Last month, the Washington Court of Appeals affirmed a lower court’s decision to dismiss a challenge to the recently enacted payroll expense tax in Seattle, WA. Seattle Metro. Chamber of Commerce v. City of Seattle, No. 82830-4-I, 2022 WL 2206828 (Wash. Ct. App. June 21, 2022).
The tax, which went into effect on January 1, 2021, applies to entities “engaging in business within Seattle” and is measured using the business’s “payroll expense” (defined as “compensation paid in Seattle to employees,” including wages, commissions, salaries, stock, grants, gifts, bonuses and stipends). The tax only applies to businesses with a payroll expense of more than $7 million in the prior calendar year, and compensation is considered “paid in Seattle” if the employee works more than 50% of the time in the city.
In-house counsel and human resources professionals at tax-exempt colleges and universities often face a variety of challenges when structuring, and determining obligations due under, severance arrangements. There are some key considerations to bear in mind, which are outlined in this article.
In a presentation at McDermott’s Employment and Employee Benefits Forum, Andrew Liazos discussed areas of focus for Section 162(m) and third-party loan funding for employee stock purchase plans (ESPPs). He also provided insight on the new SEC final rule on hedging, and the 21 percent excise tax on pay over $1 million to covered employees at tax-exempt organizations.
One of the more controversial and complex provisions of the Tax Cuts and Jobs Act has been the 21 percent excise tax on certain nonprofit executive compensation. On December 31, 2018, the IRS issued interim guidance that addresses how this tax will apply in various situations that commonly arise for tax-exempt employers. Establishing internal systems to comply with this guidance will be challenging.
The Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) made some significant changes to the executive pay area for tax-exempt organizations with the imposition of a new excise tax on certain amounts paid to some employees of the tax-exempt organization. Imposing taxation in areas which previously had no such result will warrant tax-exempt organizations reviewing their compensation structures in light of the new rules to ensure not only an understanding of the new rules but to evaluate feasible options in minimizing any taxes.
Partners Mary Samsa and Joe Urwitz discuss the new challenges created for tax-exempts in compensating their executives given the new 21 percent excise tax on pay over $1 million. Now is the time for tax-exempts to be evaluating potential tax planning opportunities for structuring pay to avoid application of the 21 percent excise tax.
On January 22, 2018, Congress passed an interim funding bill to end the three-day government shutdown that also pushed back the effective date of the Affordable Care Act’s controversial “Cadillac Tax.” The Cadillac Tax imposes an excise tax on group health plans that provide benefits in excess of certain thresholds. The new legislation pushes the effective date back an additional two years to January 1, 2022.
Michael Peregrine and Ralph DeJong wrote this bylined article about what they called the “enormous consequences” for tax-exempt hospital senior executive compensation due to the new Tax Cuts and Jobs Act provisions that place an excise tax on executive compensation and benefits. “From a corporate governance perspective, the significance of these new provisions carries the potential for recalibrating the relationship between the board and its executive compensation committee,” the authors wrote.
Tax-exempt organizations—especially hospitals and health systems—face a new tax reality now that both houses of Congress have voted to pass the final tax reform bill.
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