Insurance Trades Pleased With Exceptions in Nonprofit Executive Comp Regs

August 10, 2020

The Honorable David J. Kautter
Assistant Secretary for Tax Policy
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

The Honorable Michael J. Desmond
Chief Counsel
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224

RE: REG-122345-18; Tax on Excess Tax-Exempt Organization Executive Compensation

Dear Messrs. Kautter and Desmond:

The American Property Casualty Insurance Association, the National Association of Mutual Insurance Companies, and the Reinsurance Association of America (the Trades) appreciate the opportunity to comment on REG-122345-18, proposed 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 Trades collectively represent the great majority of insurance companies issuing property and casualty (non-life) insurance throughout the United States.

In response to Notice 2019-09: Interim Guidance Under Section 4960, the Trades urged the Treasury Department and the Internal Revenue Service to clarify that volunteers that serve on applicable tax-exempt organizations (ATEO) and do not receive any compensation for their volunteer services are not considered employees of the ATEO for purposes of applying Section 4960.

The 2017 tax act, commonly referred to as the Tax Cuts and Jobs Act, added Section 4960 to the Internal Revenue Code. Section 4960 imposes an excise tax equal to the corporate income tax rate (currently 21%) on compensation in excess of $1 million paid by a nonprofit organization to any of its five highest-compensated employees. The excise tax is applicable to compensation paid by a nonprofit organization directly and to compensation paid by a "related organization" of such nonprofit.

It is common practice for individuals employed by a for-profit entity to volunteer their services to a related or affiliated tax-exempt organization. Often, for-profit entities set up private foundations and ask their key employees to serve as officers of the foundation.

Many property/casualty insurance companies have related or affiliated tax-exempt organizations and officers, directors or employees serve in volunteer capacities with those related tax-exempt organizations. The Trades raised concerns that based on Notice 2019-19, volunteers could be treated as an employee of an ATEO, and that for purposes of determining employment status and calculating the excise tax, would factor in the compensation received from a related for-profit entity for services performed for said for-profit entity.

The Trades requested explicit guidance that the determination of employment status of an ATEO include a de minimis standard to the extent services rendered are immaterial and/or that the calculation of the excise tax is based on compensation received for services to the ATEO. We are pleased that the proposed regulations propose exceptions to the definition of "employee" and "covered employee" and the rules for identifying the five highest-compensated employees to address these concerns, the “limited hours” and “non-exempt funds” exceptions.

The regulations proposed that an individual would not be considered a covered employee and thereby disregarded for purposes of determining a nonprofit's five highest-compensated employees if: 1) neither the nonprofit nor any related nonprofit pays compensation to the individual for services that such individual performed as an employee of the nonprofit; and 2) the individual performed services as an employee of the nonprofit and all related nonprofits for no more than the greater of (a) 10 percent of the total hours or days the individual worked for the nonprofit and all related organizations (including for-profit organizations), or (b) 100 hours.

The regulations further propose that in the case of employees who spend more than 10 percent, but less than 50 percent, of their time (measured by hours or days) providing services to a nonprofit organization, they are also disregarded if they meet two additional tests: (1) the individual may not receive any compensation from a for-profit entity that is controlled by the nonprofit and (2) the nonprofit may not pay a fee for services to the for-profit entity or any other related entity that provides compensation to the individual.

We believe the intention behind the statute was to only factor in remuneration paid for services performed on behalf of the ATEO. We appreciate the Department and the Service's recognition that limited or voluntary services provided to an ATEO by employees of a related organization should not trigger the excise tax on excess compensation. We believe the proposed regulations reflect congressional intent and will provide needed clarity in application of the excise tax.

We appreciate the consideration given to the concerns raised with the Interim Guidance and support the proposed exemptions.

Sincerely,

David Pearce, Jr.
Vice President and Director of Tax Policy
American Property Casualty Insurance Association

Joseph B. Sieverling
Senior Vice President and Director of Financial Services
Reinsurance Association of America

Jonathan Rodgers
Director of Financial and Tax Policy
National Association of Mutual Insurance Companies