NAICU Washington Update

IRS Releases Final Regulations on Executive Compensation Tax

January 14, 2021

The IRS has issued final regulations implementing the excise tax on the compensation of certain private college employees.  This 21 percent excise tax hits the five highest-compensated employees at private, nonprofit colleges and universities whose salaries are over $1 million annually or who receive an excess parachute payment.  

The final regulations include definitions of terms and rules for determining what specific employees are subject to the tax. There are also exceptions and separate calculation formulas for employees who do volunteer work and provide medical services.

The tax was enacted as part of the Tax Cuts and Jobs Act of 2017 and, with few exceptions, does not affect public colleges, much like the endowment/net investment income tax. Most, and certainly the largest, public colleges and universities fall under the doctrine of implied statutory immunity, which requires specific authority from the federal government to tax a state instrumentality. 

While Congress intended the tax to apply to the highest paid employees at all colleges and universities, public and private, the details of statutory immunity were missed in the bill drafting.  In 2018, House leadership attempted to push through a technical correction bill  that would have applied the tax to publics, but Congress changed leadership before the Senate could take it up.

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