On December 31, 2018, the IRS released Notice 2019-9.  This 65-page treatise on new I.R.C. Section 4960 is pretty technical and institutions should especially be aware of the issue with severance situations that might contain “excess parachute payments.”



Saltwater Christian College (SCC) 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.

SCC’s CFO recently sat through a webinar on the new Section 4960, Tax on excess tax-exempt organization executive compensation recently and emerged thoroughly confused.  We did a Zoom call with the entire Accounting Team at SCC to talk about the “Million Dollar Tax” that seemed to be targeting highly paid university sports coaches.

“Okay,” said the CFO, “we’re never going to pay anyone over $1 million a year, at least I hope not, but we may have a situation where we are going to have an “excess parachute payment” in 2019.  Without getting too technical, can you please give us an overview of the potential Section 4960 excise tax on “excess parachute payments?”

“Well,” we say, “why don’t you lay out the situation/example you are looking at and we will run it through the framework of Notice 2019-9.”

“Sounds good, but again, please don’t get too technical.  Here goes, we hired a ‘superstar’ professor a few years ago and our administration got too enamored with the deal.  This professor was hired under a four-year guaranteed employment contract.  She is a ‘covered employee’ because she certainly has been one of our five highest paid employees.  She is not a licensed medical professional or veterinarian.  The contract states that she was to receive a salary of $100,000 for the first year of the agreement, and for each succeeding year, an annual salary that is $50,000 higher than the previous year. The agreement provides that, in the event of A’s involuntary separation from employment without cause, she will receive the remaining salary due under the agreement.  She’s been paid $100,000 for 2017, $150,000 for 2018, and now we’re going to pay her the required $450,000 ($200,000 for 2019 + $250,000 for 2020) this month under a formal separation agreement which is effective December 31, 2018.”

“According to Notice 2019-9, this is a payment in the nature of compensation that is contingent on an involuntary separation from employment and is not subject to an exclusion.  Then, we calculate the present value of her contingent payments to be the total of $450,000 (because it is being paid now – normally a p.v. base of 120% of the Applicable Federal Rate would be utilized).  Next, we calculate her base amount to be $125,000 (average of past five years unless employee has worked less – in this case two years).  Step 4 is to determine whether the contingent payments are ‘parachute payments’ and they are because $450,000 is more than three times the base amount of $125,000.  Now (to quote Big Fig) here’s the tricky part: the “excess parachute payment” is $325,000 – it is the parachute payment over 1 TIMES the base amount, not three times.  So, in this example, SCC would owe an excise tax of $68,250 payable on Form 4720 (and, don’t forget to answer “Yes” to 2018 Form 990, Part V, Line 15).”

“Ouch,” says SCC’s CFO.  “Ouch,” say we.



From Notice 2019-019, Section F. Excess Parachute Payments:

The discussion of Q/A–16 through Q/A–34 that follows provides an overview of the guidance in this notice for purposes of calculating the excise tax under section  4960(a)(2), noting certain similarities and differences between those Q/As and the Q/As under Treas. Reg. § 1.280G-1. As a preliminary matter, however, the following summarizes the basic steps used to determine the amount of excise tax (if any) under section 4960(a)(2):

Step 1: Determine if a covered employee is entitled to receive payments in the nature of compensation that are contingent on an involuntary separation from employment and are not subject to an exclusion.

Step 2: Calculate the total aggregate present value of the contingent payments, taking into account the special valuation rules that apply when an involuntary separation from employment accelerates payment or vesting of a right to a payment.

Step 3: Calculate the covered employee’s base amount with respect to the base period.

Step 4: Determine if the contingent payments are parachute payments. The contingent payments are parachute payments if their total aggregate present value equals or exceeds an amount equal to three times the covered employee’s base amount.

Step 5: Calculate the amount of excess parachute payments. A parachute payment is an excess parachute payment to the extent the payment exceeds the base amount allocated to the payment. (Note that this is the excess over 1 times the base amount, and not the excess over 3 times the base amount.)

Step 6: Calculate the amount of excise tax under section 4960(a)(2). The excise tax is the amount equal to the product of the rate of tax under section 11 and the sum of any excess parachute payments paid by an ATEO or related organization to the covered employee.

From Notice 2019-019, Q/A:

Q-17: What is a parachute payment under section 4960(c)(5)(B)?

A-17: (a) In general. The term “parachute payment” means any payment in the nature of compensation made by an ATEO (or a predecessor organization of the ATEO) or a related organization to (or for the benefit of) a covered employee if-

  1. the payment is contingent on the employee’s separation from employment with the employer; and
  2. 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 three times the base amount. [See exclusions]


Q-9: Who is a covered employee within the meaning of section 4960(c)(2)?

A-9: The term “covered employee” means any employee (including any former employee) of an ATEO, if the employee-

  1. is one of the five highest-compensated employees of the organization for the taxable year of the ATEO, or
  2. was a covered employee of the ATEO (or any predecessor) for any of the ATEO’s preceding taxable years beginning after December 31, 2016.



  • The “Tax Cuts and Jobs Act” introduced I.R.C. Section 4960 – Tax on excess tax-exempt organization executive compensation
  • Most institutions have heard that this “Million Dollar Tax” is ultimately a 21% excise tax for amounts you pay over $1,000,000 per year to your “covered employees” (Top 5 highest paid employee for any of the past tax years beginning after 12/31/16)
  • However, you could get caught up in a severance pay situation that is deemed to be an “excess parachute payment” and get hit with the tax unawares
  • Notice 2019-9 contains a plethora (and I mean a PLETHORA) of technical information on this subject (it’s 65 pages long and includes intense narrative, 39 detailed Q&A topics, and numerous examples)


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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