The new Internal Revenue Code Section 4960 – the “Million Dollar Tax” – is very complicated.  As we’ve said previously (see Tax Tips, 1/9/19), your school may never pay a worker $1,000,000 a year, but institutions should be aware of the “excess parachute payments” codicils of the law.




Denali Christian College (DCC) is a private college exempt under Internal Revenue Code section 501(c)(3) and 170(b)(1)(A)(ii).  They are required to file Form 990 annually.

DCC’s CFO has been going through the cycle of analyzing how the Section 4960 rules might affect DCC now and in the future.  He calls us to ask about Notice 2019-09’s verbiage about a “excess parachute payments.”

“We’ve got a now former employee – one of our ‘High Five’ – who received a severance package earlier this year.  As I go through the calculations, this person may have received an excess parachute payment.  I need help with how to navigate the accelerated portions of the severance package to see whether or not we are liable for the excise taxes under 4960.”

We say, “This is cool, but complex.  First, understand that the ‘excess parachute payments’ are only amounts that are compensation/benefits given to a covered employee that are contingent on the employee’s separation from employment with the employer and the aggregate present value of the payments in the nature of compensation/benefit to such individual which are contingent on such separation equals or exceeds an amount equal to three times the base amount. Ultimately, the rules set forth guidelines on how to calculate the portion of the severance pay that is considered earned for services and amounts contingent on separation – which can constitute the ‘excess parachute payment.’  The short answer is to take a look at Q/A 24 in Notice 2019-09.”

“We’ll do that,” they say.  “But what are some of the complex issues?  Can’t we just use the Form W-2, Box 1 numbers for the separation year?”

“Generally, no.  Ultimately, you have present value calculations, 1% per month calculations (aligned with I.R.C. Section 280G), backed-out bonuses, maybe nonqualified deferred compensation, and other factors – it’s technical.”



From IRS Notice 2019-09:

Q–24: How is an accelerated payment or accelerated vesting resulting from an involuntary separation from employment treated?

A–24: (a) In general. As described in Q/A–24(b) and (c), if a payment is accelerated or a substantial risk of forfeiture lapses as a result of an involuntary separation from employment, only the value due to the acceleration is treated as contingent on a separation from employment. For purposes of this Q/A–24, the terms “vested” and “substantial risk of forfeiture” have the same meaning as provided in Q/A–13(a).



  • You do not have to pay any employees over $1 million per year to possibly be “sucked into” the excise tax under I.R.C. Section 4960.
  • If you have severance payments that are more than double an individual’s recent annual compensation, schools should analyze the payment in accordance with IRS Notice 2019-09.
  • Be aware that the total amount of the severance package might not all be defined as an “excess parachute payment” – there are “allocations” to be aware of.
  • This is a technical area, touch base with qualified tax advisor if you suspect that your institution may be “in the mix” of Section 4960.

Specific questions? Email Dave Moja

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.

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