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    Don’t Be Caught Unprepared for the New Excise Tax

    As you may have heard, there’s a new tax that affects tax-exempt entities, including credit unions. In response to complaints from taxed corporations that tax-exempt organizations are enjoying preferential treatment, the 2017 Tax Act included a 21% excise tax on compensation exceeding $1 million paid to specific employees of tax-exempt organizations.

    Upon hearing about the new excise tax, you may assume that your credit union is in the clear because none of your executives’ salaries is more than $1 million. Unfortunately, salary is just part of the calculation. The $1 million limit includes 457(f) deferred compensation plan funds and severance packages, so many credit unions may find themselves with surprise bills of $50,000 to $200,000 or more come tax time!

    How the Excise Tax Works

    Here are the details of how the new excise tax is applied:

    • Starting in tax year 2017, your credit union may be charged a tax on compensation paid to its five highest paid employees.

    • When examining amounts for those five employees, the government considers all compensation subject to federal income tax withholding, 457(f) deferred compensation subject to tax, and employment-related compensation amounts paid by a related organization.

    • The government imposes a 21% excise tax to your credit union on compensation amounts exceeding $1 million per included employee.

    • Even terminated employees may trigger a tax. This is especially important to remember when your credit union considers offering a generous executive severance package.

    • Spreading 457(f) benefits over multiple years is not a good tax avoidance strategy because 457(f) plans are subject to IRS code 409A, which means a material change will require the benefit to be pushed out five or more years into the future.

    How the Excise Tax Adds Up

    To show you how this new excise tax can affect your credit union’s bottom line, here’s an example of a scenario common to the credit unions I work with:

    Executive’s salary

    $400,000

    Bonus

    +60,000

    Car allowance and perks

    +10,000

    2018 compensation

    $470,000

     

    457(f) deferred compensation gross benefit

    +$1,500,000

    2018 total compensation

    $1,970,000

    Subtract $1,000,000 allowance

    -$1,000,000

    Compensation subject to excise tax

    $970,000

    21% excise tax to credit union

    $203,700


    How to Minimize Effects of the Excise Tax

    Needless to say, a tax bill of $203,700 can wreak havoc on your credit union’s expenses and ability to return value to your members! Even more than corporations, credit unions run on a strict budget, with no room to pay thousands in unplanned tax expenses, of course. While you may think you have no option but to start budgeting for this new tax expense, the wiser choice is to work with an executive benefits expert, who will review your existing benefits package and recommend changes and solutions that minimize or eliminate your credit union’s benefits taxes. In addition, an executive benefits expert can advise you in benefits pre-funding, which takes advantage of a rule enabling credit unions to invest in funds normally not allowed, as long as returns are used to defray employee benefits costs.

    Contact SWBC’s Executive Benefits team for help constructing attractive, tax-efficient executive benefits packages, optimizing your existing benefit packages to minimize excise and other taxes, and establishing benefits pre-funding for your credit union.

    Member SIPC & FINRA. Advisory services offered through SWBC Investment Company, a Registered Investment Advisor.

    Not for redistribution—SWBC may from time to time publish content in this blog and/or on this site that has been created by affiliated or unaffiliated contributors. These contributors may include SWBC employees, other financial advisors, third-party authors who are paid a fee by SWBC, or other parties. The content of such posts does not necessarily represent the actual views or opinions of SWBC or any of its officers, directors, or employees. The opinions expressed by guest bloggers and/or blog interviewees are strictly their own and do not necessarily represent those of SWBC. The information provided on this site is for general information only, and SWBC cannot and does not guarantee the accuracy, validity, timeliness or completeness of any information contained on this site. None of the information on this site, nor any opinion contained in any blog post or other content on this site, constitutes a solicitation or offer by SWBC or its affiliates to buy or sell any securities, futures, options or other financial instruments. Nothing on this site constitutes any investment advice or service. Financial advisory services are provided only to investors who become SWBC clients.

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    Roger Versteeg

    Roger Versteeg joined SWBC in October 2007 as part of SWBC Executive Benefits. Roger has more than 33 years of insurance and financial services experience, specializing in non-qualified deferred compensation and succession planning for credit unions. As an award-winning executive benefits professional, Roger has qualified numerous times as a lifetime member of the Million Dollar Round Table™ Top of the Table. Roger is a member of the Mankato, Minnesota Chapter of the Society for Financial Services Professionals, the National Association of Independent Financial Advisors, and he has served as President for the Southern Minnesota division of each group. His humble philosophy is to make every conscientious effort to serve his clients in the same manner as he would apply to himself.

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