In this LawFlash, our Tax and Employee Benefits and Executive Compensation teams describe proposed regulations recently released by the Internal Revenue Service implementing Internal Revenue Code Section 4960. Section 4960 imposes a 21% excise tax on certain executive compensation paid to employees of tax-exempt organizations, including nonprofit hospital systems. The proposed regulations address important questions concerning the applicability of Section 4960. Those interested in submitting comments on the proposed regulations have until August 10, 2020 to do so.
The 116th Congress convened on January 3 with Democrats controlling the House for the first time since 2011 and Republicans maintaining their majority in the Senate. Divided government typically constrains Congress’s ability to pass broad, new legislative initiatives, while also limiting the scope of the legislation that does pass. Healthcare policy, especially, has been a point of partisan contention in the past. However, there are several areas where some degree of cooperation is possible in the 116th Congress and will likely impact the healthcare industry and health policy in 2019.
Chairman of the Senate Finance Committee, Senator Chuck Grassley, sent a letter on February 19 to the Internal Revenue Service (IRS) asking questions regarding IRS efforts to enforce Section 501(r) as it applies to tax-exempt hospitals. Section 501(r) requires a hospital to meet the following requirements in order to be tax-exempt: (1) conduct a community health assessment; (2) establish a financial assistance policy; (3) have limitations on charges for emergency or necessary medical care provided to individuals covered under a financial assistance policy; and (4) not engage in extraordinary billing and collection actions before determining if someone qualifies for its financial assistance policy. Mr. Grassley cited as reason for his concerns of noncompliance a 2017 article with statistics that large tax-exempt hospitals have decreased amounts of free charity care, while increasing total revenue.
The 2017 Tax Cuts and Jobs Act, Section 4960 imposes a 21% excise tax on certain executive compensation in excess of $1 million as well as certain excess parachute payments paid to a “covered employee” by tax-exempt entities, including tax-exempt hospitals and health systems. Recently, the Internal Revenue Service issued Notice 2019-09, which provides interim guidance on such topics as identifying covered employees, calculating remuneration under Section 4960, and allocating excess parachute payments. In a recent LawFlash, partner Mims Maynard Zabriskie and associate Anna M. Pomykala offer a timely analysis of Notice 2019-09 and identify some of the compliance challenges.