Highest earners at tax-exempt hospitals face new tax on compensation under GOP plan

The Republican tax reform bill released Nov. 2 proposes a new excise tax on compensation that would affect executive teams at tax-exempt hospitals.

The bill, titled the Tax Cuts and Jobs Act, proposes a 20 percent excise tax on compensation of $1 million or more paid to an employee of a tax-exempt organization, effective in 2018. The new excise tax would apply to the organization's five highest-paid employees.

The legislation would also repeal the performance-based exception to the $1 million limit on deductible compensation. Right now, businesses can write up up to $1 million in compensation expenses for the five highest earners in the company as well as any amount beyond that $1 million that is tied to performance targets. The GOP proposal will retain that $1 million threshold, but public companies would no longer be able to deduct annual performance-based compensation in excess of $1 million for the CEO, CFO and top three highest-paid employees.

In a statement, Tom Nickels, executive vice president of the American Hospital Association, described the effects of the tax proposal on hospital and health system executive compensation.

"We are concerned about the proposed 20 percent excise tax for certain hospital employee compensation," Mr. Nickels said. "There is already a rigorous process prescribed by the Internal Revenue Service for setting up executive compensation and the process requires an impartial panel drawn primarily from the board of trustees.

"As Congress engages in the important work of reforming the nation's tax code, we urge them to retain tax code incentives and fair treatment for hospitals."

Brian M. Pinheiro, chair of Ballard Spahr's business and finance department and practice leader of the firm's employee benefits and executive compensation group, stated in a National Law Review report that some of the most significant changes from the bill relate to limits on executive compensation.

The bill also contains changes to rules around nonqualified deferred compensation plans, which are agreements between employer and employee to pay the employee compensation in the future. Bloomberg likens these plans to "super-sized 401(k) plans for executives at hundreds of U.S. companies." Participants can currently contribute salary and other awards to the plans free of taxes, invest the money and defer tax payments until years later when money is withdrawn.

As a result, these plans allow executives to defer a much larger portion of their compensation.

The tax reform bill would make nonqualified deferred compensation taxable once there is no longer a substantial risk of forfeiture, a major departure from current for-profit company rules. This proposal would apply deferred compensation rules in effect for tax-exempt organizations to for-profit companies.

More articles on compensation:
SullivanCotter rolls out new software for performance-based compensation
6 notes on salary & bonuses for health informatics directors
Study: CEO media appearances associated with 6-figure increase in pay

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