Think of Retirement Plans To Address Excise Taxes on Exess Compensation
June 26, 2018
All entities are now pursuant to the 2017 Tax Cuts & Jobs Act (TCJA) liable for penalties due to overpaying employees.
For-profit companies have been at risk for losing their tax deduction for excessive salaries, with publicly-traded companies subject to a specific $1 million limit that the TCJA made easier to exceed.
Certain nonprofit organizations have been at risk for “intermediate sanctions,” but the Act also created a new Internal Revenue Code (Code) section that places tax-exempt organizations and governmental entities at risk for a 21 percent excise tax for excessive compensation.
Amounts contributed to a retirement plan avoid or delay the application of these rules.
Amounts contributed to and distributed from retirement plans subject to Code ss. 401(a), 401(k), 403(b), and 457(b) are not included in “compensation” that can trigger the penalty; and amounts contributed to retirement plans subject to Code ss. 409A or 457(f) (often called “nonqualified deferred compensation plans”) are not included in the assessment until those amounts are distributed or no longer subject to a substantial risk of forfeiture.
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