregation of earnings and losses across related 
employers would implicate the statutory allocation of the liability for 
the tax on excess remuneration under section 4960(c)(4)(C), since the 
aggregation of earnings and losses would impact the relative 
remuneration paid by the separate employers.

E. Request for a Grandfathering Rule

    One commenter suggested that these final regulations provide for 
grandfathering of employee remuneration contracts executed on or before 
November 2, 2017, so that amounts paid under such contracts would not 
be treated as remuneration for purposes of section 4960. The commenter 
reasoned that the grandfathering of employee remuneration contracts 
executed on or before November 2, 2017, would help certain employers in 
overcoming challenges in hiring executives, and that the legislative 
history of the TCJA failed to consider the differences between tax-
exempt employers and their taxable counterparts. The final regulations 
do not adopt the commenter's suggested rule. Section 13602(c) of TCJA, 
which added section 4960 to the Code, did not provide for a 
grandfathering rule and there is no indication in the legislative 
history that Congress intended that one be adopted by regulation. In 
contrast, section 13601 of TCJA amended section 162(m) of the Code and 
provided an explicit grandfathering rule. Under these circumstances, 
the Treasury Department and the IRS do not find it appropriate to 
provide a grandfathering rule. However, these final regulations

[[Page 6209]]

provide rules that have the effect of grandfathering remuneration that 
vested before the taxpayer's first taxable year beginning after 
December 31, 2017.
    Section III.E. of the Explanation of Provisions of the proposed 
regulations, titled ``Request for a Grandfather Rule,'' explained that 
one of the consequences of treating remuneration as paid at the time 
the remuneration vests is that any remuneration that vested prior to 
the first day of the first taxable year of the ATEO beginning after 
December 31, 2017, is not considered remuneration for purposes of 
section 4960. One commenter recommended that the Treasury Department 
and the IRS explicitly reflect this rule in these final regulations. In 
response to this comment, these final regulations provide that any 
vested remuneration, including vested but unpaid earnings accrued on 
deferred amounts, that is treated as paid before the effective date of 
section 4960 (January 1, 2018, for a calendar year employer) is not 
subject to the excise tax imposed under section 4960(a)(1). All 
earnings on those vested amounts that accrue or vest after the 
effective date, however, are treated as remuneration paid for purposes 
of section 4960(a)(1).
    Similarly, for an employee who has vested compensation from years 
prior to the taxable year in which the employee first became a covered 
employee, these final regulations adopt the rule in the proposed 
regulations providing that vested remuneration (including vested but 
unpaid earnings) that would have been treated as remuneration paid for 
a taxable year before the taxable year in which an employee first 
became a covered employee under section 4960 is not remuneration 
subject to the excise tax imposed by section 4960(a)(1) for the first 
taxable year in which the employee becomes a covered employee or any 
subsequent year. However, subsequent earnings that accrue on those 
vested amounts when the employee is a covered employee are treated as 
remuneration paid for purposes of section 4960(a)(1).

F. Remuneration Paid to a Covered Employee for Which a Deduction Is 
Disallowed Under Section 162(m)

    Section 4960(c)(6) provides that remuneration for which a deduction 
is disallowed under section 162(m) is not taken into account for 
purposes of section 4960. Thus, remuneration that is paid to a covered 
employee of an ATEO who is also a covered employee of a related 
``publicly held corporation'' or an applicable individual of a related 
``covered health insurance provider'' (as defined in section 162(m)(2) 
and (m)(6)(C), respectively), for which a deduction is disallowed under 
section 162(m), generally is not treated as remuneration for purposes 
of determining whether remuneration has been paid. However, that 
remuneration is taken into account for purposes of determining the 
ATEO's five highest-compensated employees. See section II.E. of this 
Summary of Comments and Explanation of Revisions, titled ``Covered 
Employee.''
    As discussed in section III.F. of the Explanation of Provisions of 
the proposed regulations, titled ``Remuneration Paid to a Covered 
Employee for Which a Deduction Is Disallowed Under Section 162(m),'' 
the application of this provision raises significant issues stemming 
largely from the difference in timing between the payment of 
remuneration under section 4960 (when the right to the amount vests), 
and the availability of a deduction that may be restricted by section 
162(m) (generally when the amount is paid). Section III.F. of the 
Explanation of Provisions of the proposed regulations, titled 
``Remuneration Paid to a Covered Employee for Which a Deduction Is 
Disallowed Under Section 162(m),'' described two possible approaches 
for addressing these circumstances and requested comments on those 
approaches. The Treasury Department and the IRS continue to consider 
the issues raised by this provision in section 4960(c)(6) requiring 
coordination with section 162(m), including the comments submitted, but 
have not yet determined the appropriate manner of implementation. 
Accordingly, these final regulations do not address the coordination of 
sections 4960 and 162(m) in these circumstances, but instead reserve a 
section of these final regulations as a place for future guidance.
    Until that future guidance is issued, taxpayers may use a 
reasonable, good faith approach with respect to the coordination of 
sections 4960 and 162(m) in circumstances in which it is not known 
whether a deduction for the remuneration will be disallowed under 
section 162(m) by the due date (including any extension) of the 
relevant Form 4720. For this purpose, a reasonable, good faith approach 
must have a reasonable basis for anticipating that the compensation 
that a particular employee will be paid in the future may be subject to 
the deduction limitations of section 162(m). For example, it is not 
reasonable for this purpose to anticipate that an ATEO may become a 
public corporation by the date the compensation will be paid absent 
facts indicating that is a realistic potentiality. Additionally, until 
further guidance is issued, the two approaches regarding deferred 
compensation described in section III.F. of the Explanation of 
Provisions of the proposed regulations, titled ``Remuneration Paid to a 
Covered Employee for Which a Deduction Is Disallowed Under Section 
162(m),'' will be treated as reasonable, good faith approaches. 
However, a third approach suggested by a commenter, under which section 
162(m) would not disallow a taxpayer's deduction for remuneration that 
the taxpayer treated as excess remuneration under section 4960 in a 
previous taxable year, will not be treated as a reasonable, good faith 
approach, because such an approach would be inconsistent with section 
162(m) and the regulations thereunder.

IV. Excess Remuneration

    In general, the excise tax imposed under section 4960(a)(1) is 
based on the remuneration paid (other than any excess parachute 
payment) by an ATEO for the taxable year with respect to employment of 
any covered employee in excess of $1 million. Consistent with the 
proposed regulations, these final regulations refer to this amount as 
``excess remuneration.'' The $1 million threshold provided in section 
4960(a)(1) is not adjusted for inflation, and an amount subject to tax 
under section 4960(a)(2) as an excess parachute payment is not subject 
to tax under section 4960(a)(1) as excess remuneration.
    As provided in section 4960(c)(4)(C), if an individual performs 
services as an employee for two or more related organizations during an 
applicable year, one or more of which is an ATEO, each employer is 
liable for its proportionate share of the excise tax. These final 
regulations adopt the rules provided in the proposed regulations for 
allocating liability for the excise tax among the employers. For this 
purpose, remuneration that is paid by a separate organization (whether 
related to the ATEO or not) for services performed as an employee of 
the ATEO is treated as remuneration paid by the ATEO. For a further 
discussion of when amounts are treated as paid by an ATEO, see section 
VI of this Summary of Comments and Explanation of Revisions, titled 
``Calculation, Reporting, and Payment of the Tax.''

V. Excess Parachute Payments

A. In General

    The proposed regulations set forth rules with respect to excess 
parachute payments under section 4960. No

[[Page 6210]]

comments were received on these rules, and these final regulations 
adopt them without change. Section 4960(a)(2) imposes an excise tax on 
any excess parachute payment. Section 4960(c)(5)(A) provides that 
``excess parachute payment'' means an amount equal to the excess of any 
parachute payment over the portion of the base amount allocated to such 
payment. Section 4960(c)(5)(B) provides that ``parachute payment'' 
means any payment in the nature of compensation to (or for the benefit 
of) a covered employee if the payment is contingent on the employee's 
separation from employment with the employer and the aggregate present 
value of the payments in the nature of compensation to (or for the 
benefit of) the individual that are contingent on the separation equals 
or exceeds an amount equal to 3-times the base amount. Under section 
4960(c)(5)(C), certain retirement plan payments, certain payments to 
licensed medical professionals, and payments to an individual who is 
not a ``highly compensated employee'' (HCE) as defined in section 
414(q) are not excess parachute payments.\9\
---------------------------------------------------------------------------

    \9\ Under section 414(q), a ``highly compensated employee'' 
generally is defined as any employee who was a five-percent owner at 
any time during the year or the preceding year or who had 
compensation from the employer in the preceding year in excess of an 
inflation-adjusted amount. Notice 2019-59 (2019-47 I.R.B. 1091) and 
Notice 2020-79 (2020-46 I.R.B 1014), provide that the inflation-
adjusted amounts for 2020 and 2021 are $130,000 and $130,000, 
respectively. See section 414(q) and the regulations thereunder for 
additional rules, including the availability of an election to treat 
no more than the top 20 percent of an employer's employees as highly 
compensated employees by reason of their compensation.
---------------------------------------------------------------------------

    The excess parachute payment rules under section 4960 are modeled 
after section 280G, but section 4960(c)(5)(B) defines ``parachute 
payment'' differently than section 280G(b)(2). The section 4960 
definition refers to payments contingent on an employee's separation 
from employment, whereas the section 280G definition refers to payments 
contingent on a change in the ownership or effective control of a 
corporation (or in the ownership of a substantial portion of the assets 
of the corporation). While these final regulations incorporate many of 
the concepts found in the rules under Sec.  1.280G-1, with 
modifications to reflect the statutory differences between sections 
280G and 4960, they do not incorporate other rules under Sec.  1.280G-1 
because those rules address issues that do not arise under section 
4960. In addition, many provisions in these final regulations do not 
have parallel rules under Sec.  1.280G-1 because they address issues 
that arise under section 4960, but not under section 280G.
    The following sections provide a general overview of these final 
regulations for purposes of calculating the excise tax imposed under 
section 4960(a)(2), noting certain similarities and differences between 
these final regulations and the rules under Sec.  1.280G-1. For more 
information concerning these rules, including additional similarities 
and differences with the rules under section 280G, see section V of the 
Explanation of Provisions of the proposed regulations, titled ``Excess 
Parachute Payments.''

B. Definitions Related to Excess Parachute Payments

    These final regulations define ``excess parachute payment'' and the 
term ``parachute payment'' for purposes of section 4960. Any payment in 
the nature of compensation made by an ATEO (or any predecessor or 
related organization) to a covered employee that is contingent on the 
employee's separation from employment is taken into account for 
purposes of the parachute payment calculation, assuming no exclusion 
applies. Those combined payments constitute a parachute payment if the 
aggregate present value of all such payments made to an individual 
equals or exceeds 3-times the individual's base amount. A parachute 
payment is an excess parachute payment to the extent it exceeds one-
times the individual's base amount allocated to the payment.
    These final regulations define a ``payment in the nature of 
compensation'' based on Sec.  1.280G-1, Q/A-11 and Q/A-14. In general, 
any payment arising out of an employment relationship is a payment in 
the nature of compensation. A payment in the nature of compensation is 
reduced, however, by any consideration paid by the covered employee in 
exchange for the payment.

C. Payments Contingent on a Separation From Employment

1. In General
    Although section 4960 does not define what it means for a payment 
to be contingent on a separation from employment, these final 
regulations generally treat a payment as contingent on an employee's 
separation from employment only if there is an involuntary separation 
from employment. If the payment is subject to a substantial risk of 
forfeiture (defined in a manner consistent with section 457(f)) that 
lapses upon an involuntary separation from employment, and the 
separation causes the risk of forfeiture to lapse, the payment is 
contingent on separation from employment.
2. Requirement of Involuntary Separation From Employment
    Separation from employment (whether voluntary or involuntary) often 
is used in compensation arrangements as a trigger to pay vested 
compensation. For example, it is typical for a nonqualified deferred 
compensation plan to provide that a payment or a series of payments 
will be made or begin upon a separation from employment, including 
separation from employment resulting from death or disability. The 
vested amounts that are to be paid after a separation from employment 
generally are not treated as contingent on a separation from employment 
because the amounts will never be subject to forfeiture or otherwise 
not paid (even if an employee does not voluntarily or involuntarily 
terminate employment during the employee's lifetime, the payments will 
be made upon the employee's death). In these cases, the separation from 
employment functions only as a payment timing event and is neither a 
contingent event that may not occur nor a precondition to entitlement 
to the payment.
3. Definition of ``Involuntary Separation From Employment''
    If an amount is payable solely upon an involuntary separation from 
employment, then it is a payment contingent on an event that may not 
occur and that is a precondition to entitlement to the payment. The 
definition of an ``involuntary separation from employment'' set forth 
in these final regulations is modeled after the definition of an 
``involuntary separation from service'' in Sec.  1.409A-1(n)(1), which 
also was the model for the definition of an ``involuntary severance 
from employment'' under Prop. Sec.  1.457-11(d)(2). A separation from 
employment for good reason is treated as an involuntary separation from 
employment for purposes of section 4960 if certain conditions are met. 
For this purpose, these regulations generally adopt the standards set 
forth in Sec.  1.409A-1(n)(2) and Prop. Sec.  1.457-11(d)(2)(ii).
    These final regulations generally adopt the standards of the 
section 409A regulations for purposes of determining whether there has 
been a separation from employment, except that for purposes of section 
4960 a bona fide change from employee to independent contractor status 
is treated as a

[[Page 6211]]

separation from employment. Because the section 409A regulations do not 
provide a standard for determining when an involuntary change of status 
from employee to independent contractor results in a separation from 
employment, in section V.C.3. of the Explanation of Provisions of the 
proposed regulations, titled ``Definition of `Involuntary Separation 
from Employment,' '' the Treasury Department and the IRS requested 
comments on whether additional guidance is needed on this issue. No 
comments were received in response to that request. Consistent with the 
proposed regulations, these final regulations provide that a separation 
from employment occurs in the case of a bona fide and involuntary 
change of status from employee to independent contractor in 
circumstances in which the change in status otherwise meets the 
requirements for an involuntary separation from employment.
    With respect to when an employee otherwise has terminated 
employment, these final regulations adopt rules based on the section 
409A regulations. Specifically, these regulations adopt the standards 
of Sec.  1.409A-1(h)(1)(ii), providing that an anticipated reduction in 
the level of services of more than 80 percent is treated as a 
separation from employment, an anticipated reduction in the level of 
services of less than 50 percent is not treated as a separation from 
employment, and the treatment of an anticipated reduction between these 
two levels will depend on the facts and circumstances. The measurement 
of the anticipated reduction in the level of services is based on the 
average level of bona fide services performed over the immediately 
preceding 3 years (or shorter period for an employee employed for less 
than 3 full prior years). However, these regulations do not adopt the 
rule in Sec.  1.409A-1(h)(1)(ii), under which an employer may modify 
the level of the anticipated reduction in future services that will be 
considered to result in a separation from employment.
4. When a Payment Is Contingent on Separation From Employment
    In defining when a payment is contingent on separation from 
employment, these final regulations do not focus solely on whether the 
payment would not have been made but for a separation from employment, 
but also take into consideration whether the separation from employment 
accelerates the right to payment or the lapse of a substantial risk of 
forfeiture with respect to the right to payment. Generally, if the 
payment or the lapse of a substantial risk of forfeiture is accelerated 
as a result of an involuntary separation from employment (such as a 
payment that otherwise would have vested and been paid had the employee 
remained employed for a subsequent period), then the value of any 
accelerated payment plus the value of any lapse of the substantial risk 
of forfeiture is treated as contingent on a separation from employment 
(since the employer would not have provided the increased value in the 
absence of an involuntary separation from employment).
    However, if the lapse of the substantial risk of forfeiture is 
dependent on an event other than the performance of services, such as 
the attainment of a performance goal, and if that event does not occur 
prior to the employee's separation from employment, but the payment 
vests due to the employee's involuntary separation from employment, 
then the full amount of the payment is treated as contingent on the 
separation from employment.
    As discussed in section V.C.4. of the Explanation of Provisions of 
the proposed regulations, titled ``When a Payment Is Contingent on 
Separation from Employment,'' a payment the right to which is not 
subject to a substantial risk of forfeiture within the meaning of 
section 457(f)(3)(B) at the time of an involuntary separation from 
employment generally is not contingent on a separation from employment 
(since the right to the payment is not triggered by the separation from 
employment). However, the increased value of a payment accelerated due 
to the involuntary separation from employment, and the value of 
accelerated vesting due to the involuntary separation from employment, 
each generally are treated as a payment contingent on a separation from 
employment. In addition, a payment for damages due to the breach of an 
employment agreement that is related to an involuntary separation from 
employment generally constitutes a payment contingent on a separation 
from employment, and a payment for compliance with a noncompetition 
agreement or similar arrangement may, in certain situations, constitute 
a payment contingent on a separation from employment.
    Actual or constructive payment of an amount that was previously 
includible in gross income is not a payment contingent on a separation 
from employment. For example, a payment of deferred compensation after 
an involuntary separation from employment that vested based on years of 
service completed before the involuntary separation from employment 
generally is not a payment that is contingent on a separation from 
employment because the separation from employment may affect the time 
of, but not the right to, the payment (although the value of an 
acceleration of the payment may be contingent on a separation from 
employment).
    Unlike Q/A-25 and Q/A-26 of Sec.  1.280G-1, these regulations do 
not provide a presumption that a payment made pursuant to an agreement 
entered into or modified within 12 months of a separation from 
employment is a payment that is contingent on a separation from 
employment. However, as discussed later in this section, if the facts 
and circumstances demonstrate that either the vesting or the payment of 
an amount would not have occurred but for the involuntary nature of the 
separation from employment, the amount will be treated as a payment 
contingent on a separation from employment.
    In addition, these final regulations do not provide a rule similar 
to Sec.  1.280G-1, Q/A-9 (exempting reasonable compensation for 
services rendered on or after a change in ownership or control from the 
definition of ``parachute payment''), which would exclude reasonable 
compensation for services provided after a separation from employment. 
In most cases, the issue of whether payments made after a separation 
from employment are reasonable compensation for services will not arise 
because the employee will not provide services after the separation 
from employment. However, if the employee continues to provide services 
(including as a bona fide independent contractor) after an involuntary 
separation from employment, payments for those services are not 
contingent on the involuntary separation from employment to the extent 
those payments are reasonable and are not made due to the involuntary 
nature of the separation from employment.
    Notwithstanding the foregoing, if the facts and circumstances 
demonstrate that either vesting or payment of an amount (whether before 
or after an involuntary separation from employment) would not have 
occurred but for the involuntary nature of the separation from 
employment, the amount will be treated as contingent on a separation 
from employment. For example, an employer's exercise of discretion to 
accelerate vesting of an amount shortly before an involuntary 
separation from employment may indicate that the acceleration of 
vesting was due to the involuntary nature of the separation from 
employment and was

[[Page 6212]]

therefore contingent on the employee's separation from employment.
    In section V.C.4. of the Explanation of Provisions of the proposed 
regulations, titled ``When a Payment Is Contingent on Separation from 
Employment,'' the Treasury Department and the IRS requested comments on 
whether there are additional types of payments made in connection with 
separation from employment and the extent to which these final 
regulations under section 4960 should be modified to ensure appropriate 
classification of those payments as contingent or not contingent on 
separation from employment. No comments were received in response to 
this request, and no modifications have been made in the final 
regulations.

D. Three-Times-Base-Amount Test

    Section 4960(c)(5) provides rules for determining the tax on any 
excess parachute payment imposed under section 4960(a)(2). Section 
4960(c)(5)(B) provides that a payment is a parachute payment only if 
the aggregate present value of the payments in the nature of 
compensation to (or for the benefit of) an individual that are 
contingent on a separation from employment equals or exceeds an amount 
equal to 3-times the base amount. Section 4960(c)(5)(D) provides that 
rules similar to the rules of section 280G(b)(3) apply for purposes of 
determining the base amount, and section 4960(c)(5)(E) provides that 
rules similar to the rules of section 280G(d)(3) and (4) apply for 
purposes of present value determinations. Section 280G(b)(3) provides 
that ``base amount'' means an individual's annualized includible 
compensation for the base period. Section 280G(d)(2) defines ``base 
period'' as the period consisting of the 5 most-recent taxable years of 
the service provider ending before the date on which the change in 
ownership or control occurs or the portion of such period during which 
the individual performed personal services for the corporation.
    These final regulations provide that the ``base amount'' is the 
average annual compensation as an employee of the ATEO (including 
services performed as an employee of a predecessor or related 
organization) for the taxable years in the ``base period.'' The base 
period is the 5 most-recent taxable years during which the individual 
was an employee of the ATEO (or predecessor or related organization) or 
the portion of the 5-year period during which the employee was an 
employee of the ATEO (or predecessor or related organization).
    These final regulations provide rules for determining whether a 
payment is an excess parachute payment, including rules for applying 
the 3-times-base-amount test. The rules for determining the base 
amount, base period, and present value, including determining the 
present value of payments that are contingent on uncertain future 
events, are based on the rules under Sec.  1.280G-1, Q/A-30 through Q/
A-36 (substituting an involuntary separation from employment for a 
change in control). These final regulations describe when a payment in 
the nature of compensation is considered made for purposes of section 
4960(a)(2), based on the rules in Sec.  1.280G-1, Q/A-11 through Q/A-
14. Consistent with the rules provided under Sec.  1.280G-1, Q/A-12(a), 
these final regulations provide that the transfer of section 83 
property generally is considered a payment made in the taxable year in 
which the fair market value of the property would be includible in the 
gross income of the covered employee under section 83, disregarding any 
election made by the employee under section 83(b) or (i). In addition, 
similar to the rules provided under Sec.  1.280G-1, Q/A-13(a), these 
regulations generally provide that stock options are treated as 
property transferred on the date of vesting (regardless of whether the 
option has a ``readily ascertainable value'' as defined in Sec.  1.83-
7(b)). For purposes of determining the timing and amount of any payment 
related to an option, the principles of Sec.  1.280G-1, Q/A-13 and Rev. 
Proc. 2003-68 (2003-2 C.B. 398) apply.

E. Computation of Excess Parachute Payments

    Consistent with section 4960(c)(5)(A), these final regulations 
provide that an ``excess parachute payment'' is an amount equal to the 
excess of any parachute payment over the portion of the base amount 
allocated to the payment. The portion of the base amount allocated to 
any parachute payment is the amount that bears the same ratio to the 
base amount as the present value of the parachute payment bears to the 
aggregate present value of all parachute payments to be made to the 
covered employee. The rules on allocation of the base amount in these 
regulations are based on Sec.  1.280G-1, Q/A-38.

VI. Calculation, Reporting, and Payment of the Tax

    ATEOs (and any related non-ATEO organizations) are liable for the 
excise tax imposed by section 4960 only if they pay a covered employee 
sufficient remuneration to trigger the tax. An ATEO is not subject to 
the excise tax under section 4960(a)(1) unless the ATEO (together with 
any related organizations) pays more than $1 million of remuneration to 
a covered employee for a taxable year. An ATEO cannot make an excess 
parachute payment subject to the excise tax under section 4960(a)(2) if 
the employer does not have any HCEs under section 414(q) \10\ for the 
taxable year. If both of these situations apply to an ATEO, the ATEO is 
not liable for any excise tax under section 4960 for that taxable year.
---------------------------------------------------------------------------

    \10\ See footnote 9.
---------------------------------------------------------------------------

    These final regulations generally adopt the proposed rules 
regarding the entity that is liable for the excise tax under section 
4960 and how that excise tax is calculated. These regulations provide 
that the employer, as determined under section 3401(d), without regard 
to paragraph (d)(1) or (d)(2), is liable for the excise tax imposed 
under section 4960. Further, as authorized by section 4960(d), a 
payment by the employer may be treated as remuneration or a parachute 
payment if, based on the facts and circumstances, the payment is 
structured such that it has the effect of avoiding the tax applicable 
under section 4960. For example, the excise tax under section 4960 
would apply with respect to an individual who is an employee of an ATEO 
or related organization but who is incorrectly classified as an 
independent contractor. Similarly, the excise tax under section 4960 
would apply to an amount paid to a limited liability company or other 
entity owned all or in part by an employee (or owned by another entity 
unrelated to the ATEO or related organization) for services performed 
by an employee of the ATEO or related organization if the arrangement 
would otherwise have the effect of avoiding the tax applicable under 
section 4960. For a further discussion of the definition of 
``employer'' see section II.D. of this Summary of Comments and 
Explanation of Revisions, titled ``Employer.''

A. Calculation of Tax on Excess Remuneration

    An individual may perform services as an employee of an ATEO and as 
an employee of one or more related organizations during the same 
applicable year, in which case remuneration paid for the taxable year 
is aggregated for purposes of determining whether excess remuneration 
has been paid. To address these cases, these final regulations adopt 
the proposed rules for allocating liability for the excise tax among 
the related employers. As provided in

[[Page 6213]]

section 4960(c)(4)(C), in any case in which an ATEO includes 
remuneration from one or more related organizations as separate 
employers of the individual in determining the excise tax imposed by 
section 4960(a), each employer is liable for its proportionate share of 
the excise tax. In contrast, a payment to an individual for performing 
services as an employee of an ATEO that is made by a third-party payor 
(whether the payor is related to the ATEO or not) is remuneration paid 
by the ATEO for section 4960 purposes and thus is included with any 
remuneration paid directly by the ATEO (and the related liability is 
not allocated to the other organization). If a covered employee is 
employed by one employer when the legally binding right to the 
remuneration is granted and by a different employer at vesting, then 
the covered employee's employer at vesting is treated as paying the 
remuneration, provided the employment relationship is bona fide and not 
a means to avoid tax under section 4960. A related organization may 
become (or cease to be) related during the applicable year, in which 
case only remuneration the related organization pays (or is treated as 
paying due to vesting) to the ATEO's covered employee during the 
portion of the applicable year that it is a related organization is 
treated as paid by the ATEO for the taxable year, as provided in 
section 4960(c)(4)(A).
    If an employee is a covered employee of more than one ATEO, these 
final regulations provide that each ATEO calculates its liability under 
section 4960(a)(1), taking into account remuneration paid to the 
employee by the organizations to which it is related. These regulations 
also provide that, rather than owing tax as both an ATEO and a related 
organization for the same remuneration paid to a covered employee, each 
employer is liable only for the greater of the excise tax for which it 
would be liable as an ATEO or the excise tax it would be liable for as 
a related organization with respect to that covered employee (and if 
there is more than one related group of organizations, then for the 
group that results in the greatest amount of tax). These regulations 
provide that these same allocation principles apply in the case of the 
allocation of liability in situations involving an ATEO or related 
organization with a short taxable year, and should be applied in a 
manner that avoids, to the extent possible, duplicative taxation of 
remuneration paid to the same individual. Because the application of 
the allocation rules may prove complicated in situations involving 
short taxable years, especially if those situations also involve 
multiple short taxable years or differing taxable years among the group 
constituting the ATEO and its related organizations, the regulations 
further provide that the Commissioner may prescribe guidance of general 
applicability addressing how the allocation rules apply in particular 
circumstances involving short taxable years.
    Under section 4960(b) and (c)(4)(C), the employer or employers are 
liable for the excise tax imposed by section 4960. Related 
organizations must obtain information from each other on remuneration 
paid to covered employees in order to calculate the tax and their share 
of the liability. One commenter noted that there may be situations in 
which an employer is unable to obtain complete information on the 
remuneration and benefits paid by other employers. The commenter 
requested guidance on relief from penalties or interest for an error if 
the employer made a bona fide attempt to obtain the necessary 
information when it became aware of the error and requested guidance on 
what would be a bona fide attempt for this purpose. If an ATEO or 
related organization fails to pay tax it is liable for due to failure 
to obtain information on remuneration paid by other organizations 
within the related group, it may be liable for a civil penalty under 
section 6651 (and in some cases, criminal penalties). Section 6651 
includes an exception for reasonable cause. Guidance as to reasonable 
cause for penalty relief, and therefore the guidance requested by this 
commenter, is beyond the scope of these final regulations, and 
therefore is not addressed in these final regulations.

B. Calculation of Tax on an Excess Parachute Payment

    These final regulations adopt the proposed regulations with respect 
to the rules for the calculation of tax on an excess parachute payment. 
With respect to the calculation of, and liability for, the tax on 
excess parachute payments, the proposed regulations differed in one 
respect from the guidance provided in Q/A-1 of Notice 2019-09. Notice 
2019-09 provided that an ATEO or related organization may be liable for 
the tax on an excess parachute payment based on the aggregate parachute 
payments made by the ATEO and its related organizations, including 
parachute payments based on separation from employment from a related 
organization. As in the proposed regulations, these final regulations 
provide that only an excess parachute payment paid by an ATEO is 
subject to the excise tax on excess parachute payments. However, 
consistent with the provision in section 4960(c)(5)(D) that rules 
similar to section 280G(b)(3) apply for purposes of determining the 
base amount under section 4960, payments from all related organizations 
(including payments from non-ATEOs) are considered for purposes of 
determining the base amount and total payments in the nature of 
compensation that are contingent on the covered employee's separation 
from employment with the employer. See Sec.  1.280G-1, Q/A-34. 
Generally, this means that a covered employee's base amount calculation 
includes remuneration from the ATEO and all related organizations, and 
that a covered employee's parachute payment calculation includes all 
payments (made by the ATEO and all related organizations) that are 
contingent on the employee's involuntary separation from employment. 
However, only an ATEO is subject to the excise tax on excess parachute 
payments it makes to a covered employee. A non-ATEO that pays an amount 
that would otherwise be an excess parachute payment is not subject to 
the excise tax. These regulations further provide that, based on the 
facts and circumstances, the Commissioner may reallocate excess 
parachute payments to an ATEO if it is determined that excess parachute 
payments were made by a non-ATEO for the purpose of avoiding the tax 
under section 4960. Step by step instructions for calculating the tax 
on excess parachute payments were provided in section VI.B. of the 
Explanation of Provisions of the proposed regulations, titled 
``Calculation of Tax on an Excess Parachute Payment.''

C. Reporting and Payment of the Tax

    These final regulations adopt without change the rules provided in 
the proposed regulations relating to the reporting and payment of the 
excise tax. Under Sec. Sec.  53.6011-1 and 53.6071-1, the excise tax 
under section 4960 is reported on Form 4720, ``Return of Certain Excise 
Taxes Under Chapters 41 and 42 of the Internal Revenue Code,'' which is 
the form generally used for reporting and paying chapter 42 taxes. The 
reporting and payment of any applicable taxes are due when payments of 
chapter 42 taxes are ordinarily due (the 15th day of the 5th month 
after the end of the taxpayer's taxable year--May 15 for a calendar 
year employer), subject to an extension of time for filing returns and 
making payments \11\ that generally

[[Page 6214]]

applies. Because section 6655 has not been amended to include section 
4960, no quarterly payments of estimated excise tax imposed by section 
4960 are required under section 6655.
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    \11\ The tentative tax, an estimate, must be paid by the due 
date of Form 4720 without extensions and may be paid with Form 8868, 
``Application for Automatic Extension of Time To File an Exempt 
Organization Return.''
---------------------------------------------------------------------------

    These final regulations require that the excise tax imposed by 
section 4960 be reported and paid in the form and manner prescribed by 
the Commissioner, and Sec.  53.6011-1 requires that every person 
(including a governmental entity) liable for the excise tax imposed by 
section 4960 shall file Form 4720, ``Return of Certain Excise Taxes 
Under Chapters 41 and 42 of the Internal Revenue Code.'' Notice 2019-
09, Q/A-33(a) required each employer liable for the excise tax imposed 
by section 4960 to file a separate Form 4720 to report its share of 
liability. Two commenters recommended allowing related employers to 
file a joint Form 4720, as has been permitted in Sec.  53.6011-1(c) for 
private foundations and their disqualified persons and foundation 
managers. In addition to being beyond the scope of these regulations, 
permitting joint filing of Form 4720 is incompatible with electronic 
filing of Form 4720 that is required for certain tax-exempt 
organizations under the Taxpayer First Act, Public Law 116-25. See 
Notice 2021-01.
    These final regulations also provide that an employer may elect to 
prepay the excise tax imposed under section 4960(a)(2) for excess 
parachute payments in the year of separation from employment or any 
taxable year prior to the year in which the parachute payment is 
actually paid. This prepayment rule for the tax applicable to excess 
parachute payments is similar to the rule in Sec.  1.280G-1, Q/A-11(c), 
under which a disqualified employee may elect to prepay the excise tax 
under section 4999 based on the present value of the excise tax that 
would be owed by the employee when the parachute payments are actually 
made.

VII. Applicability Date

    These final regulations were proposed to apply to taxable years 
beginning after December 31 of the calendar year in which the Treasury 
decision adopting these rules as final regulations is published in the 
Federal Register. The Treasury Department and the IRS requested 
comments on the burdens anticipated and the timeframe expected to be 
necessary to implement these final regulations (taking into account 
that the statutory provisions are already effective).
    One commenter recommended that these final regulations apply to 
taxable years beginning after December 31 of the calendar year that 
ends at least six months after the date on which these final 
regulations are published in the Federal Register in order for ATEOs 
and related organization to have sufficient time to understand and 
apply these final regulations. The Treasury Department and the IRS 
agree with this recommendation, and therefore these final regulations 
apply to taxable years beginning after December 31, 2021 (with the 
first applicable year generally being the 2022 calendar year).
    The guidance provided in these final regulations and the proposed 
regulations generally is consistent with the guidance provided in 
Notice 2019-09. Until the applicability date of these final 
regulations, taxpayers may rely on the guidance provided in Notice 
2019-09 in its entirety or on the proposed regulations in their 
entirety. Alternatively, taxpayers may choose to apply these final 
regulations to taxable years beginning after December 31, 2017, and on 
or before December 31, 2021, provided they apply the final regulations 
in their entirety and in a consistent manner.
    Until the applicability date of these final regulations, taxpayers 
may also base their positions upon a reasonable, good faith 
interpretation of the statute that includes consideration of any 
relevant legislative history. Whether a taxpayer's position that is 
inconsistent with Notice 2019-09, the proposed regulations, or these 
final regulations constitutes a reasonable, good faith interpretation 
of the statute generally will be determined based upon all of the 
relevant facts and circumstances, including whether the taxpayer has 
applied the position consistently and the extent to which the taxpayer 
has resolved interpretive issues based on consistent principles and in 
a consistent manner. Notwithstanding the previous sentence, the 
preamble to Notice 2019-09 describes certain positions that the 
Treasury Department and the IRS have concluded are not consistent with 
a reasonable, good faith interpretation of the statutory language, and 
the proposed regulations and these final regulations reflect this view. 
For a description of each of these positions, see section VII of the 
Explanation of Provisions of the proposed regulations, titled 
``Proposed Applicability Date.''

Special Analyses

I. Regulatory Planning and Review

    Executive Orders 13771, 13563, and 12866 direct agencies to assess 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing rules, and of promoting 
flexibility. The Executive Order 13771 designation for this rule is 
``regulatory.''
    The regulations have been designated as subject to review under 
Executive Order 12866 pursuant to the Memorandum of Agreement (April 
11, 2018) between the Treasury Department and the Office of Management 
and Budget (OMB) regarding review of tax regulations. The Office of 
Information and Regulatory Affairs (OIRA) has designated the rulemaking 
as significant under section 1(c) of the Memorandum of Agreement. 
Accordingly, OMB has reviewed the regulations.

A. Background

1. The Excise Tax Under Section 4960
    Section 4960 was added to the Code by TCJA. Section 4960(a) 
subjects excess remuneration above $1 million and excess parachute 
payments that an ATEO pays to a covered employee to an excise tax equal 
to the rate of tax imposed on corporations under section 11 (21 percent 
for 2020). Before TCJA, compensation paid by tax-exempt organizations 
was not subject to an excise tax, although section 4958 applies an 
excise tax to penalize excess benefit transactions in which an 
``applicable tax-exempt organization'' (as defined in section 4958) 
provides a benefit to a disqualified person that exceeds the reasonable 
fair market value of the services received.
    Section 4960 defines an ``ATEO'' as any organization which is 
exempt from taxation under section 501(a), is a farmers' cooperative 
organization described in section 521(b)(1), has income excluded from 
taxation under section 115(1), or is a political organization described 
in section 527(e)(1). Covered employees of an ATEO include the five 
highest-compensated employees of the organization for the taxable year 
and any employee or former employee who was a covered employee of the 
organization (or predecessor) for any

[[Page 6215]]

preceding taxable year beginning after December 31, 2016.
    ``Remuneration'' means ``wages'' as defined in section 3401(a) 
(excluding designated Roth contributions) and includes amounts required 
to be included in gross income under section 457(f). Section 4960 
excludes from remuneration any amount paid to a licensed medical 
professional for medical or veterinary services provided. Remuneration 
also includes payments with respect to employment of a covered employee 
by any person or government entity related to the ATEO. A person or 
governmental entity is treated as related to the ATEO if that person or 
governmental entity controls, or is controlled by, the ATEO, is 
controlled by one or more persons which control the ATEO, is a 
``supported organization'' (as defined in section 509(f)(3)) during the 
taxable year with respect to the ATEO, is a supporting organization 
described in section 509(a)(3) during the taxable year with respect to 
the ATEO, or in the case of an organization which is a voluntary 
employees' beneficiary association (VEBA) under section 501(c)(9), 
established, maintains, or makes contribution to such VEBA.
2. Notice 2019-09 and the Proposed and Final Regulations
    Notice 2019-09 provided taxpayers with initial guidance on the 
application of section 4960, including that taxpayers may base their 
positions on a reasonable, good faith interpretation of the statute 
until further guidance is issued. On June 11, 2020, the Treasury 
Department and the IRS published proposed regulations on section 4960 
in the Federal Register (REG-122345-18, 85 FR 35746) (the proposed 
regulations). The Treasury Department and the IRS received comments 
responding to the proposed regulations, which were considered in these 
final regulations, published here. The comments primarily discussed the 
treatment of employees of a related organization who also provide 
services to the ATEO, suggesting various exceptions for these 
situations. Comments also addressed the possibility of a grandfather 
rule for compensation to be paid under arrangements in place prior to 
the effective date of section 4960, treatment of deferred compensation 
as remuneration, the definition of ``control,'' and which organizations 
are ATEOs.

B. Baseline

    The Treasury Department and the IRS have assessed the benefits and 
costs of the final regulations relative to a no-action baseline 
reflecting anticipated Federal income tax-related behavior in the 
absence of these regulations.

C. Affected Entities

    The final regulations affect an estimated 261,000 ATEOs and 77,000 
non-ATEO related organizations of ATEOs that in historical filings 
report substantial executive compensation.\12\ Of the roughly 261,000 
such ATEOs based on filings for tax year 2017, 239,000 are section 
501(a) exempt organizations (including 23,000 private foundations), 
19,000 are section 115 state and local instrumentalities, 2,000 are 
section 527 political organizations, 600 are exempt farmers' 
cooperative organizations described in section 521(b)(1), and 200 are 
federal instrumentalities (although the Treasury Department and the IRS 
will continue to consider whether federal instrumentalities are ATEOs).
---------------------------------------------------------------------------

    \12\ The methods and data used to estimate the number of 
affected entities are discussed in detail in the Paperwork Reduction 
Act special analysis.
---------------------------------------------------------------------------

D. Economic Analysis

    This section describes the key economic effects of the provisions 
of these final regulations.
1. Clarifications
    Most provisions of these final regulations clarify aspects of the 
excise tax imposed by section 4960, minimizing the burdens entities 
bear to comply with section 4960, and have little other economic 
impact. Clarifications reduce uncertainty, lowering the effort required 
to infer which organizations, employees, and payments are subject to 
the excise tax and the potential for conflict if entities and tax 
administrators interpret provisions differently. Examples of provisions 
of these final regulations that are primarily clarifications include 
the definition of ``control,'' treatment of deferred compensation and 
vesting, and which organizations are ATEOs.
2. ``Volunteer'' Exceptions
    Several commenters expressed concern that highly-paid employees of 
a non-ATEO performing services for a related ATEO without receiving 
compensation from the ATEO may be subject to the excise tax. To avoid 
the excise tax, individuals might cease performing such services, or 
ATEOs might dissolve their relationships with related non-ATEOs, 
reducing donations from related non-ATEOs.
    The final regulations include exceptions to the definitions of 
``employee'' and ``covered employees'' (specifically to the rules for 
determining the five highest compensated employees for purposes of 
identifying covered employees) to address such situations. With respect 
to the first exception, the regulations define ``employee'' consistent 
with section 3401(c), in particular adopting the rule that a director 
is not an employee in the capacity as a director and an officer 
performing minor or no services and not receiving any remuneration for 
those services is not an employee.
    The general rule provides that employees of a related non-ATEO are 
not considered for purposes of determining the five highest-compensated 
employees if they are never employees of the ATEO. In addition, 
individuals who receive no remuneration (or grant of a legally binding 
right to remuneration) from the ATEO or a related organization cannot 
be among the ATEO's five highest-compensated employees.
    Under the exceptions, an ATEO's five highest-compensated employees 
also exclude an employee of the ATEO who receives no remuneration from 
the ATEO and performs only limited hours of service for the ATEO, which 
means that no more than 10 percent of total annual hours worked for the 
ATEO and related organizations are for services performed for the ATEO. 
An employee who performs fewer than 100 hours of services as an 
employee of an ATEO and its related ATEOs is treated as having worked 
less than 10 percent of total hours for the ATEO and related ATEOs. An 
employee who is not compensated by an ATEO, related ATEO, or any 
taxable related organization controlled by the ATEO and who primarily 
(more than 50 percent of total hours worked) provides services to a 
related non-ATEO is also disregarded. In response to comments on the 
proposed regulations expressing concern that this exception did not 
provide sufficient flexibility for situations in which an employee of a 
non-ATEO performs services for a related ATEO as a temporary 
assignment, these final regulations provide that the 50 percent of 
total hours worked threshold can be computed over a period of two 
consecutive years, rather than a single year. This modification expands 
the exception to provide additional flexibility. An employee is also 
disregarded if an ATEO paid less than 10 percent of the employee's 
total remuneration for services performed for the ATEO and all related 
organizations, and the ATEO had at least one related ATEO during the 
applicable year. Additionally, if neither the ATEO nor any related ATEO 
paid more than 10 percent of the employee's total

[[Page 6216]]

remuneration, then the ATEO that paid the highest percent of 
remuneration does not meet this exception.
    Consider, for example, a corporate employee making $2 million per 
year who spends 5 percent of her time (roughly one day each month) 
working for the corporation's foundation, a related ATEO, without 
receiving compensation from the ATEO and who would be a covered 
employee of the ATEO absent the exceptions. Without the exceptions, her 
compensation in excess of $1 million from the corporation, which is a 
related party of the foundation, is subject to a 21 percent excise tax, 
or $210,000 in excise tax liability. The exceptions (either of the 
first two could apply here) remove that liability and the incentive it 
provides to stop providing such services or to dissolve the 
relationship between the ATEO and the related organization. The 
exceptions support a transfer of substantial value (5 percent of the 
employee's salary, or $100,000) that might otherwise not take place.
    Commenters on the proposed regulations suggested other ways in 
which the exceptions could be expanded. The Treasury Department and the 
IRS considered these suggested expansions of the exceptions and 
concluded that the suggestions were inconsistent with the statute and 
legislative history or would enable organizations to circumvent the 
excise tax in situations where an individual performs services for an 
ATEO on more than a volunteer basis, creating the potential for abuse 
and increasing the costs of administering the excise tax. Therefore, 
these final regulations do not adopt the suggested expansions of the 
exceptions.
    The exceptions in these final regulations may have a substantial 
impact on donations relative to a no-action baseline, although the 
magnitude of the potential impact depends on how often the exceptions 
apply and on how responsive organizations and employees are to the 
excise tax, both of which are uncertain.
    The exceptions apply only in particular circumstances: For example, 
the employee must be employed by a related organization (typically an 
organization that controls or is controlled by the ATEO), the employee 
must be highly compensated, and the employee's work for the ATEO must 
be sufficiently minimal. Historically, many ATEOs report employees with 
compensation from related organizations. An estimated 8,500 ATEOs 
filing Form 990 in tax year 2017 reported both compensation of $500,000 
or more for any person and any compensation from related organizations. 
These ATEOs are estimated to have an average of 18 non-ATEO related 
organizations based on information reported on Form 990 Schedule R, 
yielding an estimated 154,000 non-ATEO related organizations, of which 
half, or 77,000, are estimated to employ a covered employee of the 
ATEO. The fraction of the 154,000 non-ATEO related organizations with 
employees to whom the exceptions apply (and who are thus not covered 
employees of the ATEO) is uncertain, but perhaps half the related 
organizations, or 77,000, have such an employee.
    This entity count omits a substantial number of private foundations 
which may have employees who receive no compensation from the ATEO but 
who are highly compensated by related organizations, because while the 
ATEO count used in these estimates includes approximately 100 private 
foundations that have historically reported employee compensation of 
$500,000 or more on Form 990-PF, Form 990-PF (unlike Form 990) does not 
include information on employee compensation received from related 
organizations. The exceptions are particularly likely to apply to 
donations to foundations related to non-ATEO businesses, as companies 
are highly likely to be related organizations of a company's 
foundation, many family foundations are controlled by the same family 
that controls a private business, and executives of the related 
business often provide services to the foundation without payment from 
the foundation. Because of these facts, looking at pre-TCJA tax forms 
may underestimate the number of entities potentially affected by the 
exceptions. In the U.S. in 2015, there were about 2,000 company 
foundations responsible for $5.5 billion in giving, and 42,000 family 
foundations.\13\ It is reasonable to assume that about half of these 
foundations, or 22,000, have a related business with an employee to 
whom the exceptions apply.
---------------------------------------------------------------------------

    \13\ http://data.foundationcenter.org/.
---------------------------------------------------------------------------

    Under reasonable assumptions about the response of donated services 
to the excise tax, the exceptions may restore substantial donations 
(transfers) of services that the excise tax could potentially otherwise 
eliminate. Totaling both private foundations and other ATEOs, roughly 
99,000 related organizations are estimated to have employees to whom 
the exceptions apply. If the excise tax would have reduced services 
that are donated under the exceptions by an average of just over $5,000 
per related organization, the total transfer reduction exceeds $500 
million.
    Absent the exceptions, organizations may also avoid the excise tax 
by dissolving the relationship between the ATEO and non-ATEO, which may 
affect donations of money as well as services. Considering only 
corporate foundations and setting aside other ATEOs, if such 
dissolutions would lead to a two percent reduction in the $5.5 billion 
in corporate giving that would otherwise take place through related 
foundations, the reduction exceeds $100 million. The Treasury 
Department and the IRS requested but did not receive comments on the 
impact of the exceptions on the dissolution of relationships between 
ATEOs and related organizations.
    It is plausible that these final regulations restore substantial 
economic activity relative to regulatory alternatives, under which the 
excise tax would discourage highly-compensated employees of related 
non-ATEOs from providing services to a related ATEO without 
compensation from the ATEO and discourage relationships between ATEOs 
and non-ATEOs.
3. Summary
    This analysis suggests that these final regulations will reduce 
compliance burden on affected entities by providing clarifications and, 
through the exceptions, increase services provided to ATEOs without 
compensation from the ATEO by a small but potentially economically 
significant amount ($100 million or more), relative to regulatory 
alternatives. The Treasury Department and the IRS requested but did not 
receive comments on the economic impact of these proposed regulations 
(in particular, comments providing data, other evidence, or models that 
provide insight).

II. Paperwork Reduction Act

    The collections of information in these final regulations are in 
Sec.  53.4960-1(d), (h), and (i); Sec.  53.4960-2(a), (c) and (d); and 
Sec.  53.4960-4(a) and (d). This information is required to determine 
an ATEO's ``covered employees'' as defined in section 4960(c)(2); to 
calculate remuneration in excess of $1 million as described in section 
4960(c)(3); to determine remuneration from related organizations and 
allocation of liability as described in section 4960(c)(4); and to 
determine any excess parachute payments to covered employees described 
in section 4960(c)(5).
    The IRS intends that the burden of the collections of information 
will be reflected in the burden associated with Form 4720, under OMB 
approval

[[Page 6217]]

number 1545-0047. The burden associated with Form 4720 is included in 
the aggregated burden estimates for OMB control number 1545-0047, which 
represents a total estimated burden time for all forms and schedules of 
52.450 million hours and total estimated burden in dollars of $1.497 
billion (estimated for fiscal year 2021). The overall burden estimates 
provided for 1545-0047 are aggregate amounts that relate to all 
information collections associated with that OMB control number. This 
estimate is therefore unrelated to the future calculations needed to 
assess the burden imposed by these regulations. To guard against over-
counting the burden imposed, the Treasury Department and the IRS urge 
readers to recognize that these burden estimates are aggregates for the 
applicable types of filers. For purposes of the Paperwork Reduction 
Act, the Treasury Department and the IRS have not estimated the burden, 
including that of any new information collections, related to the 
requirements under these final regulations. Future burden estimates 
under OMB control number 1545-0047 would capture changes made by TCJA 
and changes that arise out of discretionary authority exercised in the 
regulations.
    The expected burden associated with section 4960 compliance 
(including Form 4720 preparation and filing) for ATEOs as described in 
section 4960(c)(1) and related organizations as described in section 
4960(c)(4)(B) is listed below:
    Estimated number of respondents: 337,888.
    Estimated average annual burden hours per response: 0.20 hours.
    Estimated total annual burden: $3,569,632 (2020).
    Estimated frequency of collection: Annual.
    In the proposed regulations, the Treasury Department and the IRS 
requested comments on all aspects of information collection burdens 
related to the proposed regulations, including estimates for how much 
time it would take to comply with the paperwork burdens previously 
described in this section for each relevant form and ways for the IRS 
to minimize the paperwork burden. The Treasury Department and the IRS 
did not receive any comments on these issues. Revisions (if any) to 
these forms that reflect the information collections included in these 
final regulations will be made available for public comment at https://apps.irs.gov/app/picklist/list/draftTaxForms.html and will not be 
finalized until after these forms have been approved by OMB under the 
PRA. Comments on these forms can be submitted at https://www.irs.gov/forms-pubs/comment-on-tax-forms-and-publications.
    The current status of the PRA submissions related to section 4960 
are provided in the following table.

------------------------------------------------------------------------
         Form            Type of filer     OMB No.(s)         Status
------------------------------------------------------------------------
Form 4720............  Tax-exempt             1545-0047  Published in
                        organizations                     the Federal
                        and their                         Register on 11/
                        related                           12/20. Public
                        organizations,                    comment period
                        including for-                    closes on 1/11/
                        profit and                        21.
                        government
                        entities.
------------------------------------------------------------------------

    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law.
    Generally, tax returns and return information are confidential, as 
required by 26 U.S.C. 6103.

III. Regulatory Flexibility Act

    Pursuant to the Regulatory Flexibility Act (RFA) (5 U.S.C. chapter 
6), it is hereby certified that these final regulations will not have a 
significant economic impact on a substantial number of small entities. 
In the proposed regulations, the Treasury Department and the IRS 
invited comments on the impact this rule would have on small entities. 
The Treasury Department and the IRS did not receive any comments on 
this issue.
    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) 
generally defines a ``small entity'' as (1) a proprietary firm meeting 
the size standards of the Small Business Administration (SBA) (13 CFR 
121.201), (2) a nonprofit organization that is not dominant in its 
field, or (3) a small government jurisdiction with a population of less 
than 50,000. (States and individuals are not included in the definition 
of ``small entity.'') The Treasury Department and the IRS estimate that 
these final regulations will affect 324,000 small entities, 73,000 of 
which are proprietary firms meeting the size standards of the SBA and 
251,000 of which are nonprofit organizations that are not dominant in 
their fields or small government jurisdictions with a population of 
less than 50,000.
    The Treasury Department and the IRS estimated the number of ATEOs, 
based primarily on Form 990 data for filers with at least one employee 
(and thus having a burden, at a minimum, of maintaining annual lists of 
covered employees), as 261,118, and the number of non-ATEO related 
organizations employing at least one covered employee of an ATEO as 
76,770, for a total of 337,888 affected entities. The SBA defines a 
small business as an independent business having fewer than 500 
employees. (See A Guide for Government Agencies, How to Comply with the 
Regulatory Flexibility Act, Appendix B \14\). Tax data available to the 
Treasury Department and the IRS include employee counts for only half 
the affected entities, as employee counts are included on Form 990, but 
not on other forms including Form 990-EZ and 990-PF. An examination of 
tax data from 2016 shows that for filers for whom employee counts were 
available and who had at least one employee, 96.5 percent had fewer 
than 500 employees. Similarly, there are no bright lines in the 
available data to distinguish small nonprofit organizations that are 
not dominant in their field. An examination of non-tax data shows that 
a similar proportion, approximately 96 percent, of all incorporated 
cities, towns, and villages in 2014 had a population of less than 
50,000, which may serve as a proxy for small government jurisdictions 
generally.\15\ By applying the 96 percent estimate to all entities 
affected by section 4960, the Treasury Department and the IRS estimate 
that 324,000 small entities are affected by these regulations. However, 
the Treasury Department and the IRS have determined that the rules 
regarding an ATEO's covered employees will not have a significant 
economic impact on affected small entities as described later in this 
discussion of the RFA.
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    \14\ https://advocacy.sba.gov/2017/08/31/a-guide-for-government-agencies-how-to-comply-with-the-regulatory-flexibility-act/.
    \15\ See https://www.statista.com/statistics/241695/number-of-us-cities-towns-villages-by-population-size/.
---------------------------------------------------------------------------

    Section 4960 imposes the excise tax on ATEOs and their related 
organizations to the extent they pay certain compensation to a covered 
employee. Because covered employee

[[Page 6218]]

status is permanent, every ATEO must determine its five highest-
compensated employees for the taxable year--even if the ATEO is not 
subject to the tax for that taxable year--and maintain a list of 
covered employees. Accordingly, these final rules likely will affect a 
substantial number of small entities, especially nonprofit entities 
that are not dominant in their fields.
    The Treasury Department and the IRS estimate that the vast majority 
of ATEOs, particularly small ATEOs, can determine their five highest-
compensated employees for the taxable year under the method provided in 
these final rules very quickly and at negligible cost using information 
already collected in the normal course of business. The time necessary 
to determine an ATEO's five highest-compensated employees is positively 
correlated with the size of the entity (that is, the smaller the 
entity, the less time such a determination should take). Larger ATEOs 
may need more time, but it is estimated that this determination will 
take less than seven hours. The burden for making this determination is 
estimated to fall on the small number of larger ATEOs. Putting these 
two groups together, the total estimated cost for all 261,118 ATEOs to 
make these determinations is $1,255,760 per year, averaging $4.81 per 
ATEO. Thus, it is hereby certified that these final regulations will 
not have a significant economic impact on a substantial number of small 
entities within the meaning of section 601(6) of the Regulatory 
Flexibility Act (5 U.S.C. 601 et seq.) (RFA).
    Pursuant to section 7805(f) of the Code, the proposed regulations 
preceding these final regulations were submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small entities and no comments were received.

IV. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits and take certain 
other actions before issuing a final rule that includes any Federal 
mandate that may result in expenditures in any one year by a state, 
local, or tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. This final rule does not include any Federal mandate that 
may result in expenditures by state, local, or tribal governments, or 
by the private sector in excess of that threshold.

V. Executive Order 13132: Federalism

    Executive Order 13132 (titled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial, direct compliance costs on state and local 
governments, and is not required by statute, or preempts state law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive Order. This final rule does not have 
federalism implications that are not required by the statute and does 
not impose substantial direct compliance costs on state and local 
governments or preempt state law within the meaning of the Executive 
Order.

VI. Congressional Review Act

    The Administrator of OIRA has determined that this is a major rule 
for purposes of the Congressional Review Act (5 U.S.C. 801 et seq.) 
(CRA). Under section 801(3) of the CRA, a major rule takes effect 60 
days after the rule is published in the Federal Register.
    Notwithstanding this requirement, section 808(2) of the CRA allows 
agencies to dispense with the requirements of section 801 when the 
agency for good cause finds that such procedure would be impracticable, 
unnecessary, or contrary to the public interest and the rule shall take 
effect at such time as the agency promulgating the rule determines. 
Pursuant to section 808(2) of the CRA, the Treasury Department and the 
IRS find, for good cause, that a 60-day delay in the effective date is 
unnecessary and contrary to the public interest.
    Following the addition of section 4960 to the Code by TCJA, the 
Treasury Department and the IRS published the proposed regulations 
setting forth guidance on all aspects of the law, including certain 
exceptions to the definition of ``employee'' and ``covered employee'' 
for purposes of identifying covered employees. The majority of comments 
received in response to the proposed regulations requested additional 
clarifications or modifications of the rules for these exceptions. In 
response, these final regulations include certain clarifications and 
modifications to the proposed rules. The clarifications and 
modifications in these final regulations reduce both uncertainty and 
the burden associated with application of these rules.
    In response to certain commenter requests that the applicability 
date of the final regulations be delayed after publication of the 
regulations as final in the Federal Register so that ATEOs and related 
organizations have sufficient time to understand and apply these final 
regulations, these final regulations apply to taxable years beginning 
after December 31, 2021. However, until the applicability date, 
taxpayers may choose to apply these final regulations to taxable years 
beginning after December 31, 2017, and on or before December 31, 2021, 
provided the taxpayer applies them in their entirety and in a 
consistent manner. Therefore, ATEOs and related organizations that wish 
to apply these regulations prior to the applicability date will need to 
know that these final regulations are effective before incurring 
necessary costs to timely comply with these final regulations. In 
particular, certainty that these rules are effective is essential to 
taxpayers so that they can determine whether and to what extent the 
excise tax imposed by section 4960 applies to an organization and which 
employees are covered employees, given that taxpayers will begin 
preparing their 2020 tax returns in early 2021. Further, for these 
potentially affected taxpayers, certainty with respect to these rules 
is necessary for them to proceed with several aspects of their 
operations, including employee hiring and retention, designing of 
compensatory arrangements, recordkeeping, and maintaining relationships 
between related non-ATEOs and ATEOs--including with respect to donating 
of services. Further, the COVID-19 pandemic has affected many ATEOs, 
and providing additional clarification regarding these rules, in 
particular with respect to the exceptions for purposes of determining 
covered employees, will better enable ATEOs and related organizations 
to perform financial and operational planning tasks for the tax year as 
they anticipate the easing of restrictions that have severely impacted 
their operations during the COVID-19 pandemic. Consistent with 
Executive Order 13924 (May 19, 2020), the Treasury Department and the 
IRS have therefore determined that an expedited effective date of these 
final regulations will provide critical guidance on what the law 
requires for taxpayers to determine whether the excise tax imposed by 
section 4960 applies, which employees may be considered to be covered 
employees, and what actions are required under the law as a result. 
Accordingly, the Treasury Department and the IRS have determined that 
the rules in this Treasury decision will take effect on the date of 
filing for public inspection in the Federal Register.

[[Page 6219]]

Statutory Authority

    The regulations are adopted pursuant to the authority contained in 
sections 7805 and 4960.

Drafting Information

    The principal authors of the regulations are William McNally and 
Patrick Sternal of the Office of Associate Chief Counsel (Employee 
Benefits, Exempt Organizations, and Employment Taxes). However, other 
personnel from the Treasury Department and the IRS participated in the 
development of the regulations.

Statement of Availability

    IRS Revenue Procedures, Revenue Rulings, Notices, and other 
guidance cited in this preamble are published in the Internal Revenue 
Bulletin (or Cumulative Bulletin) and are available from the 
Superintendent of Documents, U.S. Government Publishing Office, 
Washington, DC 20402, or by visiting the IRS website at https://www.irs.gov.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 53

    Excise taxes, Foundations, Investments, Lobbying, Reporting and 
recordkeeping requirements.

Amendments to the Regulations

    Accordingly, the Department of the Treasury and the Internal 
Revenue Service amend 26 CFR parts 1 and 53 as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *


0
Par. 2. Section 1.338-1 is amended by revising paragraph (b)(2)(i) to 
read as follows:


Sec.  1.338-1  General principles; status of old target and new target.

* * * * *
    (b) * * *
    (2) * * *
    (i) The rules applicable to employee benefit plans (including those 
plans described in sections 79, 104, 105, 106, 125, 127, 129, 132, 137, 
and 220), qualified pension, profit-sharing, stock bonus and annuity 
plans (sections 401(a) and 403(a)), simplified employee pensions 
(section 408(k)), tax qualified stock option plans (sections 422 and 
423), welfare benefit funds (sections 419, 419A, 512(a)(3), and 4976), 
voluntary employees' beneficiary associations (section 501(c)(9) and 
the regulations thereunder), and tax on excess tax-exempt organization 
executive compensation (section 4960) and the regulations in part 53 
under section 4960;
* * * * *

PART 53--FOUNDATION AND SIMILAR EXCISE TAXES

0
Par. 3. The authority citation for part 53 is revised to read in part 
as follows:

    Authority: 26 U.S.C. 7805; 4960.

* * * * *

0
Par. 4. Sections 53.4960-0 through 53.4960-6 are added to read as 
follows:
* * * * *
53.4960-0 Table of contents.
53.4960-1 Scope and definitions.
53.4960-2 Determination of remuneration paid for a taxable year.
53.4960-3 Determination of whether there is a parachute payment.
53.4960-4 Liability for tax on excess remuneration and excess 
parachute payments.
53.4960-5 Coordination with section 162(m) [reserved].
53.4960-6 Applicability date.
* * * * *


Sec.  53.4960-0  Table of contents.

Sec.  53.4960-1 Scope and definitions.

    (a) Scope.
    (b) Applicable tax-exempt organization.
    (1) In general.
    (i) Section 501(a) organization.
    (ii) Section 521 farmers' cooperative.
    (iii) Section 115(1) organization.
    (iv) Section 527 political organization.
    (2) Certain foreign organizations.
    (3) Organization described in section 501(c)(1)(A)(i) for which 
the enabling act provides for exemption from all current and future 
Federal taxes.
    (c) Applicable year.
    (1) In general.
    (2) Examples.
    (3) Short applicable years.
    (i) In general.
    (ii) Initial year of ATEO status.
    (iii) Year of termination of ATEO status.
    (A) Termination on or before the close of the calendar year 
ending with or within the taxable year of termination.
    (B) Termination after the close of the calendar year ending in 
the taxable year of termination.
    (4) Examples.
    (d) Covered employee.
    (1) In general.
    (2) Five highest-compensated employees.
    (i) In general.
    (ii) Limited hours exception.
    (A) In general.
    (1) Remuneration requirement.
    (2) Hours of service requirement.
    (B) Certain payments disregarded.
    (C) Safe harbor.
    (iii) Nonexempt funds exception.
    (A) In general.
    (1) Remuneration requirement.
    (2) Hours of service requirement.
    (3) Related organizations requirement.
    (B) Certain payments disregarded.
    (iv) Limited services exception.
    (A) Remuneration requirement.
    (B) Related ATEO requirement.
    (1) Ten percent remuneration condition.
    (2) Less remuneration condition.
    (3) Examples.
    (e) Employee.
    (1) In general.
    (2) Directors.
    (3) Trustees.
    (f) Employer.
    (1) In general.
    (2) Disregarded entities.
    (g) Medical services.
    (1) Medical and veterinary services.
    (i) In general.
    (ii) Examples.
    (2) Definition of licensed medical professional.
    (h) Predecessor.
    (1) Asset acquisitions.
    (2) Corporate reorganizations.
    (3) Predecessor change of form or of place of organization.
    (4) ATEO that becomes a non-ATEO.
    (i) General rule.
    (ii) Intervening changes or entities.
    (5) Predecessor of a predecessor.
    (6) Elections under sections 336(e) and 338.
    (7) Date of transaction.
    (i) Related organization.
    (1) In general.
    (i) Controls or controlled by test.
    (ii) Controlled by same persons test.
    (iii) Supported organization test.
    (iv) Supporting organization test.
    (v) VEBA test.
    (2) Control.
    (i) In general.
    (ii) Stock corporation.
    (iii) Partnership.
    (iv) Trust.
    (v) Nonstock organization.
    (A) In general.
    (B) Control of a trustee or director of a nonstock organization.
    (C) Representatives.
    (vi) Brother-sister related organizations.
    (vii) Section 318 principles.
    (A) In general.
    (B) Nonstock organizations.
    (1) Attribution of ownership interest from a nonstock 
organization to a controlling person.
    (2) Attribution of ownership interest from a controlling person 
to a nonstock organization.
    (3) Indirect control of a nonstock organization through another 
nonstock organization.
    (4) Attribution of control of nonstock organization to family 
member.
    (3) Examples.

Sec.  53.4960-2 Determination of remuneration paid for a taxable 
year.

    (a) Remuneration.
    (1) In general.
    (2) Exclusion of remuneration for medical services.

[[Page 6220]]

    (i) In general.
    (ii) Allocation of remuneration for medical services and non-
medical services.
    (iii) Examples.
    (b) Source of payment.
    (1) Remuneration paid by third parties for employment by an 
employer.
    (2) Remuneration paid by a related organization for employment 
by the related organization.
    (c) Applicable year in which remuneration is treated as paid.
    (1) In general.
    (2) Vested remuneration.
    (3) Change in related status during the year.
    (d) Amount of remuneration treated as paid.
    (1) In general.
    (2) Earnings and losses on previously paid remuneration.
    (i) In general.
    (ii) Previously paid remuneration.
    (A) New covered employee.
    (B) Existing covered employee.
    (iii) Earnings.
    (iv) Losses.
    (v) Net earnings.
    (vi) Net losses.
    (3) Remuneration paid for a taxable year before the employee 
becomes a covered employee.
    (i) In general.
    (ii) Examples.
    (e) Calculation of present value.
    (1) In general.
    (2) Treatment of future payment amount as present value for 
certain amounts.
    (f) Examples.

Sec.  53.4960-3 Determination of whether there is a parachute 
payment.

    (a) Parachute payment.
    (1) In general.
    (2) Exclusions.
    (i) Certain qualified plans.
    (ii) Certain annuity contracts.
    (iii) Compensation for medical services.
    (iv) Payments to non-HCEs.
    (3) Determination of HCEs for purposes of the exclusion from 
parachute payments.
    (b) Payment in the nature of compensation.
    (1) In general.
    (2) Consideration paid by covered employee.
    (c) When payment is considered to be made.
    (1) In general.
    (2) Transfers of section 83 property.
    (3) Stock options.
    (d) Payment contingent on an employee's separation from 
employment.
    (1) In general.
    (2) Employment agreements.
    (i) In general.
    (ii) Example.
    (3) Noncompetition agreements.
    (4) Payment of amounts previously included in income or excess 
remuneration.
    (5) Window programs.
    (6) Anti-abuse provision.
    (e) Involuntary separation from employment.
    (1) In general.
    (2) Separation from employment for good reason.
    (i) In general.
    (ii) Material negative change required.
    (iii) Deemed material negative change.
    (A) Material diminution of compensation.
    (B) Material diminution of responsibility.
    (C) Material diminution of authority of a supervisor.
    (D) Material diminution of a location.
    (E) Material change of location.
    (F) Other material breach.
    (3) Separation from employment.
    (f) Accelerated payment or accelerated vesting resulting from an 
involuntary separation from employment.
    (1) In general.
    (2) Nonvested payments subject to a non-service vesting 
condition.
    (3) Vested payments.
    (4) Nonvested payments subject to a service vesting condition.
    (i) In general.
    (A) Vesting trigger.
    (B) Vesting condition.
    (C) Services condition.
    (ii) Value of the lapse of the obligation to continue to perform 
services.
    (iii) Accelerated vesting of equity compensation.
    (5) Application to benefits under a nonqualified deferred 
compensation plan.
    (6) Present value.
    (7) Examples.
    (g) Three-times-base-amount test for parachute payments.
    (1) In general.
    (2) Examples.
    (h) Calculating present value.
    (1) In general.
    (2) Deferred payments.
    (3) Health care.
    (i) Discount rate.
    (j) Present value of a payment to be made in the future that is 
contingent on an uncertain future event or condition.
    (1) Treatment based on the estimated probability of payment.
    (2) Correction of incorrect estimates.
    (3) Initial option value estimate.
    (4) Examples.
    (k) Base amount.
    (1) In general.
    (2) Short or incomplete taxable years.
    (3) Excludable fringe benefits.
    (4) Section 83(b) income.
    (l) Base period.
    (1) In general.
    (2) Determination of base amount if employee separates from 
employment in the year hired.
    (3) Examples.

Sec.  53.4960-4 Liability for tax on excess remuneration and excess 
parachute payments.

    (a) Liability, reporting, and payment of excise taxes.
    (1) Liability.
    (2) Reporting and payment.
    (3) Arrangements between an ATEO and a related organization.
    (4) Certain foreign related organizations.
    (5) [Reserved]
    (b) Amounts subject to tax.
    (1) Excess remuneration.
    (i) In general.
    (ii) Exclusion for excess parachute payments.
    (2) Excess parachute payment.
    (c) Calculation of liability for tax on excess remuneration.
    (1) In general.
    (2) Calculation if liability is allocated from more than one 
ATEO with respect to an individual.
    (3) Calculation if liability is allocated from an ATEO with a 
short applicable year.
    (4) Examples.
    (d) Calculation of liability for excess parachute payments.
    (1) In general.
    (2) Computation of excess parachute payments.
    (3) Reallocation when the payment is disproportionate to base 
amount.
    (4) Election to prepay tax.
    (5) Liability after a redetermination of total parachute 
payments.
    (6) Examples.

Sec.  53.4960-5 [Reserved]

Sec.  53.4960-6 Applicability date.

    (a) General applicability date.
    (b) [Reserved]


Sec.  53.4960-1  Scope and definitions.

    (a) Scope. This section provides definitions for purposes of 
section 4960, this section, and Sec. Sec.  53.4960-2 through 53.4960-6. 
Section 53.4960-2 provides definitions and rules for determining the 
amount of remuneration paid for a taxable year. Section 53.4960-3 
provides definitions and rules for determining whether a parachute 
payment is paid. Section 53.4960-4 provides definitions and rules for 
calculating the amount of excess remuneration paid for a taxable year, 
excess parachute payments paid in a taxable year, and liability for the 
excise tax. Section 53.4960-5 is reserved for rules on the coordination 
of sections 4960 and 162(m). Section 53.4960-6 provides rules regarding 
the applicability date for the regulations in Sec. Sec.  53.4960-1 
through 53.4960-5. The rules and definitions provided in this section 
through Sec.  53.4960-6 apply solely for purposes of section 4960 
unless specified otherwise.
    (b) Applicable tax-exempt organization--(1) In general. Applicable 
tax-exempt organization or ATEO means any organization that is one of 
the following types of organizations:
    (i) Section 501(a) organization. The organization is exempt from 
taxation under section 501(a) (except as provided in paragraph (b)(2) 
or (b)(3) of this section);
    (ii) Section 521 farmers' cooperative. The organization is a 
farmers' cooperative organization described in section 521(b)(1);
    (iii) Section 115(1) organization. The organization has income 
excluded from taxation under section 115(1); or
    (iv) Section 527 political organization. The organization is a 
political

[[Page 6221]]

organization described in section 527(e)(1).
    (2) Certain foreign organizations. Any foreign organization 
described in section 4948(b) that either is exempt from tax under 
section 501(a) or is a taxable private foundation (section 4948(b) 
organization) is not an ATEO. A foreign organization is an organization 
not created or organized in the United States or in any possession 
thereof, or under the law of the United States, any State, the District 
of Columbia, or any possession of the United States. See section 
4948(b) and Sec.  53.4948-1. For purposes of this paragraph (b)(2) and 
the application of section 4960 to a taxable year, an organization's 
status as a section 4948(b) organization is determined at the end of 
its taxable year.
    (c) Applicable year--(1) In general. Applicable year means the 
calendar year ending with or within the ATEO's taxable year. See Sec.  
53.4960-4 regarding how an ATEO's applicable year affects the liability 
of related organizations.
    (2) Examples. The following examples illustrate the rules of 
paragraph (c)(1) of this section.
    (i) Example 1 (Calendar year taxpayer)--(A) Facts. ATEO 1 uses the 
calendar year as its taxable year and became an ATEO before 2022.
    (B) Conclusion. ATEO 1's applicable year for its 2022 taxable year 
is the period from January 1, 2022, through December 31, 2022 (that is, 
the 2022 calendar year).
    (ii) Example 2 (Fiscal year taxpayer)--(A) Facts. ATEO 2 uses a 
taxable year that starts July 1 and ends June 30 and became an ATEO 
before 2022.
    (B) Conclusion. ATEO 2's applicable year for the taxable year 
beginning July 1, 2022, and ending June 30, 2023, is the 2022 calendar 
year.
    (3) Short applicable years--(i) In general. An ATEO may have an 
applicable year that does not span the entire calendar year for the 
initial taxable year that the organization is an ATEO or for the 
taxable year in which the taxpayer ceases to be an ATEO. The beginning 
and end dates of the applicable year in the case of an ATEO's change in 
status depend on when the change in status occurs.
    (ii) Initial year of ATEO status. For the taxable year in which an 
ATEO first becomes an ATEO, applicable year means the period beginning 
on the date the ATEO first becomes an ATEO and ending on the last day 
of the calendar year ending with or within such taxable year (or, if 
earlier, the date of termination of ATEO status, as described in 
paragraph (c)(3)(ii)(A) of this section). If the taxable year in which 
an ATEO first becomes an ATEO ends before the end of the calendar year 
in which the ATEO first becomes an ATEO, then there is no applicable 
year for the ATEO's first taxable year; however, for the ATEO's next 
taxable year, applicable year means the period beginning on the date 
the ATEO first becomes an ATEO and ending on December 31 of the 
calendar year (or, if earlier, the date of termination of ATEO status, 
as described in paragraph (c)(3)(ii)(A) of this section).
    (iii) Year of termination of ATEO status--(A) Termination on or 
before the close of the calendar year ending with or within the taxable 
year of termination. If an ATEO has a termination of ATEO status during 
the taxable year and the termination of ATEO status occurs on or before 
the close of the calendar year ending with or within such taxable year, 
then, for the taxable year of termination of ATEO status, applicable 
year means the period starting January 1 of the calendar year of the 
termination of ATEO status and ending on the date of the termination of 
ATEO status.
    (B) Termination after the close of the calendar year ending in the 
taxable year of termination. If an ATEO has a termination of ATEO 
status during the taxable year and the termination of ATEO status 
occurs after the close of the calendar year ending within such taxable 
year, then, for the taxable year of the termination of ATEO status, 
applicable year means both the calendar year ending within such taxable 
year and the period beginning January 1 of the calendar year of the 
termination of ATEO status and ending on the date of the termination of 
ATEO status. Both such applicable years are treated as separate 
applicable years. See Sec.  53.4960-4(b)(2)(ii) for rules regarding 
calculation of the tax in the event there are multiple applicable years 
associated with a taxable year.
    (4) Examples. The following examples illustrate the rules of 
paragraph (c)(3) of this section. For purposes of these examples, 
assume any entity referred to as ``ATEO'' is an ATEO and any entity 
referred to as ``CORP'' is not an ATEO.
    (i) Example 1 (Taxable year of formation ending after December 
31)--(A) Facts. ATEO 1, ATEO 2, and CORP 1 are related organizations 
that all use a taxable year that starts July 1 and ends June 30. ATEO 1 
is recognized as a section 501(c)(3) organization by the IRS on May 8, 
2023, effective as of October 1, 2022. ATEO 2 became an ATEO in 2017.
    (B) Conclusion (ATEO 1). ATEO 1's applicable year for the taxable 
year beginning October 1, 2022, and ending June 30, 2023, is the period 
beginning October 1, 2022, and ending December 31, 2022. For purposes 
of determining the amount of remuneration paid by ATEO 1 and all 
related organizations for ATEO 1's taxable year beginning October 1, 
2022, and ending June 30, 2023, (including for purposes of determining 
ATEO 1's covered employees), only remuneration paid between October 1, 
2022, and December 31, 2022, is taken into account. Thus, any 
remuneration paid by ATEO 1, ATEO 2, and CORP 1 before October 1, 2022, 
is disregarded for purposes of ATEO 1's applicable year associated with 
its initial taxable year.
    (C) Conclusion (ATEO 2). ATEO 2's applicable year for its taxable 
year beginning July 1, 2022, and ending June 30, 2023, is the 2022 
calendar year. Thus, any remuneration paid by ATEO 1, ATEO 2, and CORP 
1 during the 2022 calendar year is taken into account for purposes of 
determining ATEO 2's covered employees and remuneration paid for ATEO 
2's taxable year ending June 30, 2023.
    (ii) Example 2 (Taxable year of formation ending before December 
31)--(A) Facts. Assume the same facts as in paragraph (c)(4)(i)(A) of 
this section (Example 1), except that ATEO 1 is recognized as a section 
501(c)(3) organization effective as of March 15, 2023.
    (B) Conclusion. ATEO 1 has no applicable year for the taxable year 
starting March 15, 2023, and ending June 30, 2023, because no calendar 
year ends (or termination of ATEO status occurs) with or within the 
taxable year. ATEO 1's applicable year for the taxable year ending June 
30, 2024, is the period beginning March 15, 2023, and ending December 
31, 2023. For purposes of determining the amount of remuneration paid 
by ATEO 1 and all related organizations for ATEO 1's taxable year 
ending June 30, 2024 (including for purposes of determining ATEO 1's 
covered employees), only remuneration paid between March 15, 2023, and 
December 31, 2023, is taken into account. The conclusion for ATEO 2 is 
the same as in paragraph (c)(4)(i)(C) of this section (Example 1).
    (iii) Example 3 (Termination before the close of the calendar year 
ending in the taxable year of termination)--(A) Facts. Assume the same 
facts as in paragraph (c)(4)(i)(A) of this section (Example 1). In 
addition, ATEO 1 has a termination of ATEO status on September 30, 
2024.
    (B) Conclusion. For ATEO 1's taxable year beginning July 1, 2024, 
and ending September 30, 2024, ATEO 1's applicable year is the period 
beginning

[[Page 6222]]

January 1, 2024, and ending September 30, 2024.
    (iv) Example 4 (Termination after the close of the calendar year 
ending in the taxable year of termination)--(A) Facts. Assume the same 
facts as in paragraph (c)(4)(i)(A) of this section (Example 1). In 
addition, ATEO 1 has a termination of ATEO status on March 31, 2025.
    (B) Conclusion. For ATEO 1's taxable year beginning July 1, 2024, 
and ending March 31, 2025, ATEO 1 has two applicable years: the 2024 
calendar year, and the period beginning on January 1, 2025, and ending 
on March 31, 2025.
    (d) Covered employee--(1) In general. For each taxable year, 
covered employee means any individual who is one of the five highest-
compensated employees of the ATEO for the taxable year or was a covered 
employee of the ATEO (or any predecessor) for any preceding taxable 
year beginning after December 31, 2016.
    (2) Five highest-compensated employees--(i) In general. Except as 
otherwise provided in this paragraph (d)(2), an individual is one of an 
ATEO's five highest- compensated employees for the taxable year if the 
individual is among the five employees of the ATEO with the highest 
amount of remuneration paid during the applicable year, as determined 
under Sec.  53.4960-2. However, remuneration for which the deduction is 
disallowed by reason of section 162(m) is taken into account for 
purposes of determining an ATEO's five highest-compensated employees. 
The five highest-compensated employees of an ATEO for the taxable year 
are identified on the basis of the total remuneration paid during the 
applicable year to the employee for services performed as an employee 
of the ATEO or any related organization. An ATEO may have fewer than 
five highest-compensated employees for a taxable year if it has fewer 
than five employees other than employees who are disregarded under 
paragraphs (d)(2)(ii) through (iv) of this section. For purposes of 
this paragraph (d)(2), a grant of a legally binding right (within the 
meaning of Sec.  1.409A-1(b)) to vested remuneration is considered to 
be remuneration paid as of the date of grant, as described in Sec.  
53.4960-2(c)(2), and a person or governmental entity is considered to 
grant a legally binding right to nonvested remuneration if the person 
or governmental entity grants a legally binding right to remuneration 
that is not vested within the meaning of Sec.  53.4960-2(c)(2). An 
employee is disregarded for purposes of determining an ATEO's five 
highest-compensated employees for a taxable year if, during the 
applicable year, neither the ATEO nor any related organization paid 
remuneration or granted a legally binding right to nonvested 
remuneration to the individual for services the individual performed as 
an employee of the ATEO or any related organization.
    (ii) Limited hours exception--(A) In general. An individual is 
disregarded for purposes of determining an ATEO's five highest-
compensated employees for a taxable year if all of the following 
requirements are met:
    (1) Remuneration requirement. Neither the ATEO nor any related ATEO 
paid remuneration or granted a legally binding right to nonvested 
remuneration to the individual for services the individual performed as 
an employee of the ATEO during the applicable year; and
    (2) Hours of service requirement. The individual performed services 
as an employee of the ATEO and all related ATEOs for no more than 10 
percent of the total hours the individual worked as an employee of the 
ATEO and any related organizations during the applicable year. An ATEO 
may instead make this determination based on the total days the 
individual worked as an employee of the ATEO and all related ATEOs as a 
percentage of the total days worked as an employee of the ATEO and all 
related organizations, provided that for purposes of the calculation, 
any day that the individual worked at least one hour as an employee of 
the ATEO or a related ATEO is treated as a day worked as an employee of 
the ATEO and not for any other organization.
    (B) Certain payments disregarded. For purposes of paragraph 
(d)(2)(ii)(A)(1) of this section, a payment of remuneration made to the 
individual by a related organization that is an employer of the 
individual and for which the related organization is neither entitled 
to reimbursement by the ATEO nor entitled to any other consideration 
from the ATEO is not considered remuneration paid by the ATEO under 
Sec.  53.4960-2(b)(1), and a payment of remuneration made to the 
individual by a related organization is not treated as remuneration 
paid by the ATEO under Sec.  53.4960-2(b)(2).
    (C) Safe harbor. For purposes of paragraph (d)(2)(ii)(A)(2) of this 
section, an individual is treated as having performed services as an 
employee of the ATEO and all related ATEOs for no more than 10 percent 
of the total hours the individual worked as an employee of the ATEO and 
all related organizations during the applicable year if the employee 
performed no more than 100 hours of service as an employee of the ATEO 
and all related ATEOs during the applicable year.
    (iii) Nonexempt funds exception--(A) In general. An individual is 
disregarded for purposes of determining an ATEO's five highest-
compensated employees for a taxable year if all the following 
requirements are met:
    (1) Remuneration requirement. Neither the ATEO, nor any related 
ATEO, nor any taxable related organization controlled by the ATEO, or 
by one or more related ATEOs, either alone or together with the ATEO, 
paid remuneration or granted a legally binding right to nonvested 
remuneration to the individual for services the individual performed as 
an employee of an ATEO during the applicable year and the preceding 
applicable year. For this purpose, whether a taxable related 
organization is controlled by the ATEO (or one or more related ATEOs) 
is determined without regard to paragraph (i)(2)(vii)(B)(2) of this 
section and without regard to section 318(a)(3) for purposes of 
applying paragraph (i)(2)(vii)(A) of this section, so that an interest 
in a corporation or nonstock entity is not attributed downward in 
determining control of the corporation or nonstock entity;
    (2) Hours of service requirement. The individual performed services 
as an employee of the ATEO and any related ATEOs for not more than 50 
percent of the total hours worked as an employee of the ATEO and any 
related organizations during the applicable year and the preceding 
applicable year. An ATEO may instead make this determination based on 
the total days the individual worked as an employee of the ATEO and all 
related ATEOs as a percentage of the total days worked as an employee 
of the ATEO and all related organizations, provided that for purposes 
of the calculation, any day that the individual worked at least one 
hour as an employee of the ATEO or a related ATEO is treated as a day 
worked as an employee of the ATEO and not for any other organization; 
and
    (3) Related organizations requirement. No related organization that 
paid remuneration or granted a legally binding right to nonvested 
remuneration to the individual during the applicable year and the 
preceding applicable year provided services for a fee to the ATEO, to 
any related ATEO, or to any taxable related organization controlled by 
the ATEO or by one or more related ATEOs, either alone or together with 
the ATEO, during the applicable year and the preceding applicable year. 
For purposes of this paragraph (d)(2)(iii)(A)(3), whether a taxable 
related organization is controlled by the ATEO (or one or more related 
ATEOs) is determined without regard to paragraph (i)(2)(vii)(B)(2) of

[[Page 6223]]

this section and without regard to section 318(a)(3) for purposes of 
applying paragraph (i)(2)(vii)(A) of this section, so that an interest 
in a corporation or nonstock entity is not attributed downward in 
determining control of the corporation or nonstock entity.
    (B) Certain payments disregarded. For purposes of paragraph 
(d)(2)(iii)(A)(1) of this section, a payment of remuneration made to an 
individual by a related organization that is an employer of the 
individual and for which the related organization is neither entitled 
to reimbursement by the ATEO nor entitled to any other consideration 
from the ATEO is not considered remuneration paid by the ATEO under 
Sec.  53.4960-2(b)(1) and a payment of remuneration made to the 
individual by a related organization is not treated as paid by the ATEO 
under Sec.  53.4960-2(b)(2).
    (iv) Limited services exception. An individual is disregarded for 
purposes of determining an ATEO's five highest-compensated employees 
for a taxable year even though the ATEO paid remuneration to the 
individual if, disregarding Sec.  53.4960-2(b)(2), all of the following 
requirements are met:
    (A) Remuneration requirement. The ATEO did not pay 10 percent or 
more of the individual's total remuneration for services performed as 
an employee of the ATEO and all related organizations during the 
applicable year; and
    (B) Related ATEO requirement. The ATEO had at least one related 
ATEO during the applicable year and one of the following conditions 
applies:
    (1) Ten percent remuneration condition. A related ATEO paid at 
least 10 percent of the remuneration paid by the ATEO and any related 
organizations during the applicable year; or
    (2) Less remuneration condition. No related ATEO paid at least 10 
percent of the total remuneration paid by the ATEO and any related 
organizations and the ATEO paid less remuneration to the individual 
than at least one related ATEO during the applicable year.
    (3) Examples. The following examples illustrate the rules of this 
paragraph (d). For purposes of these examples, assume any entity 
referred to as ``ATEO'' is an ATEO, any entity referred to as ``CORP'' 
is not an ATEO and is not a publicly held company within the meaning of 
section 162(m)(2) unless otherwise stated, and each taxpayer uses the 
calendar year as its taxable year.
    (i) Example 1 (Employee of two related ATEOs)--(A) Facts. ATEO 1 
and ATEO 2 are related organizations and have no other related 
organizations. Both employ Employee A during calendar year 2022 and pay 
remuneration to Employee A for Employee A's services. During 2022, 
Employee A performed services for 1,000 hours as an employee of ATEO 1 
and 1,000 hours as an employee of ATEO 2.
    (B) Conclusion. Employee A may be a covered employee of both ATEO 1 
and ATEO 2 as one of the five highest-compensated employees for taxable 
year 2022 under paragraph (d)(2)(i) of this section because the 
exceptions in paragraphs (d)(2)(ii) through (iv) of this section do not 
apply. Because they are related organizations, ATEO 1 and ATEO 2 must 
each include the remuneration paid to Employee A by the other during 
each of their applicable years in determining their respective five 
highest-compensated employees for taxable year 2022.
    (ii) Example 2 (Employee of an ATEO and a related non-ATEO)--(A) 
Facts. Assume the same facts as in paragraph (d)(3)(i) of this section 
(Example 1), except that ATEO 1 is instead CORP 1.
    (B) Conclusion (CORP 1). For taxable year 2022, CORP 1 is not an 
ATEO and therefore does not need to identify covered employees.
    (C) Conclusion (ATEO 2). Employee A may be a covered employee of 
ATEO 2 as one of its five highest-compensated employees for taxable 
year 2022 under paragraph (d)(2)(i) of this section because no 
exception in paragraphs (d)(2)(ii) through (iv) of this section 
applies. ATEO 2 must include the remuneration paid to Employee A by 
CORP 1 during its applicable year in determining ATEO 2's five highest-
compensated employees for taxable year 2022.
    (iii) Example 3 (Amounts for which a deduction is disallowed under 
section 162(m) are taken into account for purposes of determining the 
five highest-compensated employees)--(A) Facts. CORP 2 is a publicly 
held corporation within the meaning of section 162(m)(2) and is a 
related organization of ATEO 3. ATEO 3 is a corporation that is part of 
CORP 2's affiliated group (as defined in section 1504, without regard 
to section 1504(b)) and has no other related organizations. Employee B 
is a covered employee (as defined in section 162(m)(3)) of CORP 2 and 
an employee of ATEO 3. In 2022, CORP 2 paid Employee B $8 million of 
remuneration for services provided as an employee of CORP 2 and ATEO 3 
paid Employee B $500,000 of remuneration for services provided as an 
employee of ATEO 3. $7.5 million of the remuneration is compensation 
for which a deduction is disallowed pursuant to section 162(m)(1).
    (B) Conclusion. The $7.5 million of remuneration for which a 
deduction is disallowed under section 162(m)(1) is taken into account 
for purposes of determining ATEO 3's five highest-compensated 
employees. Thus, ATEO 3 is treated as paying Employee B $8.5 million of 
remuneration for purposes of determining its five highest-compensated 
employees.
    (iv) Example 4 (Employee disregarded due to receiving no 
remuneration)--(A) Facts. Employee C is an officer of ATEO 4 who 
performs more than minor services for ATEO 4. In 2022, neither ATEO 4 
nor any related organization paid remuneration or granted a legally 
binding right to any nonvested remuneration to Employee C. ATEO 4 paid 
premiums for insurance for liability arising from Employee C's service 
with ATEO 4, which is properly treated as a working condition fringe 
benefit excluded from gross income under Sec.  1.132-5.
    (B) Conclusion. Even though Employee C is an employee of ATEO 4, 
Employee C is disregarded for purposes of determining ATEO 4's five 
highest-compensated employees for taxable year 2022 under paragraph 
(d)(2)(i) of this section because neither ATEO 4 nor any related 
organization paid Employee C any remuneration (nor did they grant a 
legally binding right to nonvested remuneration) in applicable year 
2022. The working condition fringe benefit is not wages within the 
meaning of section 3401(a), as provided in section 3401(a)(19), and 
thus is not remuneration within the meaning of Sec.  53.4960-2(a).
    (v) Example 5 (Limited hours exception)--(A) Facts. ATEO 5 and CORP 
3 are related organizations. ATEO 5 has no other related organizations. 
Employee D is an employee of CORP 3. As part of Employee D's duties at 
CORP 3, Employee D serves as an officer of ATEO 5. Only CORP 3 paid 
remuneration (or granted a legally binding right to nonvested 
remuneration) to Employee D and ATEO 5 did not reimburse CORP 3 for any 
portion of Employee D's remuneration in any manner. During 2022, 
Employee D provided services as an employee for 2,000 hours to CORP 3 
and 200 hours to ATEO 5.
    (B) Conclusion. Even though Employee D is an employee of ATEO 5 
because Employee D provided more than minor services as an officer, 
Employee D is disregarded for purposes of determining ATEO 5's five 
highest-compensated employees for taxable year 2022. Employee D is 
disregarded under

[[Page 6224]]

paragraph (d)(2)(ii) of this section because only CORP 3 paid Employee 
D any remuneration or granted a legally binding right to nonvested 
remuneration in applicable year 2022 and Employee D provided services 
as an employee of ATEO 5 for 200 hours, which is not more than ten 
percent of the 2,200 total hours (2,000 + 200 = 2,200) worked as an 
employee of ATEO 5 and all related organizations.
    (vi) Example 6 (Limited hours exception)--(A) Facts. Assume the 
same facts as in paragraph (d)(3)(v) of this section (Example 5), 
except that ATEO 5 also provides a reasonable allowance for expenses 
incurred by Employee D in executing Employee D's duties as an officer 
of ATEO 5, which is properly excluded from gross income under an 
accountable plan described in Sec.  1.62-2.
    (B) Conclusion. The conclusion is the same as in paragraph 
(d)(3)(v)(B) of this section (Example 5). Specifically, even though 
Employee D is an employee of ATEO 5 because Employee D provided more 
than minor services for ATEO 5, Employee D is disregarded for purposes 
of determining ATEO 5's five highest-compensated employees for taxable 
year 2022 under paragraph (d)(2)(ii) of this section because the 
expense allowance under the accountable plan is excluded from wages 
within the meaning of section 3401(a), as provided in Sec.  31.3401(a)-
4, and thus is not remuneration within the meaning of Sec.  53.4960-
2(a).
    (vii) Example 7 (No exception applies due to source of payment)--
(A) Facts. Assume the same facts as in paragraph (d)(3)(v) of this 
section (Example 5), except that ATEO 5 has a contractual arrangement 
with CORP 3 to reimburse CORP 3 for the hours of service Employee D 
provides to ATEO 5 during applicable year 2022 by paying an amount 
equal to the total remuneration received by Employee D from both ATEO 5 
and CORP 3, multiplied by a fraction equal to the hours of service 
Employee D provided ATEO 5 over Employee D's total hours of service to 
both ATEO 5 and CORP 3.
    (B) Conclusion. Employee D may be one of ATEO 5's five highest-
compensated employees for taxable year 2022 under paragraph (d)(2)(i) 
of this section because the exceptions in paragraphs (d)(2)(ii) through 
(iv) of this section do not apply. Pursuant to the contractual 
arrangement between CORP 3 and ATEO 5, ATEO 5 reimburses CORP 3 for a 
portion of Employee D's remuneration during applicable year 2022; thus, 
the exceptions under paragraphs (d)(2)(ii) and (iii) of this section do 
not apply. Further, while ATEO 5 paid Employee D less than 10 percent 
of the total remuneration from ATEO 5 and all related organizations 
(200 hours of service to ATEO 5/2,200 hours of service to ATEO 5 and 
all related organizations = 9 percent), it had no related ATEO; thus, 
the limited services exception under paragraph (d)(2)(iv) of this 
section does not apply.
    (viii) Example 8 (Nonexempt funds exception for part-time 
services)--(A) Facts. ATEO 6 and CORP 4 are related organizations. ATEO 
6 has no other related organizations and does not control CORP 4. 
During applicable year 2022, Employee E provided 2,000 hours of 
services as an employee of CORP 4 and 0 hours of services as an 
employee of ATEO 6; during applicable year 2023, Employee E provided 
1,100 hours of services as an employee of CORP 4 and 900 hours of 
services as an employee of ATEO 6; during applicable year 2024, 
Employee E provided 1,100 hours of services as an employee of CORP 4 
and 900 hours of services as an employee of ATEO 6. ATEO 6 neither paid 
any remuneration to Employee E nor paid a fee for services to CORP 4 
during any applicable year. No exception under paragraphs (d)(2)(i), 
(ii), or (iv) applies to Employee E.
    (B) Conclusion (2023). Employee E is disregarded for purposes of 
determining ATEO 6's five highest-compensated employees for taxable 
year 2023 under paragraph (d)(2)(iii) of this section because for 
applicable years 2022 and 2023, Employee E provided services as an 
employee of ATEO 6 for not more than 50 percent of the total hours 
Employee E provided services as an employee of ATEO 6 and CORP 4 (900 
hours/4,000 hours), and ATEO 6 neither paid any remuneration to 
Employee E nor paid a fee for services to CORP 4 during applicable 
years 2022 and 2023.
    (C) Conclusion (2024). Employee E is disregarded for purposes of 
determining ATEO 6's five highest-compensated employees for taxable 
year 2024 under paragraph (d)(2)(iii) of this section because for 
applicable years 2023 and 2024, Employee E provided services as an 
employee of ATEO 6 for not more than 50 percent of the total hours 
Employee E provided services as an employee of ATEO 6 and CORP 4 (1,800 
hours/4,000 hours), and ATEO 6 neither paid any remuneration to 
Employee E nor paid a fee for services to CORP 4 during applicable 
years 2023 and 2024.
    (ix) Example 9 (Nonexempt funds for full-time services in one 
applicable year)--(A) Facts. Assume the same facts as in paragraph 
(d)(3)(viii) of this section (Example 8), except that during applicable 
year 2022, Employee E provided services as an employee for 2,000 hours 
to CORP 4 and for 0 hours to ATEO 6; during applicable year 2023, 
Employee E provided services as an employee for 0 hours to CORP 4 and 
2,000 hours to ATEO 6; and during applicable year 2024, Employee E 
resumes employment with CORP 4 so that Employee E provided services as 
an employee for 2,000 hours to CORP 4 and 0 hours to ATEO 6.
    (B) Conclusion (2023). Employee E is disregarded for purposes of 
determining ATEO 6's five highest-compensated employees for taxable 
year 2023 under paragraph (d)(2)(iii) of this section because for 
applicable years 2022 and 2023, Employee E provided services as an 
employee of ATEO 6 for not more than 50 percent of the total hours 
Employee E provided services as an employee of ATEO 6 and CORP 4 (2,000 
hours/4,000 hours), and ATEO 6 neither paid any remuneration to 
Employee E nor paid a fee for services to CORP 4 during applicable 
years 2022 and 2023.
    (C) Conclusion (2024). Employee E is disregarded for purposes of 
determining ATEO 6's five highest-compensated employees for taxable 
year 2024 under paragraph (d)(2)(iii) of this section because for 
applicable years 2023 and 2024, Employee E provided services as an 
employee of ATEO 6 for not more than 50 percent of the total hours 
Employee E provided services as an employee of ATEO 6 and CORP 4 (2,000 
hours/4,000 hours for ATEO 6 and CORP 4), and ATEO 6 neither paid any 
remuneration to Employee E nor paid a fee for services to CORP 4 during 
applicable years 2023 and 2024.
    (x) Example 10 (Nonexempt funds exception for full-time services 
across two applicable years)--(A) Facts. Assume the same facts as in 
paragraph (d)(3)(viii)(A) of this section (Example 8), except that 
during applicable year 2022, Employee E provided services as an 
employee for 2,000 hours to CORP 4 and for 0 hours to ATEO 6; during 
applicable year 2023, Employee E provided services as an employee for 
600 hours to CORP 4 and for 1,400 hours to ATEO 6; and during 
applicable year 2024, Employee E provided services as an employee for 
1,400 hours to CORP 4 and for 600 hours to ATEO 6.
    (B) Conclusion (2023). Employee E is disregarded for purposes of 
determining ATEO 6's five highest-compensated employees for taxable 
year 2023 under paragraph (d)(2)(iii) of this section because for 
applicable years 2022 and 2023, Employee E provided services as an 
employee of ATEO 6 for not more than 50 percent of the total hours 
Employee E provided services as an employee of ATEO 6 and CORP 4 (1,400 
hours/4,000 hours), and ATEO 6 neither

[[Page 6225]]

paid any remuneration to Employee E, nor paid a fee for services to 
CORP 4 during applicable years 2022 and 2023.
    (C) Conclusion (2024). Employee E is disregarded for purposes of 
determining ATEO 6's five highest-compensated employees for taxable 
year 2024 under paragraph (d)(2)(iii) of this section because for 
applicable years 2023 and 2024, Employee E provided services as an 
employee of ATEO 6 for not more than 50 percent of the total hours 
Employee E provided services as an employee of ATEO 6 and CORP 4 (2,000 
hours/4,000 hours), and ATEO 6 neither paid any remuneration to 
Employee E, nor paid a fee for services to CORP 4 during applicable 
years 2023 and 2024.
    (xi) Example 11 (Failure under the nonexempt funds exception)--(A) 
Facts. Assume the same facts as in paragraph (d)(3)(viii)(A) of this 
section (Example 8), except that during applicable year 2022, Employee 
E provided services as an employee for 2,000 hours to CORP 4 and for 0 
hours to ATEO 6; during applicable year 2023, Employee E provided 
services as an employee for 600 hours to CORP 4 and for 1,400 hours to 
ATEO 6; and during applicable year 2024, Employee E provided services 
as an employee for 1,300 hours to CORP 4 and for 700 hours to ATEO 6.
    (B) Conclusion (2023). Employee E is disregarded for purposes of 
determining ATEO 6's five highest-compensated employees for taxable 
year 2023 under paragraph (d)(2)(iii) of this section because for 
applicable years 2022 and 2023, Employee E provided services as an 
employee of ATEO 6 for less than 50 percent of the total hours Employee 
E provided services as an employee of ATEO 6 and CORP 4 (1,400 hours/
4,000 hours), and ATEO 6 neither paid any remuneration to Employee E, 
nor paid a fee for services to CORP 4 during applicable years 2022 and 
2023.
    (C) Conclusion (2024). Employee E may be a covered employee of ATEO 
6 as one of its five highest-compensated employees for taxable year 
2024 because the requirements under paragraph (d)(2)(iii) are not met 
and no other exception applies. For applicable years 2023 and 2024, 
Employee E provided services as an employee of ATEO 6 for more than 50 
percent of the total hours Employee E provided services as an employee 
of ATEO 6 and CORP 4 (2,100 hours/4,000 hours).
    (xii) Example 12 (Limited services exception)--(A) Facts. ATEO 7, 
ATEO 8, ATEO 9, and ATEO 10 are a group of related organizations, none 
of which have any other related organizations. During 2022, Employee F 
is an employee of ATEO 7, ATEO 8, ATEO 9, and ATEO 10. During 
applicable year 2022, ATEO 7 paid 5 percent of Employee F's 
remuneration, ATEO 8 paid 10 percent of Employee F's remuneration, ATEO 
9 paid 25 percent of Employee F's remuneration, and ATEO 10 paid 60 
percent of Employee F's remuneration. No exception under paragraph 
(d)(2)(i), (ii), or (iii) applies to Employee F for any of ATEO 7, ATEO 
8, ATEO 9, or ATEO 10.
    (B) Conclusion (ATEO 7). Employee F is disregarded for purposes of 
determining ATEO 7's five highest-compensated employees for taxable 
year 2022 under paragraph (d)(2)(iv) of this section because ATEO 7 
paid less than 10 percent of Employee F's total remuneration from ATEO 
7 and all related organizations during applicable year 2022, and 
another related ATEO paid at least 10 percent of that total 
remuneration.
    (C) Conclusion (ATEO 8, ATEO 9, and ATEO 10). Employee F may be a 
covered employee of ATEO 8, ATEO 9, and ATEO 10 as one of their 
respective five highest-compensated employees for their taxable years 
2022 because each of those ATEOs paid 10 percent or more of Employee 
F's remuneration during the 2022 applicable year. Thus, the limited 
services exception under paragraph (d)(2)(iv) of this section does not 
apply.
    (xiii) Example 13 (Limited services exception if no ATEO paid at 
least 10 percent of remuneration)--(A) Facts. Assume the same facts as 
in paragraph (d)(3)(xii) of this section (Example 12), except that for 
applicable year 2022, ATEO 7 paid 6 percent of F's remuneration, ATEO 
8, ATEO 9, and ATEO 10 each paid 5 percent of Employee F's 
remuneration, and Employee F also works as an employee of CORP 5, a 
related organization of ATEO 7, ATEO 8, ATEO 9, and ATEO 10 that paid 
79 percent of Employee F's remuneration for applicable year 2022.
    (B) Conclusion (ATEO 7). Employee F may be one of ATEO 7's five 
highest-compensated employees for taxable year 2022. Although ATEO 7 
did not pay Employee F 10 percent or more of the total remuneration 
paid by ATEO 7 and all of its related organizations, no related ATEO 
paid more than 10 percent of Employee F's remuneration, and ATEO 7 did 
not pay less remuneration to Employee F than at least one related ATEO. 
Thus, the limited services exception under paragraph (d)(2)(iv) of this 
section does not apply, and Employee F may be one of ATEO 7's five 
highest-compensated employees because ATEO 7 paid Employee F more 
remuneration than any other related ATEO.
    (C) Conclusion (ATEO 8, ATEO 9, and ATEO 10). Employee F is 
disregarded for purposes of determining the five highest-compensated 
employees of ATEO 8, ATEO 9, and ATEO 10 for taxable year 2022 under 
paragraph (d)(2)(iv) of this section because none paid 10 percent or 
more of Employee F's total remuneration, each had no related ATEO that 
paid at least 10 percent of Employee F's total remuneration, and each 
paid less remuneration than at least one related ATEO (ATEO 7).
    (e) Employee--(1) In general. Employee means an employee as defined 
in section 3401(c) and Sec.  31.3401(c)-1. Section 31.3401(c)-1 
generally defines an employee as any individual performing services if 
the relationship between the individual and the person for whom the 
individual performs services is the legal relationship of employer and 
employee. As set forth in Sec.  31.3401(c)-1, this includes common law 
employees, as well as officers and employees of government entities, 
whether or not elected. An employee generally also includes an officer 
of a corporation, but an officer of a corporation who as such does not 
perform any services or performs only minor services and who neither 
receives, nor is entitled to receive, any remuneration is not 
considered to be an employee of the corporation solely due to the 
individual's status as an officer of the corporation. Whether an 
individual is an employee depends on the facts and circumstances.
    (2) Directors. A director of a corporation (or an individual 
holding a substantially similar position in a corporation or other 
entity) in the individual's capacity as such is not an employee of the 
corporation. See Sec.  31.3401(c)-1(f).
    (3) Trustees. The principles of paragraph (e)(2) of this section 
apply by analogy to a trustee of any arrangement classified as a trust 
for Federal tax purposes in Sec.  301.7701-4(a).
    (f) Employer--(1) In general. Employer means an employer within the 
meaning of section 3401(d), without regard to section 3401(d)(1) or 
(2), meaning generally the person or governmental entity for whom the 
services were performed as an employee. Whether a person or 
governmental entity is the employer depends on the facts and 
circumstances, but a person does not cease to be the employer through 
use of a payroll agent under section 3504, a common paymaster under 
section 3121(s), a person described in section 3401(d)(1) or (2), a 
certified professional employer

[[Page 6226]]

organization under section 7705, or any similar arrangement.
    (2) Disregarded entities. In the case of a disregarded entity 
described in Sec.  301.7701-3, Sec.  301.7701-2(c)(2)(iv) does not 
apply; thus, the sole owner of the disregarded entity is treated as the 
employer of any individual performing services as an employee of the 
disregarded entity.
    (g) Medical services--(1) Medical and veterinary services--(i) In 
general. Medical services means services directly performed by a 
licensed medical professional (as defined in paragraph (g)(2) of this 
section) for the diagnosis, cure, mitigation, treatment, or prevention 
of disease in humans or animals; services provided for the purpose of 
affecting any structure or function of the human or animal body; and 
other services integral to providing such medical services. For 
purposes of section 4960, teaching and research services are not 
medical services except to the extent that they involve the services 
performed to directly diagnose, cure, mitigate, treat, or prevent 
disease or affect a structure or function of the body. Administrative 
services may be integral to directly providing medical services. For 
example, documenting the care and condition of a patient is integral to 
providing medical services, as is accompanying another licensed 
professional as a supervisor while that medical professional provides 
medical services. However, managing an organization's operations, 
including scheduling, staffing, appraising employee performance, and 
other similar functions that may relate to a particular medical 
professional or professionals who perform medical services, is not 
integral to providing medical services. See Sec.  53.4960-2(a)(2)(ii) 
for rules regarding allocating remuneration paid to a medical 
professional who performs both medical services and other services.
    (ii) Examples. The following examples illustrate the rules of this 
paragraph (g):
    (A) Example 1 (Administrative tasks that are integral to providing 
medical services)--(1) Facts. Employee A is a doctor who is licensed to 
practice medicine in the state in which Employee A's place of 
employment is located. In the course of Employee A's practice, Employee 
A treats patients and performs some closely-related administrative 
tasks, such as examining and updating patient records.
    (2) Conclusion. Employee A's administrative tasks are integral to 
providing medical services and thus are medical services.
    (B) Example 2 (Administrative tasks that are not integral to 
providing medical services)--(1) Facts. Assume the same facts as in 
paragraph (g)(1)(ii)(A)(1) of this section (Example 1), except that 
Employee A also performs additional administrative tasks such as 
analyzing the budget, authorizing capital expenditures, and managing 
human resources for the organization by which Employee A is employed.
    (2) Conclusion. Employee A's additional administrative tasks are 
not integral to providing medical services and thus are not medical 
services.
    (C) Example 3 (Teaching duties that are and are not medical 
services)--(1) Facts. Employee B is a medical doctor who is licensed to 
practice medicine in the state in which her place of employment, a 
university hospital, is located. Employee B's duties include overseeing 
and teaching a group of resident physicians who have restricted 
licenses to practice medicine. Those duties include supervising and 
instructing the resident physicians while they treat patients and 
instruction in a classroom setting.
    (2) Conclusion. Employee B's supervision and instruction of 
resident physicians during the course of patient treatment are 
necessary for the treatment, and thus are medical services. Employee 
B's classroom instruction is not necessary for patient treatment, and 
thus is not medical services.
    (D) Example 4 (Research services that are and are not medical 
services)--(1) Facts. Employee C is a licensed medical doctor who is 
employed to work on a research trial. Employee C provides an 
experimental treatment to patients afflicted by a disease and performs 
certain closely-related administrative tasks that ordinarily are 
performed by a medical professional in a course of patient treatment. 
As part of the research trial, Employee C also compiles and analyzes 
patient results and prepares reports and articles that would not 
ordinarily be prepared by a medical professional in the course of 
patient treatment.
    (2) Conclusion. Employee C's services that are ordinarily performed 
by a medical professional in a course of treatment, including closely-
related administrative tasks, are medical services. Because the 
compilation and analysis of patient results and the formulation of 
reports and articles are neither services ordinarily performed by a 
medical professional in a course of treatment nor necessary for such 
treatment, these services are not medical services.
    (2) Definition of licensed medical professional. Licensed medical 
professional means an individual who is licensed under applicable state 
or local law to perform medical services, including as a doctor, nurse, 
nurse practitioner, dentist, veterinarian, or other licensed medical 
professional.
    (h) Predecessor--(1) Asset acquisitions. If an ATEO (acquiror) 
acquires at least 80 percent of the operating assets or total assets 
(determined by fair market value on the date of acquisition) of another 
ATEO (target), then the target is a predecessor of the acquiror. For an 
acquisition of assets that occurs over time, only assets acquired 
within a 12-month period are taken into account to determine whether at 
least 80 percent of the target's operating assets or total assets were 
acquired. However, this 12-month period is extended to include any 
continuous period that ends or begins on any day during which the 
acquiror has an arrangement to acquire directly or indirectly, assets 
of the target. Additions to the assets of target made as part of a plan 
or arrangement to avoid the application of this subsection to 
acquiror's purchase of target's assets are disregarded in applying this 
paragraph. This paragraph (h)(1) applies for purposes of determining 
whether an employee is a covered employee under paragraph (d)(1) of 
this section only with respect to a covered employee of the target who 
commences the performance of services for the acquiror (or a related 
organization with respect to the acquiror) within the period beginning 
12 months before and ending 12 months after the date of the transaction 
as defined in paragraph (h)(7) of this section.
    (2) Corporate reorganizations. A predecessor of an ATEO includes 
another separate ATEO the stock or assets of which are acquired in a 
corporate reorganization as defined in section 368(a)(1)(A), (C), (D), 
(E), (F), or (G) (including by reason of section 368(a)(2)).
    (3) Predecessor change of form or of place of organization. An ATEO 
that restructured by changing its organizational form or place of 
organization (or both) is a predecessor of the restructured ATEO.
    (4) ATEO that becomes a non-ATEO--(i) General rule. An organization 
is a predecessor of an ATEO if it ceases to be an ATEO and then again 
becomes an ATEO effective on or before the predecessor end date. The 
predecessor end date is the date that is 36 months following the date 
that the organization's Federal information return under section 6033 
(or, for an

[[Page 6227]]

ATEO described in paragraph (b)(1)(ii) or (iii) of this section, its 
Federal income tax return under section 6011(a)) is due (or would be 
due if the organization were required to file), excluding any 
extension, for the last taxable year for which the organization 
previously was an ATEO. If the organization becomes an ATEO again 
effective after the predecessor end date, then the former ATEO is 
treated as a separate organization that is not a predecessor of the 
current ATEO.
    (ii) Intervening changes or entities. If an ATEO that ceases to be 
an ATEO (former ATEO) would be treated as a predecessor to an 
organization that becomes an ATEO before the predecessor end date 
(successor ATEO), and if the former ATEO would be treated as a 
predecessor to each intervening entity (if such intervening entities 
had been ATEOs) under the rules of this paragraph (h), then the former 
ATEO is a predecessor of the successor ATEO. For example, if ATEO 1 
loses its tax-exempt status and then merges into Corporation X, 
Corporation X then merges into Corporation Y, and Corporation Y becomes 
an ATEO before the predecessor end date, then ATEO 1 is a predecessor 
of Corporation Y.
    (5) Predecessor of a predecessor. A reference to a predecessor 
includes any predecessor or predecessors of such predecessor, as 
determined under these rules.
    (6) Elections under sections 336(e) and 338. For purposes of this 
paragraph (h), when an ATEO organized as a corporation makes an 
election to treat as an asset purchase either the sale, exchange, or 
distribution of stock pursuant to regulations under section 336(e) or 
the purchase of stock pursuant to regulations under section 338, the 
corporation that issued the stock is treated as the same corporation 
both before and after such transaction.
    (7) Date of transaction. For purposes of this paragraph (h), the 
date that a transaction is treated as having occurred is the date on 
which all events necessary to complete the transaction described in the 
relevant provision have occurred.
    (i) Related organization--(1) In general. Related organization 
means any person or governmental entity, domestic or foreign, that 
meets any of the following tests:
    (i) Controls or controlled by test. The person or governmental 
entity controls, or is controlled by, the ATEO;
    (ii) Controlled by same persons test. The person or governmental 
entity is controlled by one or more persons that control the ATEO;
    (iii) Supported organization test. The person or governmental 
entity is a supported organization (as defined in section 509(f)(3)) 
with respect to the ATEO;
    (iv) Supporting organization test. The person or governmental 
entity is a supporting organization described in section 509(a)(3) with 
respect to the ATEO; or
    (v) VEBA test. With regard to an ATEO that is a voluntary 
employees' beneficiary association (VEBA) described in section 
501(c)(9), the person or governmental entity establishes, maintains, or 
makes contributions to such VEBA.
    (2) Control--(i) In general. Control may be direct or indirect. For 
rules concerning application of the principles of section 318 in 
applying this paragraph (i)(2), see paragraph (i)(2)(vii) of this 
section.
    (ii) Stock corporation. A person or governmental entity controls a 
stock corporation if it owns (by vote or value) more than 50 percent of 
the stock in the stock corporation.
    (iii) Partnership. A person or governmental entity controls a 
partnership if it owns more than 50 percent of the profits interests or 
capital interests in the partnership, determined in accordance with the 
rules and principles of Sec.  1.706-1(b)(4)(ii) for a partner's 
interest in the profits of a partnership and Sec.  1.706-1(b)(4)(iii) 
for a partner's interest in the capital of a partnership.
    (iv) Trust. A person or governmental entity controls a trust if it 
owns more than 50 percent of the beneficial interests in the trust, 
determined by actuarial value.
    (v) Nonstock organization--(A) In general. A person or governmental 
entity controls a nonstock organization if more than 50 percent of the 
trustees or directors of the nonstock organization are either 
representatives of, or directly or indirectly controlled by, the person 
or governmental entity. A nonstock organization is a nonprofit 
organization or other organization without owners and includes a 
governmental entity.
    (B) Control of a trustee or director of a nonstock organization. A 
person or governmental entity controls a trustee or director of the 
nonstock organization if the person or governmental entity has the 
power (either at will or at regular intervals) to remove such trustee 
or director and designate a new one.
    (C) Representatives. Trustees, directors, officers, employees, or 
agents of a person or governmental entity are deemed representatives of 
the person or governmental entity. However, an employee of a person or 
governmental entity (other than a trustee, director, or officer, or an 
employee who possesses at least the authority commonly exercised by an 
officer) who is a director or trustee of a nonstock organization (or 
acting in that capacity) will not be treated as a representative of the 
person or governmental entity if the employee does not act as a 
representative of the person or governmental entity and that fact is 
reported in the form and manner prescribed by the Commissioner in forms 
and instructions.
    (vi) Brother-sister related organizations. Under paragraph 
(i)(1)(ii) of this section, an organization is a related organization 
with respect to an ATEO if one or more persons control both the ATEO 
and the other organization. In the case of control by multiple persons, 
the control tests described in this paragraph (i)(2) of this section 
apply to the persons as a group. For example, if 1,000 individuals who 
are members of both ATEO 1 and ATEO 2 elect a majority of the board 
members of each organization, then ATEO 1 and ATEO 2 are related to 
each other because the same group of 1,000 persons controls both ATEO 1 
and ATEO 2.
    (vii) Section 318 principles--(A) In general. Section 318 (relating 
to constructive ownership of stock) applies in determining ownership of 
stock in a corporation. The principles of section 318 also apply for 
purposes of determining ownership of interests in a partnership or in a 
trust with beneficial interests. For example, applying the principles 
of section 318(a)(1)(A), an individual is considered to own the 
partnership interest or trust interest owned, directly or indirectly, 
by or for the family members specified in such section.
    (B) Nonstock organizations--(1) Attribution of ownership interest 
from a nonstock organization to a controlling person. If a person or 
governmental entity controls a nonstock organization, the person or 
governmental entity is treated as owning a percentage of the stock (or 
partnership interest or beneficial interest in a trust) owned by the 
nonstock organization in accordance with the percentage of trustees or 
directors of the nonstock organization that are representatives of, or 
directly or indirectly controlled by, the person or governmental 
entity.
    (2) Attribution of ownership interest from a controlling person to 
a nonstock organization. If a person or governmental entity controls a 
nonstock organization, the nonstock organization is treated as owning a 
percentage of the stock (or partnership interest or beneficial interest 
in a trust) owned by the person or governmental entity in

[[Page 6228]]

accordance with the percentage of trustees or directors of the nonstock 
organization that are representatives of, or directly or indirectly 
controlled by, the person or governmental entity.
    (3) Indirect control of a nonstock organization through another 
nonstock organization. If a person or governmental entity controls one 
nonstock organization that controls a second nonstock organization, the 
person or governmental entity is treated as controlling the second 
nonstock organization if the product of the percentage of trustees or 
directors of the first nonstock organization that are representatives 
of, or directly or indirectly controlled by, the person or governmental 
entity, multiplied by the percentage of trustees or directors of the 
second nonstock organization that are representatives of, or directly 
or indirectly controlled by, the person or governmental entity or first 
nonstock organization, exceeds 50 percent. Similar principles apply to 
successive tiers of nonstock organizations.
    (4) Attribution of control of nonstock organization to family 
member. An individual's control of a nonstock organization or of a 
trustee or director of a nonstock organization is attributed to the 
members of the individual's family (as set forth in section 318(a)(1) 
and the regulations thereunder), subject to the limitation of section 
318(a)(5)(B) and the regulations thereunder.
    (3) Examples. The following examples illustrate the principles of 
this paragraph (i). For purposes of these examples, assume any entity 
referred to as ``ATEO'' is an ATEO and any entity referred to as 
``CORP'' is not an ATEO.
    (i) Example 1 (Related through a chain of control)--(A) Facts. ATEO 
1, ATEO 2, and ATEO 3 are nonstock organizations. ATEO 3 owns 80 
percent of the stock (by value) of corporation CORP 1. Eighty percent 
of ATEO 2's directors are representatives of ATEO 1. In addition, 80 
percent of ATEO 3's directors are representatives of ATEO 1.
    (B) Conclusion. ATEO 1 is a related organization with respect to 
ATEO 2 (and vice versa) because more than 50 percent of ATEO 2's 
directors are representatives of ATEO 1; thus, ATEO 1 controls ATEO 2. 
Based on the same analysis, ATEO 1 is also a related organization with 
respect to ATEO 3 (and vice versa). CORP 1 is a related organization 
with respect to ATEO 3 because, as the owner of more than 50 percent of 
CORP 1's stock, ATEO 3 controls CORP 1. Applying the principles of 
section 318, ATEO 1 is deemed to own 64 percent of the stock of CORP 1 
(80 percent of ATEO 3's stock in CORP 1). Thus, CORP 1 is a related 
organization with respect to ATEO 1 because ATEO 1 controls CORP 1. 
ATEO 2 is a related organization with respect to ATEO 3, ATEO 3 is a 
related organization with respect to ATEO 2, and CORP 1 is a related 
organization with respect to ATEO 2 because ATEO 2, ATEO 3, and CORP 1 
are all controlled by the same person (ATEO 1).
    (ii) Example 2 (Not related through a chain of control)--(A) Facts. 
ATEO 4, ATEO 5, and ATEO 6 are nonstock organizations. Sixty percent of 
ATEO 5's directors are representatives of ATEO 4. In addition, 60 
percent of ATEO 6's directors are representatives of ATEO 5, but none 
are representatives of ATEO 4.
    (B) Conclusion. ATEO 4 is a related organization with respect to 
ATEO 5 (and vice versa) because more than 50 percent of ATEO 5's 
directors are representatives of ATEO 4; thus, ATEO 4 controls ATEO 5. 
Based on the same analysis, ATEO 6 is a related organization with 
respect to ATEO 5 (and vice versa). Applying the principles of section 
318, ATEO 4 is deemed to control 36 percent of ATEO 6's directors (60 
percent of ATEO 5's 60 percent control over ATEO 6). Because less than 
50 percent of ATEO 6's directors are representatives of ATEO 4, and 
absent any facts suggesting that ATEO 4 directly or indirectly controls 
ATEO 6, ATEO 4 and ATEO 6 are not related organizations with respect to 
each other.


Sec.  53.4960-2  Determination of remuneration paid for a taxable year.

    (a) Remuneration--(1) In general. For purposes of section 4960, 
remuneration means any amount that is wages as defined in section 
3401(a), excluding any designated Roth contribution (as defined in 
section 402A(c)) and including any amount required to be included in 
gross income under section 457(f). Remuneration includes amounts 
includible in gross income as compensation for services as an employee 
pursuant to a below-market loan described in section 7872(c)(1)(B)(i) 
(compensation-related loans) but does not include amounts excepted by 
section 7872(c)(3) ($10,000 de minimis exception). For example, see 
Sec.  1.7872-15(e)(1)(i). Director's fees paid by a corporation to a 
director of the corporation are not remuneration, provided that if the 
director is also an employee of the corporation, the director's fees 
are excluded from remuneration only to the extent that they do not 
exceed fees paid to a director who is not an employee of the 
corporation or any related organization or, if there is no such 
director, they do not exceed reasonable director's fees. Remuneration 
does not include any amount that vested or was paid by a taxpayer 
before the start of the taxpayer's first taxable year that began on or 
after January 1, 2018.
    (2) Exclusion of remuneration for medical services--(i) In general. 
Remuneration does not include the portion of any remuneration paid to a 
licensed medical professional that is for the performance of medical 
services by such professional.
    (ii) Allocation of remuneration for medical services and non-
medical services. If, during an applicable year, an employer pays a 
covered employee remuneration for providing both medical services and 
non-medical services, the employer must make a reasonable, good faith 
allocation between the remuneration for medical services and the 
remuneration for non-medical services. For example, if a medical doctor 
receives current remuneration (or vests in remuneration under a 
deferred compensation plan) for providing medical services and 
administrative or management services, the employer must make a 
reasonable, good faith allocation between the remuneration for the 
medical services and the remuneration for the administrative or 
management services. For this purpose, if an employment agreement or 
similar written arrangement sets forth the remuneration to be paid for 
particular services, that allocation of remuneration applies unless the 
facts and circumstances demonstrate that the amount allocated to 
medical services is unreasonable for those services or that the 
allocation was established for purposes of avoiding application of the 
excise tax under section 4960. If some or all of the remuneration is 
not reasonably allocated in an employment agreement or similar 
arrangement, an employer may use any reasonable allocation method. For 
example, an employer may use a representative sample of records, such 
as patient, insurance, and Medicare/Medicaid billing records or 
internal time reporting mechanisms to determine the time spent 
providing medical services, and then allocate remuneration to medical 
services in the proportion such time bears to the total hours the 
employee worked for the employer (and any related employer) for 
purposes of making a reasonable allocation of remuneration. Similarly, 
if some or all of the remuneration is not reasonably allocated in an 
employment agreement or other similar arrangement, an employer may use 
salaries or other remuneration paid by the employer or similarly 
situated employers for duties

[[Page 6229]]

comparable to those the employee performs (for example, hospital 
administrator and physician) for purposes of making a reasonable 
allocation between remuneration for providing medical services and for 
providing non-medical services.
    (iii) Examples. The following examples illustrate the rules of this 
paragraph (a)(2). For purposes of these examples, assume any entity 
referred to as ``ATEO'' is an ATEO.
    (A) Example 1 (Allocation based on employment agreement)--(1) 
Facts. Employee A is a covered employee of ATEO 1. Employee A is a 
licensed medical professional who provides patient care services for 
ATEO 1 and also provides management and administrative services to ATEO 
1 as the manager of a medical practice group within ATEO 1. The 
employment agreement between ATEO 1 and Employee A specifies that of 
Employee A's salary, 30 percent is allocable to Employee A's services 
as manager of the medical practice group and 70 percent is allocable to 
Employee A's services as a medical professional providing patient care 
services. The facts regarding Employee A's employment indicate the 
employment agreement provides a reasonable allocation and that the 
allocation was not established for purposes of avoiding application of 
the excise tax.
    (2) Conclusion. Consistent with Employee A's employment agreement, 
ATEO 1 must allocate 30 percent of Employee A's salary to the provision 
of non-medical services and 70 percent of Employee A's salary to the 
provision of medical services. Accordingly, only the 30 percent portion 
of Employee A's salary allocated to the other, non-medical services is 
remuneration for purposes of paragraph (a) of this section.
    (B) Example 2 (Allocation based on billing records)--(1) Facts. 
Assume the same facts as in paragraph (a)(2)(iii)(A) of this section 
(Example 1), except that the employment agreement does not allocate 
Employee A's salary between medical and non-medical services performed 
by Employee A. Based on a representative sample of insurance and 
Medicare billing records, as well as time reports that Employee A 
submits to ATEO 1, ATEO 1 determines that Employee A spends 50 percent 
of her work hours providing patient care and 50 percent of her work 
hours performing administrative and management services. ATEO 1 
allocates 50 percent of Employee A's remuneration to medical services.
    (2) Conclusion. ATEO 1's allocation of Employee A's salary is a 
reasonable, good faith allocation. Accordingly, only the 50 percent 
portion of Employee A's remuneration allocated to the non-medical 
services is remuneration for purposes of paragraph (a) of this section.
    (b) Source of payment. For purposes of this section, the 
determination of the source of a payment of remuneration may involve 
the application of one or both of two separate rules described in this 
paragraph (b). Paragraph (b)(1) of this section addresses payments by a 
third party for services performed as an employee of a separate 
employer entity, while paragraph (b)(2) of this section addresses the 
application of section 4960(c)(4)(A) to treat certain remuneration paid 
by a related organization (after application of paragraph (b)(1) of 
this section, if applicable) as paid by the ATEO.
    (1) Remuneration paid by a third party for employment by an 
employer. Remuneration paid (or a grant of a legally binding right to 
nonvested remuneration) by a third-party payor (whether a related 
organization, payroll agent, agent designated under section 3504, 
certified professional employer organization under section 7705, or 
other entity) during an applicable year for services performed as an 
employee of an employer is remuneration paid (or payable) by the 
employer, except as otherwise provided in Sec.  53.4960-1(d)(2)(ii) and 
(iii).
    (2) Remuneration paid by a related organization for employment by 
the related organization. Pursuant to section 4960(c)(4)(A), 
remuneration paid (or a grant of a legally binding right to nonvested 
remuneration) by a related organization to an ATEO's employee during an 
applicable year for services performed as an employee of the related 
organization is treated as remuneration paid (or payable) by the ATEO, 
except as otherwise provided in Sec.  53.4960-1(d)(2)(ii) and (iii).
    (c) Applicable year in which remuneration is treated as paid--(1) 
In general. Remuneration that is a regular wage within the meaning of 
Sec.  31.3402(g)-1(a)(1)(ii) is treated as paid on the date it is 
actually or constructively paid and all other remuneration is treated 
as paid on the first date on which the remuneration is vested.
    (2) Vested remuneration. Remuneration is vested if it is not 
subject to a substantial risk of forfeiture within the meaning of 
section 457(f)(3)(B) (regardless of whether the arrangement under which 
the remuneration is to be paid is deferred compensation described in 
section 457(f) or 409A). In general, an amount is subject to a 
substantial risk of forfeiture if entitlement to the amount is 
conditioned on the future performance of substantial services or upon 
the occurrence of a condition that is related to a purpose of the 
remuneration if the possibility of forfeiture is substantial. Except as 
provided in paragraph (c)(1) of this section, remuneration that is 
never subject to a substantial risk of forfeiture is considered paid on 
the first date the service provider has a legally binding right to the 
payment. For purposes of this section, a plan means a plan within the 
meaning of Sec.  1.409A-1(c), an account balance plan means an account 
balance plan within the meaning of Sec.  1.409A-1(c)(2)(i)(A), and a 
nonaccount balance plan means a nonaccount balance plan within the 
meaning of Sec.  1.409A-1(c)(2)(i)(C). Net earnings on previously paid 
remuneration (described in paragraph (d)(2) of this section) that are 
not subject to a substantial risk of forfeiture are vested (and, thus, 
treated as paid) at the earlier of the date actually or constructively 
paid to the employee or the close of the applicable year in which they 
accrue. For example, the present value of a principal amount accrued to 
an employee's account under an account balance plan (under which the 
earnings and losses attributed to the account are based solely on a 
predetermined actual investment as determined under Sec.  
31.3121(v)(2)-1(d)(2)(i)(B) or a reasonable market interest rate) is 
treated as paid on the date vested, but the present value of any net 
earnings subsequently accrued on that amount (the increase in value due 
to the predetermined actual investment or a reasonable market interest 
rate) is treated as paid at the close of the applicable year in which 
they accrue. Similarly, while the present value of an amount accrued 
under a nonaccount balance (including earnings that accrued while the 
amount was nonvested) is treated as paid on the date it is first 
vested, the present value of the net earnings on that amount (the 
increase in the present value) is treated as paid at the close of the 
applicable year in which they accrue.
    (3) Change in related status during the year. If a taxpayer becomes 
or ceases to be a related organization with respect to an ATEO during 
an applicable year, then only the remuneration paid by the taxpayer to 
an employee with respect to services performed as an employee of the 
related organization during the portion of the applicable year during 
which the employer is a related organization is treated as paid by the 
ATEO. If an amount is treated as paid due to vesting in the year the 
taxpayer becomes or ceases to be a related

[[Page 6230]]

organization with respect to the ATEO, then the amount is treated as 
paid by the ATEO only if the amount becomes vested during the portion 
of the applicable year that the taxpayer is a related organization with 
respect to the ATEO.
    (d) Amount of remuneration treated as paid--(1) In general. For 
each applicable year, the amount of remuneration treated as paid by the 
employer to a covered employee is the sum of regular wages within the 
meaning of Sec.  31.3402(g)-1(a)(1)(ii) actually or constructively paid 
during the applicable year and the present value (as determined under 
paragraph (e) of this section) of all other remuneration that vested 
during the applicable year. The amount of remuneration that vests 
during an applicable year is determined on an employer-by-employer 
basis with respect to each covered employee.
    (2) Earnings and losses on previously paid remuneration--(i) In 
general. The amount of net earnings or losses on previously paid 
remuneration paid by an employer is determined on an employee-by-
employee basis, such that amounts accrued with regard to one employee 
do not affect amounts accrued with regard to a different employee. 
Similarly, losses accrued on previously paid remuneration from one 
employer do not offset earnings accrued on previously paid remuneration 
from another employer. The amount of net earnings or losses on 
previously paid remuneration paid by the employer is determined on a 
net aggregate basis for all plans maintained by the employer in which 
the employee participates for each applicable year. For example, losses 
under an account balance plan may offset earnings under a nonaccount 
balance plan for the same applicable year maintained by the same 
employer for the same employee.
    (ii) Previously paid remuneration--(A) New covered employee. For an 
individual who was not a covered employee for any prior applicable 
year, previously paid remuneration means, for the applicable year for 
which the individual becomes a covered employee, the present value of 
vested remuneration that was not actually or constructively paid or 
otherwise includible in the employee's gross income before the start of 
the applicable year plus any remuneration that vested during the 
applicable year but that is not actually or constructively paid or 
otherwise includible in the employee's gross income before the close of 
the applicable year.
    (B) Existing covered employee. For an individual who was a covered 
employee for any prior applicable year, previously paid remuneration 
means, for each applicable year, the amount of remuneration that the 
employer treated as paid in the applicable year or for a prior 
applicable year but that is not actually or constructively paid or 
otherwise includible in the employee's gross income before the close of 
the applicable year. Actual or constructive payment or another event 
causing an amount of previously paid remuneration to be includible in 
the employee's gross income thus reduces the amount of previously paid 
remuneration.
    (iii) Earnings. Earnings means any increase in the vested present 
value of previously paid remuneration as of the close of the applicable 
year, regardless of whether the plan denominates the increase as 
earnings. For example, an increase in the vested account balance of a 
nonqualified deferred compensation plan based solely on the investment 
return of a predetermined actual investment (and disregarding any 
additional contributions) constitutes earnings. Similarly, an increase 
in the vested present value of a benefit under a nonqualified 
nonaccount balance plan due solely to the passage of time (and 
disregarding any additional benefit accruals) constitutes earnings. 
However, an increase in an account balance of a nonqualified deferred 
compensation plan due to a salary reduction contribution or an employer 
contribution does not constitute earnings (and therefore may not be 
offset with losses). Likewise, an increase in the benefit under a 
nonaccount balance plan due to an additional year of service or an 
increase in compensation that is reflected in a benefit formula does 
not constitute earnings.
    (iv) Losses. Losses means any decrease in the vested present value 
of previously paid remuneration as of the close of the applicable year, 
regardless of whether the plan denominates that decrease as losses.
    (v) Net earnings. Net earnings means, for each applicable year, the 
amount (if any) by which the earnings accrued for the applicable year 
on previously paid remuneration exceeds the sum of the losses accrued 
on previously paid remuneration for the applicable year and any net 
losses carried forward from a previous taxable year.
    (vi) Net losses. Net losses means, for each applicable year, the 
amount (if any) by which the sum of the losses accrued on previously 
paid remuneration for the applicable year and any net losses carried 
forward from a previous taxable year exceed the earnings accrued for 
the applicable year on previously paid remuneration. Losses may only be 
used to offset earnings and thus do not reduce the remuneration treated 
as paid for an applicable year except to the extent of the earnings 
accrued for that applicable year. However, with regard to a covered 
employee, an employer may carry net losses forward to the next 
applicable year and offset vested earnings for purposes of determining 
net earnings or losses for that subsequent applicable year. For 
example, if a covered employee who participates in a nonaccount balance 
plan and an account balance plan vests in an amount of earnings under 
the nonaccount balance plan and has losses under the account balance 
plan that exceed the vested earnings treated as remuneration under the 
nonaccount balance plan, those excess losses are carried forward to the 
next applicable year and offset vested earnings for purposes of 
determining net earnings or losses for that applicable year. If, for 
the next applicable year, there are not sufficient earnings to offset 
the entire amount of losses carried forward from the previous year (and 
any additional losses), the offset process repeats for each subsequent 
applicable year until there are sufficient earnings for the applicable 
year to offset any remaining losses carried forward.
    (3) Remuneration paid for a taxable year before the employee 
becomes a covered employee--(i) In general. In accordance with the 
payment timing rules of paragraph (c) of this section, any remuneration 
that is vested but is not actually or constructively paid or otherwise 
includible in an employee's gross income as of the close of the 
applicable year for the taxable year immediately preceding the taxable 
year in which the employee first becomes a covered employee of an ATEO 
is treated as previously paid remuneration for the taxable year in 
which the employee first becomes a covered employee. Net losses on this 
previously paid remuneration from any preceding applicable year do not 
carry forward to subsequent applicable years. However, net earnings and 
losses that vest on such previously paid remuneration in subsequent 
applicable years are treated as remuneration paid for a taxable year 
for which the employee is a covered employee.
    (ii) Examples. The following examples illustrate the rules of this 
paragraph (d)(3). For purposes of these examples, assume any 
organization described as ``ATEO'' is an ATEO.
    (A) Example 1 (Earnings on pre-covered employee remuneration)--(1) 
Facts. ATEO 1 uses a taxable year

[[Page 6231]]

beginning July 1 and ending June 30. Employee A becomes a covered 
employee of ATEO 1 for the taxable year beginning July 1, 2023, and 
ending June 30, 2024. During the 2022 applicable year, Employee A vests 
in $1 million of nonqualified deferred compensation. As of December 31, 
2022, the present value of the amount deferred under the plan is $1.1 
million. During the 2023 applicable year, ATEO 1 pays Employee A $1 
million in regular wages. The present value as of December 31, 2023, of 
Employee A's nonqualified deferred compensation is $1.3 million.
    (2) Conclusion (Taxable year beginning July 1, 2022, and ending 
June 30, 2023). ATEO 1 pays Employee A $1.1 million of remuneration in 
the 2022 applicable year. This is comprised of $1 million of vested 
nonqualified deferred compensation, and $100,000 of earnings, all of 
which is treated as paid for the taxable year beginning July 1, 2022, 
and ending June 30, 2023.
    (3) Conclusion (Taxable year beginning July 1, 2023, and ending 
June 30, 2024). ATEO 1 pays Employee A $1.2 million of remuneration in 
the 2023 applicable year. This is comprised of $1 million regular wages 
and $200,000 of earnings ($1.3 million present value as of December 31, 
2023, minus $1.1 million previously paid remuneration as of December 
31, 2022).
    (B) Example 2 (Losses on pre-covered employee remuneration)--(1) 
Facts. Assume the same facts as in paragraph (d)(3)(ii)(A) of this 
section (Example 1), except that the present value of the nonqualified 
deferred compensation as of December 31, 2022, is $900,000.
    (2) Conclusion (Taxable year beginning July 1, 2022, and ending 
June 30, 2023). ATEO 1 pays Employee A $1 million of remuneration in 
the 2022 applicable year. This is comprised of $1 million of vested 
nonqualified deferred compensation. The present value of all vested 
deferred compensation as of December 31 of the 2022 applicable year 
($900,000) is treated as previously paid remuneration for the next 
applicable year (as Employee A is a covered employee for the next 
taxable year). The $100,000 of losses accrued while Employee A was not 
a covered employee do not carry forward to the next applicable year.
    (3) Conclusion (Taxable year beginning July 1, 2023, and ending 
June 30, 2024). ATEO 1 pays Employee A $1.4 million of remuneration in 
the 2023 applicable year. This is comprised of $1 million cash and 
$400,000 of earnings ($1.3 million present value as of December 31, 
2023, minus $900,000 previously paid remuneration).
    (e) Calculation of present value--(1) In general. The employer must 
determine present value using reasonable actuarial assumptions 
regarding the amount, time, and probability that a payment will be 
made. For this purpose, a discount for the probability that an employee 
will die before commencement of benefit payments is permitted, but only 
to the extent that benefits will be forfeited upon death. The present 
value may not be discounted for the probability that payments will not 
be made (or will be reduced) because of the unfunded status of the 
plan; the risk associated with any deemed or actual investment of 
amounts deferred under the plan; the risk that the employer, the 
trustee, or another party will be unwilling or unable to pay; the 
possibility of future plan amendments; the possibility of a future 
change in the law; or similar risks or contingencies. The present value 
of the right to future payments as of the vesting date includes any 
earnings that have accrued as of the vesting date that are not 
previously paid remuneration.
    (2) Treatment of future payment amount as present value for certain 
amounts. For purposes of determining the present value of remuneration 
that is scheduled to be actually or constructively paid within 90 days 
of vesting, the employer may treat the future amount that is to be paid 
as the present value at vesting.
    (f) Examples. The following examples illustrate the rules of this 
section. For purposes of these examples, assume any entity referred to 
as ``ATEO'' is an ATEO, any entity referred to as ``CORP'' is not an 
ATEO, and all taxpayers use the calendar year as their taxable year.
    (1) Example 1 (Account balance plan)--(i) Facts. Employee A is a 
covered employee of ATEO 1. Employee A participates in a nonqualified 
deferred compensation plan (the NQDC plan) in which the account balance 
is adjusted based on the investment returns on predetermined actual 
investments. On January 1, 2022, ATEO 1 credits $100,000 to Employee 
A's account under the plan, subject to the requirement that Employee A 
remain employed through June 30, 2024. On June 30, 2024, the vested 
account balance is $110,000. Due to earnings or losses on the account 
balance, the closing account balance on each of the following dates is: 
$115,000 on December 31, 2024, $120,000 on December 31, 2025, $100,000 
on December 31, 2026, and $110,000 on December 31, 2027. During 2028, 
Employee A defers an additional $10,000 under the plan, all of which is 
vested at the time of deferral. On December 31, 2028, the closing 
account balance is $125,000. In 2029, ATEO 1 pays $10,000 to Employee A 
under the plan. On December 31, 2029, the closing account balance is 
$135,000 due to earnings on the account balance.
    (ii) Conclusion (2022 and 2023 applicable years--nonvested 
amounts). For 2022 and 2023, ATEO 1 is not treated as paying Employee A 
any remuneration attributable to Employee A's participation in the NQDC 
plan because the amount deferred under the plan remains subject to a 
substantial risk of forfeiture within the meaning of section 
457(f)(3)(B).
    (iii) Conclusion (2024 applicable year--amounts in year of 
vesting). For 2024, ATEO 1 is treated as paying Employee A $115,000 of 
remuneration attributable to Employee A's participation in the NQDC 
plan, including $110,000 of remuneration on June 30, 2024, when the 
amount becomes vested, and an additional $5,000 of remuneration on 
December 31, 2024, which is earnings on the previously paid 
remuneration ($110,000).
    (iv) Conclusion (2025 applicable year--earnings). For 2025, ATEO 1 
is treated as paying Employee A $5,000 of remuneration attributable to 
Employee A's participation in the NQDC plan, which is the additional 
earnings on the previously paid remuneration ($115,000) as of December 
31, 2025.
    (v) Conclusion (2026 applicable year--losses). For 2026, ATEO 1 is 
not treated as paying Employee A any remuneration attributable to 
Employee A's participation in the NQDC plan because the present value 
of the previously paid remuneration ($120,000) decreased to $100,000 as 
of December 31, 2026. The $20,000 loss for 2026 does not reduce any 
amount previously treated as remuneration but is available for 
carryover to subsequent taxable years to offset earnings.
    (vi) Conclusion (2027 applicable year--recovery of losses). For 
2027, ATEO 1 is not treated as paying Employee A any remuneration 
attributable to Employee A's participation in the NQDC plan because the 
present value of the previously paid remuneration ($120,000) was 
$110,000 as of December 31, 2027. Due to increases on the account 
balance, ATEO 1 recovers $10,000 of the $20,000 of losses carried over 
from 2026. The net losses as of December 31, 2027, are $10,000, and 
none of the $10,000 in earnings during 2027 is treated as remuneration 
paid in 2027.
    (vii) Conclusion (2028 applicable year--no recovery of losses 
against additional deferrals of compensation).

[[Page 6232]]

For 2028, ATEO 1 is treated as paying Employee A $10,000 of 
remuneration attributable to Employee A's participation in the NQDC 
plan. The additional $10,000 deferral is vested and thus is treated as 
remuneration paid on the date credited to Employee A's account. This 
credit increases the amount of previously paid remuneration from 
$120,000 to $130,000. Additionally, due to earnings, ATEO 1 recovers 
$5,000 of the $10,000 loss carried over from 2027, none of which was 
remuneration paid for 2026, so that as of December 31, 2028, the net 
loss available for carryover to 2029 is $5,000.
    (viii) Conclusion (2029 applicable year--distributions, recovery of 
remainder of losses through earnings and additional earnings). For 
2029, ATEO 1 is treated as paying Employee A $15,000 of remuneration 
attributable to Employee A's participation in the NQDC plan. The 
$10,000 payment reduces the amount of previously paid remuneration 
(from $130,000 to $120,000) and the account balance (from $125,000 to 
$115,000). The present value of the vested account balance increases by 
$20,000 (from $115,000 to $135,000) as of December 31, 2029. Therefore, 
due to earnings, ATEO 1 recovers the remaining $5,000 loss carried over 
from 2028 (the difference between the $120,000 previously paid 
remuneration before earnings and the $115,000 account balance before 
earnings) and is treated as paying Employee A an additional $15,000 of 
remuneration as earnings (the difference between the $135,000 account 
balance after earnings and the $120,000 previously paid remuneration 
after loss recovery).
    (2) Example 2 (Nonaccount balance plan with earnings)--(i) Facts. 
ATEO 2 and CORP 2 are related organizations. Employee B is a covered 
employee of ATEO 2 and is also employed by CORP 2. On January 1, 2022, 
CORP 2 and Employee B enter into an agreement under which CORP 2 will 
pay Employee B $100,000 on December 31, 2025, if B remains employed by 
CORP 2 through January 1, 2024. Employee B remains employed by CORP 2 
through January 1, 2024. On January 1, 2024, the present value based on 
reasonable actuarial assumptions of the $100,000 to be paid on December 
31, 2025, is $75,000. On December 31, 2024, the present value of the 
$100,000 future payment increases to $85,000 due solely to the passage 
of time. On December 31, 2025, CORP 2 pays Employee B $100,000.
    (ii) Conclusion (2022 and 2023 applicable years--nonvested 
amounts). For 2022 and 2023, CORP 2 is not treated as paying Employee B 
any remuneration attributable to the agreement because the amount 
deferred under the agreement remains subject to a substantial risk of 
forfeiture within the meaning of section 457(f)(3)(B).
    (iii) Conclusion (2024 applicable year--amounts in year of 
vesting). For 2024, CORP 2 is treated as paying Employee B $75,000 of 
remuneration attributable to the agreement on January 1, 2024, which is 
the present value on that date of the $100,000 payable on December 31, 
2025. In addition, CORP 2 is treated as paying Employee B $10,000 of 
remuneration attributable to the agreement on December 31, 2024, which 
is earnings based on the increase in the present value of the 
previously paid remuneration (from $75,000 to $85,000) as of December 
31, 2024.
    (iv) Conclusion (2025 applicable year--earnings and distribution of 
previously paid remuneration). For 2025, CORP 2 is treated as paying 
Employee B $15,000 in remuneration attributable to the agreement on 
December 31, 2025, which is earnings based on the increase in the 
present value of the previously paid remuneration (from $85,000 to 
$100,000) as of December 31, 2025. In addition, the $100,000 payment is 
treated as reducing the amount of previously paid remuneration 
($100,000) to zero.
    (3) Example 3 (Treatment of amount payable as present value at 
vesting)--(i) Facts. Employee C is a covered employee of ATEO 3. Under 
an agreement between ATEO 3 and Employee C, ATEO 3 agrees to pay 
Employee C $100,000 two months after the date Employee C meets a 
specified performance goal that is a substantial risk of forfeiture 
within the meaning of section 457(f)(3)(B). Employee C meets the 
performance goal on November 30, 2022, and ATEO 3 pays Employee C 
$100,000 on January 31, 2023. In accordance with Sec.  53.4960-2(e)(2), 
because the payment is to be made within 90 days of vesting, ATEO 3 
elects to treat the full payment amount as the amount of remuneration 
paid at vesting.
    (ii) Conclusion (2022 applicable year--election to treat amount 
payable within 90 days as paid at vesting). For taxable year 2022, ATEO 
3 is treated as paying Employee C $100,000 of remuneration attributable 
to the agreement. Employee C vests in the $100,000 payment in 2022 upon 
meeting the performance goal. Under the general rule, ATEO 3 would be 
treated as paying for the taxable year 2022 the present value as of 
November 30, 2022, of $100,000 payable on January 31, 2023 (two months 
after the date of vesting), with adjustments to the present value as of 
the end of the year. However, because ATEO 3 elected to treat the full 
$100,000 amount payable within 90 days of vesting as the remuneration 
paid, the $100,000 payable to Employee C in 2023 is treated as 
remuneration paid in 2022 (and no additional amount related to the 
$100,000 paid on January 31, 2023, is treated as remuneration paid in 
2023).
    (4) Example 4 (Aggregation of remuneration from related 
organizations)--(i) Facts. Employee D is a covered employee of ATEO 4 
and also an employee of CORP 4 and CORP 5. ATEO 4, CORP 4, and CORP 5 
are related organizations. ATEO 4, CORP 4, and CORP 5 each pay Employee 
D $200,000 of salary during 2022 and 2023. On January 1, 2022, ATEO 4 
promises to pay Employee D $120,000 on December 31, 2023, under a 
nonaccount balance plan, the right to which is vested and the present 
value of which is $100,000 on January 1, 2022. On January 1, 2022, CORP 
4 and CORP 5 each contribute $100,000 on Employee D's behalf to account 
balance plans of CORP 4 and CORP 5, respectively, under which all 
amounts deferred are vested. On December 31, 2022, the present value of 
the amounts deferred under the ATEO 4 plan is $110,000, the present 
value of the amounts deferred under the CORP 4 plan is $120,000, and 
the present value of the amounts deferred under the CORP 5 plan 
maintained is $90,000. On December 31, 2023, the present value of the 
amounts deferred under the ATEO 4 plan is $120,000, the present value 
of the amounts deferred under the CORP 4 plan is $130,000, and the 
present value of the amounts deferred under the CORP 5 plan is 
$110,000.
    (ii) Conclusion (2022 applicable year). For 2022, before 
aggregation of remuneration paid by related organizations, ATEO 4 is 
treated as paying Employee D $310,000 of remuneration ($200,000 salary 
+ $100,000 upon vesting of deferred amounts + $10,000 net earnings on 
vested deferred amounts). CORP 4 is treated as paying Employee D 
$320,000 of remuneration ($200,000 salary + $100,000 upon vesting of 
deferred amounts + $20,000 net earnings on vested deferred amounts). 
CORP 5 is treated as paying Employee D $300,000 of remuneration 
($200,000 salary + $100,000 upon vesting of deferred amounts) and has 
$10,000 of net losses on vested deferred amounts, which are carried 
forward to 2023. Thus, ATEO 4 is treated as paying $930,000 of 
remuneration to Employee D for the applicable year.

[[Page 6233]]

    (iii) Conclusion (2023 applicable year). For 2023, before 
aggregation of remuneration paid by related organizations, ATEO 4 is 
treated as paying Employee D $210,000 of remuneration ($200,000 salary 
+ $10,000 earnings on previously paid remuneration). CORP 4 is treated 
as paying Employee D $210,000 of remuneration ($200,000 salary + 
$10,000 net earnings on previously paid remuneration). CORP 5 is 
treated as paying Employee D $210,000 of remuneration ($200,000 salary 
+ $10,000 net earnings on previously paid remuneration after taking 
into account the loss carryforward). Thus, ATEO 4 is treated as paying 
$630,000 of remuneration to Employee D for the applicable year.
    (5) Example 5 (Treatment of regular wages for a pay period spanning 
applicable years)--(i) Facts. ATEO 5 pays its employees' salaries in 
accordance with a two-week payroll period that begins Sunday of the 
first week and ends Saturday of the second week. Payment occurs the 
Friday following the end of the payroll period. The last payroll period 
of 2023 ends on December 31, 2023. For the last payroll period, 
Employee E earns $8,000 of salary. In addition, ATEO 5 awards Employee 
E a $10,000 bonus that vests on December 31, 2023. ATEO 5 pays Employee 
E $18,000 on Friday, January 5, 2024, reflecting Employee E's salary 
for the last payroll period of 2023 and the bonus, the right to which 
vested on December 31, 2023.
    (ii) Conclusion (Regular wages). The $8,000 of salary is regular 
wages within the meaning of Sec.  31.3402(g)-1(a)(1)(ii) because it is 
an amount paid at a periodic rate for the current payroll period. Thus, 
$8,000 is treated as remuneration paid on January 5, 2024 (when it is 
actually or constructively paid), and, therefore, is treated as 
remuneration paid in ATEO 5's 2024 applicable year.
    (iii) Conclusion (Amounts other than regular wages). The $10,000 
bonus is not regular wages within the meaning of Sec.  31.3402(g)-
1(a)(1)(ii) because it is not an amount paid at a periodic rate for the 
current payroll period. Thus, $10,000 is treated as remuneration paid 
on December 31, 2023 (when it is vested) and, therefore, is treated as 
remuneration paid in ATEO 5's 2023 applicable year.


Sec.  53.4960-3  Determination of whether there is a parachute payment.

    (a) Parachute payment--(1) In general. Except as otherwise provided 
in paragraph (a)(2) of this section (relating to payments excluded from 
the definition of a parachute payment), parachute payment means any 
payment in the nature of compensation made by an ATEO (or a predecessor 
of the ATEO) or a related organization to (or for the benefit of) a 
covered employee if the payment is contingent on the employee's 
separation from employment with the employer, and the aggregate present 
value of the payments in the nature of compensation to (or for the 
benefit of) the individual that are contingent on the separation equals 
or exceeds an amount equal to 3-times the base amount.
    (2) Exclusions. The following payments are not parachute payments:
    (i) Certain qualified plans. A payment that is a contribution to or 
a distribution from a plan described in section 401(a) that includes a 
trust exempt from tax under section 501(a), an annuity plan described 
in section 403(a), a simplified employee pension (as defined in section 
408(k)), or a simple retirement account described in section 408(p);
    (ii) Certain annuity contracts. A payment made under or to an 
annuity contract described in section 403(b) or a plan described in 
section 457(b);
    (iii) Compensation for medical services. A payment made to a 
licensed medical professional for the performance of medical services 
performed by such professional; and
    (iv) Payments to non-HCEs. A payment made to an individual who is 
not a highly compensated employee (HCE) as defined in paragraph (a)(3) 
of this section.
    (3) Determination of HCEs for purposes of the exclusion from 
parachute payments. For purposes of this section, highly compensated 
employee or HCE means, with regard to an ATEO that maintains a 
qualified retirement plan or other employee benefit plan described in 
Sec.  1.414(q)-1T, Q/A-1, any person who is a highly compensated 
employee within the meaning of section 414(q) and, with regard to an 
ATEO that does not maintain such a plan, any person who would be a 
highly compensated employee within the meaning of section 414(q) if the 
ATEO did maintain such a plan. For purposes of determining the group of 
highly compensated employees for a determination year, consistent with 
Sec.  1.414(q)-1T, Q/A-14(a)(1), the determination year calculation is 
made on the basis of the applicable plan year under Sec.  1.414(q)-1T, 
Q/A-14(a)(2) of the plan or other entity for which a determination is 
made, and the look-back year calculation is made on the basis of the 
12-month period immediately preceding that year. For an ATEO that does 
not maintain a plan described in Sec.  1.414(q)-1T, Q/A-1, the rules 
are applied by analogy, substituting the calendar year for the plan 
year. Thus, for example, in 2022, an ATEO that does not maintain such a 
plan must use its employees' 2021 annual compensation (as defined in 
Sec.  1.414(q)-1T, Q/A-13, including any of the safe harbor definitions 
if applied consistently to all employees) to determine which employees 
are HCEs for 2022, if any, for purposes of section 4960. If an employee 
is an HCE at the time of separation from employment, then for purposes 
of section 4960 any parachute payment that is contingent on the 
separation from employment (as defined in paragraph (d) of this 
section) is treated as paid to an HCE so that the exception from the 
term parachute payment under paragraph (a)(2)(iv) of this section does 
not apply, even if the payment occurs during one or more later taxable 
years (that is, taxable years after the taxable year during which the 
employee separated from employment).
    (b) Payment in the nature of compensation--(1) In general. Any 
payment--in whatever form--is a payment in the nature of compensation 
if the payment arises out of an employment relationship, including 
holding oneself out as available to perform services and refraining 
from performing services. Thus, for example, a payment made under a 
covenant not to compete or a similar arrangement is a payment in the 
nature of compensation. A payment in the nature of compensation 
includes (but is not limited to) wages and salary, bonuses, severance 
pay, fringe benefits, life insurance, pension benefits, and other 
deferred compensation (including any amount characterized by the 
parties as interest or earnings thereon). A payment in the nature of 
compensation also includes cash when paid, the value of the right to 
receive cash, the value of accelerated vesting, or a transfer of 
property. The vesting of an option, stock appreciation right, or 
similar form of compensation as a result of a covered employee's 
separation from employment is a payment in the nature of compensation. 
However, a payment in the nature of compensation does not include 
attorney's fees or court costs paid or incurred in connection with the 
payment of any parachute payment or a reasonable rate of interest 
accrued on any amount during the period the parties contest whether a 
parachute payment will be made.
    (2) Consideration paid by covered employee. Any payment in the 
nature of compensation is reduced by the amount of any money or the 
fair market value of any property (owned by the covered

[[Page 6234]]

employee without restriction) that is (or will be) transferred by the 
covered employee in exchange for the payment.
    (c) When payment is considered to be made--(1) In general. A 
payment in the nature of compensation is considered made in the taxable 
year in which it is includible in the covered employee's gross income 
or, in the case of fringe benefits and other benefits that are 
excludable from income, in the taxable year the benefits are received. 
In the case of taxable non-cash fringe benefits provided in a calendar 
year, payment is considered made on the date or dates the employer 
chooses, but no later than December 31 of the calendar year in which 
the benefits are provided, except that when the fringe benefit is the 
transfer of personal property (either tangible or intangible) of a kind 
normally held for investment or the transfer of real property, payment 
is considered made on the actual date of transfer. If the fringe 
benefit is neither a transfer of personal property nor a transfer of 
real property, the employer may, in its discretion, treat the value of 
the benefit actually provided during the last two months of the 
calendar year as paid during the subsequent calendar year. However, an 
employer that treats the value of a benefit paid during the last two 
months of a calendar year as paid during the subsequent calendar year 
under this rule must treat the value of that fringe benefit as paid 
during the subsequent calendar year with respect to all employees who 
receive it.
    (2) Transfers of section 83 property. A transfer of property in 
connection with the performance of services that is subject to section 
83 is considered a payment made in the taxable year in which the 
property is transferred or would be includible in the gross income of 
the covered employee under section 83, disregarding any election made 
by the employee under section 83(b) or (i). Thus, in general, such a 
payment is considered made at the later of the date the property is 
transferred (as defined in Sec.  1.83-3(a)) to the covered employee or 
the date the property becomes substantially vested (as defined in Sec.  
1.83-3(b) and (j)). The amount of the payment is the compensation as 
determined under section 83, disregarding any amount includible in 
income pursuant to an election made by an employee under section 83(b).
    (3) Stock options. An option (including an option to which section 
421 applies) is treated as property that is transferred when the option 
becomes vested (regardless of whether the option has a readily 
ascertainable fair market value as defined in Sec.  1.83-7(b)). For 
purposes of determining the timing and amount of any payment related to 
the option, the principles of Sec.  1.280G-1, Q/A-13 and any method 
prescribed by the Commissioner in published guidance of general 
applicability under Sec.  601.601(d)(2) apply.
    (d) Payment contingent on an employee's separation from 
employment--(1) In general. A payment is contingent on an employee's 
separation from employment if the facts and circumstances indicate that 
the employer would not make the payment in the absence of the 
employee's involuntary separation from employment. A payment generally 
would be made in the absence of the employee's involuntary separation 
from employment if it is substantially certain at the time of the 
involuntary separation from employment that the payment would be made 
whether or not the involuntary separation occurred. A payment the right 
to which is not subject to a substantial risk of forfeiture within the 
meaning of section 457(f)(3)(B) at the time of an involuntary 
separation from employment generally is a payment that would have been 
made in the absence of an involuntary separation from employment (and 
is therefore not contingent on a separation from employment), except 
that the increased value of an accelerated payment of a vested amount 
described in paragraph (f)(3) of this section resulting from an 
involuntary separation from employment is not treated as a payment that 
would have been made in the absence of an involuntary separation from 
employment. A payment the right to which is no longer subject to a 
substantial risk of forfeiture within the meaning of section 
457(f)(3)(B) as a result of an involuntary separation from employment, 
including a payment the vesting of which is accelerated due to the 
separation from employment as described in paragraph (f)(3) of this 
section, is not treated as a payment that would have been made in the 
absence of an involuntary separation from employment (and thus is 
contingent on a separation from employment). A payment does not fail to 
be contingent on a separation from employment merely because the 
payment is conditioned upon the execution of a release of claims, 
noncompetition or nondisclosure provisions, or other similar 
requirements. See paragraph (d)(3) of this section for the treatment of 
a payment made pursuant to a covenant not to compete. If, after an 
involuntary separation from employment, the former employee continues 
to provide certain services as a nonemployee, payments for services 
rendered as a nonemployee are not payments that are contingent on a 
separation from employment to the extent those payments are reasonable 
and are not made on account of the involuntary separation from 
employment. Whether services are performed as an employee or 
nonemployee depends upon all the facts and circumstances. See Sec.  
53.4960-1(e). For rules on determining whether payments are reasonable 
compensation for services, the rules of Sec.  1.280G-1, Q/A-40 through 
Q/A-42 (excluding Q/A-40(b) and Q/A-42(b)), and Q/A-44 are applied by 
analogy (substituting involuntary separation from employment for change 
in ownership or control).
    (2) Employment agreements--(i) In general. If a covered employee 
involuntarily separates from employment before the end of a contract 
term and is paid damages for breach of contract pursuant to an 
employment agreement, the payment of damages is treated as a payment 
that is contingent on a separation from employment. An employment 
agreement is an agreement between an employee and employer that 
describes, among other things, the amount of compensation or 
remuneration payable to the employee for services performed during the 
term of the agreement.
    (ii) Example. The following example illustrates the rules of this 
paragraph (d)(2). For purposes of this example, assume any entity 
referred to as ``ATEO'' is an ATEO.
    (A) Example--(1) Facts. Employee A, a covered employee, has a 3-
year employment agreement with ATEO 1. Under the agreement, Employee A 
will receive a salary of $200,000 for the first year and, for each 
succeeding year, an annual salary that is $100,000 more than the 
previous year. The agreement provides that, in the event of A's 
involuntary separation from employment without cause, Employee A will 
receive the remaining salary due under the agreement. At the beginning 
of the second year of the agreement, ATEO 1 involuntarily terminates 
Employee A's employment without cause and pays Employee A $700,000 
representing the remaining salary due under the employment agreement 
($300,000 for the second year of the agreement plus $400,000 for the 
third year of the agreement).
    (2) Conclusion. The $700,000 payment is treated as a payment that 
is contingent on a separation from employment.
    (3) Noncompetition agreements. A payment under an agreement 
requiring a covered employee to refrain from performing services (for 
example, a

[[Page 6235]]

covenant not to compete) is a payment that is contingent on a 
separation from employment if the payment would not have been made in 
the absence of an involuntary separation from employment. For example, 
a payment contingent on compliance in whole or in part with a covenant 
not to compete negotiated as part of a severance arrangement arising 
from an involuntary separation from employment is contingent on a 
separation from employment. Similarly, one or more payments contingent 
on compliance in whole or in part with a covenant not to compete not 
negotiated as part of a severance arrangement arising from an 
involuntary separation from employment but that provides for a payment 
specific to an involuntary separation from employment (and not 
voluntary separation from employment) is contingent on a separation 
from employment. Payments made under an agreement requiring a covered 
employee to refrain from performing services that are contingent on 
separation from employment are not treated as paid in exchange for the 
performance of services and are not excluded from parachute payments.
    (4) Payment of amounts previously included in income or excess 
remuneration. Actual or constructive payment of an amount that was 
previously included in gross income of the employee is not a payment 
contingent on a separation from employment. For example, payment of an 
amount included in income under section 457(f)(1)(A) due to the lapsing 
of a substantial risk of forfeiture on a date before the separation 
from employment generally is not a payment that is contingent on a 
separation from employment, even if the amount is paid in cash or 
otherwise to the employee because of the separation from employment. In 
addition, actual or constructive receipt of an amount treated as excess 
remuneration under Sec.  53.4960-4(b)(1) is not a payment that is 
contingent on a separation from employment (and thus is not a parachute 
payment), even if the amount is paid to the employee because of the 
separation from employment.
    (5) Window programs. A payment under a window program is contingent 
on a separation from employment. A window program is a program 
established by an employer in connection with an impending separation 
from employment to provide separation pay if the program is made 
available by the employer for a limited period of time (no longer than 
12 months) to employees who separate from employment during that period 
or to employees who separate from service during that period under 
specified circumstances. A payment made under a window program is 
treated as a payment that is contingent on an employee's separation 
from employment notwithstanding that the employee may not have had an 
involuntary separation from employment.
    (6) Anti-abuse provision. Notwithstanding paragraphs (d)(1) through 
(5) of this section, if the facts and circumstances demonstrate that 
either the vesting or the payment of an amount (whether before or after 
an employee's involuntary separation from employment) would not have 
occurred but for the involuntary nature of the separation from 
employment, the payment of the amount is contingent on a separation 
from employment. For example, an employer's exercise of discretion to 
accelerate vesting of an amount shortly before an involuntary 
separation from employment may indicate that the acceleration of 
vesting was due to the involuntary nature of the separation from 
employment and was therefore contingent on the employee's separation 
from employment. Similarly, payment of an amount in excess of an amount 
otherwise payable (for example, increased salary), shortly before or 
after an involuntary separation from employment, may indicate that the 
amount was paid because the separation was involuntary and was 
therefore contingent on the employee's separation from employment. If 
an ATEO becomes a predecessor as a result of a reorganization or other 
transaction described in Sec.  53.4960-1(h), any payment to an employee 
by a successor organization that is contingent on the employee's 
separation from employment with the predecessor ATEO is treated as paid 
by the predecessor ATEO.
    (e) Involuntary separation from employment--(1) In general. 
Involuntary separation from employment means a separation from 
employment due to the independent exercise of the employer's unilateral 
authority to terminate the employee's services, other than due to the 
employee's implicit or explicit request, if the employee was willing 
and able to continue performing services as an employee. An involuntary 
separation from employment may include an employer's failure to renew a 
contract at the time the contract expires, provided that the employee 
was willing and able to execute a new contract providing terms and 
conditions substantially similar to those in the expiring contract and 
to continue providing services. The determination of whether a 
separation from employment is involuntary is based on all the facts and 
circumstances.
    (2) Separation from employment for good reason--(i) In general. 
Notwithstanding paragraph (e)(1) of this section, an employee's 
voluntary separation from employment is treated as an involuntary 
separation from employment if the separation occurs under certain bona 
fide conditions (referred to herein as a separation from employment for 
good reason).
    (ii) Material negative change required. A separation from 
employment for good reason is treated as an involuntary separation from 
employment if the relevant facts and circumstances demonstrate that it 
was the result of unilateral employer action that caused a material 
negative change to the employee's relationship with the employer. 
Factors that may provide evidence of such a material negative change 
include a material reduction in the duties to be performed, a material 
negative change in the conditions under which the duties are to be 
performed, or a material reduction in the compensation to be received 
for performing such services.
    (iii) Deemed material negative change. An involuntary separation 
from employment due to a material negative change is deemed to occur if 
the separation from employment occurs within 2 years following the 
initial existence of one or more of the following conditions arising 
without the consent of the employee:
    (A) Material diminution of compensation. A material diminution in 
the employee's base compensation;
    (B) Material diminution of responsibility. A material diminution in 
the employee's authority, duties, or responsibilities;
    (C) Material diminution of authority of supervisor. A material 
diminution in the authority, duties, or responsibilities of the 
supervisor to whom the employee is required to report, including a 
requirement that an employee report to a corporate officer or employee 
instead of reporting directly to the board of directors (or similar 
governing body) of an organization;
    (D) Material diminution of budget. A material diminution in the 
budget over which the employee retains authority;
    (E) Material change of location. A material change in the 
geographic location at which the employee must perform services; or
    (F) Other material breach. Any other action or inaction that 
constitutes a material breach by the employer of the

[[Page 6236]]

agreement under which the employee provides services.
    (3) Separation from employment. Except as otherwise provided in 
this paragraph, separation from employment has the same meaning as 
separation from service as defined in Sec.  1.409A-1(h). Pursuant to 
Sec.  1.409A-1(h), an employee generally separates from employment with 
the employer if the employee dies, retires, or otherwise has a 
termination of employment with the employer or experiences a sufficient 
reduction in the level of services provided to the employer. For 
purposes of applying the rules regarding reductions in the level of 
services set forth in the definition of termination of employment in 
Sec.  1.409A-1(h)(1)(ii), the rules are modified for purposes of this 
paragraph such that an employer may not set the level of the 
anticipated reduction in future services that will give rise to a 
separation from employment, meaning that the default percentages set 
forth in Sec.  1.409A-1(h)(1)(ii) apply in all circumstances. Thus, an 
anticipated reduction of the level of service of less than 50 percent 
is not treated as a separation from employment, an anticipated 
reduction of more than 80 percent is treated as a separation from 
employment, and the treatment of an anticipated reduction between those 
two levels is determined based on the facts and circumstances. The 
measurement of the anticipated reduction of the level of service is 
based on the average level of service for the prior 36 months (or 
shorter period for an employee employed for less than 36 months). In 
addition, an employee's separation from employment is determined 
without regard to Sec.  1.409A-1(h)(2) and (5) (application to 
independent contractors), since, for purposes of this section, only an 
employee may have a separation from employment, and a change from bona 
fide employee status to bona fide independent contractor status is also 
a separation from employment. See Sec.  53.4960-2(a)(1) regarding the 
treatment of an employee who also serves as a director of a corporation 
(or in a substantially similar position). The definition of separation 
from employment also incorporates the rules under Sec.  1.409A-
1(h)(1)(i) (addressing leaves of absence, including military leaves of 
absence), Sec.  1.409A-1(h)(4) (addressing asset purchase 
transactions), and Sec.  1.409A-1(h)(6) (addressing employees 
participating in collectively bargained plans covering multiple 
employers). The definition further incorporates the rules of Sec.  
1.409A-1(h)(3), under which an employee separates from employment only 
if the employee has a separation from employment with the employer and 
all employers that would be considered a single employer under section 
414(b) and (c), except that the ``at least 80 percent'' rule under 
section 414(b) and (c) is used, rather than replacing it with ``at 
least 50 percent.'' However, for purposes of determining whether there 
has been a separation from employment, a purported ongoing employment 
relationship between a covered employee and an ATEO or a related 
organization is disregarded if the facts and circumstances demonstrate 
that the purported employment relationship is not bona fide, or the 
primary purpose of the establishment or continuation of the 
relationship is avoidance of the application of section 4960.
    (f) Accelerated payment or accelerated vesting resulting from an 
involuntary separation from employment--(1) In general. If a payment or 
the lapse of a substantial risk of forfeiture is accelerated as a 
result of an involuntary separation from employment, generally only the 
value due to the acceleration of payment or vesting is treated as 
contingent on a separation from employment, as described in paragraphs 
(f)(3) and (4) of this section, except as otherwise provided in this 
paragraph (f). For purposes of this paragraph (f), the terms vested and 
substantial risk of forfeiture have the same meaning as provided in 
Sec.  53.4960-2(c)(2).
    (2) Nonvested payments subject to a non-service vesting condition. 
If (without regard to a separation from employment) vesting of a 
payment would depend on an event other than the performance of 
services, such as the attainment of a performance goal, and that 
vesting event does not occur prior to the employee's separation from 
employment and the payment vests due to the employee's involuntary 
separation from employment, the full amount of the payment is treated 
as contingent on the separation from employment.
    (3) Vested payments. If an involuntary separation from employment 
accelerates actual or constructive payment of an amount that previously 
vested without regard to the separation, the portion of the payment, if 
any, that is contingent on the separation from employment is the amount 
by which the present value of the accelerated payment exceeds the 
present value of the payment absent the acceleration. The payment of an 
amount otherwise due upon a separation from employment (whether 
voluntary or involuntary) is not treated as an acceleration of the 
payment unless the payment timing was accelerated due to the 
involuntary nature of the separation from employment. If the value of 
the payment absent the acceleration is not reasonably ascertainable, 
and the acceleration of the payment does not significantly increase the 
present value of the payment absent the acceleration, the present value 
of the payment absent the acceleration is the amount of the accelerated 
payment (so the amount contingent on the separation from employment is 
zero). If the present value of the payment absent the acceleration is 
not reasonably ascertainable but the acceleration significantly 
increases the present value of the payment, the future value of the 
payment contingent on the separation from employment is treated as 
equal to the amount of the accelerated payment. For purposes of this 
paragraph (f)(3), the acceleration of a payment by 90 days or less is 
not treated as significantly increasing the present value of the 
payment. For rules on determining present value, see paragraph (f)(6) 
and paragraphs (h), (i) and (j) of this section.
    (4) Nonvested payments subject to a service vesting condition--(i) 
In general. If an involuntary separation from employment accelerates 
vesting of a payment, the portion of the payment that is contingent on 
separation from employment is the amount described in paragraph (f)(3) 
of this section (if any) plus the value of the lapse of the obligation 
to continue to perform services described in paragraph (f)(4)(ii) of 
this section (but the amount cannot exceed the amount of the 
accelerated payment, or, if the payment is not accelerated, the present 
value of the payment), to the extent that all of the following 
conditions are satisfied with respect to the payment:
    (A) Vesting trigger. The payment vests as a result of an 
involuntary separation from employment;
    (B) Vesting condition. Disregarding the involuntary separation from 
employment, the vesting of the payment was contingent only on the 
continued performance of services for the employer for a specified 
period of time; and
    (C) Services condition. The payment is attributable, at least in 
part, to the performance of services before the date the payment is 
made or becomes certain to be made.
    (ii) Value of the lapse of the obligation to continue to perform 
services. The value of the lapse of the obligation to continue to 
perform services is one percent of the amount of the accelerated 
payment multiplied by the number of full months between the date that 
the employee's right to receive the payment

[[Page 6237]]

is vested and the date that, absent the acceleration, the payment would 
have been vested. This paragraph (f)(4)(ii) applies to the accelerated 
vesting of a payment in the nature of compensation even if the time 
when the payment is made is not accelerated. In that case, the value of 
the lapse of the obligation to continue to perform services is one 
percent of the present value of the future payment multiplied by the 
number of full months between the date that the individual's right to 
receive the payment is vested and the date that, absent the 
acceleration, the payment would have been vested.
    (iii) Accelerated vesting of equity compensation. For purposes of 
this paragraph (f)(4), the acceleration of the vesting of a stock 
option or stock appreciation right (or similar arrangement) or the 
lapse of a restriction on restricted stock or a restricted stock unit 
(or a similar arrangement) is considered to significantly increase the 
value of the payment.
    (5) Application to benefits under a nonqualified deferred 
compensation plan. In the case of a payment of benefits under a 
nonqualified deferred compensation plan, paragraph (f)(3) of this 
section applies to the extent benefits under the plan are vested 
without regard to the involuntary separation from employment, but the 
payment of benefits is accelerated due to the involuntary separation 
from employment. Paragraph (f)(4) of this section applies to the extent 
benefits under the plan are subject to the conditions described in 
paragraph (f)(4)(i) of this section. For any other payment of benefits 
under a nonqualified deferred compensation plan (such as a contribution 
made due to the employee's involuntary separation from employment), the 
full amount of the payment is contingent on the employee's separation 
from employment.
    (6) Present value. For purposes of this paragraph (f), the present 
value of a payment is determined based on the payment date absent the 
acceleration and the date on which the accelerated payment is scheduled 
to be made. The amount that is treated as contingent on the separation 
from employment is the amount by which the present value of the 
accelerated payment exceeds the present value of the payment absent the 
acceleration.
    (7) Examples. See Sec.  1.280G Q/A-24(f) for examples that may be 
applied by analogy to illustrate the rules of this paragraph (f).
    (g) Three-times-base-amount test for parachute payments--(1) In 
general. To determine whether payments in the nature of compensation 
made to a covered employee that are contingent on the covered employee 
separating from employment with the ATEO are parachute payments, the 
aggregate present value of the payments must be compared to the 
individual's base amount. To do this, the aggregate present value of 
all payments in the nature of compensation that are made or to be made 
to (or for the benefit of) the same covered employee by an ATEO (or any 
predecessor of the ATEO) or related organization and that are 
contingent on the separation from employment must be determined. If 
this aggregate present value equals or exceeds the amount equal to 3-
times the individual's base amount, the payments are parachute 
payments. If this aggregate present value is less than the amount equal 
to 3-times the individual's base amount, the payments are not parachute 
payments. See paragraphs (f)(6), (h), (i), and (j) of this section for 
rules on determining present value.
    (2) Examples. The following examples illustrate the rules of this 
paragraph (g). For purposes of these examples, assume any entity 
referred to as ``ATEO'' is an ATEO.
    (i) Example 1 (Parachute payment)--(A) Facts. Employee A is a 
covered employee and an HCE of ATEO 1. Employee A's base amount is 
$200,000. Payments in the nature of compensation that are contingent on 
a separation from employment with ATEO 1 totaling $800,000 are made to 
Employee A on the date of Employee A's separation from employment.
    (B) Conclusion. The payments are parachute payments because they 
have an aggregate present value at the time of the separation from 
employment of $800,000, which is at least equal to 3-times Employee A's 
base amount of $200,000 (3 x $200,000 = $600,000).
    (ii) Example 2 (No parachute payment)--(A) Facts. Assume the same 
facts as in paragraph (g)(2)(i) of this section (Example 1), except 
that the payments contingent on Employee A's separation from employment 
total $580,000.
    (B) Conclusion. Because the aggregate present value of the payments 
($580,000) is not at least equal to 3-times Employee A's base amount 
($600,000), the payments are not parachute payments.
    (h) Calculating present value--(1) In general. Except as otherwise 
provided in this paragraph (h), for purposes of determining if a 
payment contingent on a separation from employment exceeds 3-times the 
base amount, the present value of a payment is determined as of the 
date of the separation from employment or, if the payment is made prior 
to that date, the date on which the payment is made.
    (2) Deferred payments. For purposes of determining whether a 
payment is a parachute payment, if a payment in the nature of 
compensation is the right to receive payments in a year (or years) 
subsequent to the year of the separation from employment, the value of 
the payment is the present value of the payment (or payments) 
calculated on the basis of reasonable actuarial assumptions and using 
the applicable discount rate for the present value calculation that is 
determined in accordance with paragraph (i) of this section.
    (3) Health care. If the payment in the nature of compensation is an 
obligation to provide health care (including an obligation to purchase 
or provide health insurance), then, for purposes of this paragraph (h) 
and for applying the 3-times-base-amount test under paragraph (g) of 
this section, the present value of the obligation is calculated in 
accordance with generally accepted accounting principles. For purposes 
of paragraph (g) of this section and this paragraph (h), the obligation 
to provide health care is permitted to be measured by projecting the 
cost of premiums for health care insurance, even if no health care 
insurance is actually purchased. If the obligation to provide health 
care is made in coordination with a health care plan that the employer 
makes available to a group, then the premiums used for purposes of this 
paragraph (h)(3) may be the allocable portion of group premiums.
    (i) Discount rate. Present value generally is determined by using a 
discount rate equal to 120 percent of the applicable Federal rate 
(determined under section 1274(d) and the regulations in part 1 under 
section 1274(d)), compounded semiannually. The applicable Federal rate 
to be used is the Federal rate that is in effect on the date as of 
which the present value is determined, using the period until the 
payment is expected to be made as the term of the debt instrument under 
section 1274(d). See paragraph (h) of this section for rules with 
respect to the date as of which the present value is determined. 
However, for any payment, the employer and the covered employee may 
elect to use the applicable Federal rate that is in effect on the date 
on which the parties entered into the contract that provides for the 
payment if that election is set forth in writing in the contract.
    (j) Present value of a payment to be made in the future that is 
contingent on an uncertain future event or condition--

[[Page 6238]]

(1) Treatment based on the estimated probability of payment. In certain 
cases, it may be necessary to apply the 3-times-base-amount test to a 
payment that is contingent on separation from employment at a time when 
the aggregate present value of all the payments is uncertain because 
the time, amount, or right to receive one or more of the payments is 
also contingent on the occurrence of an uncertain future event or 
condition. In that case, the employer must reasonably estimate whether 
it will make the payment. If the employer reasonably estimates there is 
a 50-percent or greater probability that it will make the payment, the 
full amount of the payment is considered for purposes of the 3-times-
base-amount test and the allocation of the base amount. If the employer 
reasonably estimates there is a less than 50-percent probability that 
the payment will be made, the payment is not considered for either 
purpose.
    (2) Correction of incorrect estimates. If an ATEO later determines 
that an estimate it made under paragraph (j)(1) of this section was 
incorrect, it must reapply the 3-times-base-amount test to reflect the 
actual time and amount of the payment. In reapplying the 3-times-base-
amount test (and, if necessary, reallocating the base amount), the ATEO 
must determine the aggregate present value of payments paid or to be 
paid as of the date described in paragraph (h) of this section using 
the discount rate described in paragraph (i) of this section. This 
redetermination may affect the amount of any excess parachute payment 
for a prior taxable year. However, if, based on the application of the 
3-times-base-amount test without regard to the payment described in 
this paragraph (j), an ATEO has determined it will pay an employee an 
excess parachute payment or payments, then the 3-times-base-amount test 
does not have to be reapplied when a payment described in this 
paragraph (j) is made (or becomes certain to be made) if no base amount 
is allocated to that payment under Sec.  53.4960-4(d)(5).
    (3) Initial option value estimate. To the extent provided in 
published guidance of general applicability under Sec.  601.601(d)(2), 
an initial estimate of the value of an option subject to paragraph (c) 
of this section is permitted to be made, with the valuation 
subsequently redetermined and the 3-times-base-amount test reapplied. 
Until guidance is published under section 4960, published guidance of 
general applicability described in Sec.  601.601(d)(2) that is issued 
under section 280G applies by analogy.
    (4) Examples. See Sec.  1.280G-1, Q/A-33(d) for examples that may 
be applied by analogy to illustrate the rules of this paragraph (j).
    (k) Base amount--(1) In general. A covered employee's base amount 
is the average annual compensation for services performed as an 
employee of the ATEO (including compensation for services performed for 
a predecessor of the ATEO), and/or, if applicable, a related 
organization, with respect to which there has been a separation from 
employment, if the compensation was includible in the gross income of 
the individual for taxable years in the base period (including amounts 
that were excluded under section 911) or that would have been 
includible in the individual's gross income if the individual had been 
a United States citizen or resident. See paragraph (l) of this section 
for the definition of base period and for examples of base amount 
computations.
    (2) Short or incomplete taxable years. If the base period of a 
covered employee includes a short taxable year or less than all of a 
taxable year of the employee, compensation for the short or incomplete 
taxable year must be annualized before determining the average annual 
compensation for the base period. In annualizing compensation, the 
frequency with which payments are expected to be made over an annual 
period must be taken into account. Thus, any amount of compensation for 
a short or incomplete taxable year that represents a payment that will 
not be made more often than once per year is not annualized.
    (3) Excludable fringe benefits. Because the base amount includes 
only compensation that is includible in gross income, the base amount 
does not include certain items that may constitute parachute payments. 
For example, payments in the form of excludable fringe benefits or 
excludable health care benefits are not included in the base amount but 
may be treated as parachute payments.
    (4) Section 83(b) income. The base amount includes the amount of 
compensation included in income under section 83(b) during the base 
period.
    (l) Base period--(1) In general. The base period of a covered 
employee is the covered employee's 5 most-recent taxable years ending 
before the date on which the separation from employment occurs. 
However, if the covered employee was not an employee of the ATEO for 
this entire 5-year period, the individual's base period is the portion 
of the 5-year period during which the covered employee performed 
services for the ATEO, a predecessor, or a related organization.
    (2) Determination of base amount if employee separates from 
employment in the year hired. If a covered employee commences services 
as an employee and experiences a separation from employment in the same 
taxable year, the covered employee's base amount is the annualized 
compensation for services performed for the ATEO (or a predecessor or 
related organization) that was not contingent on the separation from 
employment and either was includible in the employee's gross income for 
that portion of the employee's taxable year prior to the employee's 
separation from employment (including amounts that were excluded under 
section 911) or would have been includible in the employee's gross 
income if the employee had been a United States citizen or resident.
    (3) Examples. The following examples illustrate the rules of 
paragraph (k) of this section and this paragraph (l). For purposes of 
these examples, assume any entity referred to as ``ATEO'' is an ATEO, 
any entity referred to as ``CORP'' is not an ATEO, and all employees 
are HCEs of their respective employers.
    (i) Example 1 (Calculation with salary deferrals)--(A) Facts. 
Employee A, a covered employee of ATEO 1, receives an annual salary of 
$500,000 per year during the 5-year base period. Employee A defers 
$100,000 of salary each year under a nonqualified deferred compensation 
plan (none of which is includible in Employee A's income until paid in 
cash to Employee A).
    (B) Conclusion. Employee A's base amount is $400,000 (($400,000 x 
5)/5).
    (ii) Example 2 (Calculation for less-than-5-year base period)--(A) 
Facts. Employee B, a covered employee of ATEO 1, was employed by ATEO 1 
for 2 years and 4 months preceding the year in which Employee B 
separates from employment. Employee B's compensation includible in 
gross income was $100,000 for the 4-month period, $420,000 for the 
first full year, and $450,000 for the second full year.
    (B) Conclusion. Employee B's base amount is $390,000 (((3 x 
$100,000) + $420,000 + $450,000)/3). Any compensation Employee B 
receives in the year of separation from employment is not included in 
the base amount calculation.
    (iii) Example 3 (Calculation for less-than-5-year base period with 
signing bonus)--(A) Facts. Assume the same facts as in paragraph 
(l)(3)(ii)(A) of this section (Example 2), except that Employee B also 
received a $60,000 signing bonus when Employee B's

[[Page 6239]]

employment with ATEO 1 commenced at the beginning of the 4-month 
period.
    (B) Conclusion. Employee B's base amount is $410,000 ((($60,000 + 
(3 x $100,000)) + $420,000 + $450,000)/3). Pursuant to paragraph (k)(2) 
of this section, because the bonus is a payment that will not be paid 
more often than once per year, the bonus is not taken into account in 
annualizing Employee B's compensation for the 4-month period.
    (iv) Example 4 (Effect of non-employee compensation)--(A) Facts. 
Employee C, a covered employee of ATEO 1, was not an employee of ATEO 1 
for the full 5-year base period. In 2024 and 2025, Employee C is only a 
director of ATEO 1 and receives $30,000 per year for services as a 
director. On January 1, 2026, Employee C becomes an officer and covered 
employee of ATEO 1. Employee C's includible compensation for services 
as an officer of ATEO 1 is $250,000 for each of 2026 and 2027, and 
$300,000 for 2028. In 2028, Employee C separates from employment with 
ATEO 1.
    (B) Conclusion. Employee C's base amount is $250,000 ((2 x 
$250,000)/2). The $30,000 of director's fees paid to Employee C in each 
of 2024 and 2025 is not included in Employee C's base amount 
calculation because it was not for services performed as an employee of 
ATEO 1.


Sec.  53.4960-4  Liability for tax on excess remuneration and excess 
parachute payments.

    (a) Liability, reporting, and payment of excise taxes--(1) 
Liability. For each taxable year, with respect to each covered 
employee, the taxpayer is liable for tax at the rate imposed under 
section 11 on the sum of the excess remuneration allocated to the 
taxpayer under paragraph (c) of this section and, if the taxpayer is an 
ATEO, any excess parachute payment paid by the taxpayer or a 
predecessor during the taxable year.
    (2) Reporting and payment. The excise tax imposed by section 4960 
is reported as provided in Sec. Sec.  53.6011-1(b) and 53.6071-1(i) and 
paid in the form and manner prescribed by the Commissioner.
    (3) Arrangements between an ATEO and a related organization. 
Calculation of, and liability for, the excise tax imposed by section 
4960 is separate from, and unaffected by, any arrangement that an ATEO 
and any related organization may have for bearing the cost of any 
liability for the excise tax imposed by section 4960.
    (4) Certain foreign related organizations. A related organization 
that is a foreign organization described in section 4948(b) that either 
is exempt from tax under section 501(a) or is a taxable private 
foundation (section 4948(b) related organization) is not liable for the 
excise tax imposed by section 4960. A foreign organization is an 
organization not created or organized in the United States or in any 
possession thereof, or under the law of the United States, any State, 
the District of Columbia, or any possession of the United States. See 
section 4948(b) and Sec.  53.4948-1. For purposes of this paragraph 
(a)(4) and the application of section 4960 to a taxable year, an 
organization's status as a section 4948(b) related organization is 
determined at the end of its taxable year. However, remuneration that 
the section 4948(b) related organization pays to a covered employee of 
an ATEO must be taken into account by the ATEO and other related 
organizations for purposes of section 4960 generally, including for 
purposes of determining the five highest-compensated employees and the 
total remuneration paid to a covered employee. For example, if an ATEO 
and its related organization that is a section 4948(b) related 
organization each paid $600,000 remuneration to a covered employee 
during the applicable year, then the related organization would not be 
liable for the tax that would otherwise be allocable to it, and the 
ATEO would be liable for tax on $100,000 (50 percent of the $200,000 
excess remuneration paid to the employee).
    (5) [Reserved]
    (b) Amounts subject to tax--(1) Excess remuneration--(i) In 
general. Excess remuneration means the amount of remuneration paid by 
an ATEO to any covered employee during an applicable year in excess of 
$1 million, as determined under Sec.  53.4960-2.
    (ii) Exclusion for excess parachute payments. Excess remuneration 
does not include any amount that is an excess parachute payment as 
defined in paragraph (b)(2) of this section.
    (2) Excess parachute payment. Excess parachute payment means an 
amount equal to the excess (if any) of the amount of any parachute 
payment paid by an ATEO, a predecessor of the ATEO, or a related 
organization, or on behalf of any such person, during the taxable year 
over the portion of the base amount allocated to such payment.
    (c) Calculation of liability for tax on excess remuneration--(1) In 
general. For each taxable year, an employer is liable for the tax on 
excess remuneration paid in the applicable year ending with or within 
the employer's taxable year. If, for the taxable year, remuneration 
paid during an applicable year by an ATEO or one or more related 
organizations to a covered employee is taken into account in 
determining the tax imposed on excess remuneration for that taxable 
year, then each employer is liable for the tax in an amount that bears 
the same ratio to the total tax determined under section 4960(a) as the 
amount of remuneration paid by the employer to the covered employee 
(including remuneration paid by the employer as described in Sec.  
53.4960-2(b)(1), but disregarding remuneration treated as paid by the 
employer under Sec.  53.4960-2(b)(2)), bears to the total amount of 
remuneration paid by the ATEO under Sec.  53.4960-2 (including 
remuneration treated as paid by the ATEO under Sec.  53.4960-2(b)(2)).
    (2) Calculation if liability is allocated from more than one ATEO 
with regard to an individual. If liability for the tax on excess 
remuneration is allocated to an employer from more than one ATEO in a 
taxable year with regard to an individual that is a covered employee of 
each ATEO, then the employer is liable for the tax only in the capacity 
in which it is liable for the greatest amount of the tax with respect 
to that individual for the taxable year. For example, assume ATEO 1 is 
a related organization to both ATEO 2 and ATEO 3 and pays excess 
remuneration to Employee D, and Employee D is a covered employee of 
ATEO 1, ATEO 2, and ATEO 3. In this case, ATEO 1's liability for the 
tax on excess remuneration to Employee D is the highest of its 
liability as an ATEO, as a related organization to ATEO 2, or as a 
related organization to ATEO 3.
    (3) Calculation if liability is allocated from an ATEO with a short 
applicable year. If liability for the tax on excess remuneration paid 
to an individual is allocated to an employer from an ATEO with a short 
applicable year under Sec.  53.4960-1(c)(3), then the liability with 
respect to the excess remuneration paid to that individual is allocated 
in accordance with the principles of this paragraph (c) adjusted as 
necessary to avoid, to the extent possible, duplication of application 
of the excise tax. The Commissioner may provide additional guidance of 
general applicability, published in the Internal Revenue Bulletin (see 
Sec.  601.601(d)(2) of this chapter), on the application of this 
paragraph (c)(3) to particular circumstances, including circumstances 
involving an ATEO with a short applicable year that has one or more 
related organizations and the ATEO's short applicable year and the 
preceding applicable year both end with or within the related 
organization's taxable year, such that the ATEO and related 
organizations are liable for the tax for

[[Page 6240]]

multiple applicable years ending with or within the employer's taxable 
year.
    (4) Examples. The following examples illustrate the rules of this 
paragraph (c). For purposes of these examples, assume that the rate of 
excise tax under section 4960 is 21 percent, that any entity that is 
referred to as ``ATEO'' is an ATEO, that any entity referred to as 
``CORP'' is not an ATEO and is not a publicly held corporation within 
the meaning of section 162(m)(2) or a covered health insurance provider 
within the meaning of section 162(m)(6)(C), that no related 
organization is a section 4948(b) related organization, all taxpayers 
use the calendar year as their taxable year unless otherwise stated, 
and that no parachute payments are made in any of the years at issue.
    (i) Example 1 (Remuneration from multiple employers)--(A) Facts. 
ATEO 1 and CORP 1 are related organizations. Employee A is a covered 
employee of ATEO 1 and an employee of CORP 1. In the 2022 applicable 
year, ATEO 1 pays Employee A $1.2 million of remuneration, and CORP 1 
pays A $800,000 of remuneration. Remuneration paid by each employer is 
for services performed by Employee A solely as an employee of that 
employer.
    (B) Conclusion. For the 2022 taxable year, ATEO 1 is treated as 
paying Employee A $2 million of remuneration, $1 million of which is 
excess remuneration. The total excise tax is $210,000 (21 percent x $1 
million). ATEO 1 paid \3/5\ of Employee A's total remuneration ($1.2 
million/$2 million); thus, ATEO 1 is liable for \3/5\ of the excise 
tax, which is $126,000. CORP 1 paid \2/5\ of Employee A's total 
remuneration ($800,000/$2 million); thus, CORP 1 is liable for \2/5\ of 
the excise tax, which is $84,000.
    (ii) Example 2 (Application when taxpayers have different taxable 
years)--(A) Facts. Assume the same facts as in paragraph (c)(4)(i) of 
this section (Example 1), except that CORP 2 uses a taxable year 
beginning July 1 and ending June 30.
    (B) Conclusion. The conclusion is the same as the conclusion in 
paragraph (c)(4)(i) of this section (Example 1), except that ATEO 1 is 
liable for the tax for its taxable year starting January 1, 2022, and 
ending December 31, 2022, and CORP 1 is liable for the tax for its 
taxable year beginning July 1, 2022, and ending June 30, 2023 (the 
taxable year with or within which ATEO 1's 2022 applicable year ends).
    (iii) Example 3 (Multiple liabilities for same applicable year due 
to multiple ATEOs)--(A) Facts. The following facts are all with respect 
to the 2023 applicable year: ATEO 5 owns 60 percent of the stock of 
CORP 2. Sixty percent of ATEO 4's directors are representatives of ATEO 
3. In addition, 60 percent of ATEO 5's directors are representatives of 
ATEO 4, but none are representatives of ATEO 3. Employee B is a covered 
employee of ATEO 3, ATEO 4, and ATEO 5 and is an employee of CORP 2. 
ATEO 3, ATEO 4, ATEO 5, and CORP 2 each pay Employee B $1.2 million of 
remuneration in the applicable year. ATEO 4's related organizations are 
ATEO 3 and ATEO 5. ATEO 3's only related organization is ATEO 4. ATEO 
5's related organizations are ATEO 4 and CORP 2.
    (B) Calculation (ATEO 3). Under ATEO 3's calculation as an ATEO for 
the 2023 applicable year, ATEO 3 is treated as paying Employee B a 
total of $2.4 million in remuneration ($1.2 million from ATEO 3 + $1.2 
million from ATEO 4). The total excise tax is $294,000 (21 percent x 
$1.4 million). ATEO 3 and ATEO 4 each paid \1/2\ of Employee B's total 
remuneration ($1.2 million/$2.4 million); thus, under ATEO 3's 
calculation, ATEO 3 and ATEO 4 each would be liable for \1/2\ of the 
excise tax, which is $147,000.
    (C) Calculation (ATEO 4). Under ATEO 4's calculation as an ATEO for 
the 2023 applicable year, ATEO 4 is treated as paying Employee B a 
total of $3.6 million in remuneration for the 2022 applicable year 
($1.2 million from ATEO 3 + $1.2 million from ATEO 4 + $1.2 million 
from ATEO 5). The total excise tax is $546,000 (21 percent x $2.6 
million). ATEO 3, ATEO 4, and ATEO 5 each paid \1/3\ of the total 
remuneration to Employee B ($1.2 million/$3.6 million); thus, under 
ATEO 4's calculation, ATEO 3, ATEO 4, and ATEO 5 each would be liable 
for \1/3\ of the excise tax, which is $182,000.
    (D) Calculation (ATEO 5). Under ATEO 5's calculation as an ATEO for 
the 2023 applicable year, ATEO 5 is treated as paying Employee B a 
total of $3.6 million in remuneration ($1.2 million from ATEO 4 + $1.2 
million from ATEO 5 + $1.2 million from CORP 2). The total excise tax 
is $546,000 (21 percent x $2.6 million). ATEO 4, ATEO 5, and CORP 2 
each paid \1/3\ of the total remuneration to Employee B ($1.2 million/
$3.6 million); thus, under ATEO 5's calculation, ATEO 4, ATEO 5, and 
CORP 2 each would be liable for \1/3\ of the excise tax, which is 
$182,000.
    (E) Conclusion (Liability of ATEO 3). For the 2023 applicable year, 
ATEO 3 is liable for $182,000 of excise tax as a related organization 
under ATEO 4's calculation, which is greater than the $147,000 of 
excise tax under ATEO 3's own calculation. Thus, ATEO 3's excise tax 
liability with respect to Employee B is $182,000 for its 2023 taxable 
year.
    (F) Conclusion (Liability of ATEO 4). For the 2023 applicable year, 
ATEO 4 is liable as a related organization for $147,000 of excise tax 
according to ATEO 3's calculation, for $182,000 according to ATEO 4's 
own calculation, and for $182,000 according to ATEO 5's calculation. 
Thus, ATEO 4's excise tax liability with respect to Employee B is 
$182,000 for its 2023 taxable year.
    (G) Conclusion (Liability of ATEO 5). For the 2023 applicable year, 
ATEO 5 is liable as a related organization for $182,000 of excise tax 
under ATEO 4's calculation, and is liable for $182,000 of excise tax 
under ATEO 5's own calculation. Thus, ATEO 5's excise tax liability 
with respect to Employee B is $182,000 for its 2023 taxable year.
    (H) Conclusion (Liability of CORP 2). For the 2023 applicable year, 
CORP 2 is liable as a related organization for $182,000 of excise tax 
according to ATEO 5's calculation only. Thus, CORP 2's excise tax 
liability with respect to Employee B is $182,000 for its 2023 taxable 
year.
    (d) Calculation of liability for excess parachute payments--(1) In 
general. Except as provided in paragraph (d)(3) of this section, only 
excess parachute payments made by or on behalf of an ATEO are subject 
to tax under this section. However, parachute payments made by related 
organizations that are not made by or on behalf of an ATEO are taken 
into account for purposes of determining the total amount of excess 
parachute payments.
    (2) Computation of excess parachute payments--(i) Calculation. The 
amount of an excess parachute payment is the excess of the amount of 
any parachute payment made by an ATEO, a predecessor of the ATEO, or a 
related organization, or on behalf of any such person, over the portion 
of the covered employee's base amount that is allocated to the payment. 
The portion of the base amount allocated to any parachute payment is 
the amount that bears the same ratio to the base amount as the present 
value of the parachute payment bears to the aggregate present value of 
all parachute payments made or to be made to (or for the benefit of) 
the same covered employee. Thus, the portion of the base amount 
allocated to any parachute payment is determined by multiplying the 
base amount by a fraction, the numerator of which is the present value 
of the parachute payment and the denominator of which is the aggregate 
present value of all parachute payments.
    (ii) Examples. The following examples illustrate the rules of this

[[Page 6241]]

paragraph (d)(2). For purposes of these examples, assume any entity 
referred to as ``ATEO'' is an ATEO and all employees are HCEs of their 
respective employers.
    (A) Example 1 (Compensation from related organizations)--(1) Facts. 
ATEO 1 and ATEO 2 are related organizations. Employee A is a covered 
employee of ATEO 1 and an employee of ATEO 2 who has an involuntary 
separation from employment with ATEO 1 and ATEO 2. Employee A's base 
amount is $200,000 with respect to ATEO 1 and $400,000 with respect to 
ATEO 2. A receives $1 million from ATEO 1 contingent upon Employee A's 
involuntary separation from employment from ATEO 1 and $1 million from 
ATEO 2 contingent upon Employee A's involuntary separation from 
employment from ATEO 2.
    (2) Conclusion. Employee A has a base amount of $600,000 ($200,000 
+ $400,000). The two $1 million payments are parachute payments because 
their aggregate present value is at least 3-times Employee A's base 
amount (3 x $600,000 = $1.8 million). The portion of the base amount 
allocated to each parachute payment is $300,000 (($1 million/$2 
million) x $600,000). Thus, the amount of each excess parachute payment 
is $700,000 ($1 million-$300,000).
    (B) Example 2 (Multiple parachute payments)--(1) Facts. Employee B 
is a covered employee of ATEO 3 with a base amount of $200,000 who is 
entitled to receive two parachute payments: One of $200,000 and the 
other of $900,000. The $200,000 payment is made upon separation from 
employment, and the $900,000 payment is to be made on a date in a 
future taxable year. The present value of the $900,000 payment is 
$800,000 as of the date of the separation from employment.
    (2) Conclusion. The portion of the base amount allocated to the 
first payment is $40,000 (($200,000 present value of the parachute 
payment/$1 million present value of all parachute payments) x $200,000 
total base amount) and the portion of the base amount allocated to the 
second payment is $160,000 (($800,000 present value of the parachute 
payment/$1 million present value of all parachute payments) x $200,000 
total base amount). Thus, the amount of the first excess parachute 
payment is $160,000 ($200,000-$40,000) and that the amount of the 
second excess parachute payment is $740,000 ($900,000-$160,000).
    (3) Reallocation when the payment is disproportionate to base 
amount. In accordance with section 4960(d), the Commissioner may treat 
a parachute payment as paid by an ATEO if the facts and circumstances 
indicate that the ATEO and other payors of parachute payments 
structured the payments in a manner primarily to avoid liability under 
section 4960. For example, if an ATEO would otherwise be treated as 
paying a portion of an excess parachute payment in an amount that is 
materially lower in proportion to the total excess parachute payment 
than the proportion that the amount of average annual compensation paid 
by the ATEO (or any predecessor) during the base period bears to the 
total average annual compensation paid by the ATEO (or any predecessor) 
and any related organization (or organizations), and the lower amount 
is offset by payments from a non-ATEO or an unrelated ATEO, this may 
indicate that that the parachute payments were structured in a manner 
primarily to avoid liability under section 4960.
    (4) Election to prepay tax. An ATEO may prepay the excise tax under 
paragraph (a)(1) of this section on any excess parachute payment for 
the taxable year of the separation from employment or any later taxable 
year before the taxable year in which the parachute payment is actually 
or constructively paid. However, an employer may not prepay the excise 
tax on a payment to be made in cash if the present value of the payment 
is not reasonably ascertainable under Sec.  31.3121(v)(2)-1(e)(4) or on 
a payment related to health coverage. Any prepayment must be based on 
the present value of the excise tax that would be due for the taxable 
year in which the employer will pay the excess parachute payment, and 
be calculated using the discount rate equal to 120 percent of the 
applicable Federal rate (determined under section 1274(d) and the 
regulations in part 1 under section 1274) and the tax rate in effect 
under section 11 for the year in which the excise tax is paid. For 
purposes of projecting the future value of a payment that provides for 
interest to be credited at a variable interest rate, the employer may 
make a reasonable assumption regarding the variable rate. An employer 
is not required to adjust the excise tax paid merely because the actual 
future interest rates are not the same as the rate used for purposes of 
projecting the future value of the payment.
    (5) Liability after a redetermination of total parachute payments. 
If an ATEO determines that an estimate made under Sec.  53.4960-3(j)(1) 
was incorrect, it must reapply the 3-times-base-amount test to reflect 
the actual time and amount of the payment. In reapplying the 3-times-
base-amount test (and, if necessary, reallocating the base amount), the 
ATEO must determine the correct base amount allocable to any parachute 
payment paid in the taxable year. See Sec.  1.280G-1, Q/A-33(d) for 
examples that may be applied by analogy to illustrate the rules of this 
paragraph (d)(5).
    (6) Examples. The following examples illustrate the rules of this 
paragraph (d). For purposes of these examples, assume any entity 
referred to as ``ATEO'' is an ATEO, any entity referred to as ``CORP'' 
is not an ATEO, and all employees are HCEs of their respective 
employers.
    (i) Example 1 (Excess parachute payment paid by a non-ATEO)--(A) 
Facts. ATEO 1 and CORP 1 are related organizations that are treated as 
the same employer for purposes of Sec.  53.4960-3(e)(3) (defining 
separation from employment) and are both calendar year taxpayers. For 
2022 through 2026, ATEO 1 and CORP 1 each pay Employee A $250,000 of 
compensation per year for services performed as an employee of each 
organization ($500,000 total per year). In 2027, ATEO 1 and CORP 1 each 
pay Employee A $1 million payment ($2 million total) that is contingent 
on Employee A's separation from employment with both ATEO 1 and CORP 1, 
all of which is remuneration, and no other compensation. Employee A is 
a covered employee of ATEO 1 in 2027.
    (B) Conclusion. Employee A's base amount in 2027 is $500,000 
(Employee A's average annual compensation from both ATEO 1 and CORP 1 
for the previous 5 years). ATEO 1 makes a parachute payment of $2 
million in 2027, the amount paid by both ATEO 1 and CORP 1 that is 
contingent on Employee A's separation from employment with ATEO 1 and 
all organizations that are treated as the same employer under Sec.  
53.4960-3(e)(3). Employee A's $2 million payment exceeds 3-times the 
base amount ($1.5 million). ATEO 1 makes a $1.5 million excess 
parachute payment (the amount by which $2 million exceeds the $500,000 
base amount). However, ATEO 1 is liable for tax only on the excess 
parachute payment paid by ATEO 1 ($1 million parachute payment-$250,000 
base amount = $750,000) that is subject to tax under Sec.  53.4960-
4(a). CORP 1 is not liable for tax under Sec.  53.4960-4(a) in 2027.
    (ii) Example 2 (Election to prepay tax on excess parachute payments 
and effect on excess remuneration)--(A) Facts. Employee B is a covered 
employee of ATEO 2 with a base amount of $200,000 who is entitled to 
receive two parachute payments from ATEO 2, one of $200,000 and the 
other

[[Page 6242]]

of $900,000. The $200,000 payment is made upon separation from 
employment, and the $900,000 payment is to be made on a date in a 
future taxable year. The present value of the $900,000 payment is 
$800,000 as of the date of the separation from employment. ATEO 2 
elects to prepay the excise tax on the $900,000 future parachute 
payment (of which $740,000 is an excess parachute payment). The tax 
rate under section 11 is 21 percent for the taxable year the excise tax 
is paid and, using a discount rate determined under Sec.  53.4960-3(i), 
the present value of the $155,400 ($740,000 x 21 percent) excise tax on 
the $740,000 future excess parachute payment is $140,000.
    (B) Conclusion. The excess parachute payment is thus $800,000 
($200,000 plus $800,000 present value of the $900,000 future payment, 
less $200,000 base amount), with $40,000 of the base amount allocable 
to the $200,000 payment and $160,000 of the base amount allocable to 
the $900,000 payment. To prepay the excise tax on the $740,000 future 
excess parachute payment, the employer must satisfy its $140,000 
obligation under section 4960 with respect to the future payment, in 
addition to the $33,600 excise tax ($160,000 x 21 percent) on the 
$160,000 excess parachute payment made upon separation from employment. 
For purposes of determining the amount of excess remuneration (if any) 
under section 4960(a)(1), the amount of remuneration paid by the 
employer to the covered employee for the taxable year of the separation 
from employment is reduced by the $900,000 of total excess parachute 
payments ($160,000 + $740,000).


Sec.  53.4960-5  [Reserved]


Sec.  53.4960-6  Applicability date.

    (a) General applicability date. Sections 53.4960-0 through 53.4960-
4 apply to taxable years beginning after December 31, 2021. Taxpayers 
may choose to apply Sec. Sec.  53.4960-0 through 53.4960-4 to taxable 
years beginning after December 31, 2017, and on or before December 31, 
2021, provided the taxpayer applies Sec. Sec.  53.4960-0 through 
53.4960-4 in their entirety and in a consistent manner.
    (b) [Reserved]

Sunita Lough,
Deputy Commissioner for Services and Enforcement.

    Approved: January 9, 2021.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2021-00772 Filed 1-15-21; 4:15 pm]
BILLING CODE 4830-01-P