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Seven-figure pay in nonprofit groups gets a new tax

GOP tax plan levies 21 percent tax on salaries of more than $1 million

IRS Form 990

Dec. 21, 2017
By Mark R. Graham

The final version of the GOP-led tax overhaul bill passed this week in Congress includes new revenue from $1 million-plus salaries paid by nonprofit organizations.

Going into effect for 2018, a 21 percent tax will be levied on salaries of more than $1 million for the five highest-paid employees of nonprofit organizations.

CEO Update, which tracks salaries at national-level associations and cause-focused nonprofits like AARP and the National Rifle Association, has determined that the proposed tax would have generated nearly $30 million in one year if applied to the most recent salaries disclosed in IRS Form 990s. 

This new tax would disproportionally affect trade associations, since 72 percent of the 151 seven-figure salaries are paid by trade groups, according to CEO Update’s 2018 Salary Guide.

If this tax was applied to the latest tax disclosures from the U.S. Chamber of Commerce, for example, the business group would be on the hook for $2.4 million in tax for its CEO and the four highest-paid staff.  

Private universities and nonprofit hospitals, where million-dollar-plus pay for CEOs and presidents is not uncommon, would also be subject to this excise tax.  Executives providing medical services, including veterinarians, are excluded. 

Compensation experts now believe that this new tax on nonprofit salaries will include a levy on one-time payments made from supplemental retirement plans (SERPs) that have been accumulating for many years before they are paid.

These SERPs, specifically the 457(f) plans, are growing more common in associations, because the plans encourage longer tenures for CEOs and executive staff.  SERPs are subject to “substantial risk of forfeiture,” meaning payment to the employee is contingent on the performance of services, which usually requires the executive to stay on the job for a specific period of time.

The bill does not grandfather compensation paid under pre-existing contractual agreements, according to an analysis of the legislation by law firm Venable.

The proposed tax may have limited repercussions on compensation for executive talent in trade associations and large, complex nonprofits, observers say.

Charles Quatt, founder and president of Quatt associates, a consulting firm that specializes in compensation for nonprofit executives, said the excise tax may slow the level of salary increases going forward, but organizations still must compete for talent that demands higher levels of pay.