The NAFCU Journal: IRS Clarifies Excise Tax Reporting Rules for Federal Credit Unions

By Brandy Bruyere

On Dec. 15, 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), which changed the tax treatment for certain compensation that a credit union pays its top-five highest-paid employees. Specifically, credit unions are now subject to a 21 percent excise tax on what is termed excess remuneration — certain compensation that when totaled exceeds $1 million — and excess parachute payments. The IRS has a very specific definition for remuneration, but generally, it is pay that is reportable in box 1 of an employee’s W-2 for which there is not a “substantial risk of forfeiture.” This includes deferred compensation such as that from 457(f) plans, depending on how those funds vest. 

Credit unions that may be subject to the excise tax are “applicable tax-exempt organizations” (ATEOs), although keep in mind this tax could also apply to credit union service organizations (CUSOs). There was much confusion about how the IRS would collect this excise tax, including what compensation would be included like “excess remuneration” or an “excess parachute payment.” It was also not clear how federal credit unions (FCUs) would report this tax to the IRS. While state-chartered credit unions file Form 990, there is not a similar requirement for federal credit unions. Given the lack of clarity overall, NAFCU began seeking clarification from the IRS on this topic shortly after the TCJA became law. NAFCU also asked Congress to address disparities in how compensation plans that existed before the TCJA was enacted are treated for credit unions as compared to for-profits.

On Dec. 31, 2018, the IRS issued interim guidance on how to report this excise tax. This included clarifying that the form for federal credit unions to use is Form 4720 and its applicable instructions. This was due by May 15, 2019, if a credit union was subject to the tax on compensation paid in 2018. Even then, there were differing opinions about whether a federal credit union’s Form 4720 would be subject to public disclosure under a Freedom of Information Act request. NAFCU reached out to the IRS for clarification and received a response clarifying that Form 4720 is “not made publicly available unless filed by a private foundation.” According to the IRS, existing guidance in the Internal Revenue Manual, Section 3.20.12.2.1 titled “Public Inspection of Annual Returns and Applications for Tax-Exempt Status” addresses the confidentiality of Form 4720.

Here is an excerpt for reference:

“If a member of the public requests information the IRS is responsible for providing the most complete and accurate copy of the forms to the customers. IRC 6104 requires the IRS to make the following available for public inspection:

… Form 4720, Return of Certain Excise Taxes on Charities and Other Persons Under Chapters 41 and 42 of IRC, if filed by a private foundation. …

Note: Form 4720 filed by individuals or organizations other than private foundations, are not subject to disclosure provisions of IRC 6104.” (Emphasis added.)

This cleared up the confusion some have had about the confidentiality of Form 4720. Where a federal credit union is required to file Form 4720 to address excise taxes on employee compensation, the form is not subject to public disclosure.

This issue implicates both benefits and tax law, which are both highly specialized, so credit unions and CUSOs that may be impacted may wish to consult with counsel to determine how this tax impacts them. NAFCU members can also download our final regulation about the excise tax.

Brandy Bruyere is NAFCU’s vice president of regulatory compliance.

This article was published in the September-October 2019 edition of The NAFCU Journal magazine. 
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