Tax Cut and Jobs Act Felt by Labor Unions and Multiemployer Pensions
Unrelated Business Income Tax (UBIT)
Provisions that may increase the unrelated business taxable income of either a union or multiemployer benefit plan include the following from either or both the House and Senate bills.
- Unrelated business income will include payment of certain employee fringe benefits made taxable to employees under the legislation. Benefits now taxable include qualified transportation fringe benefits, parking and, if present, the use of any on premises athletic facilities.
- Unrelated business taxable income will be computed separately for each unrelated trade or business.
While the above provisions have a cost associated with them, unions with unrelated business taxable income (UBTI) may benefit from the replacement of graduated corporate tax rates with the flat corporate tax rate of 20% provided that their UBTI is above the graduated rates formerly in place. For pension trusts, the new flat corporate tax rate will be a subject of some angst as trusts are and will be subject to a maximum tax rate of 39.6% on unrelated business taxable income, as well as alternative minimum tax which is eliminated for corporations. This means that multiemployer pension trusts with alternative investments producing UBTI will be potentially paying tax at a rate that is 19.6% higher than private foundations and college and university endowments would be paying on the same taxable income from the same alternative investment.
Excise Tax on Tax-Exempt Organization Excess Compensation
Under current law, publicly traded C corporations can deduct up to $1 million for compensation paid to chief executive officers and other certain highly paid officers. Current law also limits the deductibility of certain severance-pay (“parachute payments”). There is no excise tax or other limitation on the executive compensation or severance payments made by tax-exempt organizations. Under current law, there are reasonableness requirements and a prohibition against private inurement for executive compensation for tax-exempt entities. There is not, however, an excise tax under current law tied to the amount of compensation. The provision in both the House and Senate versions of TCFJA would impose an excise tax of 20 percent on compensation in excess of $1 million paid to any of the five highest-paid employees of a tax-exempt organization. The tax would apply to the value of all remuneration paid for services, including cash and the cash-value of most benefits, including plans under IRC Section 457(f), however, excluding payments under qualified plans or plans described in IRC Section 457(b). The excise tax would also apply to excess “parachute payments,” or payments in the nature of compensation that are contingent on an employee’s separation and, in present value, are at least three times the employee’s base compensation.
While, the provisions discussed above are potentially the most significant provisions of the House and Senate versions of TCJA for both labor unions and multiemployer plans, other provisions of either or both of the current versions of the legislation may affect the bottom lines of labor unions and multiemployer plans as employers. An example of one such a provision is in the House version of the legislation and repeals the exclusion from an employee’s compensation income for employer-provided education assistance. The exclusion, limited to $5,250 per year for an employee, applies to both graduate and undergraduate courses and must be part of a written plan that does not discriminate in favor of highly compensated employees. Unions and multiemployer plans providing this benefit to employees would have to consider the tax implications going forward, if the exclusion’s repeal is enacted.
If you have any questions or would like to discuss this further, please, contact Rich Ruvelson at [email protected] or 301.272.6070, or fill in the form below.
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Richard Ruvelson, Principal, JD T (301) 272-6070 [email protected] |
