IRS clarifies exclusions from remuneration for section 4960 excise tax

ARTICLE | April 18, 2025

Authored by RSM US LLP

Executive summary

On April 11, 2025, the IRS released Chief Counsel Advice (CCA) 202515014, dated May 31, 2024, clarifying the exclusion of section 403(b) elective deferrals and employee contributions to section 125 cafeteria plans from the definition of remuneration for purposes of computing the section 4960 excise tax on excess executive compensation imposed on exempt organizations. The IRS had not previously issued guidance on these items.

Background

Section 4960 imposes an excise tax on excess remuneration (payments in excess of $1 million) and excess parachute payments (certain compensation contingent upon a separation from service) paid to certain executives of exempt organizations and their related entities. These calculations can be complex, and there are gaps in existing guidance regarding the definition of includible compensation.

Overview

CCA 202515014 provides new insight into the IRS’s position regarding the definition of remuneration for purposes of the excise tax on executive compensation paid by exempt organizations. Section 4960 defines wages in reference to section 3401(a), excepting designated Roth contributions and including deferred compensation amounts required to be included in gross income under section 457(f). Section 3401(a) includes all remuneration for services performed by an employee for his employer, with enumerated exceptions.

The 4960 regulations do not include references to contributions to a section 403(b) plan (a type of retirement plan for certain exempt organization employees) or salary reduction payments to a section 125 cafeteria plan for employer-provided health insurance because section 3401(a) does not specifically exclude these amounts. However, the section 3402(a) income tax withholding rules exclude these benefits to the extent they are excludable from gross income.

Section 403(b) plan contributions

• Excludable from employee gross income and income tax withholding to the extent premiums and vested annual additions to not exceed limits under sections 402(g)(3) and 415. The contribution limit for 2025 is $23,500, with catch-up contributions of $7,500 for those ages 50 and older (or $11,250 in place of the $7,500 catch-up for those ages 60 to 63) in 2025.

Section 125 cafeteria plan contributions

• Excludable from employee gross income and income tax withholding if used to pay for health insurance premiums that meet the definitions in sections 105(b) or 106(a).

Conclusion

Because of the interplay between sections 3401 and 3402, the CCA concludes that both section 403(b) plan contributions and section 125 cafeteria plan contributions, to the extent excludable from income tax withholding, should also be treated as being excluded from the definition of remuneration under section 4960(c)(3). This clarification is in line with the position taken by many practitioners and taxpayers in computing section 4960 remuneration.

This article was written by Alexandra O. Mitchell, Karen Field , Lauren Nowakowski, Kate Walters and originally appeared on 2025-04-18. Reprinted with permission from RSM US LLP.
© 2024 RSM US LLP. All rights reserved. https://rsmus.com/insights/tax-alerts/2025/irs-clarifies-exclusions-from-remuneration-for-section-4960-excise-tax.html

RSM US LLP is a limited liability partnership and the U.S. member firm of RSM International, a global network of independent assurance, tax and consulting firms. The member firms of RSM International collaborate to provide services to global clients, but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. Visit rsmus.com/about for more information regarding RSM US LLP and RSM International.

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.