What: A new federal tax law imposing a 21% excise tax on pay to certain employees is surprising many employers. This tax may apply to any of the following:
When/Why: Federal tax legislation passed in late 2017 added Code Section 4960 to impose this tax. It is currently effective and the IRS has issued two lengthy pieces of guidance interpreting it. Now the IRS is working on proposed rules.
Who: The tax generally applies to pay of certain current or former highly compensated employees (HCEs) in two situations:
If any employee earns, or has earned, over the dollar limit ($125,000 for 2019, indexed in future years), that employee could be an HCE whose pay is subject to the tax. Employers with more than five HCEs, generally only have to track the top five per year.
Amount: If the first situation occurs, the employer must pay a tax on amounts above one times the employee’s average pay. The tax applies to amounts above $1 million in the second situation.
Examples: Some examples of situations where the tax could apply, but might be unexpected, include:
Next Steps:
If you have any questions regarding this bulletin, please feel free to contact Tony Kolenic, Heidi Lyon or any other member of Warner's Employee Benefits/Executive Compensation Practice Group.
Note: This explanation is to help our clients determine whether to seek a review of their existing employment arrangements and processes. It is not intended to be a precise, technical description of the new law (which has many nuances and must be analyzed based on specific fact patterns).
