Who Wants to be a Millionaire? – Compensation Excise Tax

By | September 17, 2019

Who Wants to be a Millionaire?

It’s not just a question for game show hosts anymore— the IRS wants to know too.

As of January 1, 2018, a new provision in the Internal Revenue Code subjects non-profits, including hospitals, to a 21% excise tax on remuneration exceeding $1 million and excess parachute payments. Here’s what you need to know about the tax, including information on the carve-out for medical professionals that may help ease the burden of affected hospitals.

Who is subject to the tax?

The tax applies to “covered employees” of “applicable tax-exempt organizations,” including non-profit hospitals.  A “covered employee” is any employee who is one of the organization’s 5 highest compensated individuals, or who was a covered employee in any preceding year beginning after December 31, 2016. This means that, once an employee is considered “covered” in a taxable year, he or she will continue to be considered as such in all succeeding tax years.

Defining remuneration

The tax applies to a covered employee’s excess “remuneration” as well as any excess parachute payments. Both “remuneration” and “excess parachute payments” are defined terms with precise meaning under the Code.[1]

In general, compensation that will trigger the tax:

  • Includes
    • Compensation (i.e. wages) exceeding $1 million
    • Excess parachute payments, meaning payments that are contingent on an employee’s separation from the employer, and exceed 3 times an employee’s “base amount”[2]
  • Does not include
    • Roth contributions
    • Certain payments under qualified plans[3]
    • Compensation excluded by the medical services exception (explained below)

Importantly, the excise tax can apply to remuneration paid by the applicable tax exempt organization and any related organization that employs the covered employee. Liability for the tax is then allocated among the employers. For a simple example, imagine that A and B are related organizations that are both applicable tax-exempt entities. C is a covered employee of both A and B. A pays $1.2m of remuneration to C and B pays $800,000 of remuneration to C. C’s total remuneration is $2m, and the excess remuneration subject to the tax is $1m. The total tax is $210,000 (21% of $1m). Since A paid 3/5 of C’s remuneration, it will be liable for 3/5 of the tax, or $126,000, while B will be liable for 2/5 or $84,000.[4]

Exception for medical services

For purposes of this tax, remuneration does not include amounts paid to licensed medical professionals for the performance of medical services. Thus, where a doctor is paid entirely based on the medical services that he or she provides, no amount of that compensation will be considered remuneration under the tax. For employees whose compensation is based partially on the provision of medical services, applicable tax-exempt entities will have to determine what portion of their compensation falls under the tax.

Things to Consider

Organizations should begin the process of determining their “covered employees” and assessing whether their compensation might trigger the excise tax. In doing so, they should:

  • Consider employees who are paid by related organizations as well those paid directly by the organization,
  • Keep in mind that once designated as a covered employee, an employee will be considered covered in every succeeding taxable year,
  • Determine if any covered employees provide medical services, and if so, determine which portion of their compensation are allocated to providing those services.
  • Note that the IRS has provided interim guidance to taxpayers in Notice 2019-09, which should help taxpayers navigate the intricacies of Section 4960 until regulations are adopted.


To hear more about this and other exciting Tax updates, register for the upcoming Accounting and Regulatory Update on November 1 in Westborough, MA. Gwen Spencer will provide the Tax Update for the session. Registration is available here.

[1] 26 U.S. Code § 4960(c)(3) & (5)

[2] 26 U.S. Code § 4960(c)(5)(B)

[3] 26 U.S. Code § 4960(c)(5)(C)(1)

[4] Notice 2019-09, p. 58

Author: Gwen Spencer and Peter Lee

Gwen Spencer is a partner in the Exempt Organizations Tax Services (EOTS) practice of PwC’s National Tax Services (NTS). She has over 20 years of consulting experience in the area of tax issues related to tax-exempt healthcare organizations, and their for-profit affiliates. Peter Lee is an associate in the EOTS practice. He graduated from Boston College Law School in May, 2018, and serves a range of non-profit hospitals and academic medical centers.