6196 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Parts 1 and 53 

[TD 9938] 

RIN 1545–BO99 

Tax on Excess Tax-Exempt 

Organization Executive Compensation 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final regulations. 

SUMMARY: This document sets forth final 

regulations under section 4960 of the 

Internal Revenue Code (Code), which 

imposes an excise tax on remuneration 

in excess of $1,000,000 and any excess 

parachute payment paid by an 

applicable tax-exempt organization to 

any covered employee. The regulations 

affect certain tax-exempt organizations 

and certain entities that are treated as 

related to those organizations. 

DATES: Effective Date: These final 

regulations are effective on January 15, 

2021. 

Applicability Dates: For dates of 

applicability, see § 53.4960–6. 

FOR FURTHER INFORMATION CONTACT: 

William McNally at (202) 317–5600 or 

Patrick Sternal at (202) 317–5800 (not 

toll-free numbers). 

SUPPLEMENTARY INFORMATION:

Background 

This document amends the 

Foundation and Similar Excise Tax 

Regulations (26 CFR part 53) by adding 

final regulations under section 4960. 

Section 4960 was added to the Code by 

section 13602 of the Tax Cuts and Jobs 

Act, Public Law 115–97, 131 Stat. 2054, 

2157 (TCJA). Section 4960(a) generally 

provides that an applicable tax-exempt 

organization (ATEO) that pays to a 

covered employee remuneration in 

excess of $1 million for a taxable year 

or any excess parachute payment is 

subject to an excise tax on the amount 

of the excess remuneration (as described 

in section IV of the Summary of 

Comments and Explanation of 

Revisions, titled ‘‘Excess 

Remuneration’’) plus excess parachute 

payments paid during that taxable year 

at a rate equal to the rate of tax imposed 

on corporations under section 11 

(currently 21 percent). Section 4960 is 

effective for taxable years beginning 

after December 31, 2017. 

An ATEO is defined in section 

4960(c)(1) as any organization that for 

the taxable year is exempt from taxation 

under section 501(a) as well as certain 

other tax-exempt organizations. A 

covered employee is defined in section 

4960(c)(2) as any employee (including 

any former employee) of an ATEO if the 

employee is one of the five highestcompensated employees of the 

organization for the taxable year or any 

preceding taxable year beginning after 

December 31, 2016. Section 

4960(c)(4)(A) provides that 

remuneration paid to a covered 

employee by an ATEO includes any 

remuneration paid with respect to 

employment of such employee by any 

related person or governmental entity. 

Section 4960(c)(4)(B) defines a related 

person or governmental entity as an 

entity that controls, or is controlled by, 

the ATEO; is controlled by one or more 

persons that control the ATEO; or is a 

supported or supporting organization as 

described in sections 509(f)(3) and 

509(a)(3), respectively. An excess 

parachute payment is defined in section 

4960(c)(5)(A) as an amount equal to the 

excess of any parachute payment over 

the portion of the base amount (as 

described in section V.D. of the 

Summary of Comments and Explanation 

of Revisions, titled ‘‘Three-Times-BaseAmount Test’’) allocated to such 

payment; section 4960(c)(5)(B) defines a 

parachute payment as any payment in 

the nature of compensation to a covered 

employee if the payment is contingent 

on the employee’s separation from 

employment with the employer and the 

aggregate present value of such 

payments exceeds 3-times the base 

amount. 

On December 31, 2018, the 

Department of the Treasury (Treasury 

Department) and the Internal Revenue 

Service (IRS) issued Notice 2019–09 

(2019–04 I.R.B. 403), setting forth initial 

guidance on the application of section 

4960. On June 11, 2020, the Treasury 

Department and the IRS published 

proposed regulations on section 4960 in 

the Federal Register (REG–122345–18, 

85 FR 35746) (the proposed regulations). 

The statutory provisions and the initial 

guidance provided by Notice 2019–09 

are described in detail in the proposed 

regulations. 

The Treasury Department and the IRS 

received written comments on the 

proposed regulations. No public hearing 

was requested or held. All written 

comments received in response to the 

proposed regulations are available at 

www.regulations.gov or upon request. 

Comments received that are outside of 

the scope of the proposed regulations 

generally are not addressed in this 

preamble but may be considered in 

connection with future guidance 

projects. After consideration of the 

relevant comments received, the 

proposed regulations under section 

4960 are adopted as final regulations as 

modified by this Treasury Decision. The 

major areas of comment and the 

revisions to the proposed regulations are 

discussed in the Summary of Comments 

and Explanation of Revisions. With 

respect to provisions in the proposed 

regulations on which no comments were 

received or for which comments were 

received prior to the issuance of the 

proposed regulations, the preamble to 

the proposed regulations may provide 

additional information. 

Summary of Comments and 

Explanation of Revisions 

These final regulations provide 

guidance on the excise tax imposed by 

section 4960 and the entities that are 

subject to the tax. 

I. Scope of Final Regulations 

These final regulations retain the 

basic approach and structure of the 

proposed regulations, with certain 

revisions. These final regulations restate 

certain statutory definitions and define 

various terms set forth in section 4960. 

These final regulations also provide 

rules for determining: The amount of 

remuneration paid for a taxable year for 

purposes of identifying covered 

employees and calculating the excise 

tax; whether excess remuneration has 

been paid and in what amount; whether 

a parachute payment has been paid and 

in what amount; the allocation of 

liability for the excise tax among related 

organizations; and the date of 

applicability of these final regulations. 

These definitions and rules apply solely 

for purposes of section 4960. 

II. Definitions 

A. Applicable Tax-Exempt Organization 

These final regulations adopt the 

definition of ‘‘applicable tax-exempt 

organization’’ or ‘‘ATEO’’ as set forth in 

the proposed regulations. Consistent 

with section 4960(c)(1), the proposed 

regulations provided that an ‘‘applicable 

tax-exempt organization’’ or ‘‘ATEO’’ 

includes an organization that is exempt 

from tax under section 501(a); is a 

farmers’ cooperative organization 

described in section 521(b)(1); has 

income excluded from taxation under 

section 115(1); or is a political 

organization described in section 

527(e)(1). 

In response to comments on Notice 

2019–09 regarding the applicability of 

the excise tax imposed by section 4960 

to certain Federal instrumentalities, 

section II.A. of the Explanation of 

Provisions of the proposed regulations, 

titled ‘‘Applicable Tax-Exempt 

Organization,’’ stated that the Treasury 


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Department and the IRS consider all 

Federal instrumentalities described in 

section 501(c)(1) to be included in the 

statutory ATEO definition as an 

organization exempt from tax under 

section 501(a) and thus subject to 

section 4960. However, the Treasury 

Department and the IRS requested 

comments regarding the application of 

section 4960 to Federal 

instrumentalities. One commenter 

requested that these final regulations 

confirm that Federal instrumentalities 

described under section 501(c)(1)(A)(i), 

for which the enabling acts provide for 

exemption from all current and future 

Federal taxes are not subject to tax 

under section 4960. These final 

regulations do not address this issue but 

reserve § 53.4960–1(b)(3) and § 53.4960– 

4(a)(5) for future rules to address these 

Federal instrumentalities. The Treasury 

Department and the IRS will continue to 

consider whether section 4960 should 

apply to Federal instrumentalities for 

which the enabling acts provide for 

exemption from all current and future 

Federal taxes. Until further guidance is 

issued, a Federal instrumentality for 

which an enabling act provides for 

exemption from all current and future 

Federal taxes may treat itself as not 

subject to tax under section 4960 as an 

ATEO or related organization. However, 

if that Federal instrumentality is a 

related organization of an ATEO, 

remuneration it pays must be taken into 

account by that ATEO. 

B. Applicable Year 

Section 4960(a)(1) refers to 

remuneration paid ‘‘for the taxable 

year,’’ but does not specify which 

taxpayer’s taxable year is referenced, 

what it means for remuneration to be 

paid ‘‘for’’ a taxable year, or how to 

measure remuneration if an ATEO and 

a related organization have different 

taxable years. The proposed regulations 

provided that remuneration is treated as 

paid for a taxable year if it is paid 

during the applicable year, and that the 

applicable year is defined as the 

calendar year ending with or within an 

ATEO’s taxable year. The proposed 

regulations provided rules for 

determining the applicable year of an 

organization with respect to the taxable 

year in which the organization becomes 

an ATEO or ceases to be an ATEO, 

including rules addressing short 

applicable years that may arise in these 

situations and rules addressing related 

organizations with different taxable 

years. No comments were received on 

those proposed rules, and these final 

regulations adopt those rules without 

change. 

C. Employee 

Section 4960(a) imposes a tax on 

excess remuneration and any excess 

parachute payment paid by an ATEO for 

the taxable year with respect to 

employment of a covered employee. 

Section 4960(c)(2) defines a ‘‘covered 

employee’’ as an employee (including 

any former employee) of the ATEO who 

meets certain other conditions. 

Accordingly, the excise tax imposed by 

section 4960(a) applies only with 

respect to a current or former employee 

of the ATEO. 

The proposed regulations defined 

‘‘employee’’ by reference to the 

definition of ‘‘employee’’ for purposes 

of Federal income tax withholding in 

section 3401(c) and the regulations 

thereunder. Specifically, the proposed 

regulations cross-referenced the 

definition of ‘‘employee’’ in 

§ 31.3401(c)–1, which includes 

common-law employees, officers or 

elected or appointed officials of 

governments, or agencies or 

instrumentalities thereof, and certain 

officers of corporations. The proposed 

regulations restated certain rules from 

§ 31.3401(c)–1 that are particularly 

relevant to section 4960, including the 

rules that a member of a board of 

directors of a corporation is not an 

employee of the corporation (in the 

member’s capacity as a director), and 

that an officer is an employee of the 

entity for which the officer serves as an 

officer (unless the officer performs no 

services or only minor services and 

neither receives, nor is entitled to 

receive, any remuneration for such 

services). For further discussion, see 

section II.E. of this Summary of 

Comments and Explanation of 

Revisions, titled ‘‘Covered Employee.’’ 

No comments were received on those 

proposed rules, and these final 

regulations adopt those provisions of 

the proposed regulations without 

change. 

One commenter requested 

clarification regarding the source of the 

remuneration that is considered for 

purposes of applying the minor services 

exception to the rule that treats a 

corporation’s officer as an employee. 

The minor services exception in Prop. 

§ 53.4960–1(e)(1) incorporated the 

standard in § 31.3401(c)–1 and provided 

that ‘‘an officer of a corporation who as 

such does not perform any services or 

performs only minor services and who 

neither receives, nor is entitled to 

receive, any remuneration is not 

considered to be an employee of the 

corporation solely due to the 

individual’s status as an officer of the 

corporation.’’ The commenter stated 

that it is unclear whether an individual 

qualifies for the exception if he or she 

receives remuneration from a related 

person or governmental entity for 

services performed for an organization 

other than the ATEO and also 

volunteers his or her time as an officer 

of the ATEO (and performs no services 

or only minor services for the ATEO). 

The commenter recommended that 

these final regulations clarify that the 

relevant remuneration for purposes of 

meeting the minor services exception is 

only remuneration paid by the ATEO. 

The minor services exception applies if 

an individual is not paid (nor is entitled 

to be paid) remuneration based ‘‘solely’’ 

on the individual’s status as an officer. 

Thus, the source of the remuneration is 

not relevant, but rather the standard is 

whether the individual received any 

remuneration for the minor services as 

an officer regardless of the source of the 

remuneration. Therefore, the Treasury 

Department and the IRS have concluded 

that this clarification of the minor 

services exception in these final 

regulations is unnecessary. 

For a discussion of how this 

definition of ‘‘employee’’ and other 

rules address employees of non-ATEO 

related organizations performing limited 

or temporary services for the related 

ATEO (in particular, while also 

receiving compensation from the nonATEO related organization), see section 

II.E.5. of this Summary of Comments 

and Explanation of Revisions, titled 

‘‘Volunteer Services and Other 

Exceptions.’’ 

D. Employer 

Section 4960(b) provides that the 

employer is liable for the tax imposed 

under section 4960(a). Similar to the 

definition of ‘‘employee,’’ the proposed 

regulations defined ‘‘employer’’ by 

reference to the definition of 

‘‘employer’’ for purposes of Federal 

income tax withholding in section 

3401(d) and the regulations thereunder, 

without regard to the special rules in 

section 3401(d)(1) and (2). Accordingly, 

control of the payment of wages would 

not be relevant for determining whether 

an entity is the employer for section 

4960 purposes. Further, the proposed 

regulations provided that a person or 

governmental entity does not avoid 

status as an employer of an employee by 

using a third-party payor to pay 

remuneration to that employee. Thirdparty payors include a payroll agent, an 

agent under section 3504, a common 

paymaster, a statutory employer under 

section 3401(d)(1), or a certified 

professional employer organization 

under section 7705 (which is an 

‘‘employer’’ only for purposes of subtitle 


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C of the Code). Similarly, consistent 

with existing principles for determining 

the employer, under certain facts and 

circumstances, a management company 

may also be acting as a third-party payor 

for the employees of its ATEO client, 

rather than as the common law 

employer of the employees. Thus, the 

proposed regulations provided that 

remuneration that is paid to an 

individual by a separate organization for 

services the individual performed as an 

employee of the ATEO would be 

remuneration paid by the ATEO to its 

employee for purposes of section 4960, 

whether or not the separate organization 

is related to the ATEO. In addition, the 

proposed regulations provided that the 

sole owner of an entity that is 

disregarded as separate from its owner 

under § 301.7701–2(c)(2)(i) would be 

treated as the employer of any employee 

of the disregarded entity, 

notwithstanding that the entity is 

regarded for subtitle C purposes under 

§ 301.7701–2(c)(2)(iv). No comments 

were received on these provisions of the 

proposed regulations, and these final 

regulations adopt them without change. 

E. Covered Employee 

1. In General 

Section 4960(c)(2) defines ‘‘covered 

employee’’ as any individual who is one 

of the five highest-compensated 

employees of the ATEO for a taxable 

year or was a covered employee of the 

ATEO (or any predecessor) for any 

preceding taxable year beginning after 

December 31, 2016. Thus, once an 

employee is a covered employee of an 

ATEO, the employee continues to be a 

covered employee for all subsequent 

taxable years of that ATEO. The 

proposed regulations provided that 

whether an employee is one of the five 

highest-compensated employees of an 

ATEO is determined separately for each 

ATEO and not for an entire group of 

related organizations. As a result, a 

group of related ATEOs could have 

more than five ‘‘five highestcompensated employees’’ for a taxable 

year. Similarly, an employee could be a 

covered employee of more than one 

ATEO in a related group of 

organizations for a taxable year. No 

comments were received on these 

provisions of the proposed regulations, 

and these final regulations adopt them 

without change. 

2. Aggregation of Remuneration Paid by 

the ATEO and Its Related Organizations 

for Purposes of Determining the Five 

Highest-Compensated Employees 

For purposes of determining whether 

an employee is one of an ATEO’s five 

highest-compensated employees for a 

taxable year, the proposed regulations 

provided that remuneration paid by the 

ATEO during the ATEO’s applicable 

year is aggregated with remuneration 

paid by any related organization during 

the ATEO’s applicable year, including 

remuneration paid by a related taxable 

organization or governmental entity, for 

services performed as an employee of 

that related organization. Remuneration 

for which a deduction is disallowed 

under section 162(m) generally is not 

considered for purposes of determining 

whether excess remuneration is paid for 

a taxable year, but that remuneration is 

considered for purposes of determining 

an ATEO’s five highest-compensated 

employees. 

One commenter suggested that, for 

purposes of determining an ATEO’s five 

highest-compensated employees, these 

final regulations should consider only 

remuneration paid (directly or 

indirectly) by an ATEO for services 

provided by an employee to the ATEO, 

rather than aggregating all remuneration 

paid to the individual for services the 

individual provides as an employee of 

the ATEO and as an employee of any 

related organization, including a related 

non-ATEO (for example, a taxable 

organization). The commenter reasoned 

that aggregating remuneration for 

purposes of determining covered 

employee status is not required by the 

statutory text and is unnecessary to 

comply with Congressional intent to 

achieve parity between ATEOs and 

publicly held corporations that are 

subject to the section 162(m) deduction 

disallowance for compensation paid to 

a covered employee in excess of $1 

million. The commenter also reasoned 

that because only an ATEO can have a 

‘‘covered employee’’ under section 

4960(c)(2), the reference to the ‘‘five 

highest-compensated employees of the 

organization’’ (emphasis in comment) in 

section 4960(c)(2)(A) should be read to 

include only compensation paid by the 

ATEO, directly or indirectly (for 

example, by reimbursing another 

entity), for services provided by the 

employee to the ATEO, regardless of the 

payor. The commenter asserted that the 

language in section 4960(c)(4)(A), which 

provides that ‘‘remuneration of a 

covered employee by an [ATEO] shall 

include any remuneration paid with 

respect to employment of such 

employee by any related person or 

governmental entity’’ (emphasis in 

comment) should not override a plain 

reading of section 4960(c)(2), which 

refers only to employment with the 

ATEO. The commenter further reasoned 

that section 4960(c)(4)(A) applies after a 

determination of the ATEO’s covered 

employees has already been made, and 

thus it is circular to read section 

4960(c)(4)(A) as requiring inclusion of 

remuneration paid to a covered 

employee of an ATEO by a related 

person or governmental entity for 

purposes of determining an ATEO’s 

highest-compensated employees (and, 

thus, its covered employees). 

While the Treasury Department and 

the IRS acknowledge that alternative 

interpretations as to whether sections 

4960(c)(2) and (c)(4)(A) take into 

account remuneration paid by a related 

organization for purposes of 

determining an ATEO’s covered 

employees may be reasonable, for the 

reasons set forth below, these final 

regulations adopt the relevant 

provisions of the proposed regulations 

without change and do not adopt the 

commenter’s recommendation. Section 

4960 does not define the ‘‘five highestcompensated employees’’ of an ATEO. 

The ambiguity in this term is 

highlighted by the fact that the only 

provision in the statute that references 

‘‘compensation’’ is section 4960(c)(2), 

which defines ‘‘covered employee’’ as 

one of the ‘‘5 highest compensated 

employees’’; the statute otherwise uses 

the defined terms ‘‘remuneration’’ and 

‘‘parachute payment’’ for purposes of 

determining the excise tax imposed by 

section 4960. In addition, there is no 

discussion in the legislative history 

describing how Congress intended an 

ATEO to determine its five highestcompensated employees. The Treasury 

Department and the IRS have concluded 

that the commenter’s suggested 

interpretation—that only remuneration 

paid by the ATEO for services 

performed for the ATEO should be 

considered for purposes of determining 

who is a covered employee—would 

raise significant tax administration 

issues and the potential for abuse in 

circumstances in which an individual 

provides services to, and receives 

compensation from, the ATEO and one 

or more related organizations during the 

applicable year. In these cases, it may be 

difficult to determine the proper 

allocation of the compensation among 

the organizations to which the 

individual provides the services and 

whether the allocation was properly 

based on the value of the services 

provided. Due to the highly factual 

nature of this analysis and the potential 

for differing conclusions on one or more 

of these issues, the commenter’s 

suggested rule would result in an 

unpredictable standard to be applied by 

taxpayers and the IRS and would raise 

the potential for abusive 


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mischaracterizations of the nature of the 

services and compensation provided. 

The commenter further asserted that 

the requirement to aggregate 

compensation paid by the ATEO and all 

related organizations is not required to 

ensure parity with the rules for 

identifying covered employees under 

section 162(m). Under §§ 1.162– 

27(c)(2)(ii) and 1.162–33(c)(1)(ii)(B), the 

amount of compensation used to 

identify the covered employees who are 

the three most highly compensated 

executive officers (other than the 

principal executive officer and the 

principal financial officer) for the 

taxable year is determined pursuant to 

the executive compensation disclosure 

rules under the Securities Exchange Act 

of 1934. Under 17 CFR 229.402(a)(2), 

the amount of compensation paid to an 

employee by a publicly held corporation 

is measured by reference to 

remuneration paid by the registrant and 

remuneration paid by the registrant’s 

subsidiaries, and is not limited to 

remuneration for services provided to 

the registrant. Although the provisions 

of sections 4960 and 162(m) are similar 

in many respects, there is no indication 

in the legislative history that sections 

162(m) and 4960 are intended to apply 

in the same manner in all situations. 

Further, the section 162(m) and section 

4960 statutory language and the 

application of the rules differ 

significantly in many respects that 

would not allow that strict parity. 

Regardless of the conclusion that the 

sections 162(m) and 4960 rules do not 

allow for strict parity, the Treasury 

Department and the IRS have concluded 

that the aggregation of compensation 

paid by all related entities in identifying 

covered employees is more analogous to 

the rules under section 162(m) than 

considering only remuneration for 

services provided to the ATEO. 

Thus, while the Treasury Department 

and the IRS considered several 

alternatives for determining the ATEO’s 

five highest-compensated employees, 

including the alternative proposed by 

the commenter, the Treasury 

Department and the IRS ultimately 

concluded that including remuneration 

paid by all related organizations is 

appropriate and that it is more 

administrable to use a single standard 

for identifying covered employees and 

computing the excise tax, if any, 

imposed by section 4960(a)(1). 

However, to mitigate the effect of 

requiring the aggregation of 

remuneration paid by an ATEO and all 

related organizations for purposes of 

determining the ATEO’s covered 

employees, these final regulations retain 

the limited hours, nonexempt funds, 

and limited services exceptions 

(discussed in section II.E.5. of this 

Summary of Comments and Explanation 

of Revisions, titled ‘‘Volunteer Services 

and Other Exceptions’’). 

3. Remuneration for Medical Services 

Consistent with section 4960(c)(3)(B) 

and the proposed regulations, these 

final regulations provide that for 

purposes of identifying an ATEO’s five 

highest-compensated employees for a 

taxable year, remuneration paid during 

the applicable year for medical services 

is not taken into account. For a 

discussion of the rules for determining 

the remuneration paid for medical or 

veterinary services and for allocating 

remuneration to medical and nonmedical services, see section II.F. of this 

Summary of Comments and Explanation 

of Revisions, titled ‘‘Medical Services.’’ 

4. Covered Employee Status Continues 

for All Subsequent Taxable Years 

In accordance with section 4960(c)(2), 

the proposed regulations provided that 

a covered employee includes any 

employee (including any former 

employee) of an ATEO who was a 

covered employee of the organization 

(or a predecessor) for any preceding 

taxable year beginning after December 

31, 2016. In response to the proposed 

regulations, one commenter suggested 

that the Treasury Department and the 

IRS reconsider the rule that an 

individual who is a covered employee 

of an ATEO (or of a predecessor ATEO) 

for one taxable year remains a covered 

employee of that ATEO (and any 

successor ATEOs) for all subsequent 

taxable years. The commenter suggested 

that an ATEO should be relieved of the 

burden of continuing to include an 

employee among its covered employees 

when a consolidation or restructuring of 

a tax-exempt organization results in 

changes to the employee’s job 

responsibilities and compensation, if it 

no longer furthers the purpose of the 

statute to include the employee among 

its covered employees. The commenter 

asserted that the requirement that an 

individual remain a covered employee 

for all subsequent years, even after the 

employment relationship has ended, 

creates a potentially excessive 

administrative burden for the ATEO. 

These final regulations do not adopt this 

suggestion because that rule would be 

inconsistent with the statutory language. 

5. Volunteer Services and Other 

Exceptions 

The proposed regulations provided 

certain exceptions to the definition of 

‘‘covered employee’’ and the rules for 

identifying the five highestcompensated employees of an ATEO. 

Several commenters supported the 

inclusion of the exceptions provided in 

Prop. § 53.4960–1(d)(2)(ii), (iii), and (iv). 

These final regulations adopt these 

exceptions with certain modifications in 

response to comments as discussed later 

in this section. 

The exceptions to the definition of 

‘‘covered employee’’ in the proposed 

regulations were provided in response 

to comments on Notice 2019–09 

expressing concern that the rules for 

identifying an ATEO’s five highestcompensated employees in the notice 

would subject a non-ATEO to the excise 

tax on remuneration it pays to an 

employee who performs limited or 

temporary services for a related ATEO 

and who typically receives 

remuneration only from the non-ATEO. 

The exceptions were intended to ensure 

that certain employees of a related nonATEO providing services as an 

employee of an ATEO are not treated as 

one of the five highest-compensated 

employees of the ATEO, and thus 

considered a covered employee, if 

certain conditions related to the 

individuals’ remuneration or hours of 

service are met. To avoid manipulation 

of the rules through the deferral of 

compensation, in determining whether 

an employee is one of the five highestcompensated employees, the proposed 

regulations provided that a grant of a 

legally binding right to vested 

remuneration is considered to be 

remuneration paid, and any grant of a 

legally binding right to nonvested 

remuneration by the ATEO (or a related 

ATEO), for example under a deferred 

compensation plan or arrangement, 

disqualifies the ATEO from claiming a 

relevant exception. No comments were 

received on those proposed rules, and 

these final regulations adopt those rules 

without change. 

a. No Remuneration and NonEmployment Exceptions 

The proposed regulations provided 

that the remuneration paid to an 

individual who is never an employee of 

an ATEO is not considered for purposes 

of section 4960. For example, an 

individual who, under all the facts and 

circumstances, performs services for an 

ATEO solely as a bona fide independent 

contractor is not an employee of the 

ATEO, and thus is not considered for 

purposes of determining the ATEO’s 

five highest-compensated employees. 

Similarly, an individual who, under all 

the facts and circumstances, performs 

services solely as a bona fide employee 

of a related organization, including a 

related organization that provides 

services to the ATEO, is not an 


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1H. Rep. 115–409, 115th Cong., 1st Sess. 333 

(Nov. 13, 2017). 

2 In a similar context, § 53.4958–4(a)(2) treats 

excessive compensation paid to a disqualified 

person with respect to an applicable tax-exempt 

organization by a controlled entity of the 

organization as excessive compensation paid by the 

organization, and thus as an excess benefit 

transaction. 

employee of the ATEO, and thus is not 

considered for purposes of determining 

the ATEO’s five highest-compensated 

employees. No comments were received 

on those provisions of the proposed 

regulations, and these final regulations 

adopt them without change. 

The proposed regulations further 

provided that, for purposes of 

determining an ATEO’s five highestcompensated employees for a taxable 

year, an employee is disregarded if 

neither the ATEO nor any related 

organization pays remuneration or 

grants a legally binding right to 

nonvested remuneration for services the 

individual performed as an employee of 

the ATEO or any related organization. 

Thus, if none of an ATEO’s employees 

received remuneration from the ATEO 

or from a related organization, then the 

ATEO has no covered employees. 

Benefits excluded from gross income are 

not considered remuneration, including 

expense allowances and 

reimbursements under an accountable 

plan (see § 1.62–2) and most insurance 

for liability arising from service with an 

ATEO, such as directors and officers 

liability insurance (see § 1.132–5(r)(3)). 

These final regulations adopt these 

provisions of the proposed regulations 

without change. 

In section II.E.2. of the Explanation of 

Provisions of the proposed regulations, 

titled ‘‘Volunteer Services and Similar 

Exceptions,’’ the Treasury Department 

and the IRS requested comments on 

whether certain taxable benefits, such as 

employer-provided parking in excess of 

the value excluded under section 132, 

should be disregarded for purposes of 

determining whether an individual 

receives remuneration for services and 

what standards should apply to identify 

those benefits. No comments were 

received on this issue. Because taxable 

fringe benefits that are wages within the 

meaning of section 3401(a) are included 

in the statutory definition of 

remuneration, these final regulations 

adopt the provisions of the proposed 

regulations providing that these 

amounts are considered for purposes of 

determining an ATEO’s five highestcompensated employees and for 

purposes of applying the exceptions 

from covered employee status. For a 

discussion of comments received on the 

exclusion of taxable fringe benefits from 

the definition of remuneration for 

purposes other than the determination 

of the five highest-compensated 

employees, see section III.A. of this 

Summary of Comments and Explanation 

of Revisions, titled ‘‘In General’’ under 

‘‘Remuneration.’’ 

b. Limited Hours Exception 

These final regulations adopt the 

‘‘limited hours’’ exception as provided 

in the proposed regulations for purposes 

of determining an ATEO’s five highestcompensated employees. Under this 

exception, an employee of an ATEO is 

disregarded for purposes of determining 

the ATEO’s five highest-compensated 

employees for a taxable year if neither 

the ATEO nor any related ATEO pays 

remuneration or grants a legally binding 

right to nonvested remuneration to the 

employee for services performed for the 

ATEO and the employee performs only 

limited hours of service for the ATEO. 

For purposes of this exception, an 

ATEO is not treated as paying an 

amount paid to an individual by a 

related organization that employs the 

individual, so long as the ATEO does 

not reimburse the payor. An employee 

qualifies for this exception only if the 

hours of service the employee performs 

as an employee of the ATEO and all 

related ATEOs comprise 10 percent or 

less of the employee’s total hours of 

service for the ATEO and all related 

organizations during the applicable 

year. For purposes of this rule, an 

employee who performs fewer than 100 

hours of service as an employee of an 

ATEO (and all related ATEOs) during an 

applicable year is treated as having 

worked no more than 10 percent of the 

employee’s total hours for the ATEO 

(and all related ATEOs). 

One commenter recommended that 

these final regulations replace the 10 

percent hours of service threshold in the 

limited hours exception with the 50 

percent hours of service threshold that 

is used for the nonexempt funds 

exception (discussed later in this 

section) because the 10 percent 

threshold fails to capture many common 

arrangements between ATEOs and 

taxable related organizations controlled 

by the ATEO (‘‘controlled taxable 

related organizations’’) that are not 

structured to avoid the excise tax 

imposed by section 4960. These final 

regulations do not adopt this suggestion 

because the limited hours exception was 

intended to address arrangements in 

which services are sufficiently limited 

so that the arrangements resemble 

volunteer arrangements. This exception 

therefore has a much lower hours of 

service threshold than the nonexempt 

funds exception but may be used by a 

broader group of ATEOs. Further, the 

Treasury Department and the IRS have 

concluded that adopting the 

commenter’s suggestion would be 

inconsistent with the legislative intent 

of section 4960. As explained in section 

II.E.2 of the Explanation of Provisions of 

the proposed regulations, titled 

‘‘Volunteer Services and Similar 

Exceptions,’’ the legislative history 

indicates that Congress intended to tax 

excessive compensation paid to covered 

employees from tax-exempt funds.1

Consistent with this intent, the 

proposed regulations provided a 

nonexempt funds exception, which 

applies if certain criteria are satisfied, 

but does not apply if an ATEO’s 

controlled taxable related organization 

pays remuneration to an employee of 

the ATEO. The Treasury Department 

and the IRS reasoned that a controlled 

taxable related organization that pays 

remuneration to an employee for 

services provided to an ATEO uses the 

ATEO’s funds to do so, either because 

the controlled taxable related 

organization’s assets are, effectively, the 

ATEO’s assets, or because the payment 

reduces the related organization’s assets, 

which in turn reduces the value of the 

ATEO’s interest in the related 

organization. The Treasury Department 

and the IRS consider the funds of an 

ATEO’s controlled taxable related 

organization as, in substance, equivalent 

to tax-exempt funds, and thus the use of 

such funds to compensate an individual 

for services provided to an ATEO is in 

substance the use of tax-exempt funds.2

One commenter expressed concern 

about the ‘‘cliff’’ nature of the proposed 

limited hours exception (as well as the 

nonexempt funds and limited services 

exceptions), noting that exceeding the 

thresholds even slightly may result in 

the employee being a covered employee 

for the applicable year and all 

subsequent applicable years. The 

commenter recommended that these 

final regulations allow a 3-year (or 

longer) measurement period to qualify 

for the limited hours exception or the 

other exceptions, primarily to prevent 

the ATEO from inadvertently failing to 

satisfy the exception. 

A 3-year measurement period would 

reduce the potential for inadvertent 

failures for an employer intending to be 

at or below the threshold for every 

applicable year. However, for an 

employer that intends to meet the 

limited hours exception during only one 

applicable year, the suggested 3-year 

standard would effectively raise the 10 

percent hours of service limit to 30 

percent and create a new ‘‘cliff’’ at that 


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30 percent threshold. In addition, 

permitting a 3-year measurement period 

would create additional complexity and 

burdens for taxpayer compliance and 

tax administration. For these reasons, 

the Treasury Department and the IRS do 

not adopt this suggestion. However, the 

modification to the nonexempt funds 

exception described later in this section, 

expanding the measurement period to 

two applicable years, is intended to 

address some of the commenter’s 

concerns with respect to inadvertent 

failures to meet the requirements of the 

nonexempt funds exception. 

Another commenter recommended 

that Example 5 in the provisions of the 

proposed regulations, which illustrated 

the application of the limited hours 

exception (Prop. § 53.4960–1(d)(3)(v)), 

be modified to eliminate from the facts 

that ATEO 5 does not control CORP 3, 

as control of another corporation by an 

ATEO is irrelevant for purposes 

determining whether the requirements 

of this exception are met, and thus 

irrelevant to the conclusion in that 

example. The commenter further 

suggested that this fact be moved to 

Example 8 in the proposed regulations, 

which illustrated the application of the 

separate nonexempt funds exception 

(Prop. § 53.4960–1(d)(3)(viii)), since 

control of another corporation by an 

ATEO is relevant for determining 

whether the requirements of that 

exception are met, and thus relevant to 

the conclusion in that example. The 

Treasury Department and the IRS agree 

with the commenter’s suggestion, and 

modified Example 5 in these final 

regulations describing the limited hours 

exception (§ 53.4960–1(d)(3)(v)) 

accordingly. However, because of 

changes to the nonexempt funds 

exception as described later in this 

Summary of Comments and Explanation 

of Revisions, these final regulations 

replace Example 8 (§ 53.4960– 

1(d)(3)(viii)) with a new example. 

c. Nonexempt Funds Exception 

As previously discussed, the 

proposed regulations also provided a 

‘‘nonexempt funds’’ exception for 

employees of a related non-ATEO 

organization who may perform a large 

portion of their overall services as an 

employee of the ATEO under certain 

circumstances. Under the nonexempt 

funds exception, an employee is 

disregarded for purposes of determining 

an ATEO’s five highest-compensated 

employees for a taxable year provided 

that none of the ATEO, any related 

ATEO, or any controlled taxable related 

organization, pays the employee of the 

ATEO any remuneration or grants a 

legally binding right to nonvested 

remuneration to the employee. When 

applying these requirements for the 

nonexempt funds exception, the ATEO 

is not treated as paying remuneration 

that is paid by a related organization 

that also employs the individual, so 

long as the ATEO does not reimburse 

the payor. Further, to prevent indirect 

payment of remuneration by the ATEO, 

a related ATEO, or controlled taxable 

related organization, no related 

organization that paid remuneration to 

the individual may provide services for 

a fee to the ATEO, related ATEO, or any 

controlled taxable related organization. 

To satisfy the nonexempt funds 

exception, the proposed regulations also 

stated that the employee must have 

provided services primarily to a taxable 

related organization or other non-ATEO 

(other than a controlled taxable related 

organization of the ATEO) during the 

applicable year. For this purpose, an 

employee is treated as having provided 

services primarily to the taxable related 

organization or other non-ATEO (other 

than a controlled taxable related 

organization of the ATEO) only if the 

employee provided services to the 

taxable related organization or other 

non-ATEO for more than 50 percent of 

the employee’s total hours worked for 

the ATEO and all related organizations 

(including ATEOs) during the 

applicable year. 

One commenter expressed concern 

that, for purposes of the nonexempt 

funds exception, the requirement 

limiting the employee’s hours worked 

for the ATEO and all related ATEOs to 

not more than 50 percent of the total 

hours worked for the ATEO and all 

related organizations during an 

applicable year was too restrictive and 

may result in inadvertent failures. The 

Treasury Department and the IRS 

acknowledge the issues presented by 

this comment. These final regulations 

modify the exception by expanding the 

measurement period from one 

applicable year to two applicable years 

(that is, the current applicable year and 

the preceding applicable year are treated 

as a single measurement period) for 

purposes of determining whether an 

employee provided services to the 

ATEO and all related ATEOs for not 

more than 50 percent of the employee’s 

total hours worked as an employee of 

the ATEO and all related organizations 

during the applicable year and the prior 

applicable year. This modification 

provides additional flexibility for 

situations in which an employee 

‘‘rotates’’ to an ATEO for a period that 

extends longer than six months, or 

when an employee unexpectedly 

provides services beyond six months in 

an applicable year. 

Another commenter recommended 

that the nonexempt funds exception be 

modified to prohibit the provision of 

services for a fee to a taxable entity only 

if the ATEO actually owns a controlling 

interest in the taxable entity, as opposed 

to being attributed the ownership 

interest under the section 318 

attribution principles, which were 

incorporated into the definitions of a 

related organization and control. The 

commenter asserted that the related 

organizations requirement under the 

proposed nonexempt funds exception 

(Prop. § 53.4960–1(d)(2)(iii)(A)(3)), 

which incorporates the section 318 

attribution principles, is unduly 

restrictive, and would have unintended 

results, as illustrated by the following 

example. An individual who is the sole 

shareholder of two taxable corporations 

(Corporation 1 and Corporation 2) also 

controls an ATEO (by having the power 

to appoint a majority of the ATEO’s 

board of directors); Corporation 1 

provides administrative services for a 

fee to Corporation 2; employee of 

Corporation 1 provides services only to 

Corporation 1 and does not provide any 

services to the ATEO. Under these facts, 

Corporation 2 is deemed to be 

controlled by the ATEO because, for 

purposes of determining whether an 

ATEO controls an organization under 

Prop. § 53.4960–1(i)(2)(vii)(B)(2), if a 

person controls an ATEO, the ATEO is 

treated as owning a percentage of the 

stock owned by that person in 

accordance with the percentage of 

directors of the ATEO that are 

controlled by that person. Because the 

related organizations requirement 

prohibits the payment of a fee by a 

related organization to a controlled 

taxable related organization for services 

performed by an employee of the 

controlled taxable related organization, 

and because Corporation 1 is providing 

services for a fee to Corporation 2, 

which is deemed to be controlled by the 

ATEO, no employee of Corporation 1 

could meet the requirements of the 

proposed nonexempt funds exception. 

The commenter suggested that this 

result is inappropriate because the 

sharing of services between two taxable 

corporations in which an ATEO has no 

actual ownership interest would not 

circumvent the legislative intent of 

section 4960. The Treasury Department 

and the IRS agree with the commenter’s 

recommendation. Accordingly, these 

final regulations modify the attribution 

rules as they apply for purposes of 

determining eligibility for the 

nonexempt funds exception by 

disregarding the application of 

downward attribution in applying 


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3The proposed and final regulations refer to 

related persons and governmental entities 

collectively as related organizations. 

section 318(a)(3) to corporations and 

other entities and in applying section 

318 principles to nonstock 

organizations. This modification applies 

only for purposes of applying the 

nonexempt funds exception and does 

not apply for purposes of determining 

whether an organization is a related 

organization generally. 

d. Limited Services Exception 

The proposed regulations provided a 

‘‘limited services’’ exception, under 

which an employee is not considered 

for purposes of determining an ATEO’s 

five highest-compensated employees for 

a taxable year if, during the applicable 

year, the ATEO paid less than 10 

percent of the employee’s total 

remuneration during the applicable year 

for services performed as an employee 

of the ATEO and all related 

organizations. However, if an employee 

would not be considered for purposes of 

determining the five highestcompensated employees of any ATEO in 

an ATEO’s group of related 

organizations because no ATEO in the 

group paid at least 10 percent of the 

total remuneration paid by the group 

during the applicable year, then this 

exception does not apply to the ATEO 

that paid the employee the most 

remuneration during that applicable 

year. No comments were received on 

that proposed rule, and these final 

regulations retain that rule without 

change. 

F. Medical Services 

Section 4960(c)(3)(B) provides that 

remuneration for purposes of section 

4960 does not include the portion of any 

remuneration paid to a licensed medical 

professional (including a veterinarian) 

that is for the performance of medical or 

veterinary services by such professional. 

Section 4960(c)(5)(C)(iii) provides a 

substantially similar exception from the 

definition of ‘‘parachute payment.’’ The 

proposed regulations provided rules 

relating to medical services and licensed 

medical professionals. No comments 

were received on those rules in the 

proposed regulations, and these final 

regulations adopt the rules in the 

proposed regulations without change. 

For further discussion of these rules, see 

section II.F. of the Explanation of 

Provisions of the proposed regulations, 

titled ‘‘Medical Services.’’ 

These final regulations also adopt the 

rule in the proposed regulations that a 

‘‘licensed medical professional’’ is an 

individual who is licensed under state 

or local law to perform medical services. 

In addition to doctors, nurses, and 

veterinarians, a licensed medical 

professional generally would include 

dentists and nurse practitioners and 

may include other medical 

professionals, depending on the 

applicable state or local law. For a 

discussion of other issues related to 

remuneration for medical or veterinary 

services, including a rule for allocating 

remuneration received for a 

combination of medical and nonmedical services, see section III.B. of 

this Summary of Comments and 

Explanation of Revisions, titled 

‘‘Remuneration Related to Medical 

Services.’’ 

G. Predecessor Organization 

Section 4960(c)(2)(B) provides that a 

covered employee includes any 

employee who was a covered employee 

of the ATEO (or any predecessor) for 

any preceding taxable year beginning 

after December 31, 2016. Because a 

covered employee, under section 

4960(c)(2), must be (or have been) an 

employee of an ATEO, the predecessor 

must also have been an ATEO at the 

time the individual was employed by 

the predecessor to be a covered 

employee. Thus, an individual who is a 

covered employee of an ATEO (or of an 

ATEO predecessor of an ATEO) for one 

taxable year remains a covered 

employee of that ATEO (and any 

successor ATEOs) for subsequent 

taxable years. 

The proposed regulations defined 

‘‘predecessor’’ by reference to several 

enumerated categories of organizational 

changes, including acquisitions, 

mergers, other reorganizations, and 

changes in tax-exempt status. A 

predecessor ATEO ordinarily is an 

ATEO that has transferred, by any of 

several legal means, its assets and 

operations to another pre-existing or 

newly created ATEO (the successor of 

the predecessor ATEO). No comments 

were received with respect to the 

proposed rules. These final regulations 

adopt the definition of predecessor as 

provided in the proposed regulations 

without change. For further information 

concerning these rules, see section II.G. 

of the Explanation of Provisions of the 

proposed regulations, titled 

‘‘Predecessor Organization.’’ 

H. Related Organization 

Section 4960(c)(4)(A) provides that 

remuneration paid to a covered 

employee by an ATEO includes any 

remuneration paid with respect to 

employment of the employee by any 

related person or governmental entity,3

and includes in the definition of 

‘‘remuneration’’ any remuneration paid 

by the employer ATEO, related ATEOs, 

and related non-ATEOs (including 

taxable entities, nonprofit entities that 

are not ATEOs, and governmental 

entities that are not ATEOs). Section 

4960(c)(4)(B) defines a ‘‘related 

organization’’ of an ATEO as a person or 

governmental entity that controls, or is 

controlled by, the ATEO; is controlled 

by one or more persons that control the 

ATEO; is a supported organization or a 

supporting organization (as defined in 

sections 509(f)(3) and 509(a)(3), 

respectively) during the taxable year of 

the ATEO, or, in the case of an ATEO 

that is a voluntary employees’ 

beneficiary association described in 

section 501(c)(9) (VEBA), establishes, 

maintains, or makes contribution to the 

VEBA. 

Section 4960(c)(4) does not define 

‘‘control’’ for purposes of identifying 

related organizations. To determine 

which persons are related organizations 

under section 4960(c)(4)(B), the 

proposed regulations generally adopted 

the definition of ‘‘control’’ set forth in 

section 512(b)(13)(D) and § 1.512(b)– 

1(l)(4). Section II.H. of the Explanation 

of Provisions of the proposed 

regulations, titled ‘‘Related 

Organization,’’ explained that this 

standard (and its ‘‘greater than 50 

percent’’ threshold) was intended to 

align the definition of ‘‘related 

organization’’ for purposes of section 

4960 with the definition of ‘‘related 

organization’’ for purposes of the annual 

reporting requirements on Form 990, 

‘‘Return of Organization Exempt From 

Income Tax,’’ and with other exempt 

organization control tests. 

One commenter recommended that 

these final regulations instead define 

‘‘control’’ based on the controlled group 

rules in section 414(b) and (c) and the 

regulations thereunder, which include 

an 80 percent control test. The 

commenter suggested that the section 

414(b) and (c) controlled group test was 

more appropriate for a number of 

reasons: The purpose of section 414(b) 

and (c) is to treat related parties as a 

single employer (the same purpose as 

section 4960(c)(4)(C)), whereas the 

purpose of section 512(b)(13) is to tax 

abusive transactions; the regulations 

under section 512(b)(13) do not reflect 

statutory revisions; the control 

definition under section 512(b)(13) is 

overinclusive; and using the Form 990 

test for control does not reduce 

administrative burdens because the 

Form 990 rules for identifying an 

ATEO’s highest-compensated 

employees and calculating 

compensation differ significantly from 

the section 4960 rules. 


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4H. Rep. 115–409, supra, at 333. 

5The imposition of excise tax under section 4960 

is not determinative as to whether the remuneration 

paid to the covered employee is excessive or 

unreasonable compensation for purposes of sections 

4941 or 4958. Similarly, there is no presumption, 

inference, or basis for concluding that remuneration 

paid to a covered employee that is not subject to 

excise tax under section 4960 is reasonable 

compensation for purposes of determining liability 

for excise tax under sections 4941 or 4958. 

6See also the representative test in section 

4911(f)(2)(B)(i) for determining affiliated 

organizations. 

These final regulations do not adopt 

the suggestion in this comment. Instead, 

these final regulations adopt the rules in 

the proposed regulations, which align 

the definition of control with the 

definition in the Form 990 instructions, 

which, in turn, is generally based on the 

section 512(b)(13) standards. The 

Treasury Department and the IRS have 

concluded that this definition of control 

is more appropriate and administrable 

because the Form 990 control definition 

and the section 512(b)(13) rules are 

familiar to and used by exempt 

organizations. Similarly, an 80 percent 

control threshold, while used in section 

414(b) and (c), as well as in regulations 

under section 162(m), generally is not a 

standard used for purposes of tax 

administration related to exempt 

organizations, whereas the 50 percent 

control threshold is a control test 

familiar to exempt organizations. See, 

for example, the instructions to Form 

990; §§ 1.509(a)–4(g)(1)(i); 1.509(a)– 

4(j)(1); 56.4911–7(b); 53.4941(d)–1(b)(5); 

53.4943–3(b)(3)(ii); 53.4958– 

4(a)(2)(ii)(B); and 53.4968–3(b). In 

addition, section 509(a)(3) supporting 

organizations and their section 509(f)(3) 

supported organizations are defined as 

related organizations under section 

4960(c)(4)(B); the adoption of an 80 

percent control threshold would be 

incongruous with the lower standards of 

control for such organizations under 

§ 1.509(a)–4 (particularly in the case of 

Type III supporting organizations, for 

which control is not required). Further, 

the legislative history states that the 

purpose for enacting section 4960 is to 

deter ‘‘excessive compensation,’’ 4

indicating an intent to deter arguably 

abusive practices, and the Treasury 

Department and the IRS have 

determined that use of a higher control 

threshold would allow potentially 

abusive compensation arrangements 

among organizations that are related to 

a lesser degree.5 For these reasons, and 

the reasons set forth in section II.H. of 

the Explanation of Provisions of the 

proposed regulations, titled ‘‘Related 

Organization,’’ these final regulations 

adopt the rules regarding the overall 

definition of ‘‘control’’ in the proposed 

regulations without change. 

To determine control of a nonstock 

organization, the proposed regulations 

provided rules similar to other 

regulations dealing with control of taxexempt organizations (§§ 1.512(b)– 

1(l)(4)(i)(b), 53.4958–4(a)(2)(ii)(B)(1)(iii), 

and 1.414(c)–5(b)) 6 that provide that a 

person is considered to control a 

nonstock organization under either a 

‘‘removal power’’ test or a 

‘‘representative’’ test. No comments 

were received addressing the ‘‘removal 

power’’ test, and the final regulations 

adopt these rules from the proposed 

regulations without change. Comments 

were received on the ‘‘representative’’ 

test, and in particular the manner in 

which the proposed regulations would 

address certain situations involving 

‘‘accidental control.’’ 

Under the representative test, a 

person or governmental entity generally 

controls a nonstock organization if more 

than 50 percent of the nonstock 

organization’s directors or trustees are 

also trustees, directors, officers, agents, 

or employees of the person or 

governmental entity. Unlike the 

representative test in §§ 1.512(b)– 

1(l)(4)(i)(b), 53.4958–4(a)(2)(ii)(B)(1)(iii), 

and 1.414(c)–5(b), the proposed 

regulations expressly included an 

officer of the person or governmental 

entity as a representative for purposes of 

determining control of a nonstock 

organization. 

In response to Notice 2019–09, a 

commenter raised the issue of 

‘‘accidental control’’ presented by the 

representative test in which, for 

example, control of an organization by 

an employer may be found because a 

few lower-level employees of the 

employer serve on the board of directors 

of the organization. The proposed 

regulations addressed this issue by 

permitting a nonstock organization (or 

its putative controlling person or 

governmental entity) to qualify for an 

exception from control status if the 

employees of the person or 

governmental entity that are directors or 

trustees of the nonstock organization are 

not trustees, directors, officers, or 

employees with the powers of a director 

or officer, of the person or governmental 

entity and are not acting as 

representatives of the person or 

governmental entity in their service 

with the nonstock organization. A 

nonstock organization that relies on this 

exception must report its reliance on 

this exception on the applicable Form 

990 and provide supporting details. 

Another commenter on the proposed 

regulations stated that compliance with 

this exception to avoid ‘‘accidental 

control’’ under the representative test 

places additional reporting burdens on 

exempt organizations and recommended 

that these final regulations remove 

‘‘employees’’ altogether from the list of 

deemed representatives and instead 

focus the representative test on the 

actual decision-makers in the 

organization. The commenter suggested 

that an expansive list of deemed 

representatives, including employees, is 

more justifiable with an 80 percent 

control threshold. These final 

regulations do not adopt the 

commenter’s suggestions. The Treasury 

Department and the IRS have concluded 

that a rule that treats as non-officers any 

employees not defined as officers under 

the organization’s organizing documents 

may be subject to abuse because 

employees frequently function as 

officers, even if they do not have that 

title. Further, a rule that treats any 

employee without the title of officer as 

a non-officer would be inconsistent with 

other Code provisions addressing 

exempt organizations, which generally 

treat as an officer any person with 

similar powers. See, for example, 

sections 4946(b)(1), 4955(f)(2)(A), 

4958(f)(2), 4965(d)(1), and 

4966(d)(3)(A). In addition, an employee 

of an organization (such as a department 

head) may serve ex officio on the board 

of another organization, and, in 

substance, serve in a representative 

capacity. Similarly, the facts of other 

arrangements in which an employee 

serves on another organization’s board 

may demonstrate that the employee is 

serving as a representative of the 

employer. Finally, the percentage 

threshold of control is not necessarily 

relevant to the determination of whether 

the individual is serving in a 

representative capacity—an employer 

with less than a specific threshold 

percentage may still have reasons to 

have an employee represent its interests 

on another organization’s board of 

directors. For these reasons, these final 

regulations adopt without change the 

representative rules in the proposed 

regulations. 

The proposed regulations also 

addressed the status of foreign 

organizations as ATEOs, excluding them 

from ATEO status if described in section 

4948(b) and the regulations thereunder. 

The Treasury Department and the IRS 

requested comments on whether a 

foreign related organization described in 

section 4948(b) should be exempt from 

tax imposed by section 4960(c)(4)(C) 

and, if so, whether remuneration paid 

by such an organization should 

nonetheless be taken into account for 

purposes of determining excess 


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6204 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 

7Some types of exempt organizations are limited 

to domestic organizations, such as section 

501(c)(10) fraternal organizations. 

8A private foundation that loses its exemption 

under section 501(c)(3) remains a taxable private 

foundation until its private foundation status is 

terminated under section 507. See sections 509(b) 

and 4940(b). 

remuneration and allocating liability 

among the ATEO and related 

organizations that are subject to the 

excise tax imposed by section 4960. No 

comments were received on these 

issues. However, the Treasury 

Department and the IRS have concluded 

that it is appropriate to address these 

issues in these final regulations. 

Chapter 42 of the Code applies 

generally to private foundations and 

other tax-exempt organizations and the 

excise taxes in chapter 42 generally are 

payable by exempt organizations and in 

some cases by persons associated with 

them. However, under section 4948(b), 

sections 507 and 508 and chapter 42 do 

not apply to a foreign organization that 

has not received substantial support 

(other than gross investment income) 

from United States sources. Section 

509(d) defines support for purposes of 

chapter 42 as including gifts, gross 

receipts from an activity that is not an 

unrelated trade or business under 

section 513, net income from unrelated 

business activities, gross investment 

income, tax revenues levied for the 

benefit of the organization, and the 

value of services or facilities furnished 

by a governmental unit without 

charge—a breadth of items that support 

a tax-exempt organization. Section 

4948(b) is thus concerned with foreign 

private foundations (including entities 

treated as private foundations for 

purposes of chapter 42) and other taxexempt organizations that have received 

sufficient support from United States 

sources to warrant subjection to taxation 

and various prohibitions under chapter 

42. Therefore, the Treasury Department 

and the IRS have determined that it is 

appropriate to exclude from taxation 

under section 4960 as a related 

organization any foreign organization 

that is both described in section 4948(b) 

and is either exempt from tax under 

section 501(a) 7 or a taxable private 

foundation.8 Such organizations 

excluded from the excise tax imposed 

by section 4960 are referred to as 

‘‘section 4948(b) related organizations.’’ 

While chapter 42 taxes are 

inapplicable to section 4948(b) related 

organizations, those organizations’ 

activities that otherwise would have 

resulted in chapter 42 taxes may have 

other consequences. For example, 

section 4948(c) in certain circumstances 

imposes loss of exemption on an exempt 

organization described in section 

4948(b) that engages in activities that 

would result in chapter 42 taxes for 

domestic organizations. Therefore, the 

Treasury Department and the IRS have 

determined that the remuneration paid 

to a covered employee of an ATEO by 

a section 4948(b) related organization 

must be taken into account by the ATEO 

and any related organizations subject to 

the excise tax imposed by section 4960 

for purposes of determining an ATEO’s 

(and related organizations’) liability 

under section 4960 and the ATEO’s five 

highest-compensated employees, even 

though the section 4948(b) related 

organization is not subject to the excise 

tax imposed by section 4960 on the 

excess remuneration that is otherwise 

allocable to that organization. These 

final regulations also clarify that for 

purposes of applying the exclusion from 

status as an ATEO or a related 

organization, whether the foreign 

organization meets the requirements of 

section 4948(b) is determined at the end 

of the organization’s taxable year. 

III. Remuneration 

A. In General 

Consistent with section 4960(c)(3)(A), 

the proposed regulations defined 

‘‘remuneration’’ as wages under section 

3401(a) (meaning generally amounts 

subject to Federal income tax 

withholding), but excluding designated 

Roth contributions under section 

402A(c) and including amounts 

required to be included in gross income 

under section 457(f). Remuneration does 

not include certain retirement benefits, 

including payments that are 

contributions to or distributions from a 

trust described in section 401(a); 

payments under or to an annuity plan 

described in section 403(a) at the time 

of payment; payments described in 

section 402(h)(1) and (2) if, at the time 

of the payment, it is reasonable to 

believe that the employee will be 

entitled to an exclusion under that 

section for the payment; payments 

under an arrangement to which section 

408(p) applies; or payments under or to 

an eligible deferred compensation plan 

described in section 457(b) and 

maintained by an eligible employer 

described in section 457(e)(1)(A) 

(governmental employer) at the time of 

payment. See section 3401(a)(12). 

Remuneration includes a parachute 

payment, but excess remuneration does 

not include a parachute payment that is 

an excess parachute payment. These 

final regulations adopt these rules 

provided in the proposed regulations 

without change. 

One commenter recommended that, 

for purposes of computing the excise 

tax, section 4960(c)(4)(A) should be 

interpreted to include only 

remuneration related to the employment 

of an employee by an ATEO, which 

would include remuneration paid by a 

related person or related governmental 

entity with respect to an ATEO or by 

any other third party, but only if the 

payment related to the employee’s 

employment by the ATEO. The 

commenter stated that this suggested 

interpretation would ensure that all 

remuneration with respect to a covered 

employee’s employment by an ATEO, 

including remuneration paid by a 

related organization of an ATEO with 

respect to services performed for the 

ATEO, would be included in computing 

the tax under section 4960(a). The 

commenter asserted that the suggested 

interpretation would avoid the 

unintended result, caused by the 

proposed regulations, of subjecting to 

the excise tax remuneration that is paid 

by persons who are not ATEOs for an 

individual’s services that are unrelated 

to an ATEO. 

The Treasury Department and the IRS 

have concluded that the more natural 

reading of the statute is that 

remuneration paid to a covered 

employee of an ATEO includes 

remuneration paid by a related 

organization with respect to services 

performed as an employee for the 

related organization. In addition, 

adoption of the commenter’s suggestion 

could raise the potential for abuse 

because it relies on an ability to identify 

the specific recipient of services that an 

employee provides to multiple entities 

and determine the relative value of the 

services or allocate the compensation to 

the entities under a reasonable 

allocation method. Specifically, given 

the facts and circumstances analysis 

that in many cases may be difficult and 

burdensome to administer, adoption of 

the suggestion could provide an opening 

for related taxpayers to coordinate their 

activities to mischaracterize the 

employer of an individual with respect 

to some or all services provided to a 

related organization, or to misallocate 

portions of the total remuneration paid 

by the related taxpayers to the 

individual as paid for services provided 

as an employee of a related 

organization, so that all the related 

entities avoid any liability under section 

4960 while still providing what would 

otherwise be excess remuneration to the 

individual as an employee of an ATEO. 

While this type of identification and 

allocation may be needed for other tax 

purposes, including in some cases the 


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allocation of liability under section 

4960, those applications do not involve 

a situation such as this in which all the 

entities may benefit from the 

mischaracterizations through the 

avoidance of the potential liability. 

Thus, the interpretation provided in 

these final regulations also is consistent 

with the exercise of authority in section 

4960(d) to prevent avoidance of the tax 

imposed by section 4960 by providing 

compensation through a third party. 

Further, adoption of the commenter’s 

suggestion could raise issues regarding 

the role of section 4960(c)(6), the 

statutory provision coordinating the 

application of section 162(m) and 

section 4960, given the impact that 

adoption of the suggestion would have 

on the scope of circumstances to which 

that provision may apply. For these 

reasons, these final regulations do not 

limit the application of section 

4960(c)(4)(A) to remuneration paid 

solely with respect to employment by an 

ATEO or for services provided to an 

ATEO, as suggested by the commenter. 

The commenter also suggested that 

these final regulations not treat 

remuneration paid by a related 

organization as paid by the ATEO if a 

covered employee is not employed by 

an ATEO at any time during an 

applicable year. For example, in 

circumstances in which a covered 

employee of an ATEO performs services 

for a related non-ATEO but provides no 

services for the ATEO during an 

applicable year, the commenter 

suggested that compensation for those 

services not be treated as remuneration 

under section 4960. These final 

regulations do not adopt this suggestion. 

Section 4960(c)(2)(B) provides that once 

an individual is a covered employee of 

an ATEO (or any predecessor), the 

employee remains a covered employee 

for all subsequent years. Section 

4960(c)(4)(A) provides that 

‘‘remuneration of a covered employee 

by an [ATEO]’’ includes ‘‘any 

remuneration paid with respect to 

employment of such employee by any 

related person or governmental entity.’’ 

The Treasury Department and the IRS 

have concluded that the better 

interpretation of section 4960(c)(2)(B) 

and (c)(4)(A), when read together, is that 

compensation paid to a covered 

employee by a related organization 

during an applicable year is 

remuneration for purposes of section 

4960, even if the covered employee does 

not perform services as an employee of 

the ATEO during the applicable year. In 

addition, the commenter’s suggestion 

also raises administrability issues 

similar to those that would arise if only 

remuneration for services provided to 

the ATEO were taken into account. If an 

employee provides services to different 

members of a group of related 

organizations from year to year, it may 

be difficult to determine what 

remuneration is allocable to services 

provided to each group member. 

Therefore, the commenter’s suggestion 

would be similarly difficult and 

burdensome to administer and could 

raise the potential for abuse. 

The same commenter also suggested 

that these final regulations apply the 

substance of the limited hours and 

nonexempt funds exceptions for 

purposes of determining remuneration 

paid. These final regulations do not 

adopt this suggestion because the 

Treasury Department and the IRS have 

concluded that the statute does not 

provide the authority to apply these 

exceptions to the definition of 

remuneration. The statute does not 

define compensation for purposes of 

identifying the five highestcompensated employees, and thus the 

statute permits flexibility in the rules for 

determining the five highestcompensated employees. In contrast, 

section 4960(c)(3)(A) defines 

remuneration as wages within the 

meaning of section 3401(a) (with certain 

specified modifications) paid by an 

ATEO and section 4960(c)(4)(A) 

provides that ‘‘remuneration of a 

covered employee by an [ATEO] shall 

include any remuneration paid with 

respect to employment of such 

employee by any related person or 

governmental entity.’’ These statutory 

provisions do not provide the flexibility 

to adopt the commenter’s suggestion to 

include the exceptions applicable to the 

determination of a covered employee in 

the definition of remuneration. 

Another commenter requested that 

these final regulations limit the scope of 

the definition of remuneration to 

include only regular employee wages, as 

defined in section 3401(a), and to 

exclude taxable fringe benefits from the 

section 4960 definition of remuneration. 

The commenter asserted that certain 

taxable fringe benefits, such as paid 

parking above the excludable limit and 

reimbursement of childcare expenses, 

are not the type of remuneration that 

was intended to be taxed under section 

4960. The commenter further suggested 

that the inclusion of taxable fringe 

benefits in remuneration would have an 

adverse effect on certain employers’ 

ability to attract and retain key 

employees. These final regulations do 

not adopt this commenter’s suggestion 

because it would be inconsistent with 

the statutory provisions. Section 

4960(c)(3)(A) defines remuneration as 

amounts that are ‘‘wages’’ within the 

meaning of section 3401(a). Section 

3401(a) defines ‘‘wages’’ as all 

remuneration for services performed by 

an employee for his employer, including 

the cash value of all remuneration 

(including benefits) paid in any medium 

other than cash, with certain specific 

exclusions. Taxable fringe benefits, 

including parking above the excludable 

limit and reimbursement of childcare 

expenses, are not excluded from wages 

under section 3401(a). In addition, 

section 4960(c)(3) specifically excludes 

other type of wages, such as designated 

Roth contributions and remuneration for 

medical services, indicating a legislative 

intent for all other types of wages to be 

included. For these reasons, the 

Treasury Department and the IRS have 

determined that providing further 

exclusions such as those suggested 

would be inconsistent with the statute 

and these final regulations do not adopt 

this suggestion. 

The proposed regulations clarified 

that remuneration includes any amount 

includible in gross income as 

compensation under section 7872 and 

the regulations thereunder. For 

example, under § 1.7872–15(e)(1)(i), a 

below-market split-dollar loan between 

an employer and employee generally is 

treated as a compensation-related loan, 

and thus any imputed transfer from the 

employer to the employee generally is a 

payment of compensation. Although 

section 7872(f)(9) provides that no 

amount shall be withheld under chapter 

24 of the Code with respect to any 

amount treated as transferred or 

retransferred under section 7872(a) or 

received under section 7872(b), those 

amounts are ‘‘remuneration . . . for 

services performed by an employee for 

his employer’’ within the meaning of 

section 3401(a) and are not specifically 

excluded from wages under section 

3401(a). Thus, those amounts are 

remuneration as defined in section 

4960(c)(3)(A). ATEOs that are private 

foundations or section 509(a)(3) 

supporting organizations should 

consider, before entering into these 

arrangements, that loans (including 

transactions treated as loans for Federal 

tax purposes, such as split-dollar 

arrangements) to certain employees may 

constitute an act of self-dealing under 

section 4941 or an excess benefit 

transaction under section 4958(c)(3). 

A commenter recommended that 

these final regulations, or alternatively 

the preamble to these final regulations, 

confirm that remuneration does not 

include amounts that are not includible 

in gross income pursuant to the $10,000 

de minimis exception under section 

7872(c)(3). Under that exception, the 


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foregone interest attributable to any day 

on which the aggregate outstanding 

amount of loans between the borrower 

and lender does not exceed $10,000 is 

not includible in gross income. These 

final regulations adopt the commenter’s 

suggestion and clarify that, in 

accordance with section 7872, these de 

minimis amounts are not remuneration 

for purposes of section 4960. Other than 

this comment that resulted in this 

clarification, no further comments were 

received on those provisions of the 

proposed regulations, and these final 

regulations adopt them without further 

changes. 

B. Remuneration Related to Medical 

Services 

Remuneration that is paid to a 

licensed medical professional for 

medical services is excluded from the 

definition of ‘‘remuneration’’ for 

purposes of section 4960. (See section 

II.F. of the Summary of Comments and 

Explanation of Revisions, titled 

‘‘Medical Services,’’ for a further 

discussion of the scope of this 

exception.) When an employer pays 

remuneration to an employee for both 

medical services (including related 

services, such as medical 

recordkeeping) and other services, the 

employer must allocate that 

remuneration between remuneration 

paid for medical services or for other 

services. These final regulations adopt 

the proposed regulations, with minor 

clarifications, and permit taxpayers to 

use a reasonable, good faith method to 

allocate remuneration between these 

two categories of services. For this 

purpose, taxpayers may rely on a 

reasonable allocation set forth in an 

employment agreement allocating 

remuneration between medical services 

and other services. If some or all of the 

remuneration is not reasonably 

allocated in an employment agreement, 

taxpayers must use another reasonable 

method of allocation. For example, 

allocating remuneration to medical 

services based on the portion of the total 

hours the employee worked for the 

employer providing medical services 

(determined based on records such as 

patient, insurance, Medicare/Medicaid 

billing records, or internal time 

reporting mechanisms) would be a 

reasonable method. 

In section III.B. of the Explanation of 

Provisions of the proposed regulations, 

titled ‘‘Remuneration Related to Medical 

Services,’’ the Treasury Department and 

the IRS requested comments on other 

reasonable methods of allocating 

remuneration between medical services 

and other services. One commenter 

recommended that an employer be 

permitted to make a reasonable, good 

faith allocation between remuneration 

for providing medical services and 

remuneration for providing nonmedical 

services, not only with respect to 

current remuneration but also with 

respect to contributions and earnings 

under a deferred compensation plan. 

These final regulations adopt this 

recommendation and clarify that an 

employer may make a reasonable, good 

faith allocation between remuneration 

for medical and nonmedical services, 

regardless of the form of compensation, 

and that an employer may apply the 

same principles with respect to 

contributions and earnings under a 

deferred compensation plan. 

C. When Remuneration Is Treated as 

Paid 

The proposed regulations addressed 

when remuneration is treated as paid for 

purposes of section 4960. The flush 

language at the end of section 4960(a) 

provides that, for purposes of section 

4960(a), remuneration is treated as paid 

when there is no substantial risk of 

forfeiture of the rights to the 

remuneration within the meaning of 

section 457(f)(3)(B). Although section 

4960(a) cross-references the definition 

of ‘‘substantial risk of forfeiture’’ in 

section 457(f)(3)(B), the rule under 

section 4960(a) providing that 

remuneration is treated as paid when 

there is no substantial risk of forfeiture 

of the rights to the remuneration is 

neither limited to remuneration that is 

otherwise subject to section 457(f) nor 

limited to amounts paid pursuant to a 

nonqualified deferred compensation 

arrangement. The proposed regulations 

provided that, for purposes of section 

4960(a), all forms of remuneration 

except for ‘‘regular wages’’ as described 

in the next paragraph are treated as paid 

when the remuneration is not subject to 

a substantial risk of forfeiture. These 

final regulations adopt this payment 

timing rule provided in the proposed 

regulations with certain modifications, 

as discussed in further detail in this 

section. 

To clarify when remuneration that is 

never subject to a substantial risk of 

forfeiture is treated as paid, the 

proposed regulations provided that 

remuneration that is a ‘‘regular wage’’ 

within the meaning of § 31.3402(g)– 

1(a)(ii) is treated as paid at the time of 

actual or constructive payment. A 

‘‘regular wage’’ is defined in 

§ 31.3402(g)–1(a)(ii) as remuneration 

‘‘paid at a regular hourly, daily, or 

similar periodic rate (and not an 

overtime rate) for the current payroll 

period or at a predetermined fixed 

determinable amount for the current 

payroll period.’’ These final regulations 

adopt these rules provided in the 

proposed regulations without change. 

Because the final regulations provide 

that remuneration that is a regular wage 

within the meaning of § 31.3402(g)– 

1(a)(1)(ii) is treated as paid when 

actually or constructively paid, an 

employer will not need to determine 

amounts of regular wages that vested in 

the preceding year for purposes of 

section 4960. For example, if a pay 

period begins December 25, 2022, and 

ends January 7, 2023, and the salary for 

that period is not actually paid until 

January 14, 2023, then the salary for the 

pay period is treated as paid in 2023, 

and the employer need not treat any 

amount as remuneration paid in 2022 

due to vesting in 2022. 

The proposed regulations treated an 

amount that is not regular wages as paid 

when it is no longer subject to a 

substantial risk of forfeiture within the 

meaning of section 457(f)(3)(B) and 

referred to such an amount as ‘‘vested.’’ 

The Treasury Department and the IRS 

issued proposed regulations under 

section 457(f) in 2016 (81 FR 40548 

(June 22, 2016)), upon which taxpayers 

may rely for periods before the 

applicability date of the final section 

457(f) regulations. Under Prop. § 1.457– 

12(e)(1), an amount of compensation is 

subject to a substantial risk of forfeiture 

only if entitlement to the amount is 

conditioned on the future performance 

of substantial services, or upon the 

occurrence of a condition that is related 

to a purpose of the compensation if the 

possibility of forfeiture is substantial. 

See Prop. § 1.457–12(e)(3) for examples 

of the rules relating to substantial risk 

forfeiture. These final regulations adopt 

the rules provided in the proposed 

regulations, including the definition of 

‘‘substantial risk of forfeiture’’ in Prop. 

§ 1.457–12(e)(1). Any changes to the 

proposed regulations under section 

457(f) when finalized will be considered 

for purposes of section 4960, and further 

guidance may be issued, if appropriate, 

including any transition guidance that 

may be needed to take into account 

periods before and after the 

applicability date of the definition of 

substantial risk of forfeiture under the 

final section 457(f) regulations. 

In section III.C. of the Explanation of 

Provisions of the proposed regulations, 

titled ‘‘When Remuneration Is Treated 

as Paid,’’ the Treasury Department and 

the IRS invited comments regarding any 

burdens that could be avoided through 

a short-term deferral rule and how such 

a rule could be designed to avoid 

permitting inappropriate avoidance of 

the tax. One commenter recommended 

that these final regulations extend the 


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rule for ‘‘regular wages’’ as defined in 

§ 31.3402(g)–1(a) to amounts that are not 

treated as deferred compensation under 

§ 1.409A–1(b)(4) or Prop. § 1.457– 

12(d)(2) because such amounts are paid 

within the ‘‘short-term deferral’’ period. 

The commenter suggested that other 

remuneration that falls outside the 

definition of ‘‘regular wages’’ be treated 

as remuneration when actually or 

constructively paid, including benefits 

under bona fide severance pay plans 

and death and disability plans, as well 

as annual bonuses, long-term incentive 

pay, business expense reimbursements, 

and noncash fringe benefits. The 

commenter noted that such amounts are 

treated as wages for other reporting 

purposes, including Federal Insurance 

Contributions Act (FICA) wage 

reporting, when actually or 

constructively paid, and thus the rules 

under the proposed regulations result in 

a timing mismatch. The commenter 

asserted that this recommendation 

would substantially reduce the 

administrative burden and potential for 

errors created by the broad timing rule 

in the proposed regulations, yet affect a 

limited range of remuneration. 

Another commenter recommended 

that these final regulations provide that 

the short-term deferral exception to the 

definition of deferred compensation for 

section 457(f) apply to section 4960 

such that the year of inclusion for 

income tax purposes matches the year of 

inclusion for section 4960 purposes. 

The commenter interpreted the statutory 

reference to wages under section 3401(a) 

and amounts included in income under 

section 457(f) as providing not only a 

substantive rule but also a timing rule, 

meaning the amount must either be 

wages within the meaning of section 

3401(a) paid during that year or be an 

amount included in income under 

section 457(f) during that year in order 

to be treated as remuneration paid in 

that year. According to the commenter, 

since amounts that meet the definition 

of a short-term deferral for purposes of 

section 457(f) are neither wages under 

section 3401(a) nor includible in income 

under section 457(f) in the year of 

vesting, those amounts should be 

treated as remuneration for purposes of 

section 4960 only in the year actually 

paid. 

Further, the commenter noted that 

applying a short-term deferral rule 

would simplify administration for 

employers because the determination of 

remuneration would more closely track 

the determination of wages for Form W– 

2, ‘‘Wage and Tax Statement,’’ reporting. 

The commenter acknowledged the 

concern stated in section III.C. of the 

Explanation of Provisions of the 

proposed regulations, titled ‘‘When 

Remuneration Is Treated as Paid,’’ that 

a short-term deferral rule would permit 

an ATEO to select the year in which 

remuneration would be subject to tax 

under section 4960, but observed that an 

individual may become a covered 

employee during the section 457(f) 

short-term deferral period after the year 

of vesting, and thus the proposed rule 

could actually result in amounts not 

being subject to the excise tax. The 

commenter also observed that treating 

short-term deferrals as remuneration in 

the year of vesting requires that those 

amounts be present-valued and that 

earnings be included in remuneration in 

the subsequent year, resulting in 

additional complexity for ATEOs. 

Finally, the commenter suggested that 

an employer be permitted to include an 

amount in remuneration in the year of 

vesting or include the amount in the 

year of payment, as is permitted for 

FICA tax purposes under 

§ 31.3121(v)(2)–1(b)(3)(iii), and require 

that employers apply consistent 

treatment of amounts with respect to its 

selection of the timing of FICA taxation 

of short-term deferrals and timing of the 

treatment as remuneration for purposes 

of section 4960. 

These final regulations do not adopt 

the commenter’s suggestions to apply a 

‘‘short-term deferral’’ rule. Rather, these 

final regulations adopt the applicable 

provisions of the proposed regulations 

without change. Under section 

4960(c)(3), an amount must either be 

wages under section 3401(a) or be 

includible in income under section 

457(f) in order to be remuneration under 

section 4960. However, the rules under 

section 4960(c)(3) determine whether an 

amount is remuneration, not when the 

remuneration is considered to be paid. 

The flush language at the end of section 

4960(a) provides that, for purposes of 

section 4960(a), remuneration is treated 

as paid when there is no substantial risk 

of forfeiture, as defined in section 

457(f)(3)(B), of the rights to the 

remuneration. Section 3401(a) primarily 

focuses on whether, not when, amounts 

are includible in wages; the basic timing 

rule for wage inclusion appears in 

regulations under section 3402(a), not 

section 3401(a). Specifically, 

§ 31.3402(a)–1(b) provides that wages 

are paid when actually or constructively 

paid and explains what it means for an 

amount to be constructively paid. Thus, 

the cross-reference to section 3401(a) 

(and not section 3402(a)) in section 

4960(c)(3) establishes the scope of the 

term ‘‘remuneration’’ without regard to 

timing, but the flush language in section 

4960(a) establishes the timing rule that 

applies to all forms of remuneration. In 

addition to being inconsistent with the 

statutory language addressing the timing 

of the payment of remuneration, 

allowing a short-term deferral rule 

similar to the rule in § 1.409A–1(b)(4) 

and Prop. § 1.457–12(d)(2) could permit 

an employer to determine the taxable 

year in which the amount is treated as 

paid, which could be used not only to 

manipulate the application of section 

4960(a) to the remuneration paid, but 

also to manipulate the identification of 

covered employees. 

This application of the statutory 

language results in circumstances in 

which the amount of remuneration paid 

for purposes of section 4960 is not the 

same as the amount reported in any box 

on Form W–2 for an applicable year. 

However, as described later in this 

section, these final regulations address 

the administrative burden of calculating 

the present value of vested but unpaid 

amounts by expanding the ability to 

include at vesting the full amount that 

is to be paid in circumstances in which 

there is a short delay between vesting 

and payment. 

These final regulations adopt the rule 

set forth in the proposed regulations 

that provided that an amount of 

remuneration treated as paid generally 

is the present value of the remuneration 

on the date on which the covered 

employee vests in the right to payment 

of the remuneration. The employer must 

determine the present value using 

reasonable actuarial assumptions 

regarding the amount, time, and 

probability that the payment will be 

made. These final regulations do not 

provide rules for the determination of 

present value. However, an employer 

may determine the present value using 

the rules set forth in Prop. § 1.457– 

12(c)(1). The Treasury Department and 

the IRS anticipate that final regulations 

addressing the determination of present 

value for purposes of section 4960 will 

be issued when final regulations under 

section 457(f) are issued. Until actually 

or constructively paid or otherwise 

includible in gross income of the 

employee, any amount treated as paid at 

vesting is referred to as ‘‘previously paid 

remuneration.’’ 

To reduce the administrative burden 

of determining the present value of 

remuneration in certain circumstances 

that would involve minimal 

discounting, these final regulations 

adopt the rule provided in the proposed 

regulations that the employer may treat 

the entire amount to be paid on a future 

date (without making a present 

valuation determination) as the present 

value on the date of vesting. However, 

these final regulations do not limit the 


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application of this rule to amounts that 

are paid under a nonaccount balance 

plan described in § 1.409A–1(c)(2)(i)(C), 

but instead this rule applies to any 

vested amount that is scheduled to be 

paid within 90 days. For example, an 

employer is not required to discount an 

annual bonus of $10,000 that vests on 

December 31, 2022, and is scheduled to 

be paid on February 15, 2023, to reflect 

the delay in actual payment, but instead 

may treat $10,000 as remuneration paid 

in 2022. 

D. Earnings and Losses 

These final regulations generally 

adopt the proposed regulations and 

provide specific rules for the treatment 

of earnings and losses on previously 

paid remuneration. In general, these 

rules are intended to minimize 

administrative burdens in determining 

the amount of earnings and losses 

treated as paid for an applicable year, as 

well as in determining the amount of 

earnings and losses across multiple 

compensation arrangements. 

The proposed regulations provided 

that net earnings on previously paid 

remuneration are treated as vested (and 

therefore paid) on the last day of the 

applicable year in which they are 

accrued unless otherwise actually or 

constructively paid before that date. For 

example, the present value of vested 

remuneration accrued to an employee’s 

account under an account balance plan 

described in § 1.409A–1(c)(2)(i)(A) 

(under which the earnings and losses 

attributed to the account are based 

solely on a predetermined actual 

investment or a reasonable market 

interest rate) is treated as paid on the 

date accrued to the employee’s account 

and, until subsequently actually or 

constructively paid, is treated as 

previously paid remuneration. In 

addition, at the end of each applicable 

year in which there is previously paid 

remuneration remaining in the covered 

employee’s account balance, the present 

value of any net earnings accrued on 

that previously paid remuneration (the 

increase in present value due to the 

application of a predetermined actual 

investment or a reasonable market 

interest rate) is treated as remuneration 

paid in that applicable year. This 

remuneration is then treated as 

previously paid remuneration for 

subsequent applicable years until 

actually or constructively paid. 

Similarly, the proposed regulations 

provided that the present value of a 

vested, fixed amount of remuneration 

under a nonaccount balance plan 

described in § 1.409A–1(c)(2)(i)(C) is 

treated as paid on the date of vesting 

and subsequently treated as previously 

paid remuneration until actually or 

constructively paid. In addition, at the 

end of each applicable year in which 

previously paid remuneration remains 

as part of the covered employee’s 

benefit under the plan, the net increase 

in the present value of that amount 

during the year due solely to the passage 

of time constitutes earnings and is 

treated as remuneration paid. For this 

purpose, earnings and losses from one 

plan or arrangement are aggregated with 

earnings and losses from any other plan 

or arrangement in which the employee 

participates that is provided by the same 

employer (but not across arrangements 

provided by related but separate 

employers). For purposes of 

determining earnings and losses, 

previously paid remuneration under a 

plan or arrangement is reduced by the 

amount actually or constructively paid 

under the plan or arrangement. These 

final regulations further illustrate the 

operation of these rules through 

examples. 

One commenter recommended that 

these final regulations permit, but not 

require, related employers to determine 

net earnings on previously paid 

remuneration on an aggregate basis by 

treating all earnings and losses on the 

previously paid remuneration of related 

employers as paid by the ATEO. The 

commenter explained that in groups of 

related taxable and tax-exempt 

organizations, related organizations 

often provide separate deferred 

compensation plans to their employees. 

Therefore, an individual employee who 

works (or has worked) for multiple 

related employers might have several 

deferred compensation plans, which 

often differ considerably, with some 

being nonaccount balance plans and 

others being account balance plans that 

may offer very different investment 

options. As a result, an individual 

employee might accrue significant 

earnings in a year under some deferred 

compensation plans but incur 

significant losses in others. The 

commenter therefore suggested that 

these final regulations permit 

aggregation of losses with earnings 

among related employers to avoid the 

inappropriate inflation of remuneration 

in certain circumstances. Any concerns 

about manipulation due to permitting 

aggregation could be addressed by 

requiring employers to aggregate (or not 

aggregate) earnings and losses 

consistently from year to year, with 

changes allowed only infrequently—for 

example, every 3 years—unless in 

response to changes in the composition 

of the group of related organizations. 

These final regulations do not adopt 

the commenter’s suggestion to permit 

the aggregation of earnings and losses 

among related organizations. The 

commenter’s suggestions would be 

feasible among related organizations 

only if they agreed to either aggregate or 

disaggregate arrangements as to all 

employees and also to coordinate and 

integrate their remuneration 

calculations across the separate plans 

and arrangements that each employer 

established to permit timely and 

accurate calculations for each covered 

employee (and employees that may 

become covered employees) who 

participated in more than one employer 

arrangement. Even if this was feasible 

for a particular year, the regulatory 

framework would need to account for 

the entry and departure of members of 

the group of related organizations and 

how the aggregation or disaggregation 

would account for those events. This 

regime would be complex and 

burdensome for taxpayers and the IRS to 

administer and is not warranted due to 

the limited potential benefits. In 

addition, the aggregation of earnings 

and losses across related employers 

would implicate the statutory allocation 

of the liability for the tax on excess 

remuneration under section 

4960(c)(4)(C), since the aggregation of 

earnings and losses would impact the 

relative remuneration paid by the 

separate employers. 

E. Request for a Grandfathering Rule 

One commenter suggested that these 

final regulations provide for 

grandfathering of employee 

remuneration contracts executed on or 

before November 2, 2017, so that 

amounts paid under such contracts 

would not be treated as remuneration 

for purposes of section 4960. The 

commenter reasoned that the 

grandfathering of employee 

remuneration contracts executed on or 

before November 2, 2017, would help 

certain employers in overcoming 

challenges in hiring executives, and that 

the legislative history of the TCJA failed 

to consider the differences between taxexempt employers and their taxable 

counterparts. The final regulations do 

not adopt the commenter’s suggested 

rule. Section 13602(c) of TCJA, which 

added section 4960 to the Code, did not 

provide for a grandfathering rule and 

there is no indication in the legislative 

history that Congress intended that one 

be adopted by regulation. In contrast, 

section 13601 of TCJA amended section 

162(m) of the Code and provided an 

explicit grandfathering rule. Under 

these circumstances, the Treasury 

Department and the IRS do not find it 

appropriate to provide a grandfathering 

rule. However, these final regulations 


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provide rules that have the effect of 

grandfathering remuneration that vested 

before the taxpayer’s first taxable year 

beginning after December 31, 2017. 

Section III.E. of the Explanation of 

Provisions of the proposed regulations, 

titled ‘‘Request for a Grandfather Rule,’’ 

explained that one of the consequences 

of treating remuneration as paid at the 

time the remuneration vests is that any 

remuneration that vested prior to the 

first day of the first taxable year of the 

ATEO beginning after December 31, 

2017, is not considered remuneration 

for purposes of section 4960. One 

commenter recommended that the 

Treasury Department and the IRS 

explicitly reflect this rule in these final 

regulations. In response to this 

comment, these final regulations 

provide that any vested remuneration, 

including vested but unpaid earnings 

accrued on deferred amounts, that is 

treated as paid before the effective date 

of section 4960 (January 1, 2018, for a 

calendar year employer) is not subject to 

the excise tax imposed under section 

4960(a)(1). All earnings on those vested 

amounts that accrue or vest after the 

effective date, however, are treated as 

remuneration paid for purposes of 

section 4960(a)(1). 

Similarly, for an employee who has 

vested compensation from years prior to 

the taxable year in which the employee 

first became a covered employee, these 

final regulations adopt the rule in the 

proposed regulations providing that 

vested remuneration (including vested 

but unpaid earnings) that would have 

been treated as remuneration paid for a 

taxable year before the taxable year in 

which an employee first became a 

covered employee under section 4960 is 

not remuneration subject to the excise 

tax imposed by section 4960(a)(1) for 

the first taxable year in which the 

employee becomes a covered employee 

or any subsequent year. However, 

subsequent earnings that accrue on 

those vested amounts when the 

employee is a covered employee are 

treated as remuneration paid for 

purposes of section 4960(a)(1). 

F. Remuneration Paid to a Covered 

Employee for Which a Deduction Is 

Disallowed Under Section 162(m) 

Section 4960(c)(6) provides that 

remuneration for which a deduction is 

disallowed under section 162(m) is not 

taken into account for purposes of 

section 4960. Thus, remuneration that is 

paid to a covered employee of an ATEO 

who is also a covered employee of a 

related ‘‘publicly held corporation’’ or 

an applicable individual of a related 

‘‘covered health insurance provider’’ (as 

defined in section 162(m)(2) and 

(m)(6)(C), respectively), for which a 

deduction is disallowed under section 

162(m), generally is not treated as 

remuneration for purposes of 

determining whether remuneration has 

been paid. However, that remuneration 

is taken into account for purposes of 

determining the ATEO’s five highestcompensated employees. See section 

II.E. of this Summary of Comments and 

Explanation of Revisions, titled 

‘‘Covered Employee.’’ 

As discussed in section III.F. of the 

Explanation of Provisions of the 

proposed regulations, titled 

‘‘Remuneration Paid to a Covered 

Employee for Which a Deduction Is 

Disallowed Under Section 162(m),’’ the 

application of this provision raises 

significant issues stemming largely from 

the difference in timing between the 

payment of remuneration under section 

4960 (when the right to the amount 

vests), and the availability of a 

deduction that may be restricted by 

section 162(m) (generally when the 

amount is paid). Section III.F. of the 

Explanation of Provisions of the 

proposed regulations, titled 

‘‘Remuneration Paid to a Covered 

Employee for Which a Deduction Is 

Disallowed Under Section 162(m),’’ 

described two possible approaches for 

addressing these circumstances and 

requested comments on those 

approaches. The Treasury Department 

and the IRS continue to consider the 

issues raised by this provision in section 

4960(c)(6) requiring coordination with 

section 162(m), including the comments 

submitted, but have not yet determined 

the appropriate manner of 

implementation. Accordingly, these 

final regulations do not address the 

coordination of sections 4960 and 

162(m) in these circumstances, but 

instead reserve a section of these final 

regulations as a place for future 

guidance. 

Until that future guidance is issued, 

taxpayers may use a reasonable, good 

faith approach with respect to the 

coordination of sections 4960 and 

162(m) in circumstances in which it is 

not known whether a deduction for the 

remuneration will be disallowed under 

section 162(m) by the due date 

(including any extension) of the relevant 

Form 4720. For this purpose, a 

reasonable, good faith approach must 

have a reasonable basis for anticipating 

that the compensation that a particular 

employee will be paid in the future may 

be subject to the deduction limitations 

of section 162(m). For example, it is not 

reasonable for this purpose to anticipate 

that an ATEO may become a public 

corporation by the date the 

compensation will be paid absent facts 

indicating that is a realistic potentiality. 

Additionally, until further guidance is 

issued, the two approaches regarding 

deferred compensation described in 

section III.F. of the Explanation of 

Provisions of the proposed regulations, 

titled ‘‘Remuneration Paid to a Covered 

Employee for Which a Deduction Is 

Disallowed Under Section 162(m),’’ will 

be treated as reasonable, good faith 

approaches. However, a third approach 

suggested by a commenter, under which 

section 162(m) would not disallow a 

taxpayer’s deduction for remuneration 

that the taxpayer treated as excess 

remuneration under section 4960 in a 

previous taxable year, will not be 

treated as a reasonable, good faith 

approach, because such an approach 

would be inconsistent with section 

162(m) and the regulations thereunder. 

IV. Excess Remuneration 

In general, the excise tax imposed 

under section 4960(a)(1) is based on the 

remuneration paid (other than any 

excess parachute payment) by an ATEO 

for the taxable year with respect to 

employment of any covered employee 

in excess of $1 million. Consistent with 

the proposed regulations, these final 

regulations refer to this amount as 

‘‘excess remuneration.’’ The $1 million 

threshold provided in section 4960(a)(1) 

is not adjusted for inflation, and an 

amount subject to tax under section 

4960(a)(2) as an excess parachute 

payment is not subject to tax under 

section 4960(a)(1) as excess 

remuneration. 

As provided in section 4960(c)(4)(C), 

if an individual performs services as an 

employee for two or more related 

organizations during an applicable year, 

one or more of which is an ATEO, each 

employer is liable for its proportionate 

share of the excise tax. These final 

regulations adopt the rules provided in 

the proposed regulations for allocating 

liability for the excise tax among the 

employers. For this purpose, 

remuneration that is paid by a separate 

organization (whether related to the 

ATEO or not) for services performed as 

an employee of the ATEO is treated as 

remuneration paid by the ATEO. For a 

further discussion of when amounts are 

treated as paid by an ATEO, see section 

VI of this Summary of Comments and 

Explanation of Revisions, titled 

‘‘Calculation, Reporting, and Payment of 

the Tax.’’ 

V. Excess Parachute Payments 

A. In General 

The proposed regulations set forth 

rules with respect to excess parachute 

payments under section 4960. No 


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9Under section 414(q), a ‘‘highly compensated 

employee’’ generally is defined as any employee 

who was a five-percent owner at any time during 

the year or the preceding year or who had 

compensation from the employer in the preceding 

year in excess of an inflation-adjusted amount. 

Notice 2019–59 (2019–47 I.R.B. 1091) and Notice 

2020–79 (2020–46 I.R.B 1014), provide that the 

inflation-adjusted amounts for 2020 and 2021 are 

$130,000 and $130,000, respectively. See section 

414(q) and the regulations thereunder for additional 

rules, including the availability of an election to 

treat no more than the top 20 percent of an 

employer’s employees as highly compensated 

employees by reason of their compensation. 

comments were received on these rules, 

and these final regulations adopt them 

without change. Section 4960(a)(2) 

imposes an excise tax on any excess 

parachute payment. Section 

4960(c)(5)(A) provides that ‘‘excess 

parachute payment’’ means an amount 

equal to the excess of any parachute 

payment over the portion of the base 

amount allocated to such payment. 

Section 4960(c)(5)(B) provides that 

‘‘parachute payment’’ means any 

payment in the nature of compensation 

to (or for the benefit of) a covered 

employee if the payment is contingent 

on the employee’s separation from 

employment with the employer and the 

aggregate present value of the payments 

in the nature of compensation to (or for 

the benefit of) the individual that are 

contingent on the separation equals or 

exceeds an amount equal to 3-times the 

base amount. Under section 

4960(c)(5)(C), certain retirement plan 

payments, certain payments to licensed 

medical professionals, and payments to 

an individual who is not a ‘‘highly 

compensated employee’’ (HCE) as 

defined in section 414(q) are not excess 

parachute payments.9

The excess parachute payment rules 

under section 4960 are modeled after 

section 280G, but section 4960(c)(5)(B) 

defines ‘‘parachute payment’’ differently 

than section 280G(b)(2). The section 

4960 definition refers to payments 

contingent on an employee’s separation 

from employment, whereas the section 

280G definition refers to payments 

contingent on a change in the 

ownership or effective control of a 

corporation (or in the ownership of a 

substantial portion of the assets of the 

corporation). While these final 

regulations incorporate many of the 

concepts found in the rules under 

§ 1.280G–1, with modifications to reflect 

the statutory differences between 

sections 280G and 4960, they do not 

incorporate other rules under § 1.280G– 

1 because those rules address issues that 

do not arise under section 4960. In 

addition, many provisions in these final 

regulations do not have parallel rules 

under § 1.280G–1 because they address 

issues that arise under section 4960, but 

not under section 280G. 

The following sections provide a 

general overview of these final 

regulations for purposes of calculating 

the excise tax imposed under section 

4960(a)(2), noting certain similarities 

and differences between these final 

regulations and the rules under 

§ 1.280G–1. For more information 

concerning these rules, including 

additional similarities and differences 

with the rules under section 280G, see 

section V of the Explanation of 

Provisions of the proposed regulations, 

titled ‘‘Excess Parachute Payments.’’ 

B. Definitions Related to Excess 

Parachute Payments 

These final regulations define ‘‘excess 

parachute payment’’ and the term 

‘‘parachute payment’’ for purposes of 

section 4960. Any payment in the 

nature of compensation made by an 

ATEO (or any predecessor or related 

organization) to a covered employee that 

is contingent on the employee’s 

separation from employment is taken 

into account for purposes of the 

parachute payment calculation, 

assuming no exclusion applies. Those 

combined payments constitute a 

parachute payment if the aggregate 

present value of all such payments 

made to an individual equals or exceeds 

3-times the individual’s base amount. A 

parachute payment is an excess 

parachute payment to the extent it 

exceeds one-times the individual’s base 

amount allocated to the payment. 

These final regulations define a 

‘‘payment in the nature of 

compensation’’ based on § 1.280G–1, Q/ 

A–11 and Q/A–14. In general, any 

payment arising out of an employment 

relationship is a payment in the nature 

of compensation. A payment in the 

nature of compensation is reduced, 

however, by any consideration paid by 

the covered employee in exchange for 

the payment. 

C. Payments Contingent on a Separation 

From Employment 

1. In General 

Although section 4960 does not 

define what it means for a payment to 

be contingent on a separation from 

employment, these final regulations 

generally treat a payment as contingent 

on an employee’s separation from 

employment only if there is an 

involuntary separation from 

employment. If the payment is subject 

to a substantial risk of forfeiture 

(defined in a manner consistent with 

section 457(f)) that lapses upon an 

involuntary separation from 

employment, and the separation causes 

the risk of forfeiture to lapse, the 

payment is contingent on separation 

from employment. 

2. Requirement of Involuntary 

Separation From Employment 

Separation from employment 

(whether voluntary or involuntary) often 

is used in compensation arrangements 

as a trigger to pay vested compensation. 

For example, it is typical for a 

nonqualified deferred compensation 

plan to provide that a payment or a 

series of payments will be made or 

begin upon a separation from 

employment, including separation from 

employment resulting from death or 

disability. The vested amounts that are 

to be paid after a separation from 

employment generally are not treated as 

contingent on a separation from 

employment because the amounts will 

never be subject to forfeiture or 

otherwise not paid (even if an employee 

does not voluntarily or involuntarily 

terminate employment during the 

employee’s lifetime, the payments will 

be made upon the employee’s death). In 

these cases, the separation from 

employment functions only as a 

payment timing event and is neither a 

contingent event that may not occur nor 

a precondition to entitlement to the 

payment. 

3. Definition of ‘‘Involuntary Separation 

From Employment’’ 

If an amount is payable solely upon 

an involuntary separation from 

employment, then it is a payment 

contingent on an event that may not 

occur and that is a precondition to 

entitlement to the payment. The 

definition of an ‘‘involuntary separation 

from employment’’ set forth in these 

final regulations is modeled after the 

definition of an ‘‘involuntary separation 

from service’’ in § 1.409A–1(n)(1), 

which also was the model for the 

definition of an ‘‘involuntary severance 

from employment’’ under Prop. § 1.457– 

11(d)(2). A separation from employment 

for good reason is treated as an 

involuntary separation from 

employment for purposes of section 

4960 if certain conditions are met. For 

this purpose, these regulations generally 

adopt the standards set forth in 

§ 1.409A–1(n)(2) and Prop. § 1.457– 

11(d)(2)(ii). 

These final regulations generally 

adopt the standards of the section 409A 

regulations for purposes of determining 

whether there has been a separation 

from employment, except that for 

purposes of section 4960 a bona fide 

change from employee to independent 

contractor status is treated as a 


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separation from employment. Because 

the section 409A regulations do not 

provide a standard for determining 

when an involuntary change of status 

from employee to independent 

contractor results in a separation from 

employment, in section V.C.3. of the 

Explanation of Provisions of the 

proposed regulations, titled ‘‘Definition 

of ‘Involuntary Separation from 

Employment,’ ’’ the Treasury 

Department and the IRS requested 

comments on whether additional 

guidance is needed on this issue. No 

comments were received in response to 

that request. Consistent with the 

proposed regulations, these final 

regulations provide that a separation 

from employment occurs in the case of 

a bona fide and involuntary change of 

status from employee to independent 

contractor in circumstances in which 

the change in status otherwise meets the 

requirements for an involuntary 

separation from employment. 

With respect to when an employee 

otherwise has terminated employment, 

these final regulations adopt rules based 

on the section 409A regulations. 

Specifically, these regulations adopt the 

standards of § 1.409A–1(h)(1)(ii), 

providing that an anticipated reduction 

in the level of services of more than 80 

percent is treated as a separation from 

employment, an anticipated reduction 

in the level of services of less than 50 

percent is not treated as a separation 

from employment, and the treatment of 

an anticipated reduction between these 

two levels will depend on the facts and 

circumstances. The measurement of the 

anticipated reduction in the level of 

services is based on the average level of 

bona fide services performed over the 

immediately preceding 3 years (or 

shorter period for an employee 

employed for less than 3 full prior 

years). However, these regulations do 

not adopt the rule in § 1.409A– 

1(h)(1)(ii), under which an employer 

may modify the level of the anticipated 

reduction in future services that will be 

considered to result in a separation from 

employment. 

4. When a Payment Is Contingent on 

Separation From Employment 

In defining when a payment is 

contingent on separation from 

employment, these final regulations do 

not focus solely on whether the 

payment would not have been made but 

for a separation from employment, but 

also take into consideration whether the 

separation from employment accelerates 

the right to payment or the lapse of a 

substantial risk of forfeiture with respect 

to the right to payment. Generally, if the 

payment or the lapse of a substantial 

risk of forfeiture is accelerated as a 

result of an involuntary separation from 

employment (such as a payment that 

otherwise would have vested and been 

paid had the employee remained 

employed for a subsequent period), then 

the value of any accelerated payment 

plus the value of any lapse of the 

substantial risk of forfeiture is treated as 

contingent on a separation from 

employment (since the employer would 

not have provided the increased value 

in the absence of an involuntary 

separation from employment). 

However, if the lapse of the 

substantial risk of forfeiture is 

dependent on an event other than the 

performance of services, such as the 

attainment of a performance goal, and if 

that event does not occur prior to the 

employee’s separation from 

employment, but the payment vests due 

to the employee’s involuntary 

separation from employment, then the 

full amount of the payment is treated as 

contingent on the separation from 

employment. 

As discussed in section V.C.4. of the 

Explanation of Provisions of the 

proposed regulations, titled ‘‘When a 

Payment Is Contingent on Separation 

from Employment,’’ a payment the right 

to which is not subject to a substantial 

risk of forfeiture within the meaning of 

section 457(f)(3)(B) at the time of an 

involuntary separation from 

employment generally is not contingent 

on a separation from employment (since 

the right to the payment is not triggered 

by the separation from employment). 

However, the increased value of a 

payment accelerated due to the 

involuntary separation from 

employment, and the value of 

accelerated vesting due to the 

involuntary separation from 

employment, each generally are treated 

as a payment contingent on a separation 

from employment. In addition, a 

payment for damages due to the breach 

of an employment agreement that is 

related to an involuntary separation 

from employment generally constitutes 

a payment contingent on a separation 

from employment, and a payment for 

compliance with a noncompetition 

agreement or similar arrangement may, 

in certain situations, constitute a 

payment contingent on a separation 

from employment. 

Actual or constructive payment of an 

amount that was previously includible 

in gross income is not a payment 

contingent on a separation from 

employment. For example, a payment of 

deferred compensation after an 

involuntary separation from 

employment that vested based on years 

of service completed before the 

involuntary separation from 

employment generally is not a payment 

that is contingent on a separation from 

employment because the separation 

from employment may affect the time 

of, but not the right to, the payment 

(although the value of an acceleration of 

the payment may be contingent on a 

separation from employment). 

Unlike Q/A–25 and Q/A–26 of 

§ 1.280G–1, these regulations do not 

provide a presumption that a payment 

made pursuant to an agreement entered 

into or modified within 12 months of a 

separation from employment is a 

payment that is contingent on a 

separation from employment. However, 

as discussed later in this section, if the 

facts and circumstances demonstrate 

that either the vesting or the payment of 

an amount would not have occurred but 

for the involuntary nature of the 

separation from employment, the 

amount will be treated as a payment 

contingent on a separation from 

employment. 

In addition, these final regulations do 

not provide a rule similar to § 1.280G– 

1, Q/A–9 (exempting reasonable 

compensation for services rendered on 

or after a change in ownership or 

control from the definition of 

‘‘parachute payment’’), which would 

exclude reasonable compensation for 

services provided after a separation 

from employment. In most cases, the 

issue of whether payments made after a 

separation from employment are 

reasonable compensation for services 

will not arise because the employee will 

not provide services after the separation 

from employment. However, if the 

employee continues to provide services 

(including as a bona fide independent 

contractor) after an involuntary 

separation from employment, payments 

for those services are not contingent on 

the involuntary separation from 

employment to the extent those 

payments are reasonable and are not 

made due to the involuntary nature of 

the separation from employment. 

Notwithstanding the foregoing, if the 

facts and circumstances demonstrate 

that either vesting or payment of an 

amount (whether before or after an 

involuntary separation from 

employment) would not have occurred 

but for the involuntary nature of the 

separation from employment, the 

amount will be treated as contingent on 

a separation from employment. For 

example, an employer’s exercise of 

discretion to accelerate vesting of an 

amount shortly before an involuntary 

separation from employment may 

indicate that the acceleration of vesting 

was due to the involuntary nature of the 

separation from employment and was 


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10See footnote 9. 

therefore contingent on the employee’s 

separation from employment. 

In section V.C.4. of the Explanation of 

Provisions of the proposed regulations, 

titled ‘‘When a Payment Is Contingent 

on Separation from Employment,’’ the 

Treasury Department and the IRS 

requested comments on whether there 

are additional types of payments made 

in connection with separation from 

employment and the extent to which 

these final regulations under section 

4960 should be modified to ensure 

appropriate classification of those 

payments as contingent or not 

contingent on separation from 

employment. No comments were 

received in response to this request, and 

no modifications have been made in the 

final regulations. 

D. Three-Times-Base-Amount Test 

Section 4960(c)(5) provides rules for 

determining the tax on any excess 

parachute payment imposed under 

section 4960(a)(2). Section 4960(c)(5)(B) 

provides that a payment is a parachute 

payment only if the aggregate present 

value of the payments in the nature of 

compensation to (or for the benefit of) 

an individual that are contingent on a 

separation from employment equals or 

exceeds an amount equal to 3-times the 

base amount. Section 4960(c)(5)(D) 

provides that rules similar to the rules 

of section 280G(b)(3) apply for purposes 

of determining the base amount, and 

section 4960(c)(5)(E) provides that rules 

similar to the rules of section 280G(d)(3) 

and (4) apply for purposes of present 

value determinations. Section 

280G(b)(3) provides that ‘‘base amount’’ 

means an individual’s annualized 

includible compensation for the base 

period. Section 280G(d)(2) defines ‘‘base 

period’’ as the period consisting of the 

5 most-recent taxable years of the 

service provider ending before the date 

on which the change in ownership or 

control occurs or the portion of such 

period during which the individual 

performed personal services for the 

corporation. 

These final regulations provide that 

the ‘‘base amount’’ is the average annual 

compensation as an employee of the 

ATEO (including services performed as 

an employee of a predecessor or related 

organization) for the taxable years in the 

‘‘base period.’’ The base period is the 5 

most-recent taxable years during which 

the individual was an employee of the 

ATEO (or predecessor or related 

organization) or the portion of the 5-year 

period during which the employee was 

an employee of the ATEO (or 

predecessor or related organization). 

These final regulations provide rules 

for determining whether a payment is 

an excess parachute payment, including 

rules for applying the 3-times-baseamount test. The rules for determining 

the base amount, base period, and 

present value, including determining 

the present value of payments that are 

contingent on uncertain future events, 

are based on the rules under § 1.280G– 

1, Q/A–30 through Q/A–36 (substituting 

an involuntary separation from 

employment for a change in control). 

These final regulations describe when a 

payment in the nature of compensation 

is considered made for purposes of 

section 4960(a)(2), based on the rules in 

§ 1.280G–1, Q/A–11 through Q/A–14. 

Consistent with the rules provided 

under § 1.280G–1, Q/A–12(a), these 

final regulations provide that the 

transfer of section 83 property generally 

is considered a payment made in the 

taxable year in which the fair market 

value of the property would be 

includible in the gross income of the 

covered employee under section 83, 

disregarding any election made by the 

employee under section 83(b) or (i). In 

addition, similar to the rules provided 

under § 1.280G–1, Q/A–13(a), these 

regulations generally provide that stock 

options are treated as property 

transferred on the date of vesting 

(regardless of whether the option has a 

‘‘readily ascertainable value’’ as defined 

in § 1.83–7(b)). For purposes of 

determining the timing and amount of 

any payment related to an option, the 

principles of § 1.280G–1, Q/A–13 and 

Rev. Proc. 2003–68 (2003–2 C.B. 398) 

apply. 

E. Computation of Excess Parachute 

Payments 

Consistent with section 4960(c)(5)(A), 

these final regulations provide that an 

‘‘excess parachute payment’’ is an 

amount equal to the excess of any 

parachute payment over the portion of 

the base amount allocated to the 

payment. The portion of the base 

amount allocated to any parachute 

payment is the amount that bears the 

same ratio to the base amount as the 

present value of the parachute payment 

bears to the aggregate present value of 

all parachute payments to be made to 

the covered employee. The rules on 

allocation of the base amount in these 

regulations are based on § 1.280G–1, Q/ 

A–38. 

VI. Calculation, Reporting, and 

Payment of the Tax 

ATEOs (and any related non-ATEO 

organizations) are liable for the excise 

tax imposed by section 4960 only if they 

pay a covered employee sufficient 

remuneration to trigger the tax. An 

ATEO is not subject to the excise tax 

under section 4960(a)(1) unless the 

ATEO (together with any related 

organizations) pays more than $1 

million of remuneration to a covered 

employee for a taxable year. An ATEO 

cannot make an excess parachute 

payment subject to the excise tax under 

section 4960(a)(2) if the employer does 

not have any HCEs under section 

414(q) 10 for the taxable year. If both of 

these situations apply to an ATEO, the 

ATEO is not liable for any excise tax 

under section 4960 for that taxable year. 

These final regulations generally 

adopt the proposed rules regarding the 

entity that is liable for the excise tax 

under section 4960 and how that excise 

tax is calculated. These regulations 

provide that the employer, as 

determined under section 3401(d), 

without regard to paragraph (d)(1) or 

(d)(2), is liable for the excise tax 

imposed under section 4960. Further, as 

authorized by section 4960(d), a 

payment by the employer may be 

treated as remuneration or a parachute 

payment if, based on the facts and 

circumstances, the payment is 

structured such that it has the effect of 

avoiding the tax applicable under 

section 4960. For example, the excise 

tax under section 4960 would apply 

with respect to an individual who is an 

employee of an ATEO or related 

organization but who is incorrectly 

classified as an independent contractor. 

Similarly, the excise tax under section 

4960 would apply to an amount paid to 

a limited liability company or other 

entity owned all or in part by an 

employee (or owned by another entity 

unrelated to the ATEO or related 

organization) for services performed by 

an employee of the ATEO or related 

organization if the arrangement would 

otherwise have the effect of avoiding the 

tax applicable under section 4960. For 

a further discussion of the definition of 

‘‘employer’’ see section II.D. of this 

Summary of Comments and Explanation 

of Revisions, titled ‘‘Employer.’’ 

A. Calculation of Tax on Excess 

Remuneration 

An individual may perform services 

as an employee of an ATEO and as an 

employee of one or more related 

organizations during the same 

applicable year, in which case 

remuneration paid for the taxable year 

is aggregated for purposes of 

determining whether excess 

remuneration has been paid. To address 

these cases, these final regulations adopt 

the proposed rules for allocating 

liability for the excise tax among the 

related employers. As provided in 


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11The tentative tax, an estimate, must be paid by 

the due date of Form 4720 without extensions and 

Continued 

section 4960(c)(4)(C), in any case in 

which an ATEO includes remuneration 

from one or more related organizations 

as separate employers of the individual 

in determining the excise tax imposed 

by section 4960(a), each employer is 

liable for its proportionate share of the 

excise tax. In contrast, a payment to an 

individual for performing services as an 

employee of an ATEO that is made by 

a third-party payor (whether the payor 

is related to the ATEO or not) is 

remuneration paid by the ATEO for 

section 4960 purposes and thus is 

included with any remuneration paid 

directly by the ATEO (and the related 

liability is not allocated to the other 

organization). If a covered employee is 

employed by one employer when the 

legally binding right to the 

remuneration is granted and by a 

different employer at vesting, then the 

covered employee’s employer at vesting 

is treated as paying the remuneration, 

provided the employment relationship 

is bona fide and not a means to avoid 

tax under section 4960. A related 

organization may become (or cease to 

be) related during the applicable year, in 

which case only remuneration the 

related organization pays (or is treated 

as paying due to vesting) to the ATEO’s 

covered employee during the portion of 

the applicable year that it is a related 

organization is treated as paid by the 

ATEO for the taxable year, as provided 

in section 4960(c)(4)(A). 

If an employee is a covered employee 

of more than one ATEO, these final 

regulations provide that each ATEO 

calculates its liability under section 

4960(a)(1), taking into account 

remuneration paid to the employee by 

the organizations to which it is related. 

These regulations also provide that, 

rather than owing tax as both an ATEO 

and a related organization for the same 

remuneration paid to a covered 

employee, each employer is liable only 

for the greater of the excise tax for 

which it would be liable as an ATEO or 

the excise tax it would be liable for as 

a related organization with respect to 

that covered employee (and if there is 

more than one related group of 

organizations, then for the group that 

results in the greatest amount of tax). 

These regulations provide that these 

same allocation principles apply in the 

case of the allocation of liability in 

situations involving an ATEO or related 

organization with a short taxable year, 

and should be applied in a manner that 

avoids, to the extent possible, 

duplicative taxation of remuneration 

paid to the same individual. Because the 

application of the allocation rules may 

prove complicated in situations 

involving short taxable years, especially 

if those situations also involve multiple 

short taxable years or differing taxable 

years among the group constituting the 

ATEO and its related organizations, the 

regulations further provide that the 

Commissioner may prescribe guidance 

of general applicability addressing how 

the allocation rules apply in particular 

circumstances involving short taxable 

years. 

Under section 4960(b) and (c)(4)(C), 

the employer or employers are liable for 

the excise tax imposed by section 4960. 

Related organizations must obtain 

information from each other on 

remuneration paid to covered 

employees in order to calculate the tax 

and their share of the liability. One 

commenter noted that there may be 

situations in which an employer is 

unable to obtain complete information 

on the remuneration and benefits paid 

by other employers. The commenter 

requested guidance on relief from 

penalties or interest for an error if the 

employer made a bona fide attempt to 

obtain the necessary information when 

it became aware of the error and 

requested guidance on what would be a 

bona fide attempt for this purpose. If an 

ATEO or related organization fails to 

pay tax it is liable for due to failure to 

obtain information on remuneration 

paid by other organizations within the 

related group, it may be liable for a civil 

penalty under section 6651 (and in 

some cases, criminal penalties). Section 

6651 includes an exception for 

reasonable cause. Guidance as to 

reasonable cause for penalty relief, and 

therefore the guidance requested by this 

commenter, is beyond the scope of these 

final regulations, and therefore is not 

addressed in these final regulations. 

B. Calculation of Tax on an Excess 

Parachute Payment 

These final regulations adopt the 

proposed regulations with respect to the 

rules for the calculation of tax on an 

excess parachute payment. With respect 

to the calculation of, and liability for, 

the tax on excess parachute payments, 

the proposed regulations differed in one 

respect from the guidance provided in 

Q/A–1 of Notice 2019–09. Notice 2019– 

09 provided that an ATEO or related 

organization may be liable for the tax on 

an excess parachute payment based on 

the aggregate parachute payments made 

by the ATEO and its related 

organizations, including parachute 

payments based on separation from 

employment from a related 

organization. As in the proposed 

regulations, these final regulations 

provide that only an excess parachute 

payment paid by an ATEO is subject to 

the excise tax on excess parachute 

payments. However, consistent with the 

provision in section 4960(c)(5)(D) that 

rules similar to section 280G(b)(3) apply 

for purposes of determining the base 

amount under section 4960, payments 

from all related organizations (including 

payments from non-ATEOs) are 

considered for purposes of determining 

the base amount and total payments in 

the nature of compensation that are 

contingent on the covered employee’s 

separation from employment with the 

employer. See § 1.280G–1, Q/A–34. 

Generally, this means that a covered 

employee’s base amount calculation 

includes remuneration from the ATEO 

and all related organizations, and that a 

covered employee’s parachute payment 

calculation includes all payments (made 

by the ATEO and all related 

organizations) that are contingent on the 

employee’s involuntary separation from 

employment. However, only an ATEO is 

subject to the excise tax on excess 

parachute payments it makes to a 

covered employee. A non-ATEO that 

pays an amount that would otherwise be 

an excess parachute payment is not 

subject to the excise tax. These 

regulations further provide that, based 

on the facts and circumstances, the 

Commissioner may reallocate excess 

parachute payments to an ATEO if it is 

determined that excess parachute 

payments were made by a non-ATEO for 

the purpose of avoiding the tax under 

section 4960. Step by step instructions 

for calculating the tax on excess 

parachute payments were provided in 

section VI.B. of the Explanation of 

Provisions of the proposed regulations, 

titled ‘‘Calculation of Tax on an Excess 

Parachute Payment.’’ 

C. Reporting and Payment of the Tax 

These final regulations adopt without 

change the rules provided in the 

proposed regulations relating to the 

reporting and payment of the excise tax. 

Under §§ 53.6011–1 and 53.6071–1, the 

excise tax under section 4960 is 

reported on Form 4720, ‘‘Return of 

Certain Excise Taxes Under Chapters 41 

and 42 of the Internal Revenue Code,’’ 

which is the form generally used for 

reporting and paying chapter 42 taxes. 

The reporting and payment of any 

applicable taxes are due when payments 

of chapter 42 taxes are ordinarily due 

(the 15th day of the 5th month after the 

end of the taxpayer’s taxable year—May 

15 for a calendar year employer), subject 

to an extension of time for filing returns 

and making payments 11 that generally 


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6214 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 

may be paid with Form 8868, ‘‘Application for 

Automatic Extension of Time To File an Exempt 

Organization Return.’’ 

applies. Because section 6655 has not 

been amended to include section 4960, 

no quarterly payments of estimated 

excise tax imposed by section 4960 are 

required under section 6655. 

These final regulations require that 

the excise tax imposed by section 4960 

be reported and paid in the form and 

manner prescribed by the 

Commissioner, and § 53.6011–1 requires 

that every person (including a 

governmental entity) liable for the 

excise tax imposed by section 4960 shall 

file Form 4720, ‘‘Return of Certain 

Excise Taxes Under Chapters 41 and 42 

of the Internal Revenue Code.’’ Notice 

2019–09, Q/A–33(a) required each 

employer liable for the excise tax 

imposed by section 4960 to file a 

separate Form 4720 to report its share of 

liability. Two commenters 

recommended allowing related 

employers to file a joint Form 4720, as 

has been permitted in § 53.6011–1(c) for 

private foundations and their 

disqualified persons and foundation 

managers. In addition to being beyond 

the scope of these regulations, 

permitting joint filing of Form 4720 is 

incompatible with electronic filing of 

Form 4720 that is required for certain 

tax-exempt organizations under the 

Taxpayer First Act, Public Law 116–25. 

See Notice 2021–01. 

These final regulations also provide 

that an employer may elect to prepay 

the excise tax imposed under section 

4960(a)(2) for excess parachute 

payments in the year of separation from 

employment or any taxable year prior to 

the year in which the parachute 

payment is actually paid. This 

prepayment rule for the tax applicable 

to excess parachute payments is similar 

to the rule in § 1.280G–1, Q/A–11(c), 

under which a disqualified employee 

may elect to prepay the excise tax under 

section 4999 based on the present value 

of the excise tax that would be owed by 

the employee when the parachute 

payments are actually made. 

VII. Applicability Date 

These final regulations were proposed 

to apply to taxable years beginning after 

December 31 of the calendar year in 

which the Treasury decision adopting 

these rules as final regulations is 

published in the Federal Register. The 

Treasury Department and the IRS 

requested comments on the burdens 

anticipated and the timeframe expected 

to be necessary to implement these final 

regulations (taking into account that the 

statutory provisions are already 

effective). 

One commenter recommended that 

these final regulations apply to taxable 

years beginning after December 31 of the 

calendar year that ends at least six 

months after the date on which these 

final regulations are published in the 

Federal Register in order for ATEOs and 

related organization to have sufficient 

time to understand and apply these final 

regulations. The Treasury Department 

and the IRS agree with this 

recommendation, and therefore these 

final regulations apply to taxable years 

beginning after December 31, 2021 (with 

the first applicable year generally being 

the 2022 calendar year). 

The guidance provided in these final 

regulations and the proposed 

regulations generally is consistent with 

the guidance provided in Notice 2019– 

09. Until the applicability date of these 

final regulations, taxpayers may rely on 

the guidance provided in Notice 2019– 

09 in its entirety or on the proposed 

regulations in their entirety. 

Alternatively, taxpayers may choose to 

apply these final regulations to taxable 

years beginning after December 31, 

2017, and on or before December 31, 

2021, provided they apply the final 

regulations in their entirety and in a 

consistent manner. 

Until the applicability date of these 

final regulations, taxpayers may also 

base their positions upon a reasonable, 

good faith interpretation of the statute 

that includes consideration of any 

relevant legislative history. Whether a 

taxpayer’s position that is inconsistent 

with Notice 2019–09, the proposed 

regulations, or these final regulations 

constitutes a reasonable, good faith 

interpretation of the statute generally 

will be determined based upon all of the 

relevant facts and circumstances, 

including whether the taxpayer has 

applied the position consistently and 

the extent to which the taxpayer has 

resolved interpretive issues based on 

consistent principles and in a consistent 

manner. Notwithstanding the previous 

sentence, the preamble to Notice 2019– 

09 describes certain positions that the 

Treasury Department and the IRS have 

concluded are not consistent with a 

reasonable, good faith interpretation of 

the statutory language, and the proposed 

regulations and these final regulations 

reflect this view. For a description of 

each of these positions, see section VII 

of the Explanation of Provisions of the 

proposed regulations, titled ‘‘Proposed 

Applicability Date.’’ 

Special Analyses 

I. Regulatory Planning and Review 

Executive Orders 13771, 13563, and 

12866 direct agencies to assess costs and 

benefits of available regulatory 

alternatives and, if regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, distributive impacts, and 

equity). Executive Order 13563 

emphasizes the importance of 

quantifying both costs and benefits, of 

reducing costs, of harmonizing rules, 

and of promoting flexibility. The 

Executive Order 13771 designation for 

this rule is ‘‘regulatory.’’ 

The regulations have been designated 

as subject to review under Executive 

Order 12866 pursuant to the 

Memorandum of Agreement (April 11, 

2018) between the Treasury Department 

and the Office of Management and 

Budget (OMB) regarding review of tax 

regulations. The Office of Information 

and Regulatory Affairs (OIRA) has 

designated the rulemaking as significant 

under section 1(c) of the Memorandum 

of Agreement. Accordingly, OMB has 

reviewed the regulations. 

A. Background 

1. The Excise Tax Under Section 4960 

Section 4960 was added to the Code 

by TCJA. Section 4960(a) subjects excess 

remuneration above $1 million and 

excess parachute payments that an 

ATEO pays to a covered employee to an 

excise tax equal to the rate of tax 

imposed on corporations under section 

11 (21 percent for 2020). Before TCJA, 

compensation paid by tax-exempt 

organizations was not subject to an 

excise tax, although section 4958 

applies an excise tax to penalize excess 

benefit transactions in which an 

‘‘applicable tax-exempt organization’’ 

(as defined in section 4958) provides a 

benefit to a disqualified person that 

exceeds the reasonable fair market value 

of the services received. 

Section 4960 defines an ‘‘ATEO’’ as 

any organization which is exempt from 

taxation under section 501(a), is a 

farmers’ cooperative organization 

described in section 521(b)(1), has 

income excluded from taxation under 

section 115(1), or is a political 

organization described in section 

527(e)(1). Covered employees of an 

ATEO include the five highestcompensated employees of the 

organization for the taxable year and 

any employee or former employee who 

was a covered employee of the 

organization (or predecessor) for any 


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12The methods and data used to estimate the 

number of affected entities are discussed in detail 

in the Paperwork Reduction Act special analysis. 

preceding taxable year beginning after 

December 31, 2016. 

‘‘Remuneration’’ means ‘‘wages’’ as 

defined in section 3401(a) (excluding 

designated Roth contributions) and 

includes amounts required to be 

included in gross income under section 

457(f). Section 4960 excludes from 

remuneration any amount paid to a 

licensed medical professional for 

medical or veterinary services provided. 

Remuneration also includes payments 

with respect to employment of a 

covered employee by any person or 

government entity related to the ATEO. 

A person or governmental entity is 

treated as related to the ATEO if that 

person or governmental entity controls, 

or is controlled by, the ATEO, is 

controlled by one or more persons 

which control the ATEO, is a 

‘‘supported organization’’ (as defined in 

section 509(f)(3)) during the taxable year 

with respect to the ATEO, is a 

supporting organization described in 

section 509(a)(3) during the taxable year 

with respect to the ATEO, or in the case 

of an organization which is a voluntary 

employees’ beneficiary association 

(VEBA) under section 501(c)(9), 

established, maintains, or makes 

contribution to such VEBA. 

2. Notice 2019–09 and the Proposed and 

Final Regulations 

Notice 2019–09 provided taxpayers 

with initial guidance on the application 

of section 4960, including that taxpayers 

may base their positions on a 

reasonable, good faith interpretation of 

the statute until further guidance is 

issued. On June 11, 2020, the Treasury 

Department and the IRS published 

proposed regulations on section 4960 in 

the Federal Register (REG–122345–18, 

85 FR 35746) (the proposed regulations). 

The Treasury Department and the IRS 

received comments responding to the 

proposed regulations, which were 

considered in these final regulations, 

published here. The comments 

primarily discussed the treatment of 

employees of a related organization who 

also provide services to the ATEO, 

suggesting various exceptions for these 

situations. Comments also addressed the 

possibility of a grandfather rule for 

compensation to be paid under 

arrangements in place prior to the 

effective date of section 4960, treatment 

of deferred compensation as 

remuneration, the definition of 

‘‘control,’’ and which organizations are 

ATEOs. 

B. Baseline 

The Treasury Department and the IRS 

have assessed the benefits and costs of 

the final regulations relative to a noaction baseline reflecting anticipated 

Federal income tax-related behavior in 

the absence of these regulations. 

C. Affected Entities 

The final regulations affect an 

estimated 261,000 ATEOs and 77,000 

non-ATEO related organizations of 

ATEOs that in historical filings report 

substantial executive compensation.12

Of the roughly 261,000 such ATEOs 

based on filings for tax year 2017, 

239,000 are section 501(a) exempt 

organizations (including 23,000 private 

foundations), 19,000 are section 115 

state and local instrumentalities, 2,000 

are section 527 political organizations, 

600 are exempt farmers’ cooperative 

organizations described in section 

521(b)(1), and 200 are federal 

instrumentalities (although the Treasury 

Department and the IRS will continue to 

consider whether federal 

instrumentalities are ATEOs). 

D. Economic Analysis 

This section describes the key 

economic effects of the provisions of 

these final regulations. 

1. Clarifications 

Most provisions of these final 

regulations clarify aspects of the excise 

tax imposed by section 4960, 

minimizing the burdens entities bear to 

comply with section 4960, and have 

little other economic impact. 

Clarifications reduce uncertainty, 

lowering the effort required to infer 

which organizations, employees, and 

payments are subject to the excise tax 

and the potential for conflict if entities 

and tax administrators interpret 

provisions differently. Examples of 

provisions of these final regulations that 

are primarily clarifications include the 

definition of ‘‘control,’’ treatment of 

deferred compensation and vesting, and 

which organizations are ATEOs. 

2. ‘‘Volunteer’’ Exceptions 

Several commenters expressed 

concern that highly-paid employees of a 

non-ATEO performing services for a 

related ATEO without receiving 

compensation from the ATEO may be 

subject to the excise tax. To avoid the 

excise tax, individuals might cease 

performing such services, or ATEOs 

might dissolve their relationships with 

related non-ATEOs, reducing donations 

from related non-ATEOs. 

The final regulations include 

exceptions to the definitions of 

‘‘employee’’ and ‘‘covered employees’’ 

(specifically to the rules for determining 

the five highest compensated employees 

for purposes of identifying covered 

employees) to address such situations. 

With respect to the first exception, the 

regulations define ‘‘employee’’ 

consistent with section 3401(c), in 

particular adopting the rule that a 

director is not an employee in the 

capacity as a director and an officer 

performing minor or no services and not 

receiving any remuneration for those 

services is not an employee. 

The general rule provides that 

employees of a related non-ATEO are 

not considered for purposes of 

determining the five highestcompensated employees if they are 

never employees of the ATEO. In 

addition, individuals who receive no 

remuneration (or grant of a legally 

binding right to remuneration) from the 

ATEO or a related organization cannot 

be among the ATEO’s five highestcompensated employees. 

Under the exceptions, an ATEO’s five 

highest-compensated employees also 

exclude an employee of the ATEO who 

receives no remuneration from the 

ATEO and performs only limited hours 

of service for the ATEO, which means 

that no more than 10 percent of total 

annual hours worked for the ATEO and 

related organizations are for services 

performed for the ATEO. An employee 

who performs fewer than 100 hours of 

services as an employee of an ATEO and 

its related ATEOs is treated as having 

worked less than 10 percent of total 

hours for the ATEO and related ATEOs. 

An employee who is not compensated 

by an ATEO, related ATEO, or any 

taxable related organization controlled 

by the ATEO and who primarily (more 

than 50 percent of total hours worked) 

provides services to a related non-ATEO 

is also disregarded. In response to 

comments on the proposed regulations 

expressing concern that this exception 

did not provide sufficient flexibility for 

situations in which an employee of a 

non-ATEO performs services for a 

related ATEO as a temporary 

assignment, these final regulations 

provide that the 50 percent of total 

hours worked threshold can be 

computed over a period of two 

consecutive years, rather than a single 

year. This modification expands the 

exception to provide additional 

flexibility. An employee is also 

disregarded if an ATEO paid less than 

10 percent of the employee’s total 

remuneration for services performed for 

the ATEO and all related organizations, 

and the ATEO had at least one related 

ATEO during the applicable year. 

Additionally, if neither the ATEO nor 

any related ATEO paid more than 10 

percent of the employee’s total 


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13http://data.foundationcenter.org/. 

remuneration, then the ATEO that paid 

the highest percent of remuneration 

does not meet this exception. 

Consider, for example, a corporate 

employee making $2 million per year 

who spends 5 percent of her time 

(roughly one day each month) working 

for the corporation’s foundation, a 

related ATEO, without receiving 

compensation from the ATEO and who 

would be a covered employee of the 

ATEO absent the exceptions. Without 

the exceptions, her compensation in 

excess of $1 million from the 

corporation, which is a related party of 

the foundation, is subject to a 21 percent 

excise tax, or $210,000 in excise tax 

liability. The exceptions (either of the 

first two could apply here) remove that 

liability and the incentive it provides to 

stop providing such services or to 

dissolve the relationship between the 

ATEO and the related organization. The 

exceptions support a transfer of 

substantial value (5 percent of the 

employee’s salary, or $100,000) that 

might otherwise not take place. 

Commenters on the proposed 

regulations suggested other ways in 

which the exceptions could be 

expanded. The Treasury Department 

and the IRS considered these suggested 

expansions of the exceptions and 

concluded that the suggestions were 

inconsistent with the statute and 

legislative history or would enable 

organizations to circumvent the excise 

tax in situations where an individual 

performs services for an ATEO on more 

than a volunteer basis, creating the 

potential for abuse and increasing the 

costs of administering the excise tax. 

Therefore, these final regulations do not 

adopt the suggested expansions of the 

exceptions. 

The exceptions in these final 

regulations may have a substantial 

impact on donations relative to a noaction baseline, although the magnitude 

of the potential impact depends on how 

often the exceptions apply and on how 

responsive organizations and employees 

are to the excise tax, both of which are 

uncertain. 

The exceptions apply only in 

particular circumstances: For example, 

the employee must be employed by a 

related organization (typically an 

organization that controls or is 

controlled by the ATEO), the employee 

must be highly compensated, and the 

employee’s work for the ATEO must be 

sufficiently minimal. Historically, many 

ATEOs report employees with 

compensation from related 

organizations. An estimated 8,500 

ATEOs filing Form 990 in tax year 2017 

reported both compensation of $500,000 

or more for any person and any 

compensation from related 

organizations. These ATEOs are 

estimated to have an average of 18 nonATEO related organizations based on 

information reported on Form 990 

Schedule R, yielding an estimated 

154,000 non-ATEO related 

organizations, of which half, or 77,000, 

are estimated to employ a covered 

employee of the ATEO. The fraction of 

the 154,000 non-ATEO related 

organizations with employees to whom 

the exceptions apply (and who are thus 

not covered employees of the ATEO) is 

uncertain, but perhaps half the related 

organizations, or 77,000, have such an 

employee. 

This entity count omits a substantial 

number of private foundations which 

may have employees who receive no 

compensation from the ATEO but who 

are highly compensated by related 

organizations, because while the ATEO 

count used in these estimates includes 

approximately 100 private foundations 

that have historically reported employee 

compensation of $500,000 or more on 

Form 990–PF, Form 990–PF (unlike 

Form 990) does not include information 

on employee compensation received 

from related organizations. The 

exceptions are particularly likely to 

apply to donations to foundations 

related to non-ATEO businesses, as 

companies are highly likely to be related 

organizations of a company’s 

foundation, many family foundations 

are controlled by the same family that 

controls a private business, and 

executives of the related business often 

provide services to the foundation 

without payment from the foundation. 

Because of these facts, looking at preTCJA tax forms may underestimate the 

number of entities potentially affected 

by the exceptions. In the U.S. in 2015, 

there were about 2,000 company 

foundations responsible for $5.5 billion 

in giving, and 42,000 family 

foundations.13 It is reasonable to assume 

that about half of these foundations, or 

22,000, have a related business with an 

employee to whom the exceptions 

apply. 

Under reasonable assumptions about 

the response of donated services to the 

excise tax, the exceptions may restore 

substantial donations (transfers) of 

services that the excise tax could 

potentially otherwise eliminate. 

Totaling both private foundations and 

other ATEOs, roughly 99,000 related 

organizations are estimated to have 

employees to whom the exceptions 

apply. If the excise tax would have 

reduced services that are donated under 

the exceptions by an average of just over 

$5,000 per related organization, the total 

transfer reduction exceeds $500 million. 

Absent the exceptions, organizations 

may also avoid the excise tax by 

dissolving the relationship between the 

ATEO and non-ATEO, which may affect 

donations of money as well as services. 

Considering only corporate foundations 

and setting aside other ATEOs, if such 

dissolutions would lead to a two 

percent reduction in the $5.5 billion in 

corporate giving that would otherwise 

take place through related foundations, 

the reduction exceeds $100 million. The 

Treasury Department and the IRS 

requested but did not receive comments 

on the impact of the exceptions on the 

dissolution of relationships between 

ATEOs and related organizations. 

It is plausible that these final 

regulations restore substantial economic 

activity relative to regulatory 

alternatives, under which the excise tax 

would discourage highly-compensated 

employees of related non-ATEOs from 

providing services to a related ATEO 

without compensation from the ATEO 

and discourage relationships between 

ATEOs and non-ATEOs. 

3. Summary 

This analysis suggests that these final 

regulations will reduce compliance 

burden on affected entities by providing 

clarifications and, through the 

exceptions, increase services provided 

to ATEOs without compensation from 

the ATEO by a small but potentially 

economically significant amount ($100 

million or more), relative to regulatory 

alternatives. The Treasury Department 

and the IRS requested but did not 

receive comments on the economic 

impact of these proposed regulations (in 

particular, comments providing data, 

other evidence, or models that provide 

insight). 

II. Paperwork Reduction Act 

The collections of information in 

these final regulations are in § 53.4960– 

1(d), (h), and (i); § 53.4960–2(a), (c) and 

(d); and § 53.4960–4(a) and (d). This 

information is required to determine an 

ATEO’s ‘‘covered employees’’ as 

defined in section 4960(c)(2); to 

calculate remuneration in excess of $1 

million as described in section 

4960(c)(3); to determine remuneration 

from related organizations and 

allocation of liability as described in 

section 4960(c)(4); and to determine any 

excess parachute payments to covered 

employees described in section 

4960(c)(5). 

The IRS intends that the burden of the 

collections of information will be 

reflected in the burden associated with 

Form 4720, under OMB approval 


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Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 6217 

14https://advocacy.sba.gov/2017/08/31/a-guidefor-government-agencies-how-to-comply-with-theregulatory-flexibility-act/. 15See https://www.statista.com/statistics/241695/ 

number-of-us-cities-towns-villages-by-populationsize/. 

number 1545–0047. The burden 

associated with Form 4720 is included 

in the aggregated burden estimates for 

OMB control number 1545–0047, which 

represents a total estimated burden time 

for all forms and schedules of 52.450 

million hours and total estimated 

burden in dollars of $1.497 billion 

(estimated for fiscal year 2021). The 

overall burden estimates provided for 

1545–0047 are aggregate amounts that 

relate to all information collections 

associated with that OMB control 

number. This estimate is therefore 

unrelated to the future calculations 

needed to assess the burden imposed by 

these regulations. To guard against overcounting the burden imposed, the 

Treasury Department and the IRS urge 

readers to recognize that these burden 

estimates are aggregates for the 

applicable types of filers. For purposes 

of the Paperwork Reduction Act, the 

Treasury Department and the IRS have 

not estimated the burden, including that 

of any new information collections, 

related to the requirements under these 

final regulations. Future burden 

estimates under OMB control number 

1545–0047 would capture changes made 

by TCJA and changes that arise out of 

discretionary authority exercised in the 

regulations. 

The expected burden associated with 

section 4960 compliance (including 

Form 4720 preparation and filing) for 

ATEOs as described in section 

4960(c)(1) and related organizations as 

described in section 4960(c)(4)(B) is 

listed below: 

Estimated number of respondents: 

337,888. 

Estimated average annual burden 

hours per response: 0.20 hours. 

Estimated total annual burden: 

$3,569,632 (2020). 

Estimated frequency of collection: 

Annual. 

In the proposed regulations, the 

Treasury Department and the IRS 

requested comments on all aspects of 

information collection burdens related 

to the proposed regulations, including 

estimates for how much time it would 

take to comply with the paperwork 

burdens previously described in this 

section for each relevant form and ways 

for the IRS to minimize the paperwork 

burden. The Treasury Department and 

the IRS did not receive any comments 

on these issues. Revisions (if any) to 

these forms that reflect the information 

collections included in these final 

regulations will be made available for 

public comment at https://apps.irs.gov/ 

app/picklist/list/draftTaxForms.html 

and will not be finalized until after 

these forms have been approved by 

OMB under the PRA. Comments on 

these forms can be submitted at https:// 

www.irs.gov/forms-pubs/comment-ontax-forms-and-publications. 

The current status of the PRA 

submissions related to section 4960 are 

provided in the following table. 

Form Type of filer OMB No.(s) Status 

Form 4720 ......... Tax-exempt organizations and their related organizations, including for-profit and government entities.1545–0047 Published in the Federal Register on 11/12/20. 

Public comment period closes on 1/11/21. 

An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless it displays a valid control 

number assigned by the Office of 

Management and Budget. 

Books or records relating to a 

collection of information must be 

retained as long as their contents may 

become material in the administration 

of any internal revenue law. 

Generally, tax returns and return 

information are confidential, as required 

by 26 U.S.C. 6103. 

III. Regulatory Flexibility Act 

Pursuant to the Regulatory Flexibility 

Act (RFA) (5 U.S.C. chapter 6), it is 

hereby certified that these final 

regulations will not have a significant 

economic impact on a substantial 

number of small entities. In the 

proposed regulations, the Treasury 

Department and the IRS invited 

comments on the impact this rule would 

have on small entities. The Treasury 

Department and the IRS did not receive 

any comments on this issue. 

The Regulatory Flexibility Act (5 

U.S.C. 601 et seq.) (RFA) generally 

defines a ‘‘small entity’’ as (1) a 

proprietary firm meeting the size 

standards of the Small Business 

Administration (SBA) (13 CFR 121.201), 

(2) a nonprofit organization that is not 

dominant in its field, or (3) a small 

government jurisdiction with a 

population of less than 50,000. (States 

and individuals are not included in the 

definition of ‘‘small entity.’’) The 

Treasury Department and the IRS 

estimate that these final regulations will 

affect 324,000 small entities, 73,000 of 

which are proprietary firms meeting the 

size standards of the SBA and 251,000 

of which are nonprofit organizations 

that are not dominant in their fields or 

small government jurisdictions with a 

population of less than 50,000. 

The Treasury Department and the IRS 

estimated the number of ATEOs, based 

primarily on Form 990 data for filers 

with at least one employee (and thus 

having a burden, at a minimum, of 

maintaining annual lists of covered 

employees), as 261,118, and the number 

of non-ATEO related organizations 

employing at least one covered 

employee of an ATEO as 76,770, for a 

total of 337,888 affected entities. The 

SBA defines a small business as an 

independent business having fewer than 

500 employees. (See A Guide for 

Government Agencies, How to Comply 

with the Regulatory Flexibility Act, 

Appendix B14). Tax data available to the 

Treasury Department and the IRS 

include employee counts for only half 

the affected entities, as employee counts 

are included on Form 990, but not on 

other forms including Form 990–EZ and 

990–PF. An examination of tax data 

from 2016 shows that for filers for 

whom employee counts were available 

and who had at least one employee, 96.5 

percent had fewer than 500 employees. 

Similarly, there are no bright lines in 

the available data to distinguish small 

nonprofit organizations that are not 

dominant in their field. An examination 

of non-tax data shows that a similar 

proportion, approximately 96 percent, 

of all incorporated cities, towns, and 

villages in 2014 had a population of less 

than 50,000, which may serve as a proxy 

for small government jurisdictions 

generally.15 By applying the 96 percent 

estimate to all entities affected by 

section 4960, the Treasury Department 

and the IRS estimate that 324,000 small 

entities are affected by these regulations. 

However, the Treasury Department and 

the IRS have determined that the rules 

regarding an ATEO’s covered employees 

will not have a significant economic 

impact on affected small entities as 

described later in this discussion of the 

RFA. 

Section 4960 imposes the excise tax 

on ATEOs and their related 

organizations to the extent they pay 

certain compensation to a covered 

employee. Because covered employee 


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6218 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 

status is permanent, every ATEO must 

determine its five highest-compensated 

employees for the taxable year—even if 

the ATEO is not subject to the tax for 

that taxable year—and maintain a list of 

covered employees. Accordingly, these 

final rules likely will affect a substantial 

number of small entities, especially 

nonprofit entities that are not dominant 

in their fields. 

The Treasury Department and the IRS 

estimate that the vast majority of 

ATEOs, particularly small ATEOs, can 

determine their five highestcompensated employees for the taxable 

year under the method provided in 

these final rules very quickly and at 

negligible cost using information 

already collected in the normal course 

of business. The time necessary to 

determine an ATEO’s five highestcompensated employees is positively 

correlated with the size of the entity 

(that is, the smaller the entity, the less 

time such a determination should take). 

Larger ATEOs may need more time, but 

it is estimated that this determination 

will take less than seven hours. The 

burden for making this determination is 

estimated to fall on the small number of 

larger ATEOs. Putting these two groups 

together, the total estimated cost for all 

261,118 ATEOs to make these 

determinations is $1,255,760 per year, 

averaging $4.81 per ATEO. Thus, it is 

hereby certified that these final 

regulations will not have a significant 

economic impact on a substantial 

number of small entities within the 

meaning of section 601(6) of the 

Regulatory Flexibility Act (5 U.S.C. 601 

et seq.) (RFA). 

Pursuant to section 7805(f) of the 

Code, the proposed regulations 

preceding these final regulations were 

submitted to the Chief Counsel for 

Advocacy of the Small Business 

Administration for comment on its 

impact on small entities and no 

comments were received. 

IV. Unfunded Mandates Reform Act 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 requires 

that agencies assess anticipated costs 

and benefits and take certain other 

actions before issuing a final rule that 

includes any Federal mandate that may 

result in expenditures in any one year 

by a state, local, or tribal government, in 

the aggregate, or by the private sector, of 

$100 million in 1995 dollars, updated 

annually for inflation. This final rule 

does not include any Federal mandate 

that may result in expenditures by state, 

local, or tribal governments, or by the 

private sector in excess of that 

threshold. 

V. Executive Order 13132: Federalism 

Executive Order 13132 (titled 

‘‘Federalism’’) prohibits an agency from 

publishing any rule that has federalism 

implications if the rule either imposes 

substantial, direct compliance costs on 

state and local governments, and is not 

required by statute, or preempts state 

law, unless the agency meets the 

consultation and funding requirements 

of section 6 of the Executive Order. This 

final rule does not have federalism 

implications that are not required by the 

statute and does not impose substantial 

direct compliance costs on state and 

local governments or preempt state law 

within the meaning of the Executive 

Order. 

VI. Congressional Review Act 

The Administrator of OIRA has 

determined that this is a major rule for 

purposes of the Congressional Review 

Act (5 U.S.C. 801 et seq.) (CRA). Under 

section 801(3) of the CRA, a major rule 

takes effect 60 days after the rule is 

published in the Federal Register. 

Notwithstanding this requirement, 

section 808(2) of the CRA allows 

agencies to dispense with the 

requirements of section 801 when the 

agency for good cause finds that such 

procedure would be impracticable, 

unnecessary, or contrary to the public 

interest and the rule shall take effect at 

such time as the agency promulgating 

the rule determines. Pursuant to section 

808(2) of the CRA, the Treasury 

Department and the IRS find, for good 

cause, that a 60-day delay in the 

effective date is unnecessary and 

contrary to the public interest. 

Following the addition of section 

4960 to the Code by TCJA, the Treasury 

Department and the IRS published the 

proposed regulations setting forth 

guidance on all aspects of the law, 

including certain exceptions to the 

definition of ‘‘employee’’ and ‘‘covered 

employee’’ for purposes of identifying 

covered employees. The majority of 

comments received in response to the 

proposed regulations requested 

additional clarifications or 

modifications of the rules for these 

exceptions. In response, these final 

regulations include certain clarifications 

and modifications to the proposed rules. 

The clarifications and modifications in 

these final regulations reduce both 

uncertainty and the burden associated 

with application of these rules. 

In response to certain commenter 

requests that the applicability date of 

the final regulations be delayed after 

publication of the regulations as final in 

the Federal Register so that ATEOs and 

related organizations have sufficient 

time to understand and apply these final 

regulations, these final regulations 

apply to taxable years beginning after 

December 31, 2021. However, until the 

applicability date, taxpayers may choose 

to apply these final regulations to 

taxable years beginning after December 

31, 2017, and on or before December 31, 

2021, provided the taxpayer applies 

them in their entirety and in a 

consistent manner. Therefore, ATEOs 

and related organizations that wish to 

apply these regulations prior to the 

applicability date will need to know 

that these final regulations are effective 

before incurring necessary costs to 

timely comply with these final 

regulations. In particular, certainty that 

these rules are effective is essential to 

taxpayers so that they can determine 

whether and to what extent the excise 

tax imposed by section 4960 applies to 

an organization and which employees 

are covered employees, given that 

taxpayers will begin preparing their 

2020 tax returns in early 2021. Further, 

for these potentially affected taxpayers, 

certainty with respect to these rules is 

necessary for them to proceed with 

several aspects of their operations, 

including employee hiring and 

retention, designing of compensatory 

arrangements, recordkeeping, and 

maintaining relationships between 

related non-ATEOs and ATEOs— 

including with respect to donating of 

services. Further, the COVID–19 

pandemic has affected many ATEOs, 

and providing additional clarification 

regarding these rules, in particular with 

respect to the exceptions for purposes of 

determining covered employees, will 

better enable ATEOs and related 

organizations to perform financial and 

operational planning tasks for the tax 

year as they anticipate the easing of 

restrictions that have severely impacted 

their operations during the COVID–19 

pandemic. Consistent with Executive 

Order 13924 (May 19, 2020), the 

Treasury Department and the IRS have 

therefore determined that an expedited 

effective date of these final regulations 

will provide critical guidance on what 

the law requires for taxpayers to 

determine whether the excise tax 

imposed by section 4960 applies, which 

employees may be considered to be 

covered employees, and what actions 

are required under the law as a result. 

Accordingly, the Treasury Department 

and the IRS have determined that the 

rules in this Treasury decision will take 

effect on the date of filing for public 

inspection in the Federal Register. 


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Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 6219 

Statutory Authority 

The regulations are adopted pursuant 

to the authority contained in sections 

7805 and 4960. 

Drafting Information 

The principal authors of the 

regulations are William McNally and 

Patrick Sternal of the Office of Associate 

Chief Counsel (Employee Benefits, 

Exempt Organizations, and Employment 

Taxes). However, other personnel from 

the Treasury Department and the IRS 

participated in the development of the 

regulations. 

Statement of Availability 

IRS Revenue Procedures, Revenue 

Rulings, Notices, and other guidance 

cited in this preamble are published in 

the Internal Revenue Bulletin (or 

Cumulative Bulletin) and are available 

from the Superintendent of Documents, 

U.S. Government Publishing Office, 

Washington, DC 20402, or by visiting 

the IRS website at https://www.irs.gov. 

List of Subjects 

26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

26 CFR Part 53 

Excise taxes, Foundations, 

Investments, Lobbying, Reporting and 

recordkeeping requirements. 

Amendments to the Regulations 

Accordingly, the Department of the 

Treasury and the Internal Revenue 

Service amend 26 CFR parts 1 and 53 

as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 continues to read in part as 

follows: 

Authority: 26 U.S.C. 7805 * * * 

■ Par. 2. Section 1.338–1 is amended by 

revising paragraph (b)(2)(i) to read as 

follows: 

§ 1.338–1 General principles; status of old 

target and new target. 

* * * * * 

(b) * * * 

(2) * * * 

(i) The rules applicable to employee 

benefit plans (including those plans 

described in sections 79, 104, 105, 106, 

125, 127, 129, 132, 137, and 220), 

qualified pension, profit-sharing, stock 

bonus and annuity plans (sections 

401(a) and 403(a)), simplified employee 

pensions (section 408(k)), tax qualified 

stock option plans (sections 422 and 

423), welfare benefit funds (sections 

419, 419A, 512(a)(3), and 4976), 

voluntary employees’ beneficiary 

associations (section 501(c)(9) and the 

regulations thereunder), and tax on 

excess tax-exempt organization 

executive compensation (section 4960) 

and the regulations in part 53 under 

section 4960; 

* * * * * 

PART 53—FOUNDATION AND SIMILAR 

EXCISE TAXES 

■ Par. 3. The authority citation for part 

53 is revised to read in part as follows: 

Authority: 26 U.S.C. 7805; 4960. 

* * * * * 

■ Par. 4. Sections 53.4960–0 through 

53.4960–6 are added to read as follows: 

* * * * * 

53.4960–0 Table of contents. 

53.4960–1 Scope and definitions. 

53.4960–2 Determination of remuneration 

paid for a taxable year. 

53.4960–3 Determination of whether there 

is a parachute payment. 

53.4960–4 Liability for tax on excess 

remuneration and excess parachute 

payments. 

53.4960–5 Coordination with section 

162(m) [reserved]. 

53.4960–6 Applicability date. 

* * * * * 

§ 53.4960–0 Table of contents. 

§ 53.4960–1 Scope and definitions. 

(a) Scope. 

(b) Applicable tax-exempt organization. 

(1) In general. 

(i) Section 501(a) organization. 

(ii) Section 521 farmers’ cooperative. 

(iii) Section 115(1) organization. 

(iv) Section 527 political organization. 

(2) Certain foreign organizations. 

(3) Organization described in section 

501(c)(1)(A)(i) for which the enabling act 

provides for exemption from all current and 

future Federal taxes. 

(c) Applicable year. 

(1) In general. 

(2) Examples. 

(3) Short applicable years. 

(i) In general. 

(ii) Initial year of ATEO status. 

(iii) Year of termination of ATEO status. 

(A) Termination on or before the close of 

the calendar year ending with or within the 

taxable year of termination. 

(B) Termination after the close of the 

calendar year ending in the taxable year of 

termination. 

(4) Examples. 

(d) Covered employee. 

(1) In general. 

(2) Five highest-compensated employees. 

(i) In general. 

(ii) Limited hours exception. 

(A) In general. 

(1) Remuneration requirement. 

(2) Hours of service requirement. 

(B) Certain payments disregarded. 

(C) Safe harbor. 

(iii) Nonexempt funds exception. 

(A) In general. 

(1) Remuneration requirement. 

(2) Hours of service requirement. 

(3) Related organizations requirement. 

(B) Certain payments disregarded. 

(iv) Limited services exception. 

(A) Remuneration requirement. 

(B) Related ATEO requirement. 

(1) Ten percent remuneration condition. 

(2) Less remuneration condition. 

(3) Examples. 

(e) Employee. 

(1) In general. 

(2) Directors. 

(3) Trustees. 

(f) Employer. 

(1) In general. 

(2) Disregarded entities. 

(g) Medical services. 

(1) Medical and veterinary services. 

(i) In general. 

(ii) Examples. 

(2) Definition of licensed medical 

professional. 

(h) Predecessor. 

(1) Asset acquisitions. 

(2) Corporate reorganizations. 

(3) Predecessor change of form or of place 

of organization. 

(4) ATEO that becomes a non-ATEO. 

(i) General rule. 

(ii) Intervening changes or entities. 

(5) Predecessor of a predecessor. 

(6) Elections under sections 336(e) and 

338. 

(7) Date of transaction. 

(i) Related organization. 

(1) In general. 

(i) Controls or controlled by test. 

(ii) Controlled by same persons test. 

(iii) Supported organization test. 

(iv) Supporting organization test. 

(v) VEBA test. 

(2) Control. 

(i) In general. 

(ii) Stock corporation. 

(iii) Partnership. 

(iv) Trust. 

(v) Nonstock organization. 

(A) In general. 

(B) Control of a trustee or director of a 

nonstock organization. 

(C) Representatives. 

(vi) Brother-sister related organizations. 

(vii) Section 318 principles. 

(A) In general. 

(B) Nonstock organizations. 

(1) Attribution of ownership interest from 

a nonstock organization to a controlling 

person. 

(2) Attribution of ownership interest from 

a controlling person to a nonstock 

organization. 

(3) Indirect control of a nonstock 

organization through another nonstock 

organization. 

(4) Attribution of control of nonstock 

organization to family member. 

(3) Examples. 

§ 53.4960–2 Determination of remuneration 

paid for a taxable year. 

(a) Remuneration. 

(1) In general. 

(2) Exclusion of remuneration for medical 

services. 


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(i) In general. 

(ii) Allocation of remuneration for medical 

services and non-medical services. 

(iii) Examples. 

(b) Source of payment. 

(1) Remuneration paid by third parties for 

employment by an employer. 

(2) Remuneration paid by a related 

organization for employment by the related 

organization. 

(c) Applicable year in which remuneration 

is treated as paid. 

(1) In general. 

(2) Vested remuneration. 

(3) Change in related status during the 

year. 

(d) Amount of remuneration treated as 

paid. 

(1) In general. 

(2) Earnings and losses on previously paid 

remuneration. 

(i) In general. 

(ii) Previously paid remuneration. 

(A) New covered employee. 

(B) Existing covered employee. 

(iii) Earnings. 

(iv) Losses. 

(v) Net earnings. 

(vi) Net losses. 

(3) Remuneration paid for a taxable year 

before the employee becomes a covered 

employee. 

(i) In general. 

(ii) Examples. 

(e) Calculation of present value. 

(1) In general. 

(2) Treatment of future payment amount as 

present value for certain amounts. 

(f) Examples. 

§ 53.4960–3 Determination of whether there 

is a parachute payment. 

(a) Parachute payment. 

(1) In general. 

(2) Exclusions. 

(i) Certain qualified plans. 

(ii) Certain annuity contracts. 

(iii) Compensation for medical services. 

(iv) Payments to non-HCEs. 

(3) Determination of HCEs for purposes of 

the exclusion from parachute payments. 

(b) Payment in the nature of compensation. 

(1) In general. 

(2) Consideration paid by covered 

employee. 

(c) When payment is considered to be 

made. 

(1) In general. 

(2) Transfers of section 83 property. 

(3) Stock options. 

(d) Payment contingent on an employee’s 

separation from employment. 

(1) In general. 

(2) Employment agreements. 

(i) In general. 

(ii) Example. 

(3) Noncompetition agreements. 

(4) Payment of amounts previously 

included in income or excess remuneration. 

(5) Window programs. 

(6) Anti-abuse provision. 

(e) Involuntary separation from 

employment. 

(1) In general. 

(2) Separation from employment for good 

reason. 

(i) In general. 

(ii) Material negative change required. 

(iii) Deemed material negative change. 

(A) Material diminution of compensation. 

(B) Material diminution of responsibility. 

(C) Material diminution of authority of a 

supervisor. 

(D) Material diminution of a location. 

(E) Material change of location. 

(F) Other material breach. 

(3) Separation from employment. 

(f) Accelerated payment or accelerated 

vesting resulting from an involuntary 

separation from employment. 

(1) In general. 

(2) Nonvested payments subject to a nonservice vesting condition. 

(3) Vested payments. 

(4) Nonvested payments subject to a 

service vesting condition. 

(i) In general. 

(A) Vesting trigger. 

(B) Vesting condition. 

(C) Services condition. 

(ii) Value of the lapse of the obligation to 

continue to perform services. 

(iii) Accelerated vesting of equity 

compensation. 

(5) Application to benefits under a 

nonqualified deferred compensation plan. 

(6) Present value. 

(7) Examples. 

(g) Three-times-base-amount test for 

parachute payments. 

(1) In general. 

(2) Examples. 

(h) Calculating present value. 

(1) In general. 

(2) Deferred payments. 

(3) Health care. 

(i) Discount rate. 

(j) Present value of a payment to be made 

in the future that is contingent on an 

uncertain future event or condition. 

(1) Treatment based on the estimated 

probability of payment. 

(2) Correction of incorrect estimates. 

(3) Initial option value estimate. 

(4) Examples. 

(k) Base amount. 

(1) In general. 

(2) Short or incomplete taxable years. 

(3) Excludable fringe benefits. 

(4) Section 83(b) income. 

(l) Base period. 

(1) In general. 

(2) Determination of base amount if 

employee separates from employment in the 

year hired. 

(3) Examples. 

§ 53.4960–4 Liability for tax on excess 

remuneration and excess parachute 

payments. 

(a) Liability, reporting, and payment of 

excise taxes. 

(1) Liability. 

(2) Reporting and payment. 

(3) Arrangements between an ATEO and a 

related organization. 

(4) Certain foreign related organizations. 

(5) [Reserved] 

(b) Amounts subject to tax. 

(1) Excess remuneration. 

(i) In general. 

(ii) Exclusion for excess parachute 

payments. 

(2) Excess parachute payment. 

(c) Calculation of liability for tax on excess 

remuneration. 

(1) In general. 

(2) Calculation if liability is allocated from 

more than one ATEO with respect to an 

individual. 

(3) Calculation if liability is allocated from 

an ATEO with a short applicable year. 

(4) Examples. 

(d) Calculation of liability for excess 

parachute payments. 

(1) In general. 

(2) Computation of excess parachute 

payments. 

(3) Reallocation when the payment is 

disproportionate to base amount. 

(4) Election to prepay tax. 

(5) Liability after a redetermination of total 

parachute payments. 

(6) Examples. 

§ 53.4960–5 [Reserved] 

§ 53.4960–6 Applicability date. 

(a) General applicability date. 

(b) [Reserved] 

§ 53.4960–1 Scope and definitions. 

(a) Scope. This section provides 

definitions for purposes of section 4960, 

this section, and §§ 53.4960–2 through 

53.4960–6. Section 53.4960–2 provides 

definitions and rules for determining 

the amount of remuneration paid for a 

taxable year. Section 53.4960–3 

provides definitions and rules for 

determining whether a parachute 

payment is paid. Section 53.4960–4 

provides definitions and rules for 

calculating the amount of excess 

remuneration paid for a taxable year, 

excess parachute payments paid in a 

taxable year, and liability for the excise 

tax. Section 53.4960–5 is reserved for 

rules on the coordination of sections 

4960 and 162(m). Section 53.4960–6 

provides rules regarding the 

applicability date for the regulations in 

§§ 53.4960–1 through 53.4960–5. The 

rules and definitions provided in this 

section through § 53.4960–6 apply 

solely for purposes of section 4960 

unless specified otherwise. 

(b) Applicable tax-exempt 

organization—(1) In general. Applicable 

tax-exempt organization or ATEO 

means any organization that is one of 

the following types of organizations: 

(i) Section 501(a) organization. The 

organization is exempt from taxation 

under section 501(a) (except as provided 

in paragraph (b)(2) or (b)(3) of this 

section); 

(ii) Section 521 farmers’ cooperative. 

The organization is a farmers’ 

cooperative organization described in 

section 521(b)(1); 

(iii) Section 115(1) organization. The 

organization has income excluded from 

taxation under section 115(1); or 

(iv) Section 527 political organization. 

The organization is a political 


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organization described in section 

527(e)(1). 

(2) Certain foreign organizations. Any 

foreign organization described in 

section 4948(b) that either is exempt 

from tax under section 501(a) or is a 

taxable private foundation (section 

4948(b) organization) is not an ATEO. A 

foreign organization is an organization 

not created or organized in the United 

States or in any possession thereof, or 

under the law of the United States, any 

State, the District of Columbia, or any 

possession of the United States. See 

section 4948(b) and § 53.4948–1. For 

purposes of this paragraph (b)(2) and the 

application of section 4960 to a taxable 

year, an organization’s status as a 

section 4948(b) organization is 

determined at the end of its taxable 

year. 

(c) Applicable year—(1) In general. 

Applicable year means the calendar year 

ending with or within the ATEO’s 

taxable year. See § 53.4960–4 regarding 

how an ATEO’s applicable year affects 

the liability of related organizations. 

(2) Examples. The following examples 

illustrate the rules of paragraph (c)(1) of 

this section. 

(i) Example 1 (Calendar year 

taxpayer)—(A) Facts. ATEO 1 uses the 

calendar year as its taxable year and 

became an ATEO before 2022. 

(B) Conclusion. ATEO 1’s applicable 

year for its 2022 taxable year is the 

period from January 1, 2022, through 

December 31, 2022 (that is, the 2022 

calendar year). 

(ii) Example 2 (Fiscal year taxpayer)— 

(A) Facts. ATEO 2 uses a taxable year 

that starts July 1 and ends June 30 and 

became an ATEO before 2022. 

(B) Conclusion. ATEO 2’s applicable 

year for the taxable year beginning July 

1, 2022, and ending June 30, 2023, is the 

2022 calendar year. 

(3) Short applicable years—(i) In 

general. An ATEO may have an 

applicable year that does not span the 

entire calendar year for the initial 

taxable year that the organization is an 

ATEO or for the taxable year in which 

the taxpayer ceases to be an ATEO. The 

beginning and end dates of the 

applicable year in the case of an ATEO’s 

change in status depend on when the 

change in status occurs. 

(ii) Initial year of ATEO status. For 

the taxable year in which an ATEO first 

becomes an ATEO, applicable year 

means the period beginning on the date 

the ATEO first becomes an ATEO and 

ending on the last day of the calendar 

year ending with or within such taxable 

year (or, if earlier, the date of 

termination of ATEO status, as 

described in paragraph (c)(3)(ii)(A) of 

this section). If the taxable year in 

which an ATEO first becomes an ATEO 

ends before the end of the calendar year 

in which the ATEO first becomes an 

ATEO, then there is no applicable year 

for the ATEO’s first taxable year; 

however, for the ATEO’s next taxable 

year, applicable year means the period 

beginning on the date the ATEO first 

becomes an ATEO and ending on 

December 31 of the calendar year (or, if 

earlier, the date of termination of ATEO 

status, as described in paragraph 

(c)(3)(ii)(A) of this section). 

(iii) Year of termination of ATEO 

status—(A) Termination on or before the 

close of the calendar year ending with 

or within the taxable year of 

termination. If an ATEO has a 

termination of ATEO status during the 

taxable year and the termination of 

ATEO status occurs on or before the 

close of the calendar year ending with 

or within such taxable year, then, for the 

taxable year of termination of ATEO 

status, applicable year means the period 

starting January 1 of the calendar year 

of the termination of ATEO status and 

ending on the date of the termination of 

ATEO status. 

(B) Termination after the close of the 

calendar year ending in the taxable year 

of termination. If an ATEO has a 

termination of ATEO status during the 

taxable year and the termination of 

ATEO status occurs after the close of the 

calendar year ending within such 

taxable year, then, for the taxable year 

of the termination of ATEO status, 

applicable year means both the calendar 

year ending within such taxable year 

and the period beginning January 1 of 

the calendar year of the termination of 

ATEO status and ending on the date of 

the termination of ATEO status. Both 

such applicable years are treated as 

separate applicable years. See 

§ 53.4960–4(b)(2)(ii) for rules regarding 

calculation of the tax in the event there 

are multiple applicable years associated 

with a taxable year. 

(4) Examples. The following examples 

illustrate the rules of paragraph (c)(3) of 

this section. For purposes of these 

examples, assume any entity referred to 

as ‘‘ATEO’’ is an ATEO and any entity 

referred to as ‘‘CORP’’ is not an ATEO. 

(i) Example 1 (Taxable year of 

formation ending after December 31)— 

(A) Facts. ATEO 1, ATEO 2, and CORP 

1 are related organizations that all use 

a taxable year that starts July 1 and ends 

June 30. ATEO 1 is recognized as a 

section 501(c)(3) organization by the IRS 

on May 8, 2023, effective as of October 

1, 2022. ATEO 2 became an ATEO in 

2017. 

(B) Conclusion (ATEO 1). ATEO 1’s 

applicable year for the taxable year 

beginning October 1, 2022, and ending 

June 30, 2023, is the period beginning 

October 1, 2022, and ending December 

31, 2022. For purposes of determining 

the amount of remuneration paid by 

ATEO 1 and all related organizations for 

ATEO 1’s taxable year beginning 

October 1, 2022, and ending June 30, 

2023, (including for purposes of 

determining ATEO 1’s covered 

employees), only remuneration paid 

between October 1, 2022, and December 

31, 2022, is taken into account. Thus, 

any remuneration paid by ATEO 1, 

ATEO 2, and CORP 1 before October 1, 

2022, is disregarded for purposes of 

ATEO 1’s applicable year associated 

with its initial taxable year. 

(C) Conclusion (ATEO 2). ATEO 2’s 

applicable year for its taxable year 

beginning July 1, 2022, and ending June 

30, 2023, is the 2022 calendar year. 

Thus, any remuneration paid by ATEO 

1, ATEO 2, and CORP 1 during the 2022 

calendar year is taken into account for 

purposes of determining ATEO 2’s 

covered employees and remuneration 

paid for ATEO 2’s taxable year ending 

June 30, 2023. 

(ii) Example 2 (Taxable year of 

formation ending before December 31)— 

(A) Facts. Assume the same facts as in 

paragraph (c)(4)(i)(A) of this section 

(Example 1), except that ATEO 1 is 

recognized as a section 501(c)(3) 

organization effective as of March 15, 

2023. 

(B) Conclusion. ATEO 1 has no 

applicable year for the taxable year 

starting March 15, 2023, and ending 

June 30, 2023, because no calendar year 

ends (or termination of ATEO status 

occurs) with or within the taxable year. 

ATEO 1’s applicable year for the taxable 

year ending June 30, 2024, is the period 

beginning March 15, 2023, and ending 

December 31, 2023. For purposes of 

determining the amount of 

remuneration paid by ATEO 1 and all 

related organizations for ATEO 1’s 

taxable year ending June 30, 2024 

(including for purposes of determining 

ATEO 1’s covered employees), only 

remuneration paid between March 15, 

2023, and December 31, 2023, is taken 

into account. The conclusion for ATEO 

2 is the same as in paragraph (c)(4)(i)(C) 

of this section (Example 1). 

(iii) Example 3 (Termination before 

the close of the calendar year ending in 

the taxable year of termination)—(A) 

Facts. Assume the same facts as in 

paragraph (c)(4)(i)(A) of this section 

(Example 1). In addition, ATEO 1 has a 

termination of ATEO status on 

September 30, 2024. 

(B) Conclusion. For ATEO 1’s taxable 

year beginning July 1, 2024, and ending 

September 30, 2024, ATEO 1’s 

applicable year is the period beginning 


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January 1, 2024, and ending September 

30, 2024. 

(iv) Example 4 (Termination after the 

close of the calendar year ending in the 

taxable year of termination)—(A) Facts. 

Assume the same facts as in paragraph 

(c)(4)(i)(A) of this section (Example 1). 

In addition, ATEO 1 has a termination 

of ATEO status on March 31, 2025. 

(B) Conclusion. For ATEO 1’s taxable 

year beginning July 1, 2024, and ending 

March 31, 2025, ATEO 1 has two 

applicable years: the 2024 calendar year, 

and the period beginning on January 1, 

2025, and ending on March 31, 2025. 

(d) Covered employee—(1) In general. 

For each taxable year, covered employee 

means any individual who is one of the 

five highest-compensated employees of 

the ATEO for the taxable year or was a 

covered employee of the ATEO (or any 

predecessor) for any preceding taxable 

year beginning after December 31, 2016. 

(2) Five highest-compensated 

employees—(i) In general. Except as 

otherwise provided in this paragraph 

(d)(2), an individual is one of an ATEO’s 

five highest- compensated employees 

for the taxable year if the individual is 

among the five employees of the ATEO 

with the highest amount of 

remuneration paid during the applicable 

year, as determined under § 53.4960–2. 

However, remuneration for which the 

deduction is disallowed by reason of 

section 162(m) is taken into account for 

purposes of determining an ATEO’s five 

highest-compensated employees. The 

five highest-compensated employees of 

an ATEO for the taxable year are 

identified on the basis of the total 

remuneration paid during the applicable 

year to the employee for services 

performed as an employee of the ATEO 

or any related organization. An ATEO 

may have fewer than five highestcompensated employees for a taxable 

year if it has fewer than five employees 

other than employees who are 

disregarded under paragraphs (d)(2)(ii) 

through (iv) of this section. For 

purposes of this paragraph (d)(2), a grant 

of a legally binding right (within the 

meaning of § 1.409A–1(b)) to vested 

remuneration is considered to be 

remuneration paid as of the date of 

grant, as described in § 53.4960–2(c)(2), 

and a person or governmental entity is 

considered to grant a legally binding 

right to nonvested remuneration if the 

person or governmental entity grants a 

legally binding right to remuneration 

that is not vested within the meaning of 

§ 53.4960–2(c)(2). An employee is 

disregarded for purposes of determining 

an ATEO’s five highest-compensated 

employees for a taxable year if, during 

the applicable year, neither the ATEO 

nor any related organization paid 

remuneration or granted a legally 

binding right to nonvested remuneration 

to the individual for services the 

individual performed as an employee of 

the ATEO or any related organization. 

(ii) Limited hours exception—(A) In 

general. An individual is disregarded 

for purposes of determining an ATEO’s 

five highest-compensated employees for 

a taxable year if all of the following 

requirements are met: 

(1) Remuneration requirement. 

Neither the ATEO nor any related ATEO 

paid remuneration or granted a legally 

binding right to nonvested remuneration 

to the individual for services the 

individual performed as an employee of 

the ATEO during the applicable year; 

and 

(2) Hours of service requirement. The 

individual performed services as an 

employee of the ATEO and all related 

ATEOs for no more than 10 percent of 

the total hours the individual worked as 

an employee of the ATEO and any 

related organizations during the 

applicable year. An ATEO may instead 

make this determination based on the 

total days the individual worked as an 

employee of the ATEO and all related 

ATEOs as a percentage of the total days 

worked as an employee of the ATEO 

and all related organizations, provided 

that for purposes of the calculation, any 

day that the individual worked at least 

one hour as an employee of the ATEO 

or a related ATEO is treated as a day 

worked as an employee of the ATEO 

and not for any other organization. 

(B) Certain payments disregarded. For 

purposes of paragraph (d)(2)(ii)(A)(1) of 

this section, a payment of remuneration 

made to the individual by a related 

organization that is an employer of the 

individual and for which the related 

organization is neither entitled to 

reimbursement by the ATEO nor 

entitled to any other consideration from 

the ATEO is not considered 

remuneration paid by the ATEO under 

§ 53.4960–2(b)(1), and a payment of 

remuneration made to the individual by 

a related organization is not treated as 

remuneration paid by the ATEO under 

§ 53.4960–2(b)(2). 

(C) Safe harbor. For purposes of 

paragraph (d)(2)(ii)(A)(2) of this section, 

an individual is treated as having 

performed services as an employee of 

the ATEO and all related ATEOs for no 

more than 10 percent of the total hours 

the individual worked as an employee 

of the ATEO and all related 

organizations during the applicable year 

if the employee performed no more than 

100 hours of service as an employee of 

the ATEO and all related ATEOs during 

the applicable year. 

(iii) Nonexempt funds exception—(A) 

In general. An individual is disregarded 

for purposes of determining an ATEO’s 

five highest-compensated employees for 

a taxable year if all the following 

requirements are met: 

(1) Remuneration requirement. 

Neither the ATEO, nor any related 

ATEO, nor any taxable related 

organization controlled by the ATEO, or 

by one or more related ATEOs, either 

alone or together with the ATEO, paid 

remuneration or granted a legally 

binding right to nonvested remuneration 

to the individual for services the 

individual performed as an employee of 

an ATEO during the applicable year and 

the preceding applicable year. For this 

purpose, whether a taxable related 

organization is controlled by the ATEO 

(or one or more related ATEOs) is 

determined without regard to paragraph 

(i)(2)(vii)(B)(2) of this section and 

without regard to section 318(a)(3) for 

purposes of applying paragraph 

(i)(2)(vii)(A) of this section, so that an 

interest in a corporation or nonstock 

entity is not attributed downward in 

determining control of the corporation 

or nonstock entity; 

(2) Hours of service requirement. The 

individual performed services as an 

employee of the ATEO and any related 

ATEOs for not more than 50 percent of 

the total hours worked as an employee 

of the ATEO and any related 

organizations during the applicable year 

and the preceding applicable year. An 

ATEO may instead make this 

determination based on the total days 

the individual worked as an employee 

of the ATEO and all related ATEOs as 

a percentage of the total days worked as 

an employee of the ATEO and all 

related organizations, provided that for 

purposes of the calculation, any day that 

the individual worked at least one hour 

as an employee of the ATEO or a related 

ATEO is treated as a day worked as an 

employee of the ATEO and not for any 

other organization; and 

(3) Related organizations requirement. 

No related organization that paid 

remuneration or granted a legally 

binding right to nonvested remuneration 

to the individual during the applicable 

year and the preceding applicable year 

provided services for a fee to the ATEO, 

to any related ATEO, or to any taxable 

related organization controlled by the 

ATEO or by one or more related ATEOs, 

either alone or together with the ATEO, 

during the applicable year and the 

preceding applicable year. For purposes 

of this paragraph (d)(2)(iii)(A)(3), 

whether a taxable related organization is 

controlled by the ATEO (or one or more 

related ATEOs) is determined without 

regard to paragraph (i)(2)(vii)(B)(2) of 


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this section and without regard to 

section 318(a)(3) for purposes of 

applying paragraph (i)(2)(vii)(A) of this 

section, so that an interest in a 

corporation or nonstock entity is not 

attributed downward in determining 

control of the corporation or nonstock 

entity. 

(B) Certain payments disregarded. For 

purposes of paragraph (d)(2)(iii)(A)(1) of 

this section, a payment of remuneration 

made to an individual by a related 

organization that is an employer of the 

individual and for which the related 

organization is neither entitled to 

reimbursement by the ATEO nor 

entitled to any other consideration from 

the ATEO is not considered 

remuneration paid by the ATEO under 

§ 53.4960–2(b)(1) and a payment of 

remuneration made to the individual by 

a related organization is not treated as 

paid by the ATEO under § 53.4960– 

2(b)(2). 

(iv) Limited services exception. An 

individual is disregarded for purposes 

of determining an ATEO’s five highestcompensated employees for a taxable 

year even though the ATEO paid 

remuneration to the individual if, 

disregarding § 53.4960–2(b)(2), all of the 

following requirements are met: 

(A) Remuneration requirement. The 

ATEO did not pay 10 percent or more 

of the individual’s total remuneration 

for services performed as an employee 

of the ATEO and all related 

organizations during the applicable 

year; and 

(B) Related ATEO requirement. The 

ATEO had at least one related ATEO 

during the applicable year and one of 

the following conditions applies: 

(1) Ten percent remuneration 

condition. A related ATEO paid at least 

10 percent of the remuneration paid by 

the ATEO and any related organizations 

during the applicable year; or 

(2) Less remuneration condition. No 

related ATEO paid at least 10 percent of 

the total remuneration paid by the 

ATEO and any related organizations and 

the ATEO paid less remuneration to the 

individual than at least one related 

ATEO during the applicable year. 

(3) Examples. The following examples 

illustrate the rules of this paragraph (d). 

For purposes of these examples, assume 

any entity referred to as ‘‘ATEO’’ is an 

ATEO, any entity referred to as ‘‘CORP’’ 

is not an ATEO and is not a publicly 

held company within the meaning of 

section 162(m)(2) unless otherwise 

stated, and each taxpayer uses the 

calendar year as its taxable year. 

(i) Example 1 (Employee of two 

related ATEOs)—(A) Facts. ATEO 1 and 

ATEO 2 are related organizations and 

have no other related organizations. 

Both employ Employee A during 

calendar year 2022 and pay 

remuneration to Employee A for 

Employee A’s services. During 2022, 

Employee A performed services for 

1,000 hours as an employee of ATEO 1 

and 1,000 hours as an employee of 

ATEO 2. 

(B) Conclusion. Employee A may be a 

covered employee of both ATEO 1 and 

ATEO 2 as one of the five highestcompensated employees for taxable year 

2022 under paragraph (d)(2)(i) of this 

section because the exceptions in 

paragraphs (d)(2)(ii) through (iv) of this 

section do not apply. Because they are 

related organizations, ATEO 1 and 

ATEO 2 must each include the 

remuneration paid to Employee A by 

the other during each of their applicable 

years in determining their respective 

five highest-compensated employees for 

taxable year 2022. 

(ii) Example 2 (Employee of an ATEO 

and a related non-ATEO)—(A) Facts. 

Assume the same facts as in paragraph 

(d)(3)(i) of this section (Example 1), 

except that ATEO 1 is instead CORP 1. 

(B) Conclusion (CORP 1). For taxable 

year 2022, CORP 1 is not an ATEO and 

therefore does not need to identify 

covered employees. 

(C) Conclusion (ATEO 2). Employee A 

may be a covered employee of ATEO 2 

as one of its five highest-compensated 

employees for taxable year 2022 under 

paragraph (d)(2)(i) of this section 

because no exception in paragraphs 

(d)(2)(ii) through (iv) of this section 

applies. ATEO 2 must include the 

remuneration paid to Employee A by 

CORP 1 during its applicable year in 

determining ATEO 2’s five highestcompensated employees for taxable year 

2022. 

(iii) Example 3 (Amounts for which a 

deduction is disallowed under section 

162(m) are taken into account for 

purposes of determining the five 

highest-compensated employees)—(A) 

Facts. CORP 2 is a publicly held 

corporation within the meaning of 

section 162(m)(2) and is a related 

organization of ATEO 3. ATEO 3 is a 

corporation that is part of CORP 2’s 

affiliated group (as defined in section 

1504, without regard to section 1504(b)) 

and has no other related organizations. 

Employee B is a covered employee (as 

defined in section 162(m)(3)) of CORP 2 

and an employee of ATEO 3. In 2022, 

CORP 2 paid Employee B $8 million of 

remuneration for services provided as 

an employee of CORP 2 and ATEO 3 

paid Employee B $500,000 of 

remuneration for services provided as 

an employee of ATEO 3. $7.5 million of 

the remuneration is compensation for 

which a deduction is disallowed 

pursuant to section 162(m)(1). 

(B) Conclusion. The $7.5 million of 

remuneration for which a deduction is 

disallowed under section 162(m)(1) is 

taken into account for purposes of 

determining ATEO 3’s five highestcompensated employees. Thus, ATEO 3 

is treated as paying Employee B $8.5 

million of remuneration for purposes of 

determining its five highestcompensated employees. 

(iv) Example 4 (Employee disregarded 

due to receiving no remuneration)—(A) 

Facts. Employee C is an officer of ATEO 

4 who performs more than minor 

services for ATEO 4. In 2022, neither 

ATEO 4 nor any related organization 

paid remuneration or granted a legally 

binding right to any nonvested 

remuneration to Employee C. ATEO 4 

paid premiums for insurance for 

liability arising from Employee C’s 

service with ATEO 4, which is properly 

treated as a working condition fringe 

benefit excluded from gross income 

under § 1.132–5. 

(B) Conclusion. Even though 

Employee C is an employee of ATEO 4, 

Employee C is disregarded for purposes 

of determining ATEO 4’s five highestcompensated employees for taxable year 

2022 under paragraph (d)(2)(i) of this 

section because neither ATEO 4 nor any 

related organization paid Employee C 

any remuneration (nor did they grant a 

legally binding right to nonvested 

remuneration) in applicable year 2022. 

The working condition fringe benefit is 

not wages within the meaning of section 

3401(a), as provided in section 

3401(a)(19), and thus is not 

remuneration within the meaning of 

§ 53.4960–2(a). 

(v) Example 5 (Limited hours 

exception)—(A) Facts. ATEO 5 and 

CORP 3 are related organizations. ATEO 

5 has no other related organizations. 

Employee D is an employee of CORP 3. 

As part of Employee D’s duties at CORP 

3, Employee D serves as an officer of 

ATEO 5. Only CORP 3 paid 

remuneration (or granted a legally 

binding right to nonvested 

remuneration) to Employee D and ATEO 

5 did not reimburse CORP 3 for any 

portion of Employee D’s remuneration 

in any manner. During 2022, Employee 

D provided services as an employee for 

2,000 hours to CORP 3 and 200 hours 

to ATEO 5. 

(B) Conclusion. Even though 

Employee D is an employee of ATEO 5 

because Employee D provided more 

than minor services as an officer, 

Employee D is disregarded for purposes 

of determining ATEO 5’s five highestcompensated employees for taxable year 

2022. Employee D is disregarded under 


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paragraph (d)(2)(ii) of this section 

because only CORP 3 paid Employee D 

any remuneration or granted a legally 

binding right to nonvested remuneration 

in applicable year 2022 and Employee D 

provided services as an employee of 

ATEO 5 for 200 hours, which is not 

more than ten percent of the 2,200 total 

hours (2,000 + 200 = 2,200) worked as 

an employee of ATEO 5 and all related 

organizations. 

(vi) Example 6 (Limited hours 

exception)—(A) Facts. Assume the same 

facts as in paragraph (d)(3)(v) of this 

section (Example 5), except that ATEO 

5 also provides a reasonable allowance 

for expenses incurred by Employee D in 

executing Employee D’s duties as an 

officer of ATEO 5, which is properly 

excluded from gross income under an 

accountable plan described in § 1.62–2. 

(B) Conclusion. The conclusion is the 

same as in paragraph (d)(3)(v)(B) of this 

section (Example 5). Specifically, even 

though Employee D is an employee of 

ATEO 5 because Employee D provided 

more than minor services for ATEO 5, 

Employee D is disregarded for purposes 

of determining ATEO 5’s five highestcompensated employees for taxable year 

2022 under paragraph (d)(2)(ii) of this 

section because the expense allowance 

under the accountable plan is excluded 

from wages within the meaning of 

section 3401(a), as provided in 

§ 31.3401(a)-4, and thus is not 

remuneration within the meaning of 

§ 53.4960–2(a). 

(vii) Example 7 (No exception applies 

due to source of payment)—(A) Facts. 

Assume the same facts as in paragraph 

(d)(3)(v) of this section (Example 5), 

except that ATEO 5 has a contractual 

arrangement with CORP 3 to reimburse 

CORP 3 for the hours of service 

Employee D provides to ATEO 5 during 

applicable year 2022 by paying an 

amount equal to the total remuneration 

received by Employee D from both 

ATEO 5 and CORP 3, multiplied by a 

fraction equal to the hours of service 

Employee D provided ATEO 5 over 

Employee D’s total hours of service to 

both ATEO 5 and CORP 3. 

(B) Conclusion. Employee D may be 

one of ATEO 5’s five highestcompensated employees for taxable year 

2022 under paragraph (d)(2)(i) of this 

section because the exceptions in 

paragraphs (d)(2)(ii) through (iv) of this 

section do not apply. Pursuant to the 

contractual arrangement between CORP 

3 and ATEO 5, ATEO 5 reimburses 

CORP 3 for a portion of Employee D’s 

remuneration during applicable year 

2022; thus, the exceptions under 

paragraphs (d)(2)(ii) and (iii) of this 

section do not apply. Further, while 

ATEO 5 paid Employee D less than 10 

percent of the total remuneration from 

ATEO 5 and all related organizations 

(200 hours of service to ATEO 5/2,200 

hours of service to ATEO 5 and all 

related organizations = 9 percent), it had 

no related ATEO; thus, the limited 

services exception under paragraph 

(d)(2)(iv) of this section does not apply. 

(viii) Example 8 (Nonexempt funds 

exception for part-time services)—(A) 

Facts. ATEO 6 and CORP 4 are related 

organizations. ATEO 6 has no other 

related organizations and does not 

control CORP 4. During applicable year 

2022, Employee E provided 2,000 hours 

of services as an employee of CORP 4 

and 0 hours of services as an employee 

of ATEO 6; during applicable year 2023, 

Employee E provided 1,100 hours of 

services as an employee of CORP 4 and 

900 hours of services as an employee of 

ATEO 6; during applicable year 2024, 

Employee E provided 1,100 hours of 

services as an employee of CORP 4 and 

900 hours of services as an employee of 

ATEO 6. ATEO 6 neither paid any 

remuneration to Employee E nor paid a 

fee for services to CORP 4 during any 

applicable year. No exception under 

paragraphs (d)(2)(i), (ii), or (iv) applies 

to Employee E. 

(B) Conclusion (2023). Employee E is 

disregarded for purposes of determining 

ATEO 6’s five highest-compensated 

employees for taxable year 2023 under 

paragraph (d)(2)(iii) of this section 

because for applicable years 2022 and 

2023, Employee E provided services as 

an employee of ATEO 6 for not more 

than 50 percent of the total hours 

Employee E provided services as an 

employee of ATEO 6 and CORP 4 (900 

hours/4,000 hours), and ATEO 6 neither 

paid any remuneration to Employee E 

nor paid a fee for services to CORP 4 

during applicable years 2022 and 2023. 

(C) Conclusion (2024). Employee E is 

disregarded for purposes of determining 

ATEO 6’s five highest-compensated 

employees for taxable year 2024 under 

paragraph (d)(2)(iii) of this section 

because for applicable years 2023 and 

2024, Employee E provided services as 

an employee of ATEO 6 for not more 

than 50 percent of the total hours 

Employee E provided services as an 

employee of ATEO 6 and CORP 4 (1,800 

hours/4,000 hours), and ATEO 6 neither 

paid any remuneration to Employee E 

nor paid a fee for services to CORP 4 

during applicable years 2023 and 2024. 

(ix) Example 9 (Nonexempt funds for 

full-time services in one applicable 

year)—(A) Facts. Assume the same facts 

as in paragraph (d)(3)(viii) of this 

section (Example 8), except that during 

applicable year 2022, Employee E 

provided services as an employee for 

2,000 hours to CORP 4 and for 0 hours 

to ATEO 6; during applicable year 2023, 

Employee E provided services as an 

employee for 0 hours to CORP 4 and 

2,000 hours to ATEO 6; and during 

applicable year 2024, Employee E 

resumes employment with CORP 4 so 

that Employee E provided services as an 

employee for 2,000 hours to CORP 4 and 

0 hours to ATEO 6. 

(B) Conclusion (2023). Employee E is 

disregarded for purposes of determining 

ATEO 6’s five highest-compensated 

employees for taxable year 2023 under 

paragraph (d)(2)(iii) of this section 

because for applicable years 2022 and 

2023, Employee E provided services as 

an employee of ATEO 6 for not more 

than 50 percent of the total hours 

Employee E provided services as an 

employee of ATEO 6 and CORP 4 (2,000 

hours/4,000 hours), and ATEO 6 neither 

paid any remuneration to Employee E 

nor paid a fee for services to CORP 4 

during applicable years 2022 and 2023. 

(C) Conclusion (2024). Employee E is 

disregarded for purposes of determining 

ATEO 6’s five highest-compensated 

employees for taxable year 2024 under 

paragraph (d)(2)(iii) of this section 

because for applicable years 2023 and 

2024, Employee E provided services as 

an employee of ATEO 6 for not more 

than 50 percent of the total hours 

Employee E provided services as an 

employee of ATEO 6 and CORP 4 (2,000 

hours/4,000 hours for ATEO 6 and 

CORP 4), and ATEO 6 neither paid any 

remuneration to Employee E nor paid a 

fee for services to CORP 4 during 

applicable years 2023 and 2024. 

(x) Example 10 (Nonexempt funds 

exception for full-time services across 

two applicable years)—(A) Facts. 

Assume the same facts as in paragraph 

(d)(3)(viii)(A) of this section (Example 

8), except that during applicable year 

2022, Employee E provided services as 

an employee for 2,000 hours to CORP 4 

and for 0 hours to ATEO 6; during 

applicable year 2023, Employee E 

provided services as an employee for 

600 hours to CORP 4 and for 1,400 

hours to ATEO 6; and during applicable 

year 2024, Employee E provided 

services as an employee for 1,400 hours 

to CORP 4 and for 600 hours to ATEO 

6. 

(B) Conclusion (2023). Employee E is 

disregarded for purposes of determining 

ATEO 6’s five highest-compensated 

employees for taxable year 2023 under 

paragraph (d)(2)(iii) of this section 

because for applicable years 2022 and 

2023, Employee E provided services as 

an employee of ATEO 6 for not more 

than 50 percent of the total hours 

Employee E provided services as an 

employee of ATEO 6 and CORP 4 (1,400 

hours/4,000 hours), and ATEO 6 neither 


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paid any remuneration to Employee E, 

nor paid a fee for services to CORP 4 

during applicable years 2022 and 2023. 

(C) Conclusion (2024). Employee E is 

disregarded for purposes of determining 

ATEO 6’s five highest-compensated 

employees for taxable year 2024 under 

paragraph (d)(2)(iii) of this section 

because for applicable years 2023 and 

2024, Employee E provided services as 

an employee of ATEO 6 for not more 

than 50 percent of the total hours 

Employee E provided services as an 

employee of ATEO 6 and CORP 4 (2,000 

hours/4,000 hours), and ATEO 6 neither 

paid any remuneration to Employee E, 

nor paid a fee for services to CORP 4 

during applicable years 2023 and 2024. 

(xi) Example 11 (Failure under the 

nonexempt funds exception)—(A) Facts. 

Assume the same facts as in paragraph 

(d)(3)(viii)(A) of this section (Example 

8), except that during applicable year 

2022, Employee E provided services as 

an employee for 2,000 hours to CORP 4 

and for 0 hours to ATEO 6; during 

applicable year 2023, Employee E 

provided services as an employee for 

600 hours to CORP 4 and for 1,400 

hours to ATEO 6; and during applicable 

year 2024, Employee E provided 

services as an employee for 1,300 hours 

to CORP 4 and for 700 hours to ATEO 

6. 

(B) Conclusion (2023). Employee E is 

disregarded for purposes of determining 

ATEO 6’s five highest-compensated 

employees for taxable year 2023 under 

paragraph (d)(2)(iii) of this section 

because for applicable years 2022 and 

2023, Employee E provided services as 

an employee of ATEO 6 for less than 50 

percent of the total hours Employee E 

provided services as an employee of 

ATEO 6 and CORP 4 (1,400 hours/4,000 

hours), and ATEO 6 neither paid any 

remuneration to Employee E, nor paid a 

fee for services to CORP 4 during 

applicable years 2022 and 2023. 

(C) Conclusion (2024). Employee E 

may be a covered employee of ATEO 6 

as one of its five highest-compensated 

employees for taxable year 2024 because 

the requirements under paragraph 

(d)(2)(iii) are not met and no other 

exception applies. For applicable years 

2023 and 2024, Employee E provided 

services as an employee of ATEO 6 for 

more than 50 percent of the total hours 

Employee E provided services as an 

employee of ATEO 6 and CORP 4 (2,100 

hours/4,000 hours). 

(xii) Example 12 (Limited services 

exception)—(A) Facts. ATEO 7, ATEO 8, 

ATEO 9, and ATEO 10 are a group of 

related organizations, none of which 

have any other related organizations. 

During 2022, Employee F is an 

employee of ATEO 7, ATEO 8, ATEO 9, 

and ATEO 10. During applicable year 

2022, ATEO 7 paid 5 percent of 

Employee F’s remuneration, ATEO 8 

paid 10 percent of Employee F’s 

remuneration, ATEO 9 paid 25 percent 

of Employee F’s remuneration, and 

ATEO 10 paid 60 percent of Employee 

F’s remuneration. No exception under 

paragraph (d)(2)(i), (ii), or (iii) applies to 

Employee F for any of ATEO 7, ATEO 

8, ATEO 9, or ATEO 10. 

(B) Conclusion (ATEO 7). Employee F 

is disregarded for purposes of 

determining ATEO 7’s five highestcompensated employees for taxable year 

2022 under paragraph (d)(2)(iv) of this 

section because ATEO 7 paid less than 

10 percent of Employee F’s total 

remuneration from ATEO 7 and all 

related organizations during applicable 

year 2022, and another related ATEO 

paid at least 10 percent of that total 

remuneration. 

(C) Conclusion (ATEO 8, ATEO 9, and 

ATEO 10). Employee F may be a 

covered employee of ATEO 8, ATEO 9, 

and ATEO 10 as one of their respective 

five highest-compensated employees for 

their taxable years 2022 because each of 

those ATEOs paid 10 percent or more of 

Employee F’s remuneration during the 

2022 applicable year. Thus, the limited 

services exception under paragraph 

(d)(2)(iv) of this section does not apply. 

(xiii) Example 13 (Limited services 

exception if no ATEO paid at least 10 

percent of remuneration)—(A) Facts. 

Assume the same facts as in paragraph 

(d)(3)(xii) of this section (Example 12), 

except that for applicable year 2022, 

ATEO 7 paid 6 percent of F’s 

remuneration, ATEO 8, ATEO 9, and 

ATEO 10 each paid 5 percent of 

Employee F’s remuneration, and 

Employee F also works as an employee 

of CORP 5, a related organization of 

ATEO 7, ATEO 8, ATEO 9, and ATEO 

10 that paid 79 percent of Employee F’s 

remuneration for applicable year 2022. 

(B) Conclusion (ATEO 7). Employee F 

may be one of ATEO 7’s five highestcompensated employees for taxable year 

2022. Although ATEO 7 did not pay 

Employee F 10 percent or more of the 

total remuneration paid by ATEO 7 and 

all of its related organizations, no 

related ATEO paid more than 10 percent 

of Employee F’s remuneration, and 

ATEO 7 did not pay less remuneration 

to Employee F than at least one related 

ATEO. Thus, the limited services 

exception under paragraph (d)(2)(iv) of 

this section does not apply, and 

Employee F may be one of ATEO 7’s 

five highest-compensated employees 

because ATEO 7 paid Employee F more 

remuneration than any other related 

ATEO. 

(C) Conclusion (ATEO 8, ATEO 9, and 

ATEO 10). Employee F is disregarded 

for purposes of determining the five 

highest-compensated employees of 

ATEO 8, ATEO 9, and ATEO 10 for 

taxable year 2022 under paragraph 

(d)(2)(iv) of this section because none 

paid 10 percent or more of Employee F’s 

total remuneration, each had no related 

ATEO that paid at least 10 percent of 

Employee F’s total remuneration, and 

each paid less remuneration than at 

least one related ATEO (ATEO 7). 

(e) Employee—(1) In general. 

Employee means an employee as 

defined in section 3401(c) and 

§ 31.3401(c)–1. Section 31.3401(c)–1 

generally defines an employee as any 

individual performing services if the 

relationship between the individual and 

the person for whom the individual 

performs services is the legal 

relationship of employer and employee. 

As set forth in § 31.3401(c)–1, this 

includes common law employees, as 

well as officers and employees of 

government entities, whether or not 

elected. An employee generally also 

includes an officer of a corporation, but 

an officer of a corporation who as such 

does not perform any services or 

performs only minor services and who 

neither receives, nor is entitled to 

receive, any remuneration is not 

considered to be an employee of the 

corporation solely due to the 

individual’s status as an officer of the 

corporation. Whether an individual is 

an employee depends on the facts and 

circumstances. 

(2) Directors. A director of a 

corporation (or an individual holding a 

substantially similar position in a 

corporation or other entity) in the 

individual’s capacity as such is not an 

employee of the corporation. See 

§ 31.3401(c)–1(f). 

(3) Trustees. The principles of 

paragraph (e)(2) of this section apply by 

analogy to a trustee of any arrangement 

classified as a trust for Federal tax 

purposes in § 301.7701–4(a). 

(f) Employer—(1) In general. 

Employer means an employer within the 

meaning of section 3401(d), without 

regard to section 3401(d)(1) or (2), 

meaning generally the person or 

governmental entity for whom the 

services were performed as an 

employee. Whether a person or 

governmental entity is the employer 

depends on the facts and circumstances, 

but a person does not cease to be the 

employer through use of a payroll agent 

under section 3504, a common 

paymaster under section 3121(s), a 

person described in section 3401(d)(1) 

or (2), a certified professional employer 


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organization under section 7705, or any 

similar arrangement. 

(2) Disregarded entities. In the case of 

a disregarded entity described in 

§ 301.7701–3, § 301.7701–2(c)(2)(iv) 

does not apply; thus, the sole owner of 

the disregarded entity is treated as the 

employer of any individual performing 

services as an employee of the 

disregarded entity. 

(g) Medical services—(1) Medical and 

veterinary services—(i) In general. 

Medical services means services directly 

performed by a licensed medical 

professional (as defined in paragraph 

(g)(2) of this section) for the diagnosis, 

cure, mitigation, treatment, or 

prevention of disease in humans or 

animals; services provided for the 

purpose of affecting any structure or 

function of the human or animal body; 

and other services integral to providing 

such medical services. For purposes of 

section 4960, teaching and research 

services are not medical services except 

to the extent that they involve the 

services performed to directly diagnose, 

cure, mitigate, treat, or prevent disease 

or affect a structure or function of the 

body. Administrative services may be 

integral to directly providing medical 

services. For example, documenting the 

care and condition of a patient is 

integral to providing medical services, 

as is accompanying another licensed 

professional as a supervisor while that 

medical professional provides medical 

services. However, managing an 

organization’s operations, including 

scheduling, staffing, appraising 

employee performance, and other 

similar functions that may relate to a 

particular medical professional or 

professionals who perform medical 

services, is not integral to providing 

medical services. See § 53.4960– 

2(a)(2)(ii) for rules regarding allocating 

remuneration paid to a medical 

professional who performs both medical 

services and other services. 

(ii) Examples. The following 

examples illustrate the rules of this 

paragraph (g): 

(A) Example 1 (Administrative tasks 

that are integral to providing medical 

services)—(1) Facts. Employee A is a 

doctor who is licensed to practice 

medicine in the state in which 

Employee A’s place of employment is 

located. In the course of Employee A’s 

practice, Employee A treats patients and 

performs some closely-related 

administrative tasks, such as examining 

and updating patient records. 

(2) Conclusion. Employee A’s 

administrative tasks are integral to 

providing medical services and thus are 

medical services. 

(B) Example 2 (Administrative tasks 

that are not integral to providing 

medical services)—(1) Facts. Assume 

the same facts as in paragraph 

(g)(1)(ii)(A)(1) of this section (Example 

1), except that Employee A also 

performs additional administrative tasks 

such as analyzing the budget, 

authorizing capital expenditures, and 

managing human resources for the 

organization by which Employee A is 

employed. 

(2) Conclusion. Employee A’s 

additional administrative tasks are not 

integral to providing medical services 

and thus are not medical services. 

(C) Example 3 (Teaching duties that 

are and are not medical services)—(1) 

Facts. Employee B is a medical doctor 

who is licensed to practice medicine in 

the state in which her place of 

employment, a university hospital, is 

located. Employee B’s duties include 

overseeing and teaching a group of 

resident physicians who have restricted 

licenses to practice medicine. Those 

duties include supervising and 

instructing the resident physicians 

while they treat patients and instruction 

in a classroom setting. 

(2) Conclusion. Employee B’s 

supervision and instruction of resident 

physicians during the course of patient 

treatment are necessary for the 

treatment, and thus are medical 

services. Employee B’s classroom 

instruction is not necessary for patient 

treatment, and thus is not medical 

services. 

(D) Example 4 (Research services that 

are and are not medical services)—(1) 

Facts. Employee C is a licensed medical 

doctor who is employed to work on a 

research trial. Employee C provides an 

experimental treatment to patients 

afflicted by a disease and performs 

certain closely-related administrative 

tasks that ordinarily are performed by a 

medical professional in a course of 

patient treatment. As part of the 

research trial, Employee C also compiles 

and analyzes patient results and 

prepares reports and articles that would 

not ordinarily be prepared by a medical 

professional in the course of patient 

treatment. 

(2) Conclusion. Employee C’s services 

that are ordinarily performed by a 

medical professional in a course of 

treatment, including closely-related 

administrative tasks, are medical 

services. Because the compilation and 

analysis of patient results and the 

formulation of reports and articles are 

neither services ordinarily performed by 

a medical professional in a course of 

treatment nor necessary for such 

treatment, these services are not medical 

services. 

(2) Definition of licensed medical 

professional. Licensed medical 

professional means an individual who is 

licensed under applicable state or local 

law to perform medical services, 

including as a doctor, nurse, nurse 

practitioner, dentist, veterinarian, or 

other licensed medical professional. 

(h) Predecessor—(1) Asset 

acquisitions. If an ATEO (acquiror) 

acquires at least 80 percent of the 

operating assets or total assets 

(determined by fair market value on the 

date of acquisition) of another ATEO 

(target), then the target is a predecessor 

of the acquiror. For an acquisition of 

assets that occurs over time, only assets 

acquired within a 12-month period are 

taken into account to determine whether 

at least 80 percent of the target’s 

operating assets or total assets were 

acquired. However, this 12-month 

period is extended to include any 

continuous period that ends or begins 

on any day during which the acquiror 

has an arrangement to acquire directly 

or indirectly, assets of the target. 

Additions to the assets of target made as 

part of a plan or arrangement to avoid 

the application of this subsection to 

acquiror’s purchase of target’s assets are 

disregarded in applying this paragraph. 

This paragraph (h)(1) applies for 

purposes of determining whether an 

employee is a covered employee under 

paragraph (d)(1) of this section only 

with respect to a covered employee of 

the target who commences the 

performance of services for the acquiror 

(or a related organization with respect to 

the acquiror) within the period 

beginning 12 months before and ending 

12 months after the date of the 

transaction as defined in paragraph 

(h)(7) of this section. 

(2) Corporate reorganizations. A 

predecessor of an ATEO includes 

another separate ATEO the stock or 

assets of which are acquired in a 

corporate reorganization as defined in 

section 368(a)(1)(A), (C), (D), (E), (F), or 

(G) (including by reason of section 

368(a)(2)). 

(3) Predecessor change of form or of 

place of organization. An ATEO that 

restructured by changing its 

organizational form or place of 

organization (or both) is a predecessor of 

the restructured ATEO. 

(4) ATEO that becomes a non-ATEO— 

(i) General rule. An organization is a 

predecessor of an ATEO if it ceases to 

be an ATEO and then again becomes an 

ATEO effective on or before the 

predecessor end date. The predecessor 

end date is the date that is 36 months 

following the date that the 

organization’s Federal information 

return under section 6033 (or, for an 


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ATEO described in paragraph (b)(1)(ii) 

or (iii) of this section, its Federal income 

tax return under section 6011(a)) is due 

(or would be due if the organization 

were required to file), excluding any 

extension, for the last taxable year for 

which the organization previously was 

an ATEO. If the organization becomes 

an ATEO again effective after the 

predecessor end date, then the former 

ATEO is treated as a separate 

organization that is not a predecessor of 

the current ATEO. 

(ii) Intervening changes or entities. If 

an ATEO that ceases to be an ATEO 

(former ATEO) would be treated as a 

predecessor to an organization that 

becomes an ATEO before the 

predecessor end date (successor ATEO), 

and if the former ATEO would be 

treated as a predecessor to each 

intervening entity (if such intervening 

entities had been ATEOs) under the 

rules of this paragraph (h), then the 

former ATEO is a predecessor of the 

successor ATEO. For example, if ATEO 

1 loses its tax-exempt status and then 

merges into Corporation X, Corporation 

X then merges into Corporation Y, and 

Corporation Y becomes an ATEO before 

the predecessor end date, then ATEO 1 

is a predecessor of Corporation Y. 

(5) Predecessor of a predecessor. A 

reference to a predecessor includes any 

predecessor or predecessors of such 

predecessor, as determined under these 

rules. 

(6) Elections under sections 336(e) 

and 338. For purposes of this paragraph 

(h), when an ATEO organized as a 

corporation makes an election to treat as 

an asset purchase either the sale, 

exchange, or distribution of stock 

pursuant to regulations under section 

336(e) or the purchase of stock pursuant 

to regulations under section 338, the 

corporation that issued the stock is 

treated as the same corporation both 

before and after such transaction. 

(7) Date of transaction. For purposes 

of this paragraph (h), the date that a 

transaction is treated as having occurred 

is the date on which all events 

necessary to complete the transaction 

described in the relevant provision have 

occurred. 

(i) Related organization—(1) In 

general. Related organization means any 

person or governmental entity, domestic 

or foreign, that meets any of the 

following tests: 

(i) Controls or controlled by test. The 

person or governmental entity controls, 

or is controlled by, the ATEO; 

(ii) Controlled by same persons test. 

The person or governmental entity is 

controlled by one or more persons that 

control the ATEO; 

(iii) Supported organization test. The 

person or governmental entity is a 

supported organization (as defined in 

section 509(f)(3)) with respect to the 

ATEO; 

(iv) Supporting organization test. The 

person or governmental entity is a 

supporting organization described in 

section 509(a)(3) with respect to the 

ATEO; or 

(v) VEBA test. With regard to an 

ATEO that is a voluntary employees’ 

beneficiary association (VEBA) 

described in section 501(c)(9), the 

person or governmental entity 

establishes, maintains, or makes 

contributions to such VEBA. 

(2) Control—(i) In general. Control 

may be direct or indirect. For rules 

concerning application of the principles 

of section 318 in applying this 

paragraph (i)(2), see paragraph (i)(2)(vii) 

of this section. 

(ii) Stock corporation. A person or 

governmental entity controls a stock 

corporation if it owns (by vote or value) 

more than 50 percent of the stock in the 

stock corporation. 

(iii) Partnership. A person or 

governmental entity controls a 

partnership if it owns more than 50 

percent of the profits interests or capital 

interests in the partnership, determined 

in accordance with the rules and 

principles of § 1.706–1(b)(4)(ii) for a 

partner’s interest in the profits of a 

partnership and § 1.706–1(b)(4)(iii) for a 

partner’s interest in the capital of a 

partnership. 

(iv) Trust. A person or governmental 

entity controls a trust if it owns more 

than 50 percent of the beneficial 

interests in the trust, determined by 

actuarial value. 

(v) Nonstock organization—(A) In 

general. A person or governmental 

entity controls a nonstock organization 

if more than 50 percent of the trustees 

or directors of the nonstock organization 

are either representatives of, or directly 

or indirectly controlled by, the person 

or governmental entity. A nonstock 

organization is a nonprofit organization 

or other organization without owners 

and includes a governmental entity. 

(B) Control of a trustee or director of 

a nonstock organization. A person or 

governmental entity controls a trustee or 

director of the nonstock organization if 

the person or governmental entity has 

the power (either at will or at regular 

intervals) to remove such trustee or 

director and designate a new one. 

(C) Representatives. Trustees, 

directors, officers, employees, or agents 

of a person or governmental entity are 

deemed representatives of the person or 

governmental entity. However, an 

employee of a person or governmental 

entity (other than a trustee, director, or 

officer, or an employee who possesses at 

least the authority commonly exercised 

by an officer) who is a director or trustee 

of a nonstock organization (or acting in 

that capacity) will not be treated as a 

representative of the person or 

governmental entity if the employee 

does not act as a representative of the 

person or governmental entity and that 

fact is reported in the form and manner 

prescribed by the Commissioner in 

forms and instructions. 

(vi) Brother-sister related 

organizations. Under paragraph (i)(1)(ii) 

of this section, an organization is a 

related organization with respect to an 

ATEO if one or more persons control 

both the ATEO and the other 

organization. In the case of control by 

multiple persons, the control tests 

described in this paragraph (i)(2) of this 

section apply to the persons as a group. 

For example, if 1,000 individuals who 

are members of both ATEO 1 and ATEO 

2 elect a majority of the board members 

of each organization, then ATEO 1 and 

ATEO 2 are related to each other 

because the same group of 1,000 persons 

controls both ATEO 1 and ATEO 2. 

(vii) Section 318 principles—(A) In 

general. Section 318 (relating to 

constructive ownership of stock) applies 

in determining ownership of stock in a 

corporation. The principles of section 

318 also apply for purposes of 

determining ownership of interests in a 

partnership or in a trust with beneficial 

interests. For example, applying the 

principles of section 318(a)(1)(A), an 

individual is considered to own the 

partnership interest or trust interest 

owned, directly or indirectly, by or for 

the family members specified in such 

section. 

(B) Nonstock organizations—(1) 

Attribution of ownership interest from a 

nonstock organization to a controlling 

person. If a person or governmental 

entity controls a nonstock organization, 

the person or governmental entity is 

treated as owning a percentage of the 

stock (or partnership interest or 

beneficial interest in a trust) owned by 

the nonstock organization in accordance 

with the percentage of trustees or 

directors of the nonstock organization 

that are representatives of, or directly or 

indirectly controlled by, the person or 

governmental entity. 

(2) Attribution of ownership interest 

from a controlling person to a nonstock 

organization. If a person or 

governmental entity controls a nonstock 

organization, the nonstock organization 

is treated as owning a percentage of the 

stock (or partnership interest or 

beneficial interest in a trust) owned by 

the person or governmental entity in 


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accordance with the percentage of 

trustees or directors of the nonstock 

organization that are representatives of, 

or directly or indirectly controlled by, 

the person or governmental entity. 

(3) Indirect control of a nonstock 

organization through another nonstock 

organization. If a person or 

governmental entity controls one 

nonstock organization that controls a 

second nonstock organization, the 

person or governmental entity is treated 

as controlling the second nonstock 

organization if the product of the 

percentage of trustees or directors of the 

first nonstock organization that are 

representatives of, or directly or 

indirectly controlled by, the person or 

governmental entity, multiplied by the 

percentage of trustees or directors of the 

second nonstock organization that are 

representatives of, or directly or 

indirectly controlled by, the person or 

governmental entity or first nonstock 

organization, exceeds 50 percent. 

Similar principles apply to successive 

tiers of nonstock organizations. 

(4) Attribution of control of nonstock 

organization to family member. An 

individual’s control of a nonstock 

organization or of a trustee or director 

of a nonstock organization is attributed 

to the members of the individual’s 

family (as set forth in section 318(a)(1) 

and the regulations thereunder), subject 

to the limitation of section 318(a)(5)(B) 

and the regulations thereunder. 

(3) Examples. The following examples 

illustrate the principles of this 

paragraph (i). For purposes of these 

examples, assume any entity referred to 

as ‘‘ATEO’’ is an ATEO and any entity 

referred to as ‘‘CORP’’ is not an ATEO. 

(i) Example 1 (Related through a 

chain of control)—(A) Facts. ATEO 1, 

ATEO 2, and ATEO 3 are nonstock 

organizations. ATEO 3 owns 80 percent 

of the stock (by value) of corporation 

CORP 1. Eighty percent of ATEO 2’s 

directors are representatives of ATEO 1. 

In addition, 80 percent of ATEO 3’s 

directors are representatives of ATEO 1. 

(B) Conclusion. ATEO 1 is a related 

organization with respect to ATEO 2 

(and vice versa) because more than 50 

percent of ATEO 2’s directors are 

representatives of ATEO 1; thus, ATEO 

1 controls ATEO 2. Based on the same 

analysis, ATEO 1 is also a related 

organization with respect to ATEO 3 

(and vice versa). CORP 1 is a related 

organization with respect to ATEO 3 

because, as the owner of more than 50 

percent of CORP 1’s stock, ATEO 3 

controls CORP 1. Applying the 

principles of section 318, ATEO 1 is 

deemed to own 64 percent of the stock 

of CORP 1 (80 percent of ATEO 3’s stock 

in CORP 1). Thus, CORP 1 is a related 

organization with respect to ATEO 1 

because ATEO 1 controls CORP 1. 

ATEO 2 is a related organization with 

respect to ATEO 3, ATEO 3 is a related 

organization with respect to ATEO 2, 

and CORP 1 is a related organization 

with respect to ATEO 2 because ATEO 

2, ATEO 3, and CORP 1 are all 

controlled by the same person (ATEO 

1). 

(ii) Example 2 (Not related through a 

chain of control)—(A) Facts. ATEO 4, 

ATEO 5, and ATEO 6 are nonstock 

organizations. Sixty percent of ATEO 5’s 

directors are representatives of ATEO 4. 

In addition, 60 percent of ATEO 6’s 

directors are representatives of ATEO 5, 

but none are representatives of ATEO 4. 

(B) Conclusion. ATEO 4 is a related 

organization with respect to ATEO 5 

(and vice versa) because more than 50 

percent of ATEO 5’s directors are 

representatives of ATEO 4; thus, ATEO 

4 controls ATEO 5. Based on the same 

analysis, ATEO 6 is a related 

organization with respect to ATEO 5 

(and vice versa). Applying the 

principles of section 318, ATEO 4 is 

deemed to control 36 percent of ATEO 

6’s directors (60 percent of ATEO 5’s 60 

percent control over ATEO 6). Because 

less than 50 percent of ATEO 6’s 

directors are representatives of ATEO 4, 

and absent any facts suggesting that 

ATEO 4 directly or indirectly controls 

ATEO 6, ATEO 4 and ATEO 6 are not 

related organizations with respect to 

each other. 

§ 53.4960–2 Determination of 

remuneration paid for a taxable year. 

(a) Remuneration—(1) In general. For 

purposes of section 4960, remuneration 

means any amount that is wages as 

defined in section 3401(a), excluding 

any designated Roth contribution (as 

defined in section 402A(c)) and 

including any amount required to be 

included in gross income under section 

457(f). Remuneration includes amounts 

includible in gross income as 

compensation for services as an 

employee pursuant to a below-market 

loan described in section 

7872(c)(1)(B)(i) (compensation-related 

loans) but does not include amounts 

excepted by section 7872(c)(3) ($10,000 

de minimis exception). For example, see 

§ 1.7872–15(e)(1)(i). Director’s fees paid 

by a corporation to a director of the 

corporation are not remuneration, 

provided that if the director is also an 

employee of the corporation, the 

director’s fees are excluded from 

remuneration only to the extent that 

they do not exceed fees paid to a 

director who is not an employee of the 

corporation or any related organization 

or, if there is no such director, they do 

not exceed reasonable director’s fees. 

Remuneration does not include any 

amount that vested or was paid by a 

taxpayer before the start of the 

taxpayer’s first taxable year that began 

on or after January 1, 2018. 

(2) Exclusion of remuneration for 

medical services—(i) In general. 

Remuneration does not include the 

portion of any remuneration paid to a 

licensed medical professional that is for 

the performance of medical services by 

such professional. 

(ii) Allocation of remuneration for 

medical services and non-medical 

services. If, during an applicable year, 

an employer pays a covered employee 

remuneration for providing both 

medical services and non-medical 

services, the employer must make a 

reasonable, good faith allocation 

between the remuneration for medical 

services and the remuneration for nonmedical services. For example, if a 

medical doctor receives current 

remuneration (or vests in remuneration 

under a deferred compensation plan) for 

providing medical services and 

administrative or management services, 

the employer must make a reasonable, 

good faith allocation between the 

remuneration for the medical services 

and the remuneration for the 

administrative or management services. 

For this purpose, if an employment 

agreement or similar written 

arrangement sets forth the remuneration 

to be paid for particular services, that 

allocation of remuneration applies 

unless the facts and circumstances 

demonstrate that the amount allocated 

to medical services is unreasonable for 

those services or that the allocation was 

established for purposes of avoiding 

application of the excise tax under 

section 4960. If some or all of the 

remuneration is not reasonably 

allocated in an employment agreement 

or similar arrangement, an employer 

may use any reasonable allocation 

method. For example, an employer may 

use a representative sample of records, 

such as patient, insurance, and 

Medicare/Medicaid billing records or 

internal time reporting mechanisms to 

determine the time spent providing 

medical services, and then allocate 

remuneration to medical services in the 

proportion such time bears to the total 

hours the employee worked for the 

employer (and any related employer) for 

purposes of making a reasonable 

allocation of remuneration. Similarly, if 

some or all of the remuneration is not 

reasonably allocated in an employment 

agreement or other similar arrangement, 

an employer may use salaries or other 

remuneration paid by the employer or 

similarly situated employers for duties 


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comparable to those the employee 

performs (for example, hospital 

administrator and physician) for 

purposes of making a reasonable 

allocation between remuneration for 

providing medical services and for 

providing non-medical services. 

(iii) Examples. The following 

examples illustrate the rules of this 

paragraph (a)(2). For purposes of these 

examples, assume any entity referred to 

as ‘‘ATEO’’ is an ATEO. 

(A) Example 1 (Allocation based on 

employment agreement)—(1) Facts. 

Employee A is a covered employee of 

ATEO 1. Employee A is a licensed 

medical professional who provides 

patient care services for ATEO 1 and 

also provides management and 

administrative services to ATEO 1 as the 

manager of a medical practice group 

within ATEO 1. The employment 

agreement between ATEO 1 and 

Employee A specifies that of Employee 

A’s salary, 30 percent is allocable to 

Employee A’s services as manager of the 

medical practice group and 70 percent 

is allocable to Employee A’s services as 

a medical professional providing patient 

care services. The facts regarding 

Employee A’s employment indicate the 

employment agreement provides a 

reasonable allocation and that the 

allocation was not established for 

purposes of avoiding application of the 

excise tax. 

(2) Conclusion. Consistent with 

Employee A’s employment agreement, 

ATEO 1 must allocate 30 percent of 

Employee A’s salary to the provision of 

non-medical services and 70 percent of 

Employee A’s salary to the provision of 

medical services. Accordingly, only the 

30 percent portion of Employee A’s 

salary allocated to the other, nonmedical services is remuneration for 

purposes of paragraph (a) of this section. 

(B) Example 2 (Allocation based on 

billing records)—(1) Facts. Assume the 

same facts as in paragraph (a)(2)(iii)(A) 

of this section (Example 1), except that 

the employment agreement does not 

allocate Employee A’s salary between 

medical and non-medical services 

performed by Employee A. Based on a 

representative sample of insurance and 

Medicare billing records, as well as time 

reports that Employee A submits to 

ATEO 1, ATEO 1 determines that 

Employee A spends 50 percent of her 

work hours providing patient care and 

50 percent of her work hours performing 

administrative and management 

services. ATEO 1 allocates 50 percent of 

Employee A’s remuneration to medical 

services. 

(2) Conclusion. ATEO 1’s allocation of 

Employee A’s salary is a reasonable, 

good faith allocation. Accordingly, only 

the 50 percent portion of Employee A’s 

remuneration allocated to the nonmedical services is remuneration for 

purposes of paragraph (a) of this section. 

(b) Source of payment. For purposes 

of this section, the determination of the 

source of a payment of remuneration 

may involve the application of one or 

both of two separate rules described in 

this paragraph (b). Paragraph (b)(1) of 

this section addresses payments by a 

third party for services performed as an 

employee of a separate employer entity, 

while paragraph (b)(2) of this section 

addresses the application of section 

4960(c)(4)(A) to treat certain 

remuneration paid by a related 

organization (after application of 

paragraph (b)(1) of this section, if 

applicable) as paid by the ATEO. 

(1) Remuneration paid by a third 

party for employment by an employer. 

Remuneration paid (or a grant of a 

legally binding right to nonvested 

remuneration) by a third-party payor 

(whether a related organization, payroll 

agent, agent designated under section 

3504, certified professional employer 

organization under section 7705, or 

other entity) during an applicable year 

for services performed as an employee 

of an employer is remuneration paid (or 

payable) by the employer, except as 

otherwise provided in § 53.4960– 

1(d)(2)(ii) and (iii). 

(2) Remuneration paid by a related 

organization for employment by the 

related organization. Pursuant to section 

4960(c)(4)(A), remuneration paid (or a 

grant of a legally binding right to 

nonvested remuneration) by a related 

organization to an ATEO’s employee 

during an applicable year for services 

performed as an employee of the related 

organization is treated as remuneration 

paid (or payable) by the ATEO, except 

as otherwise provided in § 53.4960– 

1(d)(2)(ii) and (iii). 

(c) Applicable year in which 

remuneration is treated as paid—(1) In 

general. Remuneration that is a regular 

wage within the meaning of 

§ 31.3402(g)–1(a)(1)(ii) is treated as paid 

on the date it is actually or 

constructively paid and all other 

remuneration is treated as paid on the 

first date on which the remuneration is 

vested. 

(2) Vested remuneration. 

Remuneration is vested if it is not 

subject to a substantial risk of forfeiture 

within the meaning of section 

457(f)(3)(B) (regardless of whether the 

arrangement under which the 

remuneration is to be paid is deferred 

compensation described in section 

457(f) or 409A). In general, an amount 

is subject to a substantial risk of 

forfeiture if entitlement to the amount is 

conditioned on the future performance 

of substantial services or upon the 

occurrence of a condition that is related 

to a purpose of the remuneration if the 

possibility of forfeiture is substantial. 

Except as provided in paragraph (c)(1) 

of this section, remuneration that is 

never subject to a substantial risk of 

forfeiture is considered paid on the first 

date the service provider has a legally 

binding right to the payment. For 

purposes of this section, a plan means 

a plan within the meaning of § 1.409A– 

1(c), an account balance plan means an 

account balance plan within the 

meaning of § 1.409A–1(c)(2)(i)(A), and a 

nonaccount balance plan means a 

nonaccount balance plan within the 

meaning of § 1.409A–1(c)(2)(i)(C). Net 

earnings on previously paid 

remuneration (described in paragraph 

(d)(2) of this section) that are not subject 

to a substantial risk of forfeiture are 

vested (and, thus, treated as paid) at the 

earlier of the date actually or 

constructively paid to the employee or 

the close of the applicable year in which 

they accrue. For example, the present 

value of a principal amount accrued to 

an employee’s account under an 

account balance plan (under which the 

earnings and losses attributed to the 

account are based solely on a 

predetermined actual investment as 

determined under § 31.3121(v)(2)– 

1(d)(2)(i)(B) or a reasonable market 

interest rate) is treated as paid on the 

date vested, but the present value of any 

net earnings subsequently accrued on 

that amount (the increase in value due 

to the predetermined actual investment 

or a reasonable market interest rate) is 

treated as paid at the close of the 

applicable year in which they accrue. 

Similarly, while the present value of an 

amount accrued under a nonaccount 

balance (including earnings that accrued 

while the amount was nonvested) is 

treated as paid on the date it is first 

vested, the present value of the net 

earnings on that amount (the increase in 

the present value) is treated as paid at 

the close of the applicable year in which 

they accrue. 

(3) Change in related status during the 

year. If a taxpayer becomes or ceases to 

be a related organization with respect to 

an ATEO during an applicable year, 

then only the remuneration paid by the 

taxpayer to an employee with respect to 

services performed as an employee of 

the related organization during the 

portion of the applicable year during 

which the employer is a related 

organization is treated as paid by the 

ATEO. If an amount is treated as paid 

due to vesting in the year the taxpayer 

becomes or ceases to be a related 


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organization with respect to the ATEO, 

then the amount is treated as paid by 

the ATEO only if the amount becomes 

vested during the portion of the 

applicable year that the taxpayer is a 

related organization with respect to the 

ATEO. 

(d) Amount of remuneration treated 

as paid—(1) In general. For each 

applicable year, the amount of 

remuneration treated as paid by the 

employer to a covered employee is the 

sum of regular wages within the 

meaning of § 31.3402(g)–1(a)(1)(ii) 

actually or constructively paid during 

the applicable year and the present 

value (as determined under paragraph 

(e) of this section) of all other 

remuneration that vested during the 

applicable year. The amount of 

remuneration that vests during an 

applicable year is determined on an 

employer-by-employer basis with 

respect to each covered employee. 

(2) Earnings and losses on previously 

paid remuneration—(i) In general. The 

amount of net earnings or losses on 

previously paid remuneration paid by 

an employer is determined on an 

employee-by-employee basis, such that 

amounts accrued with regard to one 

employee do not affect amounts accrued 

with regard to a different employee. 

Similarly, losses accrued on previously 

paid remuneration from one employer 

do not offset earnings accrued on 

previously paid remuneration from 

another employer. The amount of net 

earnings or losses on previously paid 

remuneration paid by the employer is 

determined on a net aggregate basis for 

all plans maintained by the employer in 

which the employee participates for 

each applicable year. For example, 

losses under an account balance plan 

may offset earnings under a nonaccount 

balance plan for the same applicable 

year maintained by the same employer 

for the same employee. 

(ii) Previously paid remuneration— 

(A) New covered employee. For an 

individual who was not a covered 

employee for any prior applicable year, 

previously paid remuneration means, 

for the applicable year for which the 

individual becomes a covered 

employee, the present value of vested 

remuneration that was not actually or 

constructively paid or otherwise 

includible in the employee’s gross 

income before the start of the applicable 

year plus any remuneration that vested 

during the applicable year but that is 

not actually or constructively paid or 

otherwise includible in the employee’s 

gross income before the close of the 

applicable year. 

(B) Existing covered employee. For an 

individual who was a covered employee 

for any prior applicable year, previously 

paid remuneration means, for each 

applicable year, the amount of 

remuneration that the employer treated 

as paid in the applicable year or for a 

prior applicable year but that is not 

actually or constructively paid or 

otherwise includible in the employee’s 

gross income before the close of the 

applicable year. Actual or constructive 

payment or another event causing an 

amount of previously paid remuneration 

to be includible in the employee’s gross 

income thus reduces the amount of 

previously paid remuneration. 

(iii) Earnings. Earnings means any 

increase in the vested present value of 

previously paid remuneration as of the 

close of the applicable year, regardless 

of whether the plan denominates the 

increase as earnings. For example, an 

increase in the vested account balance 

of a nonqualified deferred compensation 

plan based solely on the investment 

return of a predetermined actual 

investment (and disregarding any 

additional contributions) constitutes 

earnings. Similarly, an increase in the 

vested present value of a benefit under 

a nonqualified nonaccount balance plan 

due solely to the passage of time (and 

disregarding any additional benefit 

accruals) constitutes earnings. However, 

an increase in an account balance of a 

nonqualified deferred compensation 

plan due to a salary reduction 

contribution or an employer 

contribution does not constitute 

earnings (and therefore may not be 

offset with losses). Likewise, an increase 

in the benefit under a nonaccount 

balance plan due to an additional year 

of service or an increase in 

compensation that is reflected in a 

benefit formula does not constitute 

earnings. 

(iv) Losses. Losses means any decrease 

in the vested present value of previously 

paid remuneration as of the close of the 

applicable year, regardless of whether 

the plan denominates that decrease as 

losses. 

(v) Net earnings. Net earnings means, 

for each applicable year, the amount (if 

any) by which the earnings accrued for 

the applicable year on previously paid 

remuneration exceeds the sum of the 

losses accrued on previously paid 

remuneration for the applicable year 

and any net losses carried forward from 

a previous taxable year. 

(vi) Net losses. Net losses means, for 

each applicable year, the amount (if 

any) by which the sum of the losses 

accrued on previously paid 

remuneration for the applicable year 

and any net losses carried forward from 

a previous taxable year exceed the 

earnings accrued for the applicable year 

on previously paid remuneration. 

Losses may only be used to offset 

earnings and thus do not reduce the 

remuneration treated as paid for an 

applicable year except to the extent of 

the earnings accrued for that applicable 

year. However, with regard to a covered 

employee, an employer may carry net 

losses forward to the next applicable 

year and offset vested earnings for 

purposes of determining net earnings or 

losses for that subsequent applicable 

year. For example, if a covered 

employee who participates in a 

nonaccount balance plan and an 

account balance plan vests in an amount 

of earnings under the nonaccount 

balance plan and has losses under the 

account balance plan that exceed the 

vested earnings treated as remuneration 

under the nonaccount balance plan, 

those excess losses are carried forward 

to the next applicable year and offset 

vested earnings for purposes of 

determining net earnings or losses for 

that applicable year. If, for the next 

applicable year, there are not sufficient 

earnings to offset the entire amount of 

losses carried forward from the previous 

year (and any additional losses), the 

offset process repeats for each 

subsequent applicable year until there 

are sufficient earnings for the applicable 

year to offset any remaining losses 

carried forward. 

(3) Remuneration paid for a taxable 

year before the employee becomes a 

covered employee—(i) In general. In 

accordance with the payment timing 

rules of paragraph (c) of this section, 

any remuneration that is vested but is 

not actually or constructively paid or 

otherwise includible in an employee’s 

gross income as of the close of the 

applicable year for the taxable year 

immediately preceding the taxable year 

in which the employee first becomes a 

covered employee of an ATEO is treated 

as previously paid remuneration for the 

taxable year in which the employee first 

becomes a covered employee. Net losses 

on this previously paid remuneration 

from any preceding applicable year do 

not carry forward to subsequent 

applicable years. However, net earnings 

and losses that vest on such previously 

paid remuneration in subsequent 

applicable years are treated as 

remuneration paid for a taxable year for 

which the employee is a covered 

employee. 

(ii) Examples. The following 

examples illustrate the rules of this 

paragraph (d)(3). For purposes of these 

examples, assume any organization 

described as ‘‘ATEO’’ is an ATEO. 

(A) Example 1 (Earnings on precovered employee remuneration)—(1) 

Facts. ATEO 1 uses a taxable year 


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beginning July 1 and ending June 30. 

Employee A becomes a covered 

employee of ATEO 1 for the taxable year 

beginning July 1, 2023, and ending June 

30, 2024. During the 2022 applicable 

year, Employee A vests in $1 million of 

nonqualified deferred compensation. As 

of December 31, 2022, the present value 

of the amount deferred under the plan 

is $1.1 million. During the 2023 

applicable year, ATEO 1 pays Employee 

A $1 million in regular wages. The 

present value as of December 31, 2023, 

of Employee A’s nonqualified deferred 

compensation is $1.3 million. 

(2) Conclusion (Taxable year 

beginning July 1, 2022, and ending June 

30, 2023). ATEO 1 pays Employee A 

$1.1 million of remuneration in the 

2022 applicable year. This is comprised 

of $1 million of vested nonqualified 

deferred compensation, and $100,000 of 

earnings, all of which is treated as paid 

for the taxable year beginning July 1, 

2022, and ending June 30, 2023. 

(3) Conclusion (Taxable year 

beginning July 1, 2023, and ending June 

30, 2024). ATEO 1 pays Employee A 

$1.2 million of remuneration in the 

2023 applicable year. This is comprised 

of $1 million regular wages and 

$200,000 of earnings ($1.3 million 

present value as of December 31, 2023, 

minus $1.1 million previously paid 

remuneration as of December 31, 2022). 

(B) Example 2 (Losses on pre-covered 

employee remuneration)—(1) Facts. 

Assume the same facts as in paragraph 

(d)(3)(ii)(A) of this section (Example 1), 

except that the present value of the 

nonqualified deferred compensation as 

of December 31, 2022, is $900,000. 

(2) Conclusion (Taxable year 

beginning July 1, 2022, and ending June 

30, 2023). ATEO 1 pays Employee A $1 

million of remuneration in the 2022 

applicable year. This is comprised of $1 

million of vested nonqualified deferred 

compensation. The present value of all 

vested deferred compensation as of 

December 31 of the 2022 applicable year 

($900,000) is treated as previously paid 

remuneration for the next applicable 

year (as Employee A is a covered 

employee for the next taxable year). The 

$100,000 of losses accrued while 

Employee A was not a covered 

employee do not carry forward to the 

next applicable year. 

(3) Conclusion (Taxable year 

beginning July 1, 2023, and ending June 

30, 2024). ATEO 1 pays Employee A 

$1.4 million of remuneration in the 

2023 applicable year. This is comprised 

of $1 million cash and $400,000 of 

earnings ($1.3 million present value as 

of December 31, 2023, minus $900,000 

previously paid remuneration). 

(e) Calculation of present value—(1) 

In general. The employer must 

determine present value using 

reasonable actuarial assumptions 

regarding the amount, time, and 

probability that a payment will be made. 

For this purpose, a discount for the 

probability that an employee will die 

before commencement of benefit 

payments is permitted, but only to the 

extent that benefits will be forfeited 

upon death. The present value may not 

be discounted for the probability that 

payments will not be made (or will be 

reduced) because of the unfunded status 

of the plan; the risk associated with any 

deemed or actual investment of amounts 

deferred under the plan; the risk that the 

employer, the trustee, or another party 

will be unwilling or unable to pay; the 

possibility of future plan amendments; 

the possibility of a future change in the 

law; or similar risks or contingencies. 

The present value of the right to future 

payments as of the vesting date includes 

any earnings that have accrued as of the 

vesting date that are not previously paid 

remuneration. 

(2) Treatment of future payment 

amount as present value for certain 

amounts. For purposes of determining 

the present value of remuneration that 

is scheduled to be actually or 

constructively paid within 90 days of 

vesting, the employer may treat the 

future amount that is to be paid as the 

present value at vesting. 

(f) Examples. The following examples 

illustrate the rules of this section. For 

purposes of these examples, assume any 

entity referred to as ‘‘ATEO’’ is an 

ATEO, any entity referred to as ‘‘CORP’’ 

is not an ATEO, and all taxpayers use 

the calendar year as their taxable year. 

(1) Example 1 (Account balance 

plan)—(i) Facts. Employee A is a 

covered employee of ATEO 1. Employee 

A participates in a nonqualified 

deferred compensation plan (the NQDC 

plan) in which the account balance is 

adjusted based on the investment 

returns on predetermined actual 

investments. On January 1, 2022, ATEO 

1 credits $100,000 to Employee A’s 

account under the plan, subject to the 

requirement that Employee A remain 

employed through June 30, 2024. On 

June 30, 2024, the vested account 

balance is $110,000. Due to earnings or 

losses on the account balance, the 

closing account balance on each of the 

following dates is: $115,000 on 

December 31, 2024, $120,000 on 

December 31, 2025, $100,000 on 

December 31, 2026, and $110,000 on 

December 31, 2027. During 2028, 

Employee A defers an additional 

$10,000 under the plan, all of which is 

vested at the time of deferral. On 

December 31, 2028, the closing account 

balance is $125,000. In 2029, ATEO 1 

pays $10,000 to Employee A under the 

plan. On December 31, 2029, the closing 

account balance is $135,000 due to 

earnings on the account balance. 

(ii) Conclusion (2022 and 2023 

applicable years—nonvested amounts). 

For 2022 and 2023, ATEO 1 is not 

treated as paying Employee A any 

remuneration attributable to Employee 

A’s participation in the NQDC plan 

because the amount deferred under the 

plan remains subject to a substantial 

risk of forfeiture within the meaning of 

section 457(f)(3)(B). 

(iii) Conclusion (2024 applicable 

year—amounts in year of vesting). For 

2024, ATEO 1 is treated as paying 

Employee A $115,000 of remuneration 

attributable to Employee A’s 

participation in the NQDC plan, 

including $110,000 of remuneration on 

June 30, 2024, when the amount 

becomes vested, and an additional 

$5,000 of remuneration on December 31, 

2024, which is earnings on the 

previously paid remuneration 

($110,000). 

(iv) Conclusion (2025 applicable 

year—earnings). For 2025, ATEO 1 is 

treated as paying Employee A $5,000 of 

remuneration attributable to Employee 

A’s participation in the NQDC plan, 

which is the additional earnings on the 

previously paid remuneration 

($115,000) as of December 31, 2025. 

(v) Conclusion (2026 applicable 

year—losses). For 2026, ATEO 1 is not 

treated as paying Employee A any 

remuneration attributable to Employee 

A’s participation in the NQDC plan 

because the present value of the 

previously paid remuneration 

($120,000) decreased to $100,000 as of 

December 31, 2026. The $20,000 loss for 

2026 does not reduce any amount 

previously treated as remuneration but 

is available for carryover to subsequent 

taxable years to offset earnings. 

(vi) Conclusion (2027 applicable 

year—recovery of losses). For 2027, 

ATEO 1 is not treated as paying 

Employee A any remuneration 

attributable to Employee A’s 

participation in the NQDC plan because 

the present value of the previously paid 

remuneration ($120,000) was $110,000 

as of December 31, 2027. Due to 

increases on the account balance, ATEO 

1 recovers $10,000 of the $20,000 of 

losses carried over from 2026. The net 

losses as of December 31, 2027, are 

$10,000, and none of the $10,000 in 

earnings during 2027 is treated as 

remuneration paid in 2027. 

(vii) Conclusion (2028 applicable 

year—no recovery of losses against 

additional deferrals of compensation). 


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For 2028, ATEO 1 is treated as paying 

Employee A $10,000 of remuneration 

attributable to Employee A’s 

participation in the NQDC plan. The 

additional $10,000 deferral is vested 

and thus is treated as remuneration paid 

on the date credited to Employee A’s 

account. This credit increases the 

amount of previously paid remuneration 

from $120,000 to $130,000. 

Additionally, due to earnings, ATEO 1 

recovers $5,000 of the $10,000 loss 

carried over from 2027, none of which 

was remuneration paid for 2026, so that 

as of December 31, 2028, the net loss 

available for carryover to 2029 is $5,000. 

(viii) Conclusion (2029 applicable 

year—distributions, recovery of 

remainder of losses through earnings 

and additional earnings). For 2029, 

ATEO 1 is treated as paying Employee 

A $15,000 of remuneration attributable 

to Employee A’s participation in the 

NQDC plan. The $10,000 payment 

reduces the amount of previously paid 

remuneration (from $130,000 to 

$120,000) and the account balance (from 

$125,000 to $115,000). The present 

value of the vested account balance 

increases by $20,000 (from $115,000 to 

$135,000) as of December 31, 2029. 

Therefore, due to earnings, ATEO 1 

recovers the remaining $5,000 loss 

carried over from 2028 (the difference 

between the $120,000 previously paid 

remuneration before earnings and the 

$115,000 account balance before 

earnings) and is treated as paying 

Employee A an additional $15,000 of 

remuneration as earnings (the difference 

between the $135,000 account balance 

after earnings and the $120,000 

previously paid remuneration after loss 

recovery). 

(2) Example 2 (Nonaccount balance 

plan with earnings)—(i) Facts. ATEO 2 

and CORP 2 are related organizations. 

Employee B is a covered employee of 

ATEO 2 and is also employed by CORP 

2. On January 1, 2022, CORP 2 and 

Employee B enter into an agreement 

under which CORP 2 will pay Employee 

B $100,000 on December 31, 2025, if B 

remains employed by CORP 2 through 

January 1, 2024. Employee B remains 

employed by CORP 2 through January 1, 

2024. On January 1, 2024, the present 

value based on reasonable actuarial 

assumptions of the $100,000 to be paid 

on December 31, 2025, is $75,000. On 

December 31, 2024, the present value of 

the $100,000 future payment increases 

to $85,000 due solely to the passage of 

time. On December 31, 2025, CORP 2 

pays Employee B $100,000. 

(ii) Conclusion (2022 and 2023 

applicable years—nonvested amounts). 

For 2022 and 2023, CORP 2 is not 

treated as paying Employee B any 

remuneration attributable to the 

agreement because the amount deferred 

under the agreement remains subject to 

a substantial risk of forfeiture within the 

meaning of section 457(f)(3)(B). 

(iii) Conclusion (2024 applicable 

year—amounts in year of vesting). For 

2024, CORP 2 is treated as paying 

Employee B $75,000 of remuneration 

attributable to the agreement on January 

1, 2024, which is the present value on 

that date of the $100,000 payable on 

December 31, 2025. In addition, CORP 

2 is treated as paying Employee B 

$10,000 of remuneration attributable to 

the agreement on December 31, 2024, 

which is earnings based on the increase 

in the present value of the previously 

paid remuneration (from $75,000 to 

$85,000) as of December 31, 2024. 

(iv) Conclusion (2025 applicable 

year—earnings and distribution of 

previously paid remuneration). For 

2025, CORP 2 is treated as paying 

Employee B $15,000 in remuneration 

attributable to the agreement on 

December 31, 2025, which is earnings 

based on the increase in the present 

value of the previously paid 

remuneration (from $85,000 to 

$100,000) as of December 31, 2025. In 

addition, the $100,000 payment is 

treated as reducing the amount of 

previously paid remuneration 

($100,000) to zero. 

(3) Example 3 (Treatment of amount 

payable as present value at vesting)—(i) 

Facts. Employee C is a covered 

employee of ATEO 3. Under an 

agreement between ATEO 3 and 

Employee C, ATEO 3 agrees to pay 

Employee C $100,000 two months after 

the date Employee C meets a specified 

performance goal that is a substantial 

risk of forfeiture within the meaning of 

section 457(f)(3)(B). Employee C meets 

the performance goal on November 30, 

2022, and ATEO 3 pays Employee C 

$100,000 on January 31, 2023. In 

accordance with § 53.4960–2(e)(2), 

because the payment is to be made 

within 90 days of vesting, ATEO 3 elects 

to treat the full payment amount as the 

amount of remuneration paid at vesting. 

(ii) Conclusion (2022 applicable 

year—election to treat amount payable 

within 90 days as paid at vesting). For 

taxable year 2022, ATEO 3 is treated as 

paying Employee C $100,000 of 

remuneration attributable to the 

agreement. Employee C vests in the 

$100,000 payment in 2022 upon 

meeting the performance goal. Under 

the general rule, ATEO 3 would be 

treated as paying for the taxable year 

2022 the present value as of November 

30, 2022, of $100,000 payable on 

January 31, 2023 (two months after the 

date of vesting), with adjustments to the 

present value as of the end of the year. 

However, because ATEO 3 elected to 

treat the full $100,000 amount payable 

within 90 days of vesting as the 

remuneration paid, the $100,000 

payable to Employee C in 2023 is 

treated as remuneration paid in 2022 

(and no additional amount related to the 

$100,000 paid on January 31, 2023, is 

treated as remuneration paid in 2023). 

(4) Example 4 (Aggregation of 

remuneration from related 

organizations)—(i) Facts. Employee D is 

a covered employee of ATEO 4 and also 

an employee of CORP 4 and CORP 5. 

ATEO 4, CORP 4, and CORP 5 are 

related organizations. ATEO 4, CORP 4, 

and CORP 5 each pay Employee D 

$200,000 of salary during 2022 and 

2023. On January 1, 2022, ATEO 4 

promises to pay Employee D $120,000 

on December 31, 2023, under a 

nonaccount balance plan, the right to 

which is vested and the present value of 

which is $100,000 on January 1, 2022. 

On January 1, 2022, CORP 4 and CORP 

5 each contribute $100,000 on Employee 

D’s behalf to account balance plans of 

CORP 4 and CORP 5, respectively, 

under which all amounts deferred are 

vested. On December 31, 2022, the 

present value of the amounts deferred 

under the ATEO 4 plan is $110,000, the 

present value of the amounts deferred 

under the CORP 4 plan is $120,000, and 

the present value of the amounts 

deferred under the CORP 5 plan 

maintained is $90,000. On December 31, 

2023, the present value of the amounts 

deferred under the ATEO 4 plan is 

$120,000, the present value of the 

amounts deferred under the CORP 4 

plan is $130,000, and the present value 

of the amounts deferred under the CORP 

5 plan is $110,000. 

(ii) Conclusion (2022 applicable year). 

For 2022, before aggregation of 

remuneration paid by related 

organizations, ATEO 4 is treated as 

paying Employee D $310,000 of 

remuneration ($200,000 salary + 

$100,000 upon vesting of deferred 

amounts + $10,000 net earnings on 

vested deferred amounts). CORP 4 is 

treated as paying Employee D $320,000 

of remuneration ($200,000 salary + 

$100,000 upon vesting of deferred 

amounts + $20,000 net earnings on 

vested deferred amounts). CORP 5 is 

treated as paying Employee D $300,000 

of remuneration ($200,000 salary + 

$100,000 upon vesting of deferred 

amounts) and has $10,000 of net losses 

on vested deferred amounts, which are 

carried forward to 2023. Thus, ATEO 4 

is treated as paying $930,000 of 

remuneration to Employee D for the 

applicable year. 


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(iii) Conclusion (2023 applicable 

year). For 2023, before aggregation of 

remuneration paid by related 

organizations, ATEO 4 is treated as 

paying Employee D $210,000 of 

remuneration ($200,000 salary + 

$10,000 earnings on previously paid 

remuneration). CORP 4 is treated as 

paying Employee D $210,000 of 

remuneration ($200,000 salary + 

$10,000 net earnings on previously paid 

remuneration). CORP 5 is treated as 

paying Employee D $210,000 of 

remuneration ($200,000 salary + 

$10,000 net earnings on previously paid 

remuneration after taking into account 

the loss carryforward). Thus, ATEO 4 is 

treated as paying $630,000 of 

remuneration to Employee D for the 

applicable year. 

(5) Example 5 (Treatment of regular 

wages for a pay period spanning 

applicable years)—(i) Facts. ATEO 5 

pays its employees’ salaries in 

accordance with a two-week payroll 

period that begins Sunday of the first 

week and ends Saturday of the second 

week. Payment occurs the Friday 

following the end of the payroll period. 

The last payroll period of 2023 ends on 

December 31, 2023. For the last payroll 

period, Employee E earns $8,000 of 

salary. In addition, ATEO 5 awards 

Employee E a $10,000 bonus that vests 

on December 31, 2023. ATEO 5 pays 

Employee E $18,000 on Friday, January 

5, 2024, reflecting Employee E’s salary 

for the last payroll period of 2023 and 

the bonus, the right to which vested on 

December 31, 2023. 

(ii) Conclusion (Regular wages). The 

$8,000 of salary is regular wages within 

the meaning of § 31.3402(g)–1(a)(1)(ii) 

because it is an amount paid at a 

periodic rate for the current payroll 

period. Thus, $8,000 is treated as 

remuneration paid on January 5, 2024 

(when it is actually or constructively 

paid), and, therefore, is treated as 

remuneration paid in ATEO 5’s 2024 

applicable year. 

(iii) Conclusion (Amounts other than 

regular wages). The $10,000 bonus is 

not regular wages within the meaning of 

§ 31.3402(g)–1(a)(1)(ii) because it is not 

an amount paid at a periodic rate for the 

current payroll period. Thus, $10,000 is 

treated as remuneration paid on 

December 31, 2023 (when it is vested) 

and, therefore, is treated as 

remuneration paid in ATEO 5’s 2023 

applicable year. 

§ 53.4960–3 Determination of whether 

there is a parachute payment. 

(a) Parachute payment—(1) In 

general. Except as otherwise provided 

in paragraph (a)(2) of this section 

(relating to payments excluded from the 

definition of a parachute payment), 

parachute payment means any payment 

in the nature of compensation made by 

an ATEO (or a predecessor of the ATEO) 

or a related organization to (or for the 

benefit of) a covered employee if the 

payment is contingent on the 

employee’s separation from 

employment with the employer, and the 

aggregate present value of the payments 

in the nature of compensation to (or for 

the benefit of) the individual that are 

contingent on the separation equals or 

exceeds an amount equal to 3-times the 

base amount. 

(2) Exclusions. The following 

payments are not parachute payments: 

(i) Certain qualified plans. A payment 

that is a contribution to or a distribution 

from a plan described in section 401(a) 

that includes a trust exempt from tax 

under section 501(a), an annuity plan 

described in section 403(a), a simplified 

employee pension (as defined in section 

408(k)), or a simple retirement account 

described in section 408(p); 

(ii) Certain annuity contracts. A 

payment made under or to an annuity 

contract described in section 403(b) or 

a plan described in section 457(b); 

(iii) Compensation for medical 

services. A payment made to a licensed 

medical professional for the 

performance of medical services 

performed by such professional; and 

(iv) Payments to non-HCEs. A 

payment made to an individual who is 

not a highly compensated employee 

(HCE) as defined in paragraph (a)(3) of 

this section. 

(3) Determination of HCEs for 

purposes of the exclusion from 

parachute payments. For purposes of 

this section, highly compensated 

employee or HCE means, with regard to 

an ATEO that maintains a qualified 

retirement plan or other employee 

benefit plan described in § 1.414(q)–1T, 

Q/A–1, any person who is a highly 

compensated employee within the 

meaning of section 414(q) and, with 

regard to an ATEO that does not 

maintain such a plan, any person who 

would be a highly compensated 

employee within the meaning of section 

414(q) if the ATEO did maintain such a 

plan. For purposes of determining the 

group of highly compensated employees 

for a determination year, consistent with 

§ 1.414(q)–1T, Q/A–14(a)(1), the 

determination year calculation is made 

on the basis of the applicable plan year 

under § 1.414(q)–1T, Q/A–14(a)(2) of the 

plan or other entity for which a 

determination is made, and the lookback year calculation is made on the 

basis of the 12-month period 

immediately preceding that year. For an 

ATEO that does not maintain a plan 

described in § 1.414(q)–1T, Q/A–1, the 

rules are applied by analogy, 

substituting the calendar year for the 

plan year. Thus, for example, in 2022, 

an ATEO that does not maintain such a 

plan must use its employees’ 2021 

annual compensation (as defined in 

§ 1.414(q)–1T, Q/A–13, including any of 

the safe harbor definitions if applied 

consistently to all employees) to 

determine which employees are HCEs 

for 2022, if any, for purposes of section 

4960. If an employee is an HCE at the 

time of separation from employment, 

then for purposes of section 4960 any 

parachute payment that is contingent on 

the separation from employment (as 

defined in paragraph (d) of this section) 

is treated as paid to an HCE so that the 

exception from the term parachute 

payment under paragraph (a)(2)(iv) of 

this section does not apply, even if the 

payment occurs during one or more 

later taxable years (that is, taxable years 

after the taxable year during which the 

employee separated from employment). 

(b) Payment in the nature of 

compensation—(1) In general. Any 

payment—in whatever form—is a 

payment in the nature of compensation 

if the payment arises out of an 

employment relationship, including 

holding oneself out as available to 

perform services and refraining from 

performing services. Thus, for example, 

a payment made under a covenant not 

to compete or a similar arrangement is 

a payment in the nature of 

compensation. A payment in the nature 

of compensation includes (but is not 

limited to) wages and salary, bonuses, 

severance pay, fringe benefits, life 

insurance, pension benefits, and other 

deferred compensation (including any 

amount characterized by the parties as 

interest or earnings thereon). A payment 

in the nature of compensation also 

includes cash when paid, the value of 

the right to receive cash, the value of 

accelerated vesting, or a transfer of 

property. The vesting of an option, stock 

appreciation right, or similar form of 

compensation as a result of a covered 

employee’s separation from 

employment is a payment in the nature 

of compensation. However, a payment 

in the nature of compensation does not 

include attorney’s fees or court costs 

paid or incurred in connection with the 

payment of any parachute payment or a 

reasonable rate of interest accrued on 

any amount during the period the 

parties contest whether a parachute 

payment will be made. 

(2) Consideration paid by covered 

employee. Any payment in the nature of 

compensation is reduced by the amount 

of any money or the fair market value 

of any property (owned by the covered 


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employee without restriction) that is (or 

will be) transferred by the covered 

employee in exchange for the payment. 

(c) When payment is considered to be 

made—(1) In general. A payment in the 

nature of compensation is considered 

made in the taxable year in which it is 

includible in the covered employee’s 

gross income or, in the case of fringe 

benefits and other benefits that are 

excludable from income, in the taxable 

year the benefits are received. In the 

case of taxable non-cash fringe benefits 

provided in a calendar year, payment is 

considered made on the date or dates 

the employer chooses, but no later than 

December 31 of the calendar year in 

which the benefits are provided, except 

that when the fringe benefit is the 

transfer of personal property (either 

tangible or intangible) of a kind 

normally held for investment or the 

transfer of real property, payment is 

considered made on the actual date of 

transfer. If the fringe benefit is neither 

a transfer of personal property nor a 

transfer of real property, the employer 

may, in its discretion, treat the value of 

the benefit actually provided during the 

last two months of the calendar year as 

paid during the subsequent calendar 

year. However, an employer that treats 

the value of a benefit paid during the 

last two months of a calendar year as 

paid during the subsequent calendar 

year under this rule must treat the value 

of that fringe benefit as paid during the 

subsequent calendar year with respect 

to all employees who receive it. 

(2) Transfers of section 83 property. A 

transfer of property in connection with 

the performance of services that is 

subject to section 83 is considered a 

payment made in the taxable year in 

which the property is transferred or 

would be includible in the gross income 

of the covered employee under section 

83, disregarding any election made by 

the employee under section 83(b) or (i). 

Thus, in general, such a payment is 

considered made at the later of the date 

the property is transferred (as defined in 

§ 1.83–3(a)) to the covered employee or 

the date the property becomes 

substantially vested (as defined in 

§ 1.83–3(b) and (j)). The amount of the 

payment is the compensation as 

determined under section 83, 

disregarding any amount includible in 

income pursuant to an election made by 

an employee under section 83(b). 

(3) Stock options. An option 

(including an option to which section 

421 applies) is treated as property that 

is transferred when the option becomes 

vested (regardless of whether the option 

has a readily ascertainable fair market 

value as defined in § 1.83–7(b)). For 

purposes of determining the timing and 

amount of any payment related to the 

option, the principles of § 1.280G–1, Q/ 

A–13 and any method prescribed by the 

Commissioner in published guidance of 

general applicability under 

§ 601.601(d)(2) apply. 

(d) Payment contingent on an 

employee’s separation from 

employment—(1) In general. A payment 

is contingent on an employee’s 

separation from employment if the facts 

and circumstances indicate that the 

employer would not make the payment 

in the absence of the employee’s 

involuntary separation from 

employment. A payment generally 

would be made in the absence of the 

employee’s involuntary separation from 

employment if it is substantially certain 

at the time of the involuntary separation 

from employment that the payment 

would be made whether or not the 

involuntary separation occurred. A 

payment the right to which is not 

subject to a substantial risk of forfeiture 

within the meaning of section 

457(f)(3)(B) at the time of an involuntary 

separation from employment generally 

is a payment that would have been 

made in the absence of an involuntary 

separation from employment (and is 

therefore not contingent on a separation 

from employment), except that the 

increased value of an accelerated 

payment of a vested amount described 

in paragraph (f)(3) of this section 

resulting from an involuntary separation 

from employment is not treated as a 

payment that would have been made in 

the absence of an involuntary separation 

from employment. A payment the right 

to which is no longer subject to a 

substantial risk of forfeiture within the 

meaning of section 457(f)(3)(B) as a 

result of an involuntary separation from 

employment, including a payment the 

vesting of which is accelerated due to 

the separation from employment as 

described in paragraph (f)(3) of this 

section, is not treated as a payment that 

would have been made in the absence 

of an involuntary separation from 

employment (and thus is contingent on 

a separation from employment). A 

payment does not fail to be contingent 

on a separation from employment 

merely because the payment is 

conditioned upon the execution of a 

release of claims, noncompetition or 

nondisclosure provisions, or other 

similar requirements. See paragraph 

(d)(3) of this section for the treatment of 

a payment made pursuant to a covenant 

not to compete. If, after an involuntary 

separation from employment, the former 

employee continues to provide certain 

services as a nonemployee, payments 

for services rendered as a nonemployee 

are not payments that are contingent on 

a separation from employment to the 

extent those payments are reasonable 

and are not made on account of the 

involuntary separation from 

employment. Whether services are 

performed as an employee or 

nonemployee depends upon all the facts 

and circumstances. See § 53.4960–1(e). 

For rules on determining whether 

payments are reasonable compensation 

for services, the rules of § 1.280G–1, Q/ 

A–40 through Q/A–42 (excluding Q/A– 

40(b) and Q/A–42(b)), and Q/A–44 are 

applied by analogy (substituting 

involuntary separation from 

employment for change in ownership or 

control). 

(2) Employment agreements—(i) In 

general. If a covered employee 

involuntarily separates from 

employment before the end of a contract 

term and is paid damages for breach of 

contract pursuant to an employment 

agreement, the payment of damages is 

treated as a payment that is contingent 

on a separation from employment. An 

employment agreement is an agreement 

between an employee and employer that 

describes, among other things, the 

amount of compensation or 

remuneration payable to the employee 

for services performed during the term 

of the agreement. 

(ii) Example. The following example 

illustrates the rules of this paragraph 

(d)(2). For purposes of this example, 

assume any entity referred to as 

‘‘ATEO’’ is an ATEO. 

(A) Example—(1) Facts. Employee A, 

a covered employee, has a 3-year 

employment agreement with ATEO 1. 

Under the agreement, Employee A will 

receive a salary of $200,000 for the first 

year and, for each succeeding year, an 

annual salary that is $100,000 more than 

the previous year. The agreement 

provides that, in the event of A’s 

involuntary separation from 

employment without cause, Employee A 

will receive the remaining salary due 

under the agreement. At the beginning 

of the second year of the agreement, 

ATEO 1 involuntarily terminates 

Employee A’s employment without 

cause and pays Employee A $700,000 

representing the remaining salary due 

under the employment agreement 

($300,000 for the second year of the 

agreement plus $400,000 for the third 

year of the agreement). 

(2) Conclusion. The $700,000 

payment is treated as a payment that is 

contingent on a separation from 

employment. 

(3) Noncompetition agreements. A 

payment under an agreement requiring 

a covered employee to refrain from 

performing services (for example, a 


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covenant not to compete) is a payment 

that is contingent on a separation from 

employment if the payment would not 

have been made in the absence of an 

involuntary separation from 

employment. For example, a payment 

contingent on compliance in whole or 

in part with a covenant not to compete 

negotiated as part of a severance 

arrangement arising from an involuntary 

separation from employment is 

contingent on a separation from 

employment. Similarly, one or more 

payments contingent on compliance in 

whole or in part with a covenant not to 

compete not negotiated as part of a 

severance arrangement arising from an 

involuntary separation from 

employment but that provides for a 

payment specific to an involuntary 

separation from employment (and not 

voluntary separation from employment) 

is contingent on a separation from 

employment. Payments made under an 

agreement requiring a covered employee 

to refrain from performing services that 

are contingent on separation from 

employment are not treated as paid in 

exchange for the performance of 

services and are not excluded from 

parachute payments. 

(4) Payment of amounts previously 

included in income or excess 

remuneration. Actual or constructive 

payment of an amount that was 

previously included in gross income of 

the employee is not a payment 

contingent on a separation from 

employment. For example, payment of 

an amount included in income under 

section 457(f)(1)(A) due to the lapsing of 

a substantial risk of forfeiture on a date 

before the separation from employment 

generally is not a payment that is 

contingent on a separation from 

employment, even if the amount is paid 

in cash or otherwise to the employee 

because of the separation from 

employment. In addition, actual or 

constructive receipt of an amount 

treated as excess remuneration under 

§ 53.4960–4(b)(1) is not a payment that 

is contingent on a separation from 

employment (and thus is not a 

parachute payment), even if the amount 

is paid to the employee because of the 

separation from employment. 

(5) Window programs. A payment 

under a window program is contingent 

on a separation from employment. A 

window program is a program 

established by an employer in 

connection with an impending 

separation from employment to provide 

separation pay if the program is made 

available by the employer for a limited 

period of time (no longer than 12 

months) to employees who separate 

from employment during that period or 

to employees who separate from service 

during that period under specified 

circumstances. A payment made under 

a window program is treated as a 

payment that is contingent on an 

employee’s separation from 

employment notwithstanding that the 

employee may not have had an 

involuntary separation from 

employment. 

(6) Anti-abuse provision. 

Notwithstanding paragraphs (d)(1) 

through (5) of this section, if the facts 

and circumstances demonstrate that 

either the vesting or the payment of an 

amount (whether before or after an 

employee’s involuntary separation from 

employment) would not have occurred 

but for the involuntary nature of the 

separation from employment, the 

payment of the amount is contingent on 

a separation from employment. For 

example, an employer’s exercise of 

discretion to accelerate vesting of an 

amount shortly before an involuntary 

separation from employment may 

indicate that the acceleration of vesting 

was due to the involuntary nature of the 

separation from employment and was 

therefore contingent on the employee’s 

separation from employment. Similarly, 

payment of an amount in excess of an 

amount otherwise payable (for example, 

increased salary), shortly before or after 

an involuntary separation from 

employment, may indicate that the 

amount was paid because the separation 

was involuntary and was therefore 

contingent on the employee’s separation 

from employment. If an ATEO becomes 

a predecessor as a result of a 

reorganization or other transaction 

described in § 53.4960–1(h), any 

payment to an employee by a successor 

organization that is contingent on the 

employee’s separation from 

employment with the predecessor 

ATEO is treated as paid by the 

predecessor ATEO. 

(e) Involuntary separation from 

employment—(1) In general. 

Involuntary separation from 

employment means a separation from 

employment due to the independent 

exercise of the employer’s unilateral 

authority to terminate the employee’s 

services, other than due to the 

employee’s implicit or explicit request, 

if the employee was willing and able to 

continue performing services as an 

employee. An involuntary separation 

from employment may include an 

employer’s failure to renew a contract at 

the time the contract expires, provided 

that the employee was willing and able 

to execute a new contract providing 

terms and conditions substantially 

similar to those in the expiring contract 

and to continue providing services. The 

determination of whether a separation 

from employment is involuntary is 

based on all the facts and 

circumstances. 

(2) Separation from employment for 

good reason—(i) In general. 

Notwithstanding paragraph (e)(1) of this 

section, an employee’s voluntary 

separation from employment is treated 

as an involuntary separation from 

employment if the separation occurs 

under certain bona fide conditions 

(referred to herein as a separation from 

employment for good reason). 

(ii) Material negative change required. 

A separation from employment for good 

reason is treated as an involuntary 

separation from employment if the 

relevant facts and circumstances 

demonstrate that it was the result of 

unilateral employer action that caused a 

material negative change to the 

employee’s relationship with the 

employer. Factors that may provide 

evidence of such a material negative 

change include a material reduction in 

the duties to be performed, a material 

negative change in the conditions under 

which the duties are to be performed, or 

a material reduction in the 

compensation to be received for 

performing such services. 

(iii) Deemed material negative 

change. An involuntary separation from 

employment due to a material negative 

change is deemed to occur if the 

separation from employment occurs 

within 2 years following the initial 

existence of one or more of the 

following conditions arising without the 

consent of the employee: 

(A) Material diminution of 

compensation. A material diminution in 

the employee’s base compensation; 

(B) Material diminution of 

responsibility. A material diminution in 

the employee’s authority, duties, or 

responsibilities; 

(C) Material diminution of authority 

of supervisor. A material diminution in 

the authority, duties, or responsibilities 

of the supervisor to whom the employee 

is required to report, including a 

requirement that an employee report to 

a corporate officer or employee instead 

of reporting directly to the board of 

directors (or similar governing body) of 

an organization; 

(D) Material diminution of budget. A 

material diminution in the budget over 

which the employee retains authority; 

(E) Material change of location. A 

material change in the geographic 

location at which the employee must 

perform services; or 

(F) Other material breach. Any other 

action or inaction that constitutes a 

material breach by the employer of the 


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agreement under which the employee 

provides services. 

(3) Separation from employment. 

Except as otherwise provided in this 

paragraph, separation from employment 

has the same meaning as separation 

from service as defined in § 1.409A– 

1(h). Pursuant to § 1.409A–1(h), an 

employee generally separates from 

employment with the employer if the 

employee dies, retires, or otherwise has 

a termination of employment with the 

employer or experiences a sufficient 

reduction in the level of services 

provided to the employer. For purposes 

of applying the rules regarding 

reductions in the level of services set 

forth in the definition of termination of 

employment in § 1.409A–1(h)(1)(ii), the 

rules are modified for purposes of this 

paragraph such that an employer may 

not set the level of the anticipated 

reduction in future services that will 

give rise to a separation from 

employment, meaning that the default 

percentages set forth in § 1.409A– 

1(h)(1)(ii) apply in all circumstances. 

Thus, an anticipated reduction of the 

level of service of less than 50 percent 

is not treated as a separation from 

employment, an anticipated reduction 

of more than 80 percent is treated as a 

separation from employment, and the 

treatment of an anticipated reduction 

between those two levels is determined 

based on the facts and circumstances. 

The measurement of the anticipated 

reduction of the level of service is based 

on the average level of service for the 

prior 36 months (or shorter period for an 

employee employed for less than 36 

months). In addition, an employee’s 

separation from employment is 

determined without regard to § 1.409A– 

1(h)(2) and (5) (application to 

independent contractors), since, for 

purposes of this section, only an 

employee may have a separation from 

employment, and a change from bona 

fide employee status to bona fide 

independent contractor status is also a 

separation from employment. See 

§ 53.4960–2(a)(1) regarding the 

treatment of an employee who also 

serves as a director of a corporation (or 

in a substantially similar position). The 

definition of separation from 

employment also incorporates the rules 

under § 1.409A–1(h)(1)(i) (addressing 

leaves of absence, including military 

leaves of absence), § 1.409A–1(h)(4) 

(addressing asset purchase transactions), 

and § 1.409A–1(h)(6) (addressing 

employees participating in collectively 

bargained plans covering multiple 

employers). The definition further 

incorporates the rules of § 1.409A– 

1(h)(3), under which an employee 

separates from employment only if the 

employee has a separation from 

employment with the employer and all 

employers that would be considered a 

single employer under section 414(b) 

and (c), except that the ‘‘at least 80 

percent’’ rule under section 414(b) and 

(c) is used, rather than replacing it with 

‘‘at least 50 percent.’’ However, for 

purposes of determining whether there 

has been a separation from employment, 

a purported ongoing employment 

relationship between a covered 

employee and an ATEO or a related 

organization is disregarded if the facts 

and circumstances demonstrate that the 

purported employment relationship is 

not bona fide, or the primary purpose of 

the establishment or continuation of the 

relationship is avoidance of the 

application of section 4960. 

(f) Accelerated payment or 

accelerated vesting resulting from an 

involuntary separation from 

employment—(1) In general. If a 

payment or the lapse of a substantial 

risk of forfeiture is accelerated as a 

result of an involuntary separation from 

employment, generally only the value 

due to the acceleration of payment or 

vesting is treated as contingent on a 

separation from employment, as 

described in paragraphs (f)(3) and (4) of 

this section, except as otherwise 

provided in this paragraph (f). For 

purposes of this paragraph (f), the terms 

vested and substantial risk of forfeiture 

have the same meaning as provided in 

§ 53.4960–2(c)(2). 

(2) Nonvested payments subject to a 

non-service vesting condition. If 

(without regard to a separation from 

employment) vesting of a payment 

would depend on an event other than 

the performance of services, such as the 

attainment of a performance goal, and 

that vesting event does not occur prior 

to the employee’s separation from 

employment and the payment vests due 

to the employee’s involuntary 

separation from employment, the full 

amount of the payment is treated as 

contingent on the separation from 

employment. 

(3) Vested payments. If an involuntary 

separation from employment accelerates 

actual or constructive payment of an 

amount that previously vested without 

regard to the separation, the portion of 

the payment, if any, that is contingent 

on the separation from employment is 

the amount by which the present value 

of the accelerated payment exceeds the 

present value of the payment absent the 

acceleration. The payment of an amount 

otherwise due upon a separation from 

employment (whether voluntary or 

involuntary) is not treated as an 

acceleration of the payment unless the 

payment timing was accelerated due to 

the involuntary nature of the separation 

from employment. If the value of the 

payment absent the acceleration is not 

reasonably ascertainable, and the 

acceleration of the payment does not 

significantly increase the present value 

of the payment absent the acceleration, 

the present value of the payment absent 

the acceleration is the amount of the 

accelerated payment (so the amount 

contingent on the separation from 

employment is zero). If the present 

value of the payment absent the 

acceleration is not reasonably 

ascertainable but the acceleration 

significantly increases the present value 

of the payment, the future value of the 

payment contingent on the separation 

from employment is treated as equal to 

the amount of the accelerated payment. 

For purposes of this paragraph (f)(3), the 

acceleration of a payment by 90 days or 

less is not treated as significantly 

increasing the present value of the 

payment. For rules on determining 

present value, see paragraph (f)(6) and 

paragraphs (h), (i) and (j) of this section. 

(4) Nonvested payments subject to a 

service vesting condition—(i) In general. 

If an involuntary separation from 

employment accelerates vesting of a 

payment, the portion of the payment 

that is contingent on separation from 

employment is the amount described in 

paragraph (f)(3) of this section (if any) 

plus the value of the lapse of the 

obligation to continue to perform 

services described in paragraph (f)(4)(ii) 

of this section (but the amount cannot 

exceed the amount of the accelerated 

payment, or, if the payment is not 

accelerated, the present value of the 

payment), to the extent that all of the 

following conditions are satisfied with 

respect to the payment: 

(A) Vesting trigger. The payment vests 

as a result of an involuntary separation 

from employment; 

(B) Vesting condition. Disregarding 

the involuntary separation from 

employment, the vesting of the payment 

was contingent only on the continued 

performance of services for the 

employer for a specified period of time; 

and 

(C) Services condition. The payment 

is attributable, at least in part, to the 

performance of services before the date 

the payment is made or becomes certain 

to be made. 

(ii) Value of the lapse of the obligation 

to continue to perform services. The 

value of the lapse of the obligation to 

continue to perform services is one 

percent of the amount of the accelerated 

payment multiplied by the number of 

full months between the date that the 

employee’s right to receive the payment 


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is vested and the date that, absent the 

acceleration, the payment would have 

been vested. This paragraph (f)(4)(ii) 

applies to the accelerated vesting of a 

payment in the nature of compensation 

even if the time when the payment is 

made is not accelerated. In that case, the 

value of the lapse of the obligation to 

continue to perform services is one 

percent of the present value of the 

future payment multiplied by the 

number of full months between the date 

that the individual’s right to receive the 

payment is vested and the date that, 

absent the acceleration, the payment 

would have been vested. 

(iii) Accelerated vesting of equity 

compensation. For purposes of this 

paragraph (f)(4), the acceleration of the 

vesting of a stock option or stock 

appreciation right (or similar 

arrangement) or the lapse of a restriction 

on restricted stock or a restricted stock 

unit (or a similar arrangement) is 

considered to significantly increase the 

value of the payment. 

(5) Application to benefits under a 

nonqualified deferred compensation 

plan. In the case of a payment of 

benefits under a nonqualified deferred 

compensation plan, paragraph (f)(3) of 

this section applies to the extent 

benefits under the plan are vested 

without regard to the involuntary 

separation from employment, but the 

payment of benefits is accelerated due 

to the involuntary separation from 

employment. Paragraph (f)(4) of this 

section applies to the extent benefits 

under the plan are subject to the 

conditions described in paragraph 

(f)(4)(i) of this section. For any other 

payment of benefits under a 

nonqualified deferred compensation 

plan (such as a contribution made due 

to the employee’s involuntary 

separation from employment), the full 

amount of the payment is contingent on 

the employee’s separation from 

employment. 

(6) Present value. For purposes of this 

paragraph (f), the present value of a 

payment is determined based on the 

payment date absent the acceleration 

and the date on which the accelerated 

payment is scheduled to be made. The 

amount that is treated as contingent on 

the separation from employment is the 

amount by which the present value of 

the accelerated payment exceeds the 

present value of the payment absent the 

acceleration. 

(7) Examples. See § 1.280G Q/A–24(f) 

for examples that may be applied by 

analogy to illustrate the rules of this 

paragraph (f). 

(g) Three-times-base-amount test for 

parachute payments—(1) In general. To 

determine whether payments in the 

nature of compensation made to a 

covered employee that are contingent on 

the covered employee separating from 

employment with the ATEO are 

parachute payments, the aggregate 

present value of the payments must be 

compared to the individual’s base 

amount. To do this, the aggregate 

present value of all payments in the 

nature of compensation that are made or 

to be made to (or for the benefit of) the 

same covered employee by an ATEO (or 

any predecessor of the ATEO) or related 

organization and that are contingent on 

the separation from employment must 

be determined. If this aggregate present 

value equals or exceeds the amount 

equal to 3-times the individual’s base 

amount, the payments are parachute 

payments. If this aggregate present value 

is less than the amount equal to 3-times 

the individual’s base amount, the 

payments are not parachute payments. 

See paragraphs (f)(6), (h), (i), and (j) of 

this section for rules on determining 

present value. 

(2) Examples. The following examples 

illustrate the rules of this paragraph (g). 

For purposes of these examples, assume 

any entity referred to as ‘‘ATEO’’ is an 

ATEO. 

(i) Example 1 (Parachute payment)— 

(A) Facts. Employee A is a covered 

employee and an HCE of ATEO 1. 

Employee A’s base amount is $200,000. 

Payments in the nature of compensation 

that are contingent on a separation from 

employment with ATEO 1 totaling 

$800,000 are made to Employee A on 

the date of Employee A’s separation 

from employment. 

(B) Conclusion. The payments are 

parachute payments because they have 

an aggregate present value at the time of 

the separation from employment of 

$800,000, which is at least equal to 3- 

times Employee A’s base amount of 

$200,000 (3 × $200,000 = $600,000). 

(ii) Example 2 (No parachute 

payment)—(A) Facts. Assume the same 

facts as in paragraph (g)(2)(i) of this 

section (Example 1), except that the 

payments contingent on Employee A’s 

separation from employment total 

$580,000. 

(B) Conclusion. Because the aggregate 

present value of the payments 

($580,000) is not at least equal to 3- 

times Employee A’s base amount 

($600,000), the payments are not 

parachute payments. 

(h) Calculating present value—(1) In 

general. Except as otherwise provided 

in this paragraph (h), for purposes of 

determining if a payment contingent on 

a separation from employment exceeds 

3-times the base amount, the present 

value of a payment is determined as of 

the date of the separation from 

employment or, if the payment is made 

prior to that date, the date on which the 

payment is made. 

(2) Deferred payments. For purposes 

of determining whether a payment is a 

parachute payment, if a payment in the 

nature of compensation is the right to 

receive payments in a year (or years) 

subsequent to the year of the separation 

from employment, the value of the 

payment is the present value of the 

payment (or payments) calculated on 

the basis of reasonable actuarial 

assumptions and using the applicable 

discount rate for the present value 

calculation that is determined in 

accordance with paragraph (i) of this 

section. 

(3) Health care. If the payment in the 

nature of compensation is an obligation 

to provide health care (including an 

obligation to purchase or provide health 

insurance), then, for purposes of this 

paragraph (h) and for applying the 3- 

times-base-amount test under paragraph 

(g) of this section, the present value of 

the obligation is calculated in 

accordance with generally accepted 

accounting principles. For purposes of 

paragraph (g) of this section and this 

paragraph (h), the obligation to provide 

health care is permitted to be measured 

by projecting the cost of premiums for 

health care insurance, even if no health 

care insurance is actually purchased. If 

the obligation to provide health care is 

made in coordination with a health care 

plan that the employer makes available 

to a group, then the premiums used for 

purposes of this paragraph (h)(3) may be 

the allocable portion of group 

premiums. 

(i) Discount rate. Present value 

generally is determined by using a 

discount rate equal to 120 percent of the 

applicable Federal rate (determined 

under section 1274(d) and the 

regulations in part 1 under section 

1274(d)), compounded semiannually. 

The applicable Federal rate to be used 

is the Federal rate that is in effect on the 

date as of which the present value is 

determined, using the period until the 

payment is expected to be made as the 

term of the debt instrument under 

section 1274(d). See paragraph (h) of 

this section for rules with respect to the 

date as of which the present value is 

determined. However, for any payment, 

the employer and the covered employee 

may elect to use the applicable Federal 

rate that is in effect on the date on 

which the parties entered into the 

contract that provides for the payment 

if that election is set forth in writing in 

the contract. 

(j) Present value of a payment to be 

made in the future that is contingent on 

an uncertain future event or condition— 


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(1) Treatment based on the estimated 

probability of payment. In certain cases, 

it may be necessary to apply the 3- 

times-base-amount test to a payment 

that is contingent on separation from 

employment at a time when the 

aggregate present value of all the 

payments is uncertain because the time, 

amount, or right to receive one or more 

of the payments is also contingent on 

the occurrence of an uncertain future 

event or condition. In that case, the 

employer must reasonably estimate 

whether it will make the payment. If the 

employer reasonably estimates there is a 

50-percent or greater probability that it 

will make the payment, the full amount 

of the payment is considered for 

purposes of the 3-times-base-amount 

test and the allocation of the base 

amount. If the employer reasonably 

estimates there is a less than 50-percent 

probability that the payment will be 

made, the payment is not considered for 

either purpose. 

(2) Correction of incorrect estimates. If 

an ATEO later determines that an 

estimate it made under paragraph (j)(1) 

of this section was incorrect, it must 

reapply the 3-times-base-amount test to 

reflect the actual time and amount of the 

payment. In reapplying the 3-timesbase-amount test (and, if necessary, 

reallocating the base amount), the ATEO 

must determine the aggregate present 

value of payments paid or to be paid as 

of the date described in paragraph (h) of 

this section using the discount rate 

described in paragraph (i) of this 

section. This redetermination may affect 

the amount of any excess parachute 

payment for a prior taxable year. 

However, if, based on the application of 

the 3-times-base-amount test without 

regard to the payment described in this 

paragraph (j), an ATEO has determined 

it will pay an employee an excess 

parachute payment or payments, then 

the 3-times-base-amount test does not 

have to be reapplied when a payment 

described in this paragraph (j) is made 

(or becomes certain to be made) if no 

base amount is allocated to that 

payment under § 53.4960–4(d)(5). 

(3) Initial option value estimate. To 

the extent provided in published 

guidance of general applicability under 

§ 601.601(d)(2), an initial estimate of the 

value of an option subject to paragraph 

(c) of this section is permitted to be 

made, with the valuation subsequently 

redetermined and the 3-times-baseamount test reapplied. Until guidance is 

published under section 4960, 

published guidance of general 

applicability described in 

§ 601.601(d)(2) that is issued under 

section 280G applies by analogy. 

(4) Examples. See § 1.280G–1, Q/A– 

33(d) for examples that may be applied 

by analogy to illustrate the rules of this 

paragraph (j). 

(k) Base amount—(1) In general. A 

covered employee’s base amount is the 

average annual compensation for 

services performed as an employee of 

the ATEO (including compensation for 

services performed for a predecessor of 

the ATEO), and/or, if applicable, a 

related organization, with respect to 

which there has been a separation from 

employment, if the compensation was 

includible in the gross income of the 

individual for taxable years in the base 

period (including amounts that were 

excluded under section 911) or that 

would have been includible in the 

individual’s gross income if the 

individual had been a United States 

citizen or resident. See paragraph (l) of 

this section for the definition of base 

period and for examples of base amount 

computations. 

(2) Short or incomplete taxable years. 

If the base period of a covered employee 

includes a short taxable year or less than 

all of a taxable year of the employee, 

compensation for the short or 

incomplete taxable year must be 

annualized before determining the 

average annual compensation for the 

base period. In annualizing 

compensation, the frequency with 

which payments are expected to be 

made over an annual period must be 

taken into account. Thus, any amount of 

compensation for a short or incomplete 

taxable year that represents a payment 

that will not be made more often than 

once per year is not annualized. 

(3) Excludable fringe benefits. 

Because the base amount includes only 

compensation that is includible in gross 

income, the base amount does not 

include certain items that may 

constitute parachute payments. For 

example, payments in the form of 

excludable fringe benefits or excludable 

health care benefits are not included in 

the base amount but may be treated as 

parachute payments. 

(4) Section 83(b) income. The base 

amount includes the amount of 

compensation included in income 

under section 83(b) during the base 

period. 

(l) Base period—(1) In general. The 

base period of a covered employee is the 

covered employee’s 5 most-recent 

taxable years ending before the date on 

which the separation from employment 

occurs. However, if the covered 

employee was not an employee of the 

ATEO for this entire 5-year period, the 

individual’s base period is the portion 

of the 5-year period during which the 

covered employee performed services 

for the ATEO, a predecessor, or a related 

organization. 

(2) Determination of base amount if 

employee separates from employment in 

the year hired. If a covered employee 

commences services as an employee and 

experiences a separation from 

employment in the same taxable year, 

the covered employee’s base amount is 

the annualized compensation for 

services performed for the ATEO (or a 

predecessor or related organization) that 

was not contingent on the separation 

from employment and either was 

includible in the employee’s gross 

income for that portion of the 

employee’s taxable year prior to the 

employee’s separation from 

employment (including amounts that 

were excluded under section 911) or 

would have been includible in the 

employee’s gross income if the 

employee had been a United States 

citizen or resident. 

(3) Examples. The following examples 

illustrate the rules of paragraph (k) of 

this section and this paragraph (l). For 

purposes of these examples, assume any 

entity referred to as ‘‘ATEO’’ is an 

ATEO, any entity referred to as ‘‘CORP’’ 

is not an ATEO, and all employees are 

HCEs of their respective employers. 

(i) Example 1 (Calculation with salary 

deferrals)—(A) Facts. Employee A, a 

covered employee of ATEO 1, receives 

an annual salary of $500,000 per year 

during the 5-year base period. Employee 

A defers $100,000 of salary each year 

under a nonqualified deferred 

compensation plan (none of which is 

includible in Employee A’s income 

until paid in cash to Employee A). 

(B) Conclusion. Employee A’s base 

amount is $400,000 (($400,000 × 5)/5). 

(ii) Example 2 (Calculation for lessthan-5-year base period)—(A) Facts. 

Employee B, a covered employee of 

ATEO 1, was employed by ATEO 1 for 

2 years and 4 months preceding the year 

in which Employee B separates from 

employment. Employee B’s 

compensation includible in gross 

income was $100,000 for the 4-month 

period, $420,000 for the first full year, 

and $450,000 for the second full year. 

(B) Conclusion. Employee B’s base 

amount is $390,000 (((3 × $100,000) + 

$420,000 + $450,000)/3). Any 

compensation Employee B receives in 

the year of separation from employment 

is not included in the base amount 

calculation. 

(iii) Example 3 (Calculation for lessthan-5-year base period with signing 

bonus)—(A) Facts. Assume the same 

facts as in paragraph (l)(3)(ii)(A) of this 

section (Example 2), except that 

Employee B also received a $60,000 

signing bonus when Employee B’s 


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employment with ATEO 1 commenced 

at the beginning of the 4-month period. 

(B) Conclusion. Employee B’s base 

amount is $410,000 ((($60,000 + (3 × 

$100,000)) + $420,000 + $450,000)/3). 

Pursuant to paragraph (k)(2) of this 

section, because the bonus is a payment 

that will not be paid more often than 

once per year, the bonus is not taken 

into account in annualizing Employee 

B’s compensation for the 4-month 

period. 

(iv) Example 4 (Effect of nonemployee compensation)—(A) Facts. 

Employee C, a covered employee of 

ATEO 1, was not an employee of ATEO 

1 for the full 5-year base period. In 2024 

and 2025, Employee C is only a director 

of ATEO 1 and receives $30,000 per 

year for services as a director. On 

January 1, 2026, Employee C becomes 

an officer and covered employee of 

ATEO 1. Employee C’s includible 

compensation for services as an officer 

of ATEO 1 is $250,000 for each of 2026 

and 2027, and $300,000 for 2028. In 

2028, Employee C separates from 

employment with ATEO 1. 

(B) Conclusion. Employee C’s base 

amount is $250,000 ((2 × $250,000)/2). 

The $30,000 of director’s fees paid to 

Employee C in each of 2024 and 2025 

is not included in Employee C’s base 

amount calculation because it was not 

for services performed as an employee 

of ATEO 1. 

§ 53.4960–4 Liability for tax on excess 

remuneration and excess parachute 

payments. 

(a) Liability, reporting, and payment 

of excise taxes—(1) Liability. For each 

taxable year, with respect to each 

covered employee, the taxpayer is liable 

for tax at the rate imposed under section 

11 on the sum of the excess 

remuneration allocated to the taxpayer 

under paragraph (c) of this section and, 

if the taxpayer is an ATEO, any excess 

parachute payment paid by the taxpayer 

or a predecessor during the taxable year. 

(2) Reporting and payment. The 

excise tax imposed by section 4960 is 

reported as provided in §§ 53.6011–1(b) 

and 53.6071–1(i) and paid in the form 

and manner prescribed by the 

Commissioner. 

(3) Arrangements between an ATEO 

and a related organization. Calculation 

of, and liability for, the excise tax 

imposed by section 4960 is separate 

from, and unaffected by, any 

arrangement that an ATEO and any 

related organization may have for 

bearing the cost of any liability for the 

excise tax imposed by section 4960. 

(4) Certain foreign related 

organizations. A related organization 

that is a foreign organization described 

in section 4948(b) that either is exempt 

from tax under section 501(a) or is a 

taxable private foundation (section 

4948(b) related organization) is not 

liable for the excise tax imposed by 

section 4960. A foreign organization is 

an organization not created or organized 

in the United States or in any 

possession thereof, or under the law of 

the United States, any State, the District 

of Columbia, or any possession of the 

United States. See section 4948(b) and 

§ 53.4948–1. For purposes of this 

paragraph (a)(4) and the application of 

section 4960 to a taxable year, an 

organization’s status as a section 4948(b) 

related organization is determined at the 

end of its taxable year. However, 

remuneration that the section 4948(b) 

related organization pays to a covered 

employee of an ATEO must be taken 

into account by the ATEO and other 

related organizations for purposes of 

section 4960 generally, including for 

purposes of determining the five 

highest-compensated employees and the 

total remuneration paid to a covered 

employee. For example, if an ATEO and 

its related organization that is a section 

4948(b) related organization each paid 

$600,000 remuneration to a covered 

employee during the applicable year, 

then the related organization would not 

be liable for the tax that would 

otherwise be allocable to it, and the 

ATEO would be liable for tax on 

$100,000 (50 percent of the $200,000 

excess remuneration paid to the 

employee). 

(5) [Reserved] 

(b) Amounts subject to tax—(1) Excess 

remuneration—(i) In general. Excess 

remuneration means the amount of 

remuneration paid by an ATEO to any 

covered employee during an applicable 

year in excess of $1 million, as 

determined under § 53.4960–2. 

(ii) Exclusion for excess parachute 

payments. Excess remuneration does 

not include any amount that is an 

excess parachute payment as defined in 

paragraph (b)(2) of this section. 

(2) Excess parachute payment. Excess 

parachute payment means an amount 

equal to the excess (if any) of the 

amount of any parachute payment paid 

by an ATEO, a predecessor of the ATEO, 

or a related organization, or on behalf of 

any such person, during the taxable year 

over the portion of the base amount 

allocated to such payment. 

(c) Calculation of liability for tax on 

excess remuneration—(1) In general. For 

each taxable year, an employer is liable 

for the tax on excess remuneration paid 

in the applicable year ending with or 

within the employer’s taxable year. If, 

for the taxable year, remuneration paid 

during an applicable year by an ATEO 

or one or more related organizations to 

a covered employee is taken into 

account in determining the tax imposed 

on excess remuneration for that taxable 

year, then each employer is liable for 

the tax in an amount that bears the same 

ratio to the total tax determined under 

section 4960(a) as the amount of 

remuneration paid by the employer to 

the covered employee (including 

remuneration paid by the employer as 

described in § 53.4960–2(b)(1), but 

disregarding remuneration treated as 

paid by the employer under § 53.4960– 

2(b)(2)), bears to the total amount of 

remuneration paid by the ATEO under 

§ 53.4960–2 (including remuneration 

treated as paid by the ATEO under 

§ 53.4960–2(b)(2)). 

(2) Calculation if liability is allocated 

from more than one ATEO with regard 

to an individual. If liability for the tax 

on excess remuneration is allocated to 

an employer from more than one ATEO 

in a taxable year with regard to an 

individual that is a covered employee of 

each ATEO, then the employer is liable 

for the tax only in the capacity in which 

it is liable for the greatest amount of the 

tax with respect to that individual for 

the taxable year. For example, assume 

ATEO 1 is a related organization to both 

ATEO 2 and ATEO 3 and pays excess 

remuneration to Employee D, and 

Employee D is a covered employee of 

ATEO 1, ATEO 2, and ATEO 3. In this 

case, ATEO 1’s liability for the tax on 

excess remuneration to Employee D is 

the highest of its liability as an ATEO, 

as a related organization to ATEO 2, or 

as a related organization to ATEO 3. 

(3) Calculation if liability is allocated 

from an ATEO with a short applicable 

year. If liability for the tax on excess 

remuneration paid to an individual is 

allocated to an employer from an ATEO 

with a short applicable year under 

§ 53.4960–1(c)(3), then the liability with 

respect to the excess remuneration paid 

to that individual is allocated in 

accordance with the principles of this 

paragraph (c) adjusted as necessary to 

avoid, to the extent possible, 

duplication of application of the excise 

tax. The Commissioner may provide 

additional guidance of general 

applicability, published in the Internal 

Revenue Bulletin (see § 601.601(d)(2) of 

this chapter), on the application of this 

paragraph (c)(3) to particular 

circumstances, including circumstances 

involving an ATEO with a short 

applicable year that has one or more 

related organizations and the ATEO’s 

short applicable year and the preceding 

applicable year both end with or within 

the related organization’s taxable year, 

such that the ATEO and related 

organizations are liable for the tax for 


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multiple applicable years ending with 

or within the employer’s taxable year. 

(4) Examples. The following examples 

illustrate the rules of this paragraph (c). 

For purposes of these examples, assume 

that the rate of excise tax under section 

4960 is 21 percent, that any entity that 

is referred to as ‘‘ATEO’’ is an ATEO, 

that any entity referred to as ‘‘CORP’’ is 

not an ATEO and is not a publicly held 

corporation within the meaning of 

section 162(m)(2) or a covered health 

insurance provider within the meaning 

of section 162(m)(6)(C), that no related 

organization is a section 4948(b) related 

organization, all taxpayers use the 

calendar year as their taxable year 

unless otherwise stated, and that no 

parachute payments are made in any of 

the years at issue. 

(i) Example 1 (Remuneration from 

multiple employers)—(A) Facts. ATEO 1 

and CORP 1 are related organizations. 

Employee A is a covered employee of 

ATEO 1 and an employee of CORP 1. In 

the 2022 applicable year, ATEO 1 pays 

Employee A $1.2 million of 

remuneration, and CORP 1 pays A 

$800,000 of remuneration. 

Remuneration paid by each employer is 

for services performed by Employee A 

solely as an employee of that employer. 

(B) Conclusion. For the 2022 taxable 

year, ATEO 1 is treated as paying 

Employee A $2 million of remuneration, 

$1 million of which is excess 

remuneration. The total excise tax is 

$210,000 (21 percent × $1 million). 

ATEO 1 paid 3⁄5 of Employee A’s total 

remuneration ($1.2 million/$2 million); 

thus, ATEO 1 is liable for 3⁄5 of the 

excise tax, which is $126,000. CORP 1 

paid 2⁄5 of Employee A’s total 

remuneration ($800,000/$2 million); 

thus, CORP 1 is liable for 2⁄5 of the 

excise tax, which is $84,000. 

(ii) Example 2 (Application when 

taxpayers have different taxable 

years)—(A) Facts. Assume the same 

facts as in paragraph (c)(4)(i) of this 

section (Example 1), except that CORP 

2 uses a taxable year beginning July 1 

and ending June 30. 

(B) Conclusion. The conclusion is the 

same as the conclusion in paragraph 

(c)(4)(i) of this section (Example 1), 

except that ATEO 1 is liable for the tax 

for its taxable year starting January 1, 

2022, and ending December 31, 2022, 

and CORP 1 is liable for the tax for its 

taxable year beginning July 1, 2022, and 

ending June 30, 2023 (the taxable year 

with or within which ATEO 1’s 2022 

applicable year ends). 

(iii) Example 3 (Multiple liabilities for 

same applicable year due to multiple 

ATEOs)—(A) Facts. The following facts 

are all with respect to the 2023 

applicable year: ATEO 5 owns 60 

percent of the stock of CORP 2. Sixty 

percent of ATEO 4’s directors are 

representatives of ATEO 3. In addition, 

60 percent of ATEO 5’s directors are 

representatives of ATEO 4, but none are 

representatives of ATEO 3. Employee B 

is a covered employee of ATEO 3, ATEO 

4, and ATEO 5 and is an employee of 

CORP 2. ATEO 3, ATEO 4, ATEO 5, and 

CORP 2 each pay Employee B $1.2 

million of remuneration in the 

applicable year. ATEO 4’s related 

organizations are ATEO 3 and ATEO 5. 

ATEO 3’s only related organization is 

ATEO 4. ATEO 5’s related organizations 

are ATEO 4 and CORP 2. 

(B) Calculation (ATEO 3). Under 

ATEO 3’s calculation as an ATEO for 

the 2023 applicable year, ATEO 3 is 

treated as paying Employee B a total of 

$2.4 million in remuneration ($1.2 

million from ATEO 3 + $1.2 million 

from ATEO 4). The total excise tax is 

$294,000 (21 percent × $1.4 million). 

ATEO 3 and ATEO 4 each paid 1⁄2 of 

Employee B’s total remuneration ($1.2 

million/$2.4 million); thus, under ATEO 

3’s calculation, ATEO 3 and ATEO 4 

each would be liable for 1⁄2 of the excise 

tax, which is $147,000. 

(C) Calculation (ATEO 4). Under 

ATEO 4’s calculation as an ATEO for 

the 2023 applicable year, ATEO 4 is 

treated as paying Employee B a total of 

$3.6 million in remuneration for the 

2022 applicable year ($1.2 million from 

ATEO 3 + $1.2 million from ATEO 4 + 

$1.2 million from ATEO 5). The total 

excise tax is $546,000 (21 percent × $2.6 

million). ATEO 3, ATEO 4, and ATEO 

5 each paid 1⁄3 of the total remuneration 

to Employee B ($1.2 million/$3.6 

million); thus, under ATEO 4’s 

calculation, ATEO 3, ATEO 4, and 

ATEO 5 each would be liable for 1⁄3 of 

the excise tax, which is $182,000. 

(D) Calculation (ATEO 5). Under 

ATEO 5’s calculation as an ATEO for 

the 2023 applicable year, ATEO 5 is 

treated as paying Employee B a total of 

$3.6 million in remuneration ($1.2 

million from ATEO 4 + $1.2 million 

from ATEO 5 + $1.2 million from CORP 

2). The total excise tax is $546,000 (21 

percent × $2.6 million). ATEO 4, ATEO 

5, and CORP 2 each paid 1⁄3 of the total 

remuneration to Employee B ($1.2 

million/$3.6 million); thus, under ATEO 

5’s calculation, ATEO 4, ATEO 5, and 

CORP 2 each would be liable for 1⁄3 of 

the excise tax, which is $182,000. 

(E) Conclusion (Liability of ATEO 3). 

For the 2023 applicable year, ATEO 3 is 

liable for $182,000 of excise tax as a 

related organization under ATEO 4’s 

calculation, which is greater than the 

$147,000 of excise tax under ATEO 3’s 

own calculation. Thus, ATEO 3’s excise 

tax liability with respect to Employee B 

is $182,000 for its 2023 taxable year. 

(F) Conclusion (Liability of ATEO 4). 

For the 2023 applicable year, ATEO 4 is 

liable as a related organization for 

$147,000 of excise tax according to 

ATEO 3’s calculation, for $182,000 

according to ATEO 4’s own calculation, 

and for $182,000 according to ATEO 5’s 

calculation. Thus, ATEO 4’s excise tax 

liability with respect to Employee B is 

$182,000 for its 2023 taxable year. 

(G) Conclusion (Liability of ATEO 5). 

For the 2023 applicable year, ATEO 5 is 

liable as a related organization for 

$182,000 of excise tax under ATEO 4’s 

calculation, and is liable for $182,000 of 

excise tax under ATEO 5’s own 

calculation. Thus, ATEO 5’s excise tax 

liability with respect to Employee B is 

$182,000 for its 2023 taxable year. 

(H) Conclusion (Liability of CORP 2). 

For the 2023 applicable year, CORP 2 is 

liable as a related organization for 

$182,000 of excise tax according to 

ATEO 5’s calculation only. Thus, CORP 

2’s excise tax liability with respect to 

Employee B is $182,000 for its 2023 

taxable year. 

(d) Calculation of liability for excess 

parachute payments—(1) In general. 

Except as provided in paragraph (d)(3) 

of this section, only excess parachute 

payments made by or on behalf of an 

ATEO are subject to tax under this 

section. However, parachute payments 

made by related organizations that are 

not made by or on behalf of an ATEO 

are taken into account for purposes of 

determining the total amount of excess 

parachute payments. 

(2) Computation of excess parachute 

payments—(i) Calculation. The amount 

of an excess parachute payment is the 

excess of the amount of any parachute 

payment made by an ATEO, a 

predecessor of the ATEO, or a related 

organization, or on behalf of any such 

person, over the portion of the covered 

employee’s base amount that is 

allocated to the payment. The portion of 

the base amount allocated to any 

parachute payment is the amount that 

bears the same ratio to the base amount 

as the present value of the parachute 

payment bears to the aggregate present 

value of all parachute payments made or 

to be made to (or for the benefit of) the 

same covered employee. Thus, the 

portion of the base amount allocated to 

any parachute payment is determined 

by multiplying the base amount by a 

fraction, the numerator of which is the 

present value of the parachute payment 

and the denominator of which is the 

aggregate present value of all parachute 

payments. 

(ii) Examples. The following 

examples illustrate the rules of this 


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paragraph (d)(2). For purposes of these 

examples, assume any entity referred to 

as ‘‘ATEO’’ is an ATEO and all 

employees are HCEs of their respective 

employers. 

(A) Example 1 (Compensation from 

related organizations)—(1) Facts. ATEO 

1 and ATEO 2 are related organizations. 

Employee A is a covered employee of 

ATEO 1 and an employee of ATEO 2 

who has an involuntary separation from 

employment with ATEO 1 and ATEO 2. 

Employee A’s base amount is $200,000 

with respect to ATEO 1 and $400,000 

with respect to ATEO 2. A receives $1 

million from ATEO 1 contingent upon 

Employee A’s involuntary separation 

from employment from ATEO 1 and $1 

million from ATEO 2 contingent upon 

Employee A’s involuntary separation 

from employment from ATEO 2. 

(2) Conclusion. Employee A has a 

base amount of $600,000 ($200,000 + 

$400,000). The two $1 million payments 

are parachute payments because their 

aggregate present value is at least 3- 

times Employee A’s base amount (3 × 

$600,000 = $1.8 million). The portion of 

the base amount allocated to each 

parachute payment is $300,000 (($1 

million/$2 million) × $600,000). Thus, 

the amount of each excess parachute 

payment is $700,000 ($1 

million¥$300,000). 

(B) Example 2 (Multiple parachute 

payments)—(1) Facts. Employee B is a 

covered employee of ATEO 3 with a 

base amount of $200,000 who is entitled 

to receive two parachute payments: One 

of $200,000 and the other of $900,000. 

The $200,000 payment is made upon 

separation from employment, and the 

$900,000 payment is to be made on a 

date in a future taxable year. The 

present value of the $900,000 payment 

is $800,000 as of the date of the 

separation from employment. 

(2) Conclusion. The portion of the 

base amount allocated to the first 

payment is $40,000 (($200,000 present 

value of the parachute payment/$1 

million present value of all parachute 

payments) × $200,000 total base 

amount) and the portion of the base 

amount allocated to the second payment 

is $160,000 (($800,000 present value of 

the parachute payment/$1 million 

present value of all parachute payments) 

× $200,000 total base amount). Thus, the 

amount of the first excess parachute 

payment is $160,000 

($200,000¥$40,000) and that the 

amount of the second excess parachute 

payment is $740,000 

($900,000¥$160,000). 

(3) Reallocation when the payment is 

disproportionate to base amount. In 

accordance with section 4960(d), the 

Commissioner may treat a parachute 

payment as paid by an ATEO if the facts 

and circumstances indicate that the 

ATEO and other payors of parachute 

payments structured the payments in a 

manner primarily to avoid liability 

under section 4960. For example, if an 

ATEO would otherwise be treated as 

paying a portion of an excess parachute 

payment in an amount that is materially 

lower in proportion to the total excess 

parachute payment than the proportion 

that the amount of average annual 

compensation paid by the ATEO (or any 

predecessor) during the base period 

bears to the total average annual 

compensation paid by the ATEO (or any 

predecessor) and any related 

organization (or organizations), and the 

lower amount is offset by payments 

from a non-ATEO or an unrelated 

ATEO, this may indicate that that the 

parachute payments were structured in 

a manner primarily to avoid liability 

under section 4960. 

(4) Election to prepay tax. An ATEO 

may prepay the excise tax under 

paragraph (a)(1) of this section on any 

excess parachute payment for the 

taxable year of the separation from 

employment or any later taxable year 

before the taxable year in which the 

parachute payment is actually or 

constructively paid. However, an 

employer may not prepay the excise tax 

on a payment to be made in cash if the 

present value of the payment is not 

reasonably ascertainable under 

§ 31.3121(v)(2)–1(e)(4) or on a payment 

related to health coverage. Any 

prepayment must be based on the 

present value of the excise tax that 

would be due for the taxable year in 

which the employer will pay the excess 

parachute payment, and be calculated 

using the discount rate equal to 120 

percent of the applicable Federal rate 

(determined under section 1274(d) and 

the regulations in part 1 under section 

1274) and the tax rate in effect under 

section 11 for the year in which the 

excise tax is paid. For purposes of 

projecting the future value of a payment 

that provides for interest to be credited 

at a variable interest rate, the employer 

may make a reasonable assumption 

regarding the variable rate. An employer 

is not required to adjust the excise tax 

paid merely because the actual future 

interest rates are not the same as the rate 

used for purposes of projecting the 

future value of the payment. 

(5) Liability after a redetermination of 

total parachute payments. If an ATEO 

determines that an estimate made under 

§ 53.4960–3(j)(1) was incorrect, it must 

reapply the 3-times-base-amount test to 

reflect the actual time and amount of the 

payment. In reapplying the 3-timesbase-amount test (and, if necessary, 

reallocating the base amount), the ATEO 

must determine the correct base amount 

allocable to any parachute payment paid 

in the taxable year. See § 1.280G–1, Q/ 

A–33(d) for examples that may be 

applied by analogy to illustrate the rules 

of this paragraph (d)(5). 

(6) Examples. The following examples 

illustrate the rules of this paragraph (d). 

For purposes of these examples, assume 

any entity referred to as ‘‘ATEO’’ is an 

ATEO, any entity referred to as ‘‘CORP’’ 

is not an ATEO, and all employees are 

HCEs of their respective employers. 

(i) Example 1 (Excess parachute 

payment paid by a non-ATEO)—(A) 

Facts. ATEO 1 and CORP 1 are related 

organizations that are treated as the 

same employer for purposes of 

§ 53.4960–3(e)(3) (defining separation 

from employment) and are both 

calendar year taxpayers. For 2022 

through 2026, ATEO 1 and CORP 1 each 

pay Employee A $250,000 of 

compensation per year for services 

performed as an employee of each 

organization ($500,000 total per year). In 

2027, ATEO 1 and CORP 1 each pay 

Employee A $1 million payment ($2 

million total) that is contingent on 

Employee A’s separation from 

employment with both ATEO 1 and 

CORP 1, all of which is remuneration, 

and no other compensation. Employee 

A is a covered employee of ATEO 1 in 

2027. 

(B) Conclusion. Employee A’s base 

amount in 2027 is $500,000 (Employee 

A’s average annual compensation from 

both ATEO 1 and CORP 1 for the 

previous 5 years). ATEO 1 makes a 

parachute payment of $2 million in 

2027, the amount paid by both ATEO 1 

and CORP 1 that is contingent on 

Employee A’s separation from 

employment with ATEO 1 and all 

organizations that are treated as the 

same employer under § 53.4960–3(e)(3). 

Employee A’s $2 million payment 

exceeds 3-times the base amount ($1.5 

million). ATEO 1 makes a $1.5 million 

excess parachute payment (the amount 

by which $2 million exceeds the 

$500,000 base amount). However, ATEO 

1 is liable for tax only on the excess 

parachute payment paid by ATEO 1 ($1 

million parachute payment¥$250,000 

base amount = $750,000) that is subject 

to tax under § 53.4960–4(a). CORP 1 is 

not liable for tax under § 53.4960–4(a) in 

2027. 

(ii) Example 2 (Election to prepay tax 

on excess parachute payments and 

effect on excess remuneration)—(A) 

Facts. Employee B is a covered 

employee of ATEO 2 with a base 

amount of $200,000 who is entitled to 

receive two parachute payments from 

ATEO 2, one of $200,000 and the other 


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of $900,000. The $200,000 payment is 

made upon separation from 

employment, and the $900,000 payment 

is to be made on a date in a future 

taxable year. The present value of the 

$900,000 payment is $800,000 as of the 

date of the separation from employment. 

ATEO 2 elects to prepay the excise tax 

on the $900,000 future parachute 

payment (of which $740,000 is an 

excess parachute payment). The tax rate 

under section 11 is 21 percent for the 

taxable year the excise tax is paid and, 

using a discount rate determined under 

§ 53.4960–3(i), the present value of the 

$155,400 ($740,000 × 21 percent) excise 

tax on the $740,000 future excess 

parachute payment is $140,000. 

(B) Conclusion. The excess parachute 

payment is thus $800,000 ($200,000 

plus $800,000 present value of the 

$900,000 future payment, less $200,000 

base amount), with $40,000 of the base 

amount allocable to the $200,000 

payment and $160,000 of the base 

amount allocable to the $900,000 

payment. To prepay the excise tax on 

the $740,000 future excess parachute 

payment, the employer must satisfy its 

$140,000 obligation under section 4960 

with respect to the future payment, in 

addition to the $33,600 excise tax 

($160,000 × 21 percent) on the $160,000 

excess parachute payment made upon 

separation from employment. For 

purposes of determining the amount of 

excess remuneration (if any) under 

section 4960(a)(1), the amount of 

remuneration paid by the employer to 

the covered employee for the taxable 

year of the separation from employment 

is reduced by the $900,000 of total 

excess parachute payments ($160,000 + 

$740,000). 

§ 53.4960–5 [Reserved] 

§ 53.4960–6 Applicability date. 

(a) General applicability date. 

Sections 53.4960–0 through 53.4960–4 

apply to taxable years beginning after 

December 31, 2021. Taxpayers may 

choose to apply §§ 53.4960–0 through 

53.4960–4 to taxable years beginning 

after December 31, 2017, and on or 

before December 31, 2021, provided the 

taxpayer applies §§ 53.4960–0 through 

53.4960–4 in their entirety and in a 

consistent manner. 

(b) [Reserved] 

Sunita Lough, 

Deputy Commissioner for Services and 

Enforcement. 

Approved: January 9, 2021. 

David J. Kautter, 

Assistant Secretary of the Treasury (Tax 

Policy). 

[FR Doc. 2021–00772 Filed 1–15–21; 4:15 pm] 

BILLING CODE 4830–01–P 


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