On December 15, 2017 Congress passed the Tax Cuts and Jobs Act which changed the tax treatment for certain compensation a credit union pays to its top five highest paid employees.. Specifically, credit unions are now subject to a 21% excise tax on what is termed excess remuneration—certain compensation that when totaled exceed $1 million—and excess parachute payments. The IRS has a very specific definition for remuneration, but generally it is pay that is reportable in box 1 of an employee’s W-2 for which there is not a “substantial risk of forfeiture.” This includes deferred compensation such as that from 457(f) plans depending on how those funds vest. For more background, check out these past blogs from 2018 and 2019, as well as this blog from NAFCU Services.
Credit unions that may be subject to the excise tax are “applicable tax-exempt organizations” or ATEOs, although keep in mind this tax could also apply to CUSOs. There was much confusion about how the IRS would collect this excise tax, including what compensation would be included like “excess remuneration” or an “excess parachute payment.” It was also not clear how federal credit unions would report this tax to the IRS. While state chartered credit unions file Form 990, there is not a similar requirement for FCUs. Given the lack of clarity overall, NAFCU began seeking clarification from the IRS on this topic shortly after the TCJA became law. NAFCU also asked Congress to address disparities in how compensation plans that existed before the TCJA was enacted are treated for credit unions as compared to for-profits.
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