SAN ANTONIO—Credit unions that believe they are not impacted by the 21% excise tax on executive compensation exceeding $1 million annually should review the new rule closely, advises SWBC.
The company is cautioning CUs that do not pay their top exec more than $1 million a year to not quickly dismiss the 2017 Tax Act’s new rule.
“You may assume your credit union is in the clear because none of your executives’ salaries exceed $1 million,” said Roger Versteeg, executive benefits advisor at SWBC Executive Benefit Solutions. “Unfortunately, salary is just part of the calculation. The $1-million limit includes 457(f) deferred compensation plan funds and severance packages, so many credit unions may find themselves with surprise bills of $50,000 to $200,000 or more come tax time.”
How The Excise Tax Works
Versteeg shared details of how the new excise tax, which was part of President Trump’s tax reform package, is applied:
- Starting in tax year 2017, a credit union may be charged a tax on compensation paid to its five highest paid employees.
- When examining amounts for those five employees, the government considers all compensation subject to federal income tax withholding, 457(f) deferred compensation subject to tax, and employment-related compensation amounts paid by a related organization.
- The government imposes a 21% excise tax to the credit union on compensation amounts exceeding $1 million per included employee.
- Even terminated employees may trigger a tax. “This is especially important to remember when your credit union considers offering a generous executive severance package,” said Versteeg.
- “Spreading 457(f) benefits over multiple years is not a good tax avoidance strategy because 457(f) plans are subject to IRS code 409A, which means a material change will require the benefit to be pushed out five or more years into the future,” he said.
Roger Versteeg
How The Excise Tax Adds Up
To show how this new excise tax could apply to a credit union, Versteeg shared an example (below) of a scenario common to credit unions with which he works:
| Executive’s salary | $400,000 |
| Bonus | +60,000 |
| Car allowance and perks | +10,000 |
| 2018 compensation | $470,000 |
| 457(f) deferred compensation gross benefit | +$1,500,000 |
| 2018 total compensation | $1,970,000 |
| Subtract $1,000,000 allowance | -$1,000,000 |
| Compensation subject to excise tax | $970,000 |
| 21% excise tax to credit union | $203,700 |
“Needless to say, a tax bill of $203,700 can wreak havoc on your credit union’s expenses and ability to return value to your members,” noted Versteeg. “Even more than corporations, credit unions run on a strict budget, with no room to pay thousands in unplanned tax expenses, of course. While you may think you have no option but to start budgeting for this new tax expense, the wiser choice is to work with an executive benefits expert, who will review your existing benefits package and recommend changes and solutions that minimize or eliminate your credit union’s benefits taxes. In addition, an executive benefits expert, such as those at SWBC, can advise you in benefits pre-funding, which takes advantage of a rule enabling credit unions to invest in funds normally not allowed, as long as returns are used to defray employee benefits costs.”