IRS Provides Guidance Regarding 21% Excise Tax on Tax-Exempt Organizations for Excessive Executive Compensation – The Tax Cuts and Jobs Act imposes a 21 percent excise tax on charitable hospitals and other tax-exempt organizations that pay excess remuneration or excess parachute payments to certain highly-compensated employees. On December 31, 2018, the Internal Revenue Service (IRS) issued interim guidance (the Guidance) to assist tax-exempt employers in understanding how this excise tax will apply. The IRS requests comments on the Guidance to be submitted no later than April 2, 2019.
Section 4960 of the Internal Revenue Code (the Code), enacted December 22, 2017, pursuant to section 13602 of the Tax Cuts and Jobs Act, imposes a tax equal to the corporate tax rate (currently at 21 percent) to be paid by applicable tax-exempt organizations (ATEOs) for: (i) remuneration paid by such organizations in excess of $1 million to any covered employee; and (ii) any excess parachute payments paid by such organizations to any covered employee.
Applicable Tax-Exempt Organizations and Related Organizations
ATEOs include many different types of nonprofit organizations, including charitable hospitals and health systems. Additionally, the excise tax applies to organizations related to the ATEO. An organization is related to an ATEO if such organization: (i) controls, or is controlled by, the ATEO; (ii) is controlled by one or more persons which control the ATEO; (iii) is a supported organization (as defined in section 509(f)(3) of the Code); (iv) is a supporting organization as described in section 509(a)(3) of the Code with respect to the ATEO; or (v) in the case of an ATEO which is a voluntary employees’ beneficiary association described in section 501(c)(9) of the Code, establishes, maintains, or makes contributions to such voluntary employees’ beneficiary association. The Guidance also clarifies that the excise tax applies to remuneration paid by a separate organization on behalf of the ATEO, such as a payroll agent or professional employer organization.
The Code defines a “covered employee” to mean the top 5 highest compensated employees for the organization for the taxable year or any preceding taxable year beginning after December 31, 2016. To reduce administrative burdens that would arise due to varying taxable years for ATEOs and related organizations, the Guidance explains that the excise tax is determined on a calendar-year basis.
Unfortunately, other aspects of Section 4960 and the Guidance create administrative burdens for tax-exempt organizations. For example, the IRS specifies that there is no minimum dollar threshold for an employee to be a covered employee. This means that even if the ATEO has no liability under Section 4960 for one year, those employees that are among the top five highest paid employees in any year beginning after December 31, 2016, will continue to possess the status of a “covered employee” in all future years and may be paid excess remuneration or excess parachute payments in a future year.
Additionally, tax-exempt systems will have to gather compensation data from the ATEO and all related organizations to accurately identify the covered employees and any excise tax owed. The Guidance states that “[t]o identify its five highest-compensated employees, the ATEO must include remuneration paid for the taxable year by any related organization, including remuneration paid by a related for-profit organization or governmental entity, for services performed as an employee of such related organization.” Each employer of a covered employee, ATEOs and related organizations, is liable for their allocated portion of the excise tax. This poses an additional hurdle for tax-exempt systems in which covered employees are employed by both an ATEO and a related organization. The Guidance includes rules for allocating the excise tax among related employers and rules regarding a change in related status during a calendar year.
Remuneration and the Exclusion of Medical Services
“Remuneration” is defined as “wages,” but Section 4960 specifically exempts compensation paid to licensed medical professionals in exchange for their professional services. This exemption excludes only compensation for the “direct performance of medical services.” The Guidance states that administrative, teaching, and research services are generally not medical services, and the tax would apply to remuneration for these services. When a covered employee is compensated for both medical services and other services, the employer must allocate remuneration paid to such employee between medical services and such other services. If the employee’s compensation is not reasonably allocated in an employment agreement, ATEOs must use a reasonable method to allocate the compensation for medical services versus non-medical services. The Guidance suggests allocating the compensation by using records such as patient, insurance, and Medicare/Medicaid billing records or internal time reporting mechanisms to determine the time spent providing medical services, and then allocate remuneration to medical services in the proportion such time bears to the total hours the covered employee worked for the ATEO.
Excess Parachute Payments
An “excess parachute payment” is an amount equal to the excess of any parachute payment over the portion of the base amount allocated to such payment. A “parachute payment” is defined as any payment in the nature of compensation to (or for the benefit of) a covered employee if: (i) such payment is contingent on such employee’s separation from employment with the employer; and (ii) the aggregate present value of the payments in the nature of compensation to (or for the benefit of) such individual which are contingent on such separation equals or exceeds an amount equal to three times the base amount. The Guidance explains that a payment is “contingent on an employee’s separation from employment” if the facts and circumstances indicate that the employer would not make the payment in the absence of an involuntary separation from employment. This includes circumstances under which the separation from employment results in the employee becoming vested or otherwise accelerates the right to payment.
The Guidance can be found here. The IRS states that it, along with the Department of Treasury, intends to incorporate the Guidance into forthcoming proposed regulations.
Reporter, Kirstin E. Rodrigues, Atlanta, +1 404 572 4671, email@example.com.
CMS Increases CLIA Certification Fees By 20% Effective Immediately – CMS recently announced a 20 percent increase to the fees that laboratories must pay when certified under the Clinical Laboratory Improvement Amendments (CLIA) of 1988. This is the first such increase in the last 20 years and is meant to address the significant CLIA program administration shortfall that has developed over time. The increase was issued in a notice with comment period that was published in the Federal Register on December 31, 2018. The fee increases are effective immediately, but comments are due by March 1, 2019.
CLIA applies to all laboratories that perform tests on human specimens to provide information regarding the diagnosis, prevention, treatment, or assessment of health. Clinical laboratories are required to obtain CLIA certification based on the type of diagnostic tests conducted. To participate, CLIA requires that laboratories pay “certificate fees” (for the issuance and renewal of CLIA certificates), “compliance fees” (for the monitoring of testing and conducting onsite inspections) and “additional fees” (for, e.g., validation inspections of non-accredited laboratories). The fee amounts vary based on factors such as dollar volume and scope of testing being performed at the laboratory. All three types of fees are subject to the 20 percent increase. In three tables in the Federal Register, CMS demonstrates the fee increase for different laboratory classifications. For example, certificate fees will jump from a range of $150–$7,940 (depending on laboratory class) to $180–$9,528.
CMS has “monitored” CLIA operation costs, including state survey agency awards, administrative costs, and contract support, and observed an approximately $9.3 million shortfall in expenditures as compared to fee collections as of fiscal year (FY) 2017. In part, CMS noted, the increase in costs related to the increase in the amount of time required to survey laboratories conducting complex testing. Without a fee increase, CMS predicted that the CLIA program would “cease to be self-sustaining” by 2020, which will “potentially compr[omise] public health and safety.” The 20 percent increase is expected to increase fees by $10.2 million in FY 2018 and sustain the CLIA program through 2021. CMS estimated that this increase will impact approximately 250,010 CLIA-certified laboratories.
CMS previously solicited comments regarding updating CLIA fees on January 9, 2018 (Request for Information). CMS stated that it will use the comments received in response to the Request for Information and this latest Notice in future rulemaking. Nonetheless, the fee increases are effective immediately.
Reporter, Elizabeth Swayne, Washington, D.C., +1 202 383 8932, firstname.lastname@example.org.
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Court Stays Ruling in Texas v. U.S. – U.S. District Judge Reed O’Connor in the Northern District of Texas, who recently ruled that the individual mandate was unconstitutional and inseverable from the Affordable Care Act, issued a Court Order on December 30th, 2018, staying his ruling and the partial final judgment during the pendency of the ruling’s appeal. The ruling is likely to face an appeal to the U.S. Court of Appeals for the Fifth Circuit in New Orleans. Please click here for a King & Spalding’s previous discussion of the Court’s ruling.
King & Spalding to Host 10th Annual Reception Celebrating the Life Sciences and Healthcare Industries – On Tuesday, January 8, 2019, from 6:30 – 8:30 p.m. PT at the SFMOMA Atrium in San Francisco, California, King & Spalding will host its 10th Annual Reception celebrating clients and friends in the life sciences and healthcare industries. If you are interested in attending, please contact Megan Wolszczak at email@example.com.
King & Spalding Roundtable Regarding the Opioid Epidemic: What Hospitals Need to Know – On Tuesday, January 15, 2019, from 1:00 – 2:00 p.m. ET, King & Spalding’s John Horn, Shannon Cox, Steve Cummings, Amy Jones, and Amy Boring will host a webinar focusing on important developments and practical tips for ensuring compliance and effectiveness with regard to controlled substances in the hospital context, including:
- Recent DEA activity demonstrating elevated concern with regard to controlled substance security, oversight and management in the hospital context;
- Unique risks present in the hospital setting, especially with regard to healthcare workers;
- The legal framework and key issues hospitals need to consider in evaluating their compliance programs and monitoring tools; and
- Best practices with regard to a hospital’s controlled substance compliance program and diversion prevention.
To register, please click here.