WASHINGTON–The credit union tax exemption may have survived the just-passed Tax Cuts and Jobs Act, but it does include a new tax on the compensation paid certain CU and CUSO executives. The tax would be paid by the credit union or CUSO, not the executive, and could amount to the hundreds of thousands of dollars.
The Tax Cuts and Jobs Act, passed with much fanfare by Republicans in Congress with strong support from President Trump, imposes a 21% excise tax on executive compensation that exceeds $1 million annually. The tax would apply to the compensation paid to the five highest-paid executives at a nonprofit organization.
While the precise number of credit union executives who are paid in excess of $1 million annually isn’t known, there are numerous executives at the largest credit unions who earn in excess of that amount annually. The new tax kicks in beginning Jan. 1, 2018.
The language appears in the bill under Part VII: Employment, Subpart A–Compensation, Section 13602, which is identified as “Excise Tax on Excess Tax-Exempt Organization Executive Compensation.”
According to CUNA’s analysis, the provision is designed to create parity with respect to for-profit entities that can only deduct the first $1 million of each individual employee’s compensation.
The bill states the excise tax also applies to “any excess parachute payment paid by such organization to any covered employee.”
What counts toward compensation? Although the bill has just been passed and there is much to digest, CUNA said it includes cash and the cash value of most benefits. “Roth” retirement plan contributions are not included, nor are 457(b) deferred compensation plans.
“However, somewhat different treatment is defined for 457(f) plans, also known as 'ineligible' deferred compensation plans,” CUNA stated. “For these plans, the bill treats the definition of compensation as including plan amounts paid when the rights to the remuneration are no longer subject to a substantial risk of forfeiture. Thus, the 21% excise tax can apply to the value of remuneration that is vested in the plan (and any increases in its value or vested remuneration), even if it is has yet to be received.”
The bill includes what CUNA described as a “huge parity problem between existing for-profit and not-for-profit employee contracts with regard to the not-for-profit 21% excise tax and the deductibility of corporate executive compensation.”
For example, the bill exempts from deductibility limits existing corporate executive compensation contracts by “grandfathering” in “for-profit” executive contracts in effect on or before Nov. 2, 2017, CUNA found. No such provision is included for not-for-profit employee contracts. CUNA said it expects a technical corrections bill to be considered in Congress in 2018 and that it will actively advocate for not-for-profit parity with for-profit businesses regarding employee contract parity and the "grandfathering” of existing contracts.
While affected credit union executives may look to compensation consultants to find ways around the new tax, the bill also includes language stating “The secretary shall prescribe such regulations as may be necessary to prevent avoidance of the tax under this section, including regulations to prevent avoidance of such tax through the performance of services other than as an employee or by providing compensation through a pass-through or other entity to avoid the tax.”