Notice 2019-09 provided — Internal Revenue Bulletin 2021-7

with initial guidance on the application of section 4960, including that taxpayers may base their positions on a reasonable, good faith interpretation of the statute until further guidance is issued. On June 11, 2020, the Treasury Department and the IRS published proposed regulations on section 4960 in the Federal Regis- ter (REG-122345-18, 85 FR 35746) (the proposed regulations). The Treasury Department and the IRS received comments responding to the proposed regulations, which were considered in these final regulations, published here. The comments primarily discussed the treatment of employees of a related organization who also provide services to the ATEO, suggesting various exceptions for these situations. Comments also addressed the possibility of a grandfather rule for compensation to be paid under arrangements in place prior to the effective date of section 4960, treatment of deferred compensation as remuneration, the definition of “control,” and which organizations are ATEOs.

B. Baseline

The Treasury Department and the IRS have assessed the benefits and costs of the final regulations relative to a no-action baseline reflecting anticipated Federal income tax-related behavior in the absence of these regulations.

C. Affected Entities

The final regulations affect an estimated 261,000 ATEOs and 77,000 non-ATEO related organizations of ATEOs that in historical filings report substantial executive compensation. ¹² Of the roughly 261,000

12 The methods and data used to estimate the number of affected entities are discussed in detail in the Paperwork Reduction Act special analysis.

Bulletin No. 2021–7 859 February 16, 2021

ATEO nor any related ATEO paid more than 10 percent of the employee’s total remuneration, then the ATEO that paid the highest percent of remuneration does not meet this exception.

Consider, for example, a corporate employee making $2 million per year who spends 5 percent of her time (roughly one day each month) working for the corporation’s foundation, a related ATEO, without receiving compensation from the ATEO and who would be a covered employee of the ATEO absent the exceptions. Without the exceptions, her compensation in excess of $1 million from the corporation, which is a related party of the foundation, is subject to a 21 percent excise tax, or $210,000 in excise tax liability. The exceptions (either of the first two could apply here) remove that liability and the incentive it provides to stop providing such services or to dissolve the relationship between the ATEO and the related organization. The exceptions support a transfer of substantial value (5 percent of the employee’s salary, or $100,000) that might otherwise not take place.

Commenters on the proposed regulations suggested other ways in which the exceptions could be expanded. The Treasury Department and the IRS considered these suggested expansions of the exceptions and concluded that the suggestions were inconsistent with the statute and legislative history or would enable organizations to circumvent the excise tax in situations where an individual performs services for an ATEO on more than a volunteer basis, creating the potential for abuse and increasing the costs of administering the excise tax. Therefore, these final regulations do not adopt the suggested expansions of the exceptions.

The exceptions in these final regulations may have a substantial impact on donations relative to a no-action baseline, although the magnitude of the potential impact depends on how often the exceptions apply and on how responsive organizations and employees are to the excise tax, both of which are uncertain.

The exceptions apply only in particular circumstances: for example, the employee must be employed by a related organization (typically an organization that controls or is controlled by the ATEO), the employee must be highly compensated,

such ATEOs based on filings for tax year 2017, 239,000 are section 501(a) exempt organizations (including 23,000 private foundations), 19,000 are section 115 state and local instrumentalities, 2,000 are section 527 political organizations, 600 are exempt farmers’ cooperative organizations described in section 521(b)(1), and 200 are federal instrumentalities (although the Treasury Department and the IRS will continue to consider whether federal instrumentalities are ATEOs).

D. Economic Analysis

This section describes the key economic effects of the provisions of these final regulations.

Clarifications

Most provisions of these final regulations clarify aspects of the excise tax imposed by section 4960, minimizing the burdens entities bear to comply with section 4960, and have little other economic impact. Clarifications reduce uncertainty, lowering the effort required to infer which organizations, employees, and payments are subject to the excise tax and the potential for conflict if entities and tax administrators interpret provisions differently. Examples of provisions of these final regulations that are primarily clarifications include the definition of “control,” treatment of deferred compensation and vesting, and which organizations are ATEOs.

“Volunteer” Exceptions

Several commenters expressed concern that highly-paid employees of a nonATEO performing services for a related ATEO without receiving compensation from the ATEO may be subject to the excise tax. To avoid the excise tax, individuals might cease performing such services, or ATEOs might dissolve their relationships with related non-ATEOs, reducing donations from related non-ATEOs.

The final regulations include exceptions to the definitions of “employee” and “covered employees” (specifically to the rules for determining the five highest compensated employees for purposes of identifying covered employees) to address such situations. With respect to the first

exception, the regulations define “employee” consistent with section 3401(c), in particular adopting the rule that a director is not an employee in the capacity as a director and an officer performing minor or no services and not receiving any remuneration for those services is not an employee.

The general rule provides that employees of a related non-ATEO are not considered for purposes of determining the five highest-compensated employees if they are never employees of the ATEO. In addition, individuals who receive no remuneration (or grant of a legally binding right to remuneration) from the ATEO or a related organization cannot be among the ATEO’s five highest-compensated employees.

Under the exceptions, an ATEO’s five highest-compensated employees also exclude an employee of the ATEO who receives no remuneration from the ATEO and performs only limited hours of service for the ATEO, which means that no more than 10 percent of total annual hours worked for the ATEO and related organizations are for services performed for the ATEO. An employee who performs fewer than 100 hours of services as an employee of an ATEO and its related ATEOs is treated as having worked less than 10 percent of total hours for the ATEO and related ATEOs. An employee who is not compensated by an ATEO, related ATEO, or any taxable related organization controlled by the ATEO and who primarily (more than 50 percent of total hours worked) provides services to a related non-ATEO is also disregarded. In response to comments on the proposed regulations expressing concern that this exception did not provide sufficient flexibility for situations in which an employee of a non-ATEO performs services for a related ATEO as a temporary assignment, these final regulations provide that the 50 percent of total hours worked threshold can be computed over a period of two consecutive years, rather than a single year. This modification expands the exception to provide additional flexibility. An employee is also disregarded if an ATEO paid less than 10 percent of the employee’s total remuneration for services performed for the ATEO and all related organizations, and the ATEO had at least one related ATEO during the applicable year. Additionally, if neither the

February 16, 2021 860 Bulletin No. 2021–7

and the employee’s work for the ATEO must be sufficiently minimal. Historically, many ATEOs report employees with compensation from related organizations. An estimated 8,500 ATEOs filing Form 990 in tax year 2017 reported both compensation of $500,000 or more for any person and any compensation from related organizations. These ATEOs are estimated to have an average of 18 non-ATEO related organizations based on information reported on Form 990 Schedule R, yielding an estimated 154,000 non-ATEO related organizations, of which half, or 77,000, are estimated to employ a covered employee of the ATEO. The fraction of the 154,000 non-ATEO related organizations with employees to whom the exceptions apply (and who are thus not covered employees of the ATEO) is uncertain, but perhaps half the related organizations, or 77,000, have such an employee.

This entity count omits a substantial number of private foundations which may have employees who receive no compensation from the ATEO but who are highly compensated by related organizations, because while the ATEO count used in these estimates includes approximately 100 private foundations that have historically reported employee compensation of $500,000 or more on Form 990-PF, Form 990-PF (unlike Form 990) does not include information on employee compensation received from related organizations. The exceptions are particularly likely to apply to donations to foundations related to nonATEO businesses, as companies are highly likely to be related organizations of a company’s foundation, many family foundations are controlled by the same family that controls a private business, and executives of the related business often provide services to the foundation without payment from the foundation. Because of these facts, looking at pre-TCJA tax forms may underestimate the number of entities potentially affected by the exceptions. In the U.S. in 2015, there were about 2,000 company foundations responsible for $5.5 billion in giving, and 42,000 family foundations. ¹³ It is reasonable to assume that about half of these foundations, or 22,000, have a related business with an employee to whom the exceptions apply.

13 http://data.foundationcenter.org/

Under reasonable assumptions about the response of donated services to the excise tax, the exceptions may restore substantial donations (transfers) of services that the excise tax could potentially otherwise eliminate. Totaling both private foundations and other ATEOs, roughly 99,000 related organizations are estimated to have employees to whom the exceptions apply. If the excise tax would have reduced services that are donated under the exceptions by an average of just over $5,000 per related organization, the total transfer reduction exceeds $500 million.

Absent the exceptions, organizations may also avoid the excise tax by dissolving the relationship between the ATEO and non-ATEO, which may affect donations of money as well as services. Considering only corporate foundations and setting aside other ATEOs, if such dissolutions would lead to a two percent reduction in the $5.5 billion in corporate giving that would otherwise take place through related foundations, the reduction exceeds $100 million. The Treasury Department and the IRS requested but did not receive comments on the impact of the exceptions on the dissolution of relationships between ATEOs and related organizations.

It is plausible that these final regulations restore substantial economic activity relative to regulatory alternatives, under which the excise tax would discourage highly-compensated employees of related non-ATEOs from providing services to a related ATEO without compensation from the ATEO and discourage relationships between ATEOs and non-ATEOs.

Summary

This analysis suggests that these final regulations will reduce compliance burden on affected entities by providing clarifications and, through the exceptions, increase services provided to ATEOs without compensation from the ATEO by a small but potentially economically significant amount ($100 million or more), relative to regulatory alternatives. The Treasury Department and the IRS requested but did not receive comments on the economic impact of these proposed regulations (in particular, comments providing

data, other evidence, or models that provide insight).

II. Paperwork Reduction Act

The collections of information in these final regulations are in §53.4960-1(d), (h), and (i); §53.4960-2(a), (c) and (d); and §53.4960-4(a) and (d). This information is required to determine an ATEO’s “covered employees” as defined in section 4960(c) (2); to calculate remuneration in excess of $1 million as described in section 4960(c) (3); to determine remuneration from related organizations and allocation of liability as described in section 4960(c)(4); and to determine any excess parachute payments to covered employees described in section 4960(c)(5). The IRS intends that the burden of the collections of information will be reflected in the burden associated with Form 4720, under OMB approval number 15450047. The burden associated with Form 4720 is included in the aggregated burden estimates for OMB control number 15450047, which represents a total estimated burden time for all forms and schedules of 52.450 million hours and total estimated burden in dollars of $1.497 billion (estimated for fiscal year 2021). The overall burden estimates provided for 1545-0047 are aggregate amounts that relate to all information collections associated with that OMB control number. This estimate is therefore unrelated to the future calculations needed to assess the burden imposed by these regulations. To guard against over-counting the burden imposed, the Treasury Department and the IRS urge readers to recognize that these burden estimates are aggregates for the applicable types of filers. For purposes of the Paperwork Reduction Act, the Treasury Department and the IRS have not estimated the burden, including that of any new information collections, related to the requirements under these final regulations. Future burden estimates under OMB control number 1545-0047 would capture changes made by TCJA and changes that arise out of discretionary authority exercised in the regulations.

The expected burden associated with section 4960 compliance (including Form

Bulletin No. 2021–7 861 February 16, 2021

4720 preparation and filing) for ATEOs as described in section 4960(c)(1) and related organizations as described in section 4960(c)(4)(B) is listed below: Estimated number of respondents: 337,888 Estimated average annual burden hours per response: 0.20 hours

Estimated total annual burden: $3,569,632 (2020)

Estimated frequency of collection: Annual

In the proposed regulations, the Treasury Department and the IRS requested comments on all aspects of information collection burdens related to the proposed regulations, including estimates for how much time it would take to comply with the paperwork burdens previously described in this section for each relevant form and ways for the IRS to minimize the paperwork burden. The Treasury Department and the IRS did not receive any comments on these issues. Revisions (if any) to these forms that reflect the information

collections included in these final regulations will be made available for public comment at https://apps.irs.gov/app/picklist/list/draftTaxForms.html and will not be finalized until after these forms have been approved by OMB under the PRA. Comments on these forms can be submitted at https://www.irs.gov/forms-pubs/ comment-on-tax-forms-and-publications.

The current status of the PRA submissions related to section 4960 are provided in the following table.

Form	Type of Filer	OMB Number(s)	Status
Form 4720	Tax-exempt organizations and their related organizations, including for- proft and government entities	1545-0047	Published in the Federal Register on 11/12/20. Public comment period closes on 1/11/21.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law.

Generally, tax returns and return information are confidential, as required by 26 U.S.C. 6103.

III. Regulatory Flexibility Act

Pursuant to the Regulatory Flexibility Act (RFA) (5 U.S.C. chapter 6), it is hereby certified that these final regulations will not have a significant economic impact on a substantial number of small entities. In the proposed regulations, the Treasury Department and the IRS invited comments on the impact this rule would have on small entities. The Treasury Department and the IRS did not receive any comments on this issue.

The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) generally defines a ‘‘small entity’’ as (1) a proprietary firm meeting the size standards of the

Small Business Administration (SBA) (13 CFR 121.201), (2) a nonprofit organization that is not dominant in its field, or (3) a small government jurisdiction with a population of less than 50,000. (States and individuals are not included in the definition of “small entity.”) The Treasury Department and the IRS estimate that these final regulations will affect 324,000 small entities, 73,000 of which are proprietary firms meeting the size standards of the SBA and 251,000 of which are nonprofit organizations that are not dominant in their fields or small government jurisdictions with a population of less than 50,000.

The Treasury Department and the IRS estimated the number of ATEOs, based primarily on Form 990 data for filers with at least one employee (and thus having a burden, at a minimum, of maintaining annual lists of covered employees), as 261,118, and the number of non-ATEO related organizations employing at least one covered employee of an ATEO as 76,770, for a total of 337,888 affected entities. The SBA defines a small business as an independent business having fewer than 500 employees. (See A Guide for Government Agencies, How to Comply with the Regulatory Flexibility Act, Appendix B ¹⁴ ). Tax data available to the Treasury Department

and the IRS include employee counts for only half the affected entities, as employee counts are included on Form 990, but not on other forms including Form 990EZ and 990-PF. An examination of tax data from 2016 shows that for filers for whom employee counts were available and who had at least one employee, 96.5 percent had fewer than 500 employees. Similarly, there are no bright lines in the available data to distinguish small nonprofit organizations that are not dominant in their field. An examination of non-tax data shows that a similar proportion, approximately 96 percent, of all incorporated cities, towns, and villages in 2014 had a population of less than 50,000, which may serve as a proxy for small government jurisdictions generally. ¹⁵ By applying the 96 percent estimate to all entities affected by section 4960, the Treasury Department and the IRS estimate that 324,000 small entities are affected by these regulations. However, the Treasury Department and the IRS have determined that the rules regarding an ATEO’s covered employees will not have a significant economic impact on affected small entities as described later in this discussion of the RFA.

Section 4960 imposes the excise tax on ATEOs and their related organizations

14 https://advocacy.sba.gov/2017/08/31/a-guide-for-government-agencies-how-to-comply-with-the-regulatory-flexibility-act/

15 See https://www.statista.com/statistics/241695/number-of-us-cities-towns-villages-by-population-size/

February 16, 2021 862 Bulletin No. 2021–7

to the extent they pay certain compensation to a covered employee. Because covered employee status is permanent, every ATEO must determine its five highest-compensated employees for the taxable year—even if the ATEO is not subject to the tax for that taxable year—and maintain a list of covered employees. Accordingly, these final rules likely will affect a substantial number of small entities, especially nonprofit entities that are not dominant in their fields.

The Treasury Department and the IRS estimate that the vast majority of ATEOs, particularly small ATEOs, can determine their five highest-compensated employees for the taxable year under the method provided in these final rules very quickly and at negligible cost using information already collected in the normal course of business. The time necessary to determine an ATEO’s five highest-compensated employees is positively correlated with the size of the entity (that is, the smaller the entity, the less time such a determination should take). Larger ATEOs may need more time, but it is estimated that this determination will take less than seven hours. The burden for making this determination is estimated to fall on the small number of larger ATEOs. Putting these two groups together, the total estimated cost for all 261,118 ATEOs to make these determinations is $1,255,760 per year, averaging $4.81 per ATEO. Thus, it is hereby certified that these final regulations will not have a significant economic impact on a substantial number of small entities within the meaning of section 601(6) of the Regulatory Flexibility Act (5 U.S.C. 601 et seq. ) (RFA). Pursuant to section 7805(f) of the Code, the proposed regulations preceding these final regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small entities and no comments were received.

IV. Unfunded Mandates Reform Act

Section 202 of the Unfunded Mandates Reform Act of 1995 requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any

one year by a state, local, or tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. This final rule does not include any Federal mandate that may result in expenditures by state, local, or tribal governments, or by the private sector in excess of that threshold.

V. Executive Order 13132: Federalism

Executive Order 13132 (titled “Federalism”) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on state and local governments, and is not required by statute, or preempts state law, unless the agency meets the consultation and funding requirements of section 6 of the Executive Order. This final rule does not have federalism implications that are not required by the statute and does not impose substantial direct compliance costs on state and local governments or preempt state law within the meaning of the Executive Order.

VI. Congressional Review Act

The Administrator of OIRA has determined that this is a major rule for purposes of the Congressional Review Act (5 U.S.C. 801 et seq.) (CRA). Under section 801(3) of the CRA, a major rule takes effect 60 days after the rule is published in the Federal Register.

Notwithstanding this requirement, section 808(2) of the CRA allows agencies to dispense with the requirements of section 801 when the agency for good cause finds that such procedure would be impracticable, unnecessary, or contrary to the public interest and the rule shall take effect at such time as the agency promulgating the rule determines. Pursuant to section 808(2) of the CRA, the Treasury Department and the IRS find, for good cause, that a 60-day delay in the effective date is unnecessary and contrary to the public interest.

Following the addition of section 4960 to the Code by TCJA, the Treasury Department and the IRS published the proposed regulations setting forth guidance on all aspects of the law, including certain exceptions to the definition of “employee” and “covered employee” for purposes of

identifying covered employees. The majority of comments received in response to the proposed regulations requested additional clarifications or modifications of the rules for these exceptions. In response, these final regulations include certain clarifications and modifications to the proposed rules. The clarifications and modifications in these final regulations reduce both uncertainty and the burden associated with application of these rules.

In response to certain commenter requests that the applicability date of the final regulations be delayed after publication of the regulations as final in the Federal Register so that ATEOs and related organizations have sufficient time to understand and apply these final regulations, these final regulations apply to taxable years beginning after December 31, 2021. However, until the applicability date, taxpayers may choose to apply these final regulations to taxable years beginning after December 31, 2017, and on or before December 31, 2021, provided the taxpayer applies them in their entirety and in a consistent manner. Therefore, ATEOs and related organizations that wish to apply these regulations prior to the applicability date will need to know that these final regulations are effective before incurring necessary costs to timely comply with these final regulations. In particular, certainty that these rules are effective is essential to taxpayers so that they can determine whether and to what extent the excise tax imposed by section 4960 applies to an organization and which employees are covered employees, given that taxpayers will begin preparing their 2020 tax returns in early 2021. Further, for these potentially affected taxpayers, certainty with respect to these rules is necessary for them to proceed with several aspects of their operations, including employee hiring and retention, designing of compensatory arrangements, recordkeeping, and maintaining relationships between related non-ATEOs and ATEOs—including with respect to donating of services. Further, the COVID‑19 pandemic has affected many ATEOs, and providing additional clarification regarding these rules, in particular with respect to the exceptions for purposes of determining covered employees, will better enable ATEOs and

Bulletin No. 2021–7 863 February 16, 2021

related organizations to perform financial and operational planning tasks for the tax year as they anticipate the easing of restrictions that have severely impacted their operations during the COVID-19 pandemic. Consistent with Executive Order 13924 (May 19, 2020), the Treasury Department and the IRS have therefore determined that an expedited effective date of these final regulations will provide critical guidance on what the law requires for taxpayers to determine whether the excise tax imposed by section 4960 applies, which employees may be considered to be covered employees, and what actions are required under the law as a result. Accordingly, the Treasury Department and the IRS have determined that the rules in this Treasury decision will take effect on the date of filing for public inspection in the Federal Register.

Statutory Authority

The regulations are adopted pursuant to the authority contained in sections 7805 and 4960.

Drafting Information

The principal authors of the regulations are William McNally and Patrick Sternal of the Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes). However, other personnel from the Treasury Department and the IRS participated in the development of the regulations.

Statement of Availability

IRS Revenue Procedures, Revenue Rulings, Notices, and other guidance cited in this preamble are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at https://www.irs.gov.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements

26 CFR Part 53

Excise taxes, Foundations, Investments, Lobbying, Reporting and recordkeeping requirements

Amendments to the Regulations

Accordingly, the Department of the Treasury and the Internal Revenue Service amend 26 CFR parts 1 and 53 as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 *** Par. 2. Section 1.338-1 is amended by revising paragraph (b)(2)(i) to read as follows:

§1.338-1 General principles; status of old target and new target.

(b) * * * (2) * * * (i) The rules applicable to employee benefit plans (including those plans described in sections 79, 104, 105, 106, 125, 127, 129, 132, 137, and 220), qualified pension, profit-sharing, stock bonus and annuity plans (sections 401(a) and 403(a)), simplified employee pensions (section 408(k)), tax qualified stock option plans (sections 422 and 423), welfare benefit funds (sections 419, 419A, 512(a) (3), and 4976), voluntary employees’ beneficiary associations (section 501(c) (9) and the regulations thereunder), and tax on excess tax-exempt organization executive compensation (section 4960) and the regulations in part 53 under section 4960;

PART 53—FOUNDATION AND SIMILAR EXCISE TAXES

Par. 3. The authority citation for part 53 is revised to read in part as follows:

Authority: 26 U.S.C. 7805; 4960.

Par. 4. Sections 53.4960-0 through 53.4960-6 are added to read as follows:

53.4960-0 Table of contents. 53.4960-1 Scope and definitions. 53.4960-2 Determination of remuneration paid for a taxable year.

53.4960-3 Determination of whether there is a parachute payment.

53.4960-4 Liability for tax on excess remuneration and excess parachute payments.

53.4960-5 Coordination with section 162(m) [reserved]. 53.4960-6 Applicability date.

§53.4960-0 Table of contents.

§53.4960-1 Scope and definitions

(a) Scope. (b) Applicable tax-exempt organization.

(1) In general. (i) Section 501(a) organization. (ii) Section 521 farmers’ cooperative. (iii) Section 115(1) organization. (iv) Section 527 political organization. (2) Certain foreign organizations. (3) [Reserved]. (c) Applicable year. (1) In general. (2) Examples. (3) Short applicable years. (i) In general (ii) Initial year of ATEO status. (iii) Year of termination of ATEO status.

(A) Termination on or before the close of the calendar year ending with or within the taxable year of termination.

(B) Termination after the close of the calendar year ending in the taxable year of termination.

(4) Examples. (d) Covered employee. (1) In general. (2) Five highest-compensated employees.

(i) In general. (ii) Limited hours exception. (A) In general. ( 1 ) Remuneration requirement. ( 2 ) Hours of service requirement. (B) Certain payments disregarded. (C) Safe harbor. (iii) Nonexempt funds exception. (A) In general.

February 16, 2021 864 Bulletin No. 2021–7

( 1 ) Remuneration requirement. ( 2 ) Hours of service requirement. ( 3 ) Related organizations requirement. (B) Certain payments disregarded. (iv) Limited services exception. (A) Remuneration requirement. (B) Related ATEO requirement. ( 1 ) Ten percent remuneration condition.

( 2 ) Less remuneration condition. (3) Examples. (e) Employee. (1) In general. (2) Directors. (3) Trustees. (f) Employer. (1) In general. (2) Disregarded entities. (g) Medical services. (1) Medical and veterinary services. (i) In general. (ii) Examples. (2) Definition of licensed medical professional.

(h) Predecessor. (1) Asset acquisitions. (2) Corporate reorganizations. (3) Predecessor change of form or of place of organization.

(4) ATEO that becomes a non-ATEO. (i) General rule. (ii) Intervening changes or entities. (5) Predecessor of a predecessor. (6) Elections under sections 336(e) and 338. (7) Date of transaction. (i) Related organization. (1) In general. (i) Controls or controlled by test. (ii) Controlled by same persons test. (iii) Supported organization test. (iv) Supporting organization test. (v) VEBA test. (2) Control. (i) In general. (ii) Stock corporation. (iii) Partnership. (iv) Trust. (v) Nonstock organization. (A) In general. (B) Control of a trustee or director of a nonstock organization.

(vii) Section 318 principles. (A) In general.

(B) Nonstock organizations. ( 1 ) Attribution of ownership interest from a nonstock organization to a controlling person.

( 2 ) Attribution of ownership interest from a controlling person to a nonstock organization.

( 3 ) Indirect control of a nonstock organization through another nonstock organization.

( 4 ) Attribution of control of nonstock organization to family member.

(3) Examples.

§53.4960-2 Determination of remuneration paid for a taxable year

(1) In general. (2) Treatment of future payment amount as present value for certain amounts.

(f) Examples.

§53.4960-3 Determination of whether

there is a parachute payment

(a) Remuneration. (1) In general (2) Exclusion of remuneration for medical services.

(i) In general. (ii) Allocation of remuneration for medical services and non-medical services.

(iii) Examples. (b) Source of payment. (1) Remuneration paid by third parties for employment by an employer.

(2) Remuneration paid by a related organization for employment by the related organization.

(1) In general. (2) Vested remuneration. (3) Change in related status during the year.

(d) Amount of remuneration treated as paid.

(1) In general. (2) Earnings and losses on previously paid remuneration.

(i) In general. (ii) Previously paid remuneration. (A) New covered employee. (B) Existing covered employee. (iii) Earnings. (iv) Losses. (v) Net earnings. (vi) Net losses. (3) Remuneration paid for a taxable year before the employee becomes a covered employee.

(i) In general. (ii) Examples. (e) Calculation of present value.

(a) Parachute payment. (1) In general. (2) Exclusions. (i) Certain qualified plans. (ii) Certain annuity contracts. (iii) Compensation for medical services.

(iv) Payments to non-HCEs. (3) Determination of HCEs for purposes of the exclusion from parachute payments.

(b) Payment in the nature of compensation.

(1) In general. (2) Consideration paid by covered employee.

(1) In general. (2) Transfers of section 83 property. (3) Stock options. (d) Payment contingent on an employee’s separation from employment.

(1) In general. (2) Employment agreements. (i) In general. (ii) Example. (3) Noncompetition agreements. (4) Payment of amounts previously included in income or excess remuneration.

(5) Window programs. (6) Anti-abuse provision. (e) Involuntary separation from employment.

(1) In general. (2) Separation from employment for good reason.

(i) In general. (ii) Material negative change required. (iii) Deemed material negative change. (A) Material diminution of compensation.

(B) Material diminution of responsibility.

(D) Material diminution of a location. (E) Material change of location. (F) Other material breach.

Bulletin No. 2021–7 865 February 16, 2021

(3) Separation from employment. (f) Accelerated payment or accelerated vesting resulting from an involuntary separation from employment.

(1) In general. (2) Nonvested payments subject to a non-service vesting condition.

(3) Vested payments. (4) Nonvested payments subject to a service vesting condition.

(i) In general. (A) Vesting trigger. (B) Vesting condition. (C) Services condition. (ii) Value of the lapse of the obligation to continue to perform services.

(iii) Accelerated vesting of equity compensation.

(5) Application to benefits under a nonqualified deferred compensation plan.

(6) Present value. (7) Examples. (g) Three-times-base-amount test for parachute payments.

(1) In general. (2) Examples. (h) Calculating present value. (1) In general. (2) Deferred payments. (3) Health care. (i) Discount rate. (j) Present value of a payment to be made in the future that is contingent on an uncertain future event or condition.

(1) Treatment based on the estimated probability of payment.

(2) Correction of incorrect estimates. (3) Initial option value estimate. (4) Examples. (k) Base amount. (1) In general. (2) Short or incomplete taxable years. (3) Excludable fringe benefits. (4) Section 83(b) income. (l) Base period. (1) In general. (2) Determination of base amount if employee separates from employment in the year hired.

(3) Examples.

excise tax. Section 53.4960-5 is reserved for rules on the coordination of sections 4960 and 162(m). Section 53.4960-6 provides rules regarding the applicability date for the regulations in §§53.4960‑1 through 53.4960‑5. The rules and definitions provided in this section through §53.4960‑6 apply solely for purposes of section 4960 unless specified otherwise.

(b) Applicable tax-exempt organiza- tion —(1) In general . Applicable tax-ex- empt organization or ATEO means any organization that is one of the following types of organizations:

(i) Section 501(a) organization . The organization is exempt from taxation under section 501(a) (except as provided in paragraph (b)(2) or (b)(3) of this section);

(ii) Section 521 farmers’ cooperative . The organization is a farmers’ cooperative organization described in section 521(b) (1);

(iii) Section 115(1) organization . The organization has income excluded from taxation under section 115(1); or

(iv) Section 527 political organization . The organization is a political organization described in section 527(e)(1).

(2) Certain foreign organizations . Any foreign organization described in section 4948(b) that either is exempt from tax under section 501(a) or is a taxable private foundation (section 4948(b) organization) is not an ATEO. A foreign organization is an organization not created or organized in the United States or in any possession thereof, or under the law of the United States, any State, the District of Columbia, or any possession of the United States. See section 4948(b) and §53.4948‑1. For purposes of this paragraph (b)(2) and the application of section 4960 to a taxable year, an organization’s status as a section 4948(b) organization is determined at the end of its taxable year.

(3) [Reserved]. (c) Applicable year —(1) In general . Applicable year means the calendar year ending with or within the ATEO’s taxable year. See §53.4960-4 regarding how an ATEO’s applicable year affects the liability of related organizations.

(2) Examples . The following examples illustrate the rules of paragraph (c)(1) of this section.

(i) Example 1 (Calendar year taxpayer) —(A) Facts . ATEO 1 uses the calendar year as its taxable year and became an ATEO before 2022.

§53.4960-4 Liability for tax on excess

remuneration and excess parachute

payments

(a) Liability, reporting, and payment of excise taxes.

(1) Liability. (2) Reporting and payment. (3) Arrangements between an ATEO and a related organization.

(4) Certain foreign related organizations.

(5) [Reserved]. (b) Amounts subject to tax. (1) Excess remuneration. (i) In general. (ii) Exclusion for excess parachute payments.

(2) Excess parachute payment. (c) Calculation of liability for tax on excess remuneration.

(1) In general. (2) Calculation if liability is allocated from more than one ATEO with respect to an individual.

(3) Calculation if liability is allocated from an ATEO with a short applicable year.

(4) Examples. (d) Calculation of liability for excess parachute payments.

(1) In general. (2) Computation of excess parachute payments.

(3) Reallocation when the payment is disproportionate to base amount.

(4) Election to prepay tax. (5) Liability after a redetermination of total parachute payments.

(6) Examples.

§53.4960-5 [Reserved]

§53.4960-6 Applicability date

(a) General applicability date. (b) [Reserved].

§53.4960-1 Scope and definitions.

(a) Scope . This section provides definitions for purposes of section 4960, this section, and §§53.4960-2 through 53.4960-6. Section 53.4960-2 provides definitions and rules for determining the amount of remuneration paid for a taxable year. Section 53.4960-3 provides definitions and rules for determining whether a parachute payment is paid. Section 53.4960‑4 provides definitions and rules for calculating the amount of excess remuneration paid for a taxable year, excess parachute payments paid in a taxable year, and liability for the

February 16, 2021 866 Bulletin No. 2021–7

(B) Conclusion . ATEO 1’s applicable year for its 2022 taxable year is the period from January 1, 2022, through December 31, 2022 (that is, the 2022 calendar year).

(ii) Example 2 (Fiscal year taxpayer) —(A) Facts . ATEO 2 uses a taxable year that starts July 1 and ends June 30 and became an ATEO before 2022.

(B) Conclusion . ATEO 2’s applicable year for the taxable year beginning July 1, 2022, and ending June 30, 2023, is the 2022 calendar year. (3) Short applicable years —(i) In general . An ATEO may have an applicable year that does not span the entire calendar year for the initial taxable year that the organization is an ATEO or for the taxable year in which the taxpayer ceases to be an ATEO. The beginning and end dates of the applicable year in the case of an ATEO’s change in status depend on when the change in status occurs.

(ii) Initial year of ATEO status . For the taxable year in which an ATEO first becomes an ATEO, applicable year means the period beginning on the date the ATEO first becomes an ATEO and ending on the last day of the calendar year ending with or within such taxable year (or, if earlier, the date of termination of ATEO status, as described in paragraph (c)(3)(ii)(A) of this section). If the taxable year in which an ATEO first becomes an ATEO ends before the end of the calendar year in which the ATEO first becomes an ATEO, then there is no applicable year for the ATEO’s first taxable year; however, for the ATEO’s next taxable year, applicable year means the period beginning on the date the ATEO first becomes an ATEO and ending on December 31 of the calendar year (or, if earlier, the date of termination of ATEO status, as described in paragraph (c)(3)(ii)(A) of this section).

(iii) Year of termination of ATEO status —(A) Termination on or before the close of the calendar year ending with or within the taxable year of termi- nation . If an ATEO has a termination of ATEO status during the taxable year and the termination of ATEO status occurs on or before the close of the calendar year ending with or within such taxable year, then, for the taxable year of termination of ATEO status, applicable year means the period starting January 1 of the calendar year of the termination of ATEO status and ending on the date of the termination of ATEO status.

(B) Termination after the close of the calendar year ending in the taxable year of termination . If an ATEO has a termination of ATEO status during the taxable year and the termination of ATEO status occurs after the close of the calendar year ending within such taxable year, then, for the taxable year of the termination of ATEO status, applicable year means both the calendar year ending within such taxable year and the period beginning January 1 of the calendar year of the termination of ATEO status and ending on the date of the termination of ATEO status. Both such applicable years are treated as separate applicable years. See §53.4960‑4(b)(2)(ii) for rules regarding calculation of the tax in the event there are multiple applicable years associated with a taxable year.

(4) Examples . The following examples illustrate the rules of paragraph (c) (3) of this section. For purposes of these examples, assume any entity referred to

as “ATEO” is an ATEO and any entity referred to as “CORP” is not an ATEO.

(i) Example 1 (Taxable year of formation ending after December 31) —(A) Facts . ATEO 1, ATEO 2, and CORP 1 are related organizations that all use a taxable year that starts July 1 and ends June 30. ATEO 1 is recognized as a section 501(c)(3) organization by the IRS on May 8, 2023, effective as of October 1, 2022. ATEO 2 became an ATEO in 2017.

(B) Conclusion (ATEO 1 ). ATEO 1’s applicable year for the taxable year beginning October 1, 2022, and ending June 30, 2023, is the period beginning October 1, 2022, and ending December 31, 2022. For purposes of determining the amount of remuneration paid by ATEO 1 and all related organizations for ATEO 1’s taxable year beginning October 1, 2022, and ending June 30, 2023, (including for purposes of determining ATEO 1’s covered employees), only remuneration paid between October 1, 2022, and December 31, 2022, is taken into account. Thus, any remuneration paid by ATEO 1, ATEO 2, and CORP 1 before October 1, 2022, is disregarded for purposes of ATEO 1’s applicable year associated with its initial taxable year.

(C) Conclusion (ATEO 2) . ATEO 2’s applicable year for its taxable year beginning July 1, 2022, and ending June 30, 2023, is the 2022 calendar year. Thus, any remuneration paid by ATEO 1, ATEO 2, and CORP 1 during the 2022 calendar year is taken into account for purposes of determining ATEO 2’s covered employees and remuneration paid for ATEO 2’s taxable year ending June 30, 2023. (ii) Example 2 (Taxable year of formation end- ing before December 31) —(A) Facts . Assume the same facts as in paragraph (c)(4)(i)(A) of this section (Example 1), except that ATEO 1 is recognized as a section 501(c)(3) organization effective as of March 15, 2023. (B) Conclusion . ATEO 1 has no applicable year for the taxable year starting March 15, 2023, and ending June 30, 2023, because no calendar year ends (or termination of ATEO status occurs) with or within the taxable year. ATEO 1’s applicable year for the taxable year ending June 30, 2024, is the period beginning March 15, 2023, and ending December 31, 2023. For purposes of determining the amount of remuneration paid by ATEO 1 and all related organizations for ATEO 1’s taxable year ending June 30, 2024 (including for purposes of determining ATEO 1’s covered employees), only remuneration paid between March 15, 2023, and December 31, 2023, is taken into account. The conclusion for ATEO 2 is the same as in paragraph (c)(4)(i)(C) of this section (Example 1).

(iii) Example 3 (Termination before the close of the calendar year ending in the taxable year of ter- mination) —(A) Facts . Assume the same facts as in paragraph (c)(4)(i)(A) of this section (Example 1). In addition, ATEO 1 has a termination of ATEO status on September 30, 2024.

(B) Conclusion . For ATEO 1’s taxable year beginning July 1, 2024, and ending September 30, 2024, ATEO 1’s applicable year is the period beginning January 1, 2024, and ending September 30, 2024. (iv) Example 4 (Termination after the close of the calendar year ending in the taxable year of ter- mination) —(A) Facts . Assume the same facts as in

paragraph (c)(4)(i)(A) of this section (Example 1). In addition, ATEO 1 has a termination of ATEO status on March 31, 2025.

(B) Conclusion . For ATEO 1’s taxable year beginning July 1, 2024, and ending March 31, 2025, ATEO 1 has two applicable years: the 2024 calendar year, and the period beginning on January 1, 2025, and ending on March 31, 2025.

(d) Covered employee —(1) In general . For each taxable year, covered employee means any individual who is one of the five highest-compensated employees of the ATEO for the taxable year or was a covered employee of the ATEO (or any predecessor) for any preceding taxable year beginning after December 31, 2016.

(2) Five highest-compensated employ- ees —(i) In general . Except as otherwise provided in this paragraph (d)(2), an individual is one of an ATEO’s five highestcompensated employees for the taxable year if the individual is among the five employees of the ATEO with the highest amount of remuneration paid during the applicable year, as determined under §53.4960-2. However, remuneration for which the deduction is disallowed by reason of section 162(m) is taken into account for purposes of determining an ATEO’s five highest-compensated employees. The five highest-compensated employees of an ATEO for the taxable year are identified on the basis of the total remuneration paid during the applicable year to the employee for services performed as an employee of the ATEO or any related organization. An ATEO may have fewer than five highest-compensated employees for a taxable year if it has fewer than five employees other than employees who are disregarded under paragraphs (d)(2)(ii) through (iv) of this section. For purposes of this paragraph (d)(2), a grant of a legally binding right (within the meaning of §1.409A‑1(b)) to vested remuneration is considered to be remuneration paid as of the date of grant, as described in §53.4960‑2(c)(2), and a person or governmental entity is considered to grant a legally binding right to nonvested remuneration if the person or governmental entity grants a legally binding right to remuneration that is not vested within the meaning of §53.4960‑2(c)(2). An employee is disregarded for purposes of determining an ATEO’s five highest-compensated employees for a taxable year if, during the applicable year, neither the ATEO nor any related organization

Bulletin No. 2021–7 867 February 16, 2021

paid remuneration or granted a legally binding right to nonvested remuneration to the individual for services the individual performed as an employee of the ATEO or any related organization.

(ii) Limited hours exception —(A) In general . An individual is disregarded for purposes of determining an ATEO’s five highest-compensated employees for a taxable year if all of the following requirements are met:

( 1 ) Remuneration requirement . Neither the ATEO nor any related ATEO paid remuneration or granted a legally binding right to nonvested remuneration to the individual for services the individual performed as an employee of the ATEO during the applicable year; and

( 2 ) Hours of service requirement . The individual performed services as an employee of the ATEO and all related ATEOs for no more than 10 percent of the total hours the individual worked as an employee of the ATEO and any related organizations during the applicable year. An ATEO may instead make this determination based on the total days the individual worked as an employee of the ATEO and all related ATEOs as a percentage of the total days worked as an employee of the ATEO and all related organizations, provided that for purposes of the calculation, any day that the individual worked at least one hour as an employee of the ATEO or a related ATEO is treated as a day worked as an employee of the ATEO and not for any other organization.

(B) Certain payments disregarded . For purposes of paragraph (d)(2)(ii)(A)( 1 ) of this section, a payment of remuneration made to the individual by a related organization that is an employer of the individual and for which the related organization is neither entitled to reimbursement by the ATEO nor entitled to any other consideration from the ATEO is not considered remuneration paid by the ATEO under §53.4960-2(b)(1), and a payment of remuneration made to the individual by a related organization is not treated as remuneration paid by the ATEO under §53.4960‑2(b)(2).

(C) Safe harbor . For purposes of paragraph (d)(2)(ii)(A)( 2 ) of this section, an individual is treated as having performed services as an employee of the ATEO and all related ATEOs for no more than 10

percent of the total hours the individual worked as an employee of the ATEO and all related organizations during the applicable year if the employee performed no more than 100 hours of service as an employee of the ATEO and all related ATEOs during the applicable year.

(iii) Nonexempt funds exception —(A) In general . An individual is disregarded for purposes of determining an ATEO’s five highest-compensated employees for a taxable year if all the following requirements are met:

( 1 ) Remuneration requirement . Neither the ATEO, nor any related ATEO, nor any taxable related organization controlled by the ATEO, or by one or more related ATEOs, either alone or together with the ATEO, paid remuneration or granted a legally binding right to nonvested remuneration to the individual for services the individual performed as an employee of an ATEO during the applicable year and the preceding applicable year. For this purpose, whether a taxable related organization is controlled by the ATEO (or one or more related ATEOs) is determined without regard to paragraph (i)(2)(vii)(B) ( 2 ) of this section and without regard to section 318(a)(3) for purposes of applying paragraph (i)(2)(vii)(A) of this section, so that an interest in a corporation or nonstock entity is not attributed downward in determining control of the corporation or nonstock entity;

( 2 ) Hours of service requirement . The individual performed services as an employee of the ATEO and any related ATEOs for not more than 50 percent of the total hours worked as an employee of the ATEO and any related organizations during the applicable year and the preceding applicable year. An ATEO may instead make this determination based on the total days the individual worked as an employee of the ATEO and all related ATEOs as a percentage of the total days worked as an employee of the ATEO and all related organizations, provided that for purposes of the calculation, any day that the individual worked at least one hour as an employee of the ATEO or a related ATEO is treated as a day worked as an employee of the ATEO and not for any other organization; and

( 3 ) Related organizations require- ment . No related organization that paid

remuneration or granted a legally binding right to nonvested remuneration to the individual during the applicable year and the preceding applicable year provided services for a fee to the ATEO, to any related ATEO, or to any taxable related organization controlled by the ATEO or by one or more related ATEOs, either alone or together with the ATEO, during the applicable year and the preceding applicable year. For purposes of this paragraph (d)(2) (iii)(A)( 3 ), whether a taxable related organization is controlled by the ATEO (or one or more related ATEOs) is determined without regard to paragraph (i)(2)(vii)(B) ( 2 ) of this section and without regard to section 318(a)(3) for purposes of applying paragraph (i)(2)(vii)(A) of this section, so that an interest in a corporation or nonstock entity is not attributed downward in determining control of the corporation or nonstock entity.

(B) Certain payments disregarded . For purposes of paragraph (d)(2)(iii)(A)( 1 ) of this section, a payment of remuneration made to an individual by a related organization that is an employer of the individual and for which the related organization is neither entitled to reimbursement by the ATEO nor entitled to any other consideration from the ATEO is not considered remuneration paid by the ATEO under §53.4960‑2(b)(1) and a payment of remuneration made to the individual by a related organization is not treated as paid by the ATEO under §53.4960‑2(b)(2).

(iv) Limited services exception . An individual is disregarded for purposes of determining an ATEO’s five highest-compensated employees for a taxable year even though the ATEO paid remuneration to the individual if, disregarding §53.4960‑2(b)(2), all of the following requirements are met:

(A) Remuneration requirement . The ATEO did not pay 10 percent or more of the individual’s total remuneration for services performed as an employee of the ATEO and all related organizations during the applicable year; and

(B) Related ATEO requirement . The ATEO had at least one related ATEO during the applicable year and one of the following conditions applies:

( 1 ) Ten percent remuneration condi- tion . A related ATEO paid at least 10 percent of the remuneration paid by the ATEO

February 16, 2021 868 Bulletin No. 2021–7

and any related organizations during the applicable year; or

( 2 ) Less remuneration condition . No related ATEO paid at least 10 percent of the total remuneration paid by the ATEO and any related organizations and the ATEO paid less remuneration to the individual than at least one related ATEO during the applicable year.

(3) Examples . The following examples illustrate the rules of this paragraph (d). For purposes of these examples, assume any entity referred to as “ATEO” is an ATEO, any entity referred to as “CORP” is not an ATEO and is not a publicly held company within the meaning of section 162(m)(2) unless otherwise stated, and each taxpayer uses the calendar year as its taxable year.

(i) Example 1 (Employee of two related ATEOs) —(A) Facts . ATEO 1 and ATEO 2 are related organizations and have no other related organizations. Both employ Employee A during calendar year 2022 and pay remuneration to Employee A for Employee A’s services. During 2022, Employee A performed services for 1,000 hours as an employee of ATEO 1 and 1,000 hours as an employee of ATEO 2.

(B) Conclusion . Employee A may be a covered employee of both ATEO 1 and ATEO 2 as one of the five highest-compensated employees for taxable year 2022 under paragraph (d)(2)(i) of this section because the exceptions in paragraphs (d)(2)(ii) through (iv) of this section do not apply. Because they are related organizations, ATEO 1 and ATEO 2 must each include the remuneration paid to Employee A by the other during each of their applicable years in determining their respective five highest-compensated employees for taxable year 2022.

(ii) Example 2 (Employee of an ATEO and a related non-ATEO) —(A) Facts . Assume the same facts as in paragraph (d)(3)(i) of this section ( Exam- ple 1 ), except that ATEO 1 is instead CORP 1.

(B) Conclusion (CORP 1) . For taxable year 2022, CORP 1 is not an ATEO and therefore does not need to identify covered employees.

(C) Conclusion (ATEO 2) . Employee A may be a covered employee of ATEO 2 as one of its five highest-compensated employees for taxable year 2022 under paragraph (d)(2)(i) of this section because no exception in paragraphs (d)(2)(ii) through (iv) of this section applies. ATEO 2 must include the remuneration paid to Employee A by CORP 1 during its applicable year in determining ATEO 2’s five highest-compensated employees for taxable year 2022.

(iii) Example 3 (Amounts for which a deduction is disallowed under section 162(m) are taken into account for purposes of determining the five high- est-compensated employees) —(A) Facts . CORP 2 is a publicly held corporation within the meaning of section 162(m)(2) and is a related organization of ATEO 3. ATEO 3 is a corporation that is part of CORP 2’s affiliated group (as defined in section 1504, without regard to section 1504(b)) and has no other related organizations. Employee B is a covered employee (as defined in section 162(m)(3)) of CORP

2 and an employee of ATEO 3. In 2022, CORP 2 paid Employee B $8 million of remuneration for services provided as an employee of CORP 2 and ATEO 3 paid Employee B $500,000 of remuneration for services provided as an employee of ATEO 3. $7.5 million of the remuneration is compensation for which a deduction is disallowed pursuant to section 162(m) (1).

(B) Conclusion . The $7.5 million of remuneration for which a deduction is disallowed under section 162(m)(1) is taken into account for purposes of determining ATEO 3’s five highest-compensated employees. Thus, ATEO 3 is treated as paying Employee B $8.5 million of remuneration for purposes of determining its five highest-compensated employees.

(iv) Example 4 (Employee disregarded due to receiving no remuneration) —(A) Facts . Employee C is an officer of ATEO 4 who performs more than minor services for ATEO 4. In 2022, neither ATEO 4 nor any related organization paid remuneration or granted a legally binding right to any nonvested remuneration to Employee C. ATEO 4 paid premiums for insurance for liability arising from Employee C’s service with ATEO 4, which is properly treated as a working condition fringe benefit excluded from gross income under §1.132‑5.

(B) Conclusion . Even though Employee C is an employee of ATEO 4, Employee C is disregarded for purposes of determining ATEO 4’s five highest-compensated employees for taxable year 2022 under paragraph (d)(2)(i) of this section because neither ATEO 4 nor any related organization paid Employee C any remuneration (nor did they grant a legally binding right to nonvested remuneration) in applicable year 2022. The working condition fringe benefit is not wages within the meaning of section 3401(a), as provided in section 3401(a)(19), and thus is not remuneration within the meaning of §53.4960-2(a).

(v) Example 5 (Limited hours exception) —(A) Facts . ATEO 5 and CORP 3 are related organizations. ATEO 5 has no other related organizations. Employee D is an employee of CORP 3. As part of Employee D’s duties at CORP 3, Employee D serves as an officer of ATEO 5. Only CORP 3 paid remuneration (or granted a legally binding right to nonvested remuneration) to Employee D and ATEO 5 did not reimburse CORP 3 for any portion of Employee D’s remuneration in any manner. During 2022, Employee D provided services as an employee for 2,000 hours to CORP 3 and 200 hours to ATEO 5.

(B) Conclusion . Even though Employee D is an employee of ATEO 5 because Employee D provided more than minor services as an officer, Employee D is disregarded for purposes of determining ATEO 5’s five highest-compensated employees for taxable year 2022. Employee D is disregarded under paragraph (d)(2)(ii) of this section because only CORP 3 paid Employee D any remuneration or granted a legally binding right to nonvested remuneration in applicable year 2022 and Employee D provided services as an employee of ATEO 5 for 200 hours, which is not more than ten percent of the 2,200 total hours (2,000

200 = 2,200) worked as an employee of ATEO 5 and all related organizations.

(vi) Example 6 (Limited hours exception) —(A) Facts . Assume the same facts as in paragraph (d)(3) (v) of this section ( Example 5 ), except that ATEO 5

also provides a reasonable allowance for expenses incurred by Employee D in executing Employee D’s duties as an officer of ATEO 5, which is properly excluded from gross income under an accountable plan described in §1.62-2.

(B) Conclusion . The conclusion is the same as in paragraph (d)(3)(v)(B) of this section ( Example 5 ). Specifically, even though Employee D is an employee of ATEO 5 because Employee D provided more than minor services for ATEO 5, Employee D is disregarded for purposes of determining ATEO 5’s five highest-compensated employees for taxable year 2022 under paragraph (d)(2)(ii) of this section because the expense allowance under the accountable plan is excluded from wages within the meaning of section 3401(a), as provided in §31.3401(a)-4, and thus is not remuneration within the meaning of §53.4960-2(a).

(vii) Example 7 (No exception applies due to source of payment) —(A) Facts . Assume the same facts as in paragraph (d)(3)(v) of this section ( Ex- ample 5 ), except that ATEO 5 has a contractual arrangement with CORP 3 to reimburse CORP 3 for the hours of service Employee D provides to ATEO 5 during applicable year 2022 by paying an amount equal to the total remuneration received by Employee D from both ATEO 5 and CORP 3, multiplied by a fraction equal to the hours of service Employee D provided ATEO 5 over Employee D’s total hours of service to both ATEO 5 and CORP 3.

(B) Conclusion . Employee D may be one of ATEO 5’s five highest-compensated employees for taxable year 2022 under paragraph (d)(2)(i) of this section because the exceptions in paragraphs (d)(2) (ii) through (iv) of this section do not apply. Pursuant to the contractual arrangement between CORP 3 and ATEO 5, ATEO 5 reimburses CORP 3 for a portion of Employee D’s remuneration during applicable year 2022; thus, the exceptions under paragraphs (d) (2)(ii) and (iii) of this section do not apply. Further, while ATEO 5 paid Employee D less than 10 percent of the total remuneration from ATEO 5 and all related organizations (200 hours of service to ATEO 5 / 2,200 hours of service to ATEO 5 and all related organizations = 9 percent), it had no related ATEO; thus, the limited services exception under paragraph (d)(2)(iv) of this section does not apply.

(viii) Example 8 (Nonexempt funds exception for part-time services) —(A) Facts . ATEO 6 and CORP 4 are related organizations. ATEO 6 has no other related organizations and does not control CORP 4. During applicable year 2022, Employee E provided 2,000 hours of services as an employee of CORP 4 and 0 hours of services as an employee of ATEO 6; during applicable year 2023, Employee E provided 1,100 hours of services as an employee of CORP 4 and 900 hours of services as an employee of ATEO 6; during applicable year 2024, Employee E provided 1,100 hours of services as an employee of CORP 4 and 900 hours of services as an employee of ATEO 6. ATEO 6 neither paid any remuneration to Employee E nor paid a fee for services to CORP 4 during any applicable year. No exception under paragraphs (d) (2)(i), (ii), or (iv) applies to Employee E.

(B) Conclusion (2023) . Employee E is disregarded for purposes of determining ATEO 6’s five highest-compensated employees for taxable year 2023 under paragraph (d)(2)(iii) of this section be

Bulletin No. 2021–7 869 February 16, 2021

cause for applicable years 2022 and 2023, Employee E provided services as an employee of ATEO 6 for not more than 50 percent of the total hours Employee E provided services as an employee of ATEO 6 and CORP 4 (900 hours / 4,000 hours), and ATEO 6 neither paid any remuneration to Employee E nor paid a fee for services to CORP 4 during applicable years 2022 and 2023. (C) Conclusion (2024) . Employee E is disregarded for purposes of determining ATEO 6’s five highest-compensated employees for taxable year 2024 under paragraph (d)(2)(iii) of this section because for applicable years 2023 and 2024, Employee E provided services as an employee of ATEO 6 for not more than 50 percent of the total hours Employee E provided services as an employee of ATEO 6 and CORP 4 (1,800 hours / 4,000 hours), and ATEO 6 neither paid any remuneration to Employee E nor paid a fee for services to CORP 4 during applicable years 2023 and 2024.

(ix) Example 9 (Nonexempt funds for full-time services in one applicable year) —(A) Facts . Assume the same facts as in paragraph (d)(3)(viii) of this section ( Example 8), except that during applicable year 2022, Employee E provided services as an employee for 2,000 hours to CORP 4 and for 0 hours to ATEO 6; during applicable year 2023, Employee E provided services as an employee for 0 hours to CORP 4 and 2,000 hours to ATEO 6; and during applicable year 2024, Employee E resumes employment with CORP 4 so that Employee E provided services as an employee for 2,000 hours to CORP 4 and 0 hours to ATEO 6. (B) Conclusion (2023) . Employee E is disregarded for purposes of determining ATEO 6’s five highest-compensated employees for taxable year 2023 under paragraph (d)(2)(iii) of this section because for applicable years 2022 and 2023, Employee E provided services as an employee of ATEO 6 for not more than 50 percent of the total hours Employee E provided services as an employee of ATEO 6 and CORP 4 (2,000 hours / 4,000 hours), and ATEO 6 neither paid any remuneration to Employee E nor paid a fee for services to CORP 4 during applicable years 2022 and 2023.

(C) Conclusion (2024) . Employee E is disregarded for purposes of determining ATEO 6’s five highest-compensated employees for taxable year 2024 under paragraph (d)(2)(iii) of this section because for applicable years 2023 and 2024, Employee E provided services as an employee of ATEO 6 for not more than 50 percent of the total hours Employee E provided services as an employee of ATEO 6 and CORP 4 (2,000 hours / 4,000 hours for ATEO 6 and CORP 4), and ATEO 6 neither paid any remuneration to Employee E nor paid a fee for services to CORP 4 during applicable years 2023 and 2024.

(x) Example 10 (Nonexempt funds exception for full-time services across two applicable years) —(A) Facts . Assume the same facts as in paragraph (d) (3)(viii)(A) of this section ( Example 8), except that during applicable year 2022, Employee E provided services as an employee for 2,000 hours to CORP 4 and for 0 hours to ATEO 6; during applicable year 2023, Employee E provided services as an employee for 600 hours to CORP 4 and for 1,400 hours to ATEO 6; and during applicable year 2024, Employee E provided services as an employee for 1,400 hours to CORP 4 and for 600 hours to ATEO 6.

(B) Conclusion (2023) . Employee E is disregarded for purposes of determining ATEO 6’s five highest-compensated employees for taxable year 2023 under paragraph (d)(2)(iii) of this section because for applicable years 2022 and 2023, Employee E provided services as an employee of ATEO 6 for not more than 50 percent of the total hours Employee E provided services as an employee of ATEO 6 and CORP 4 (1,400 hours / 4,000 hours), and ATEO 6 neither paid any remuneration to Employee E, nor paid a fee for services to CORP 4 during applicable years 2022 and 2023.

(C) Conclusion (2024) . Employee E is disregarded for purposes of determining ATEO 6’s five highest-compensated employees for taxable year 2024 under paragraph (d)(2)(iii) of this section because for applicable years 2023 and 2024, Employee E provided services as an employee of ATEO 6 for not more than 50 percent of the total hours Employee E provided services as an employee of ATEO 6 and CORP 4 (2,000 hours / 4,000 hours), and ATEO 6 neither paid any remuneration to Employee E, nor paid a fee for services to CORP 4 during applicable years 2023 and 2024.

(xi) Example 11 (Failure under the nonexempt funds exception) —(A) Facts . Assume the same facts as in paragraph (d)(3)(viii)(A) of this section ( Ex- ample 8), except that during applicable year 2022, Employee E provided services as an employee for 2,000 hours to CORP 4 and for 0 hours to ATEO 6; during applicable year 2023, Employee E provided services as an employee for 600 hours to CORP 4 and for 1,400 hours to ATEO 6; and during applicable year 2024, Employee E provided services as an employee for 1,300 hours to CORP 4 and for 700 hours to ATEO 6.

(B) Conclusion (2023) . Employee E is disregarded for purposes of determining ATEO 6’s five highest-compensated employees for taxable year 2023 under paragraph (d)(2)(iii) of this section because for applicable years 2022 and 2023, Employee E provided services as an employee of ATEO 6 for less than 50 percent of the total hours Employee E provided services as an employee of ATEO 6 and CORP 4 (1,400 hours / 4,000 hours), and ATEO 6 neither paid any remuneration to Employee E, nor paid a fee for services to CORP 4 during applicable years 2022 and 2023.

(C) Conclusion (2024) . Employee E may be a covered employee of ATEO 6 as one of its five highest-compensated employees for taxable year 2024 because the requirements under paragraph (d)(2)(iii) are not met and no other exception applies. For applicable years 2023 and 2024, Employee E provided services as an employee of ATEO 6 for more than 50 percent of the total hours Employee E provided services as an employee of ATEO 6 and CORP 4 (2,100 hours / 4,000 hours).

(xii) Example 12 (Limited services exception) (A) Facts . ATEO 7, ATEO 8, ATEO 9, and ATEO 10 are a group of related organizations, none of which have any other related organizations. During 2022, Employee F is an employee of ATEO 7, ATEO 8, ATEO 9, and ATEO 10. During applicable year 2022, ATEO 7 paid 5 percent of Employee F’s remuneration, ATEO 8 paid 10 percent of Employee F’s remuneration, ATEO 9 paid 25 percent of Employee F’s remuneration, and ATEO 10 paid 60 percent of Employee F’s remuneration. No exception under

paragraph (d)(2)(i), (ii), or (iii) applies to Employee F for any of ATEO 7, ATEO 8, ATEO 9, or ATEO 10.

(B) Conclusion (ATEO 7) . Employee F is disregarded for purposes of determining ATEO 7’s five highest-compensated employees for taxable year 2022 under paragraph (d)(2)(iv) of this section because ATEO 7 paid less than 10 percent of Employee F’s total remuneration from ATEO 7 and all related organizations during applicable year 2022, and another related ATEO paid at least 10 percent of that total remuneration.

(C) Conclusion (ATEO 8, ATEO 9, and ATEO 10) . Employee F may be a covered employee of ATEO 8, ATEO 9, and ATEO 10 as one of their respective five highest-compensated employees for their taxable years 2022 because each of those ATEOs paid 10 percent or more of Employee F’s remuneration during the 2022 applicable year. Thus, the limited services exception under paragraph (d)(2) (iv) of this section does not apply.

(xiii) Example 13 (Limited services exception if no ATEO paid at least 10 percent of remuneration) (A) Facts . Assume the same facts as in paragraph (d) (3)(xii) of this section ( Example 12 ), except that for applicable year 2022, ATEO 7 paid 6 percent of F’s remuneration, ATEO 8, ATEO 9, and ATEO 10 each paid 5 percent of Employee F’s remuneration, and Employee F also works as an employee of CORP 5, a related organization of ATEO 7, ATEO 8, ATEO 9, and ATEO 10 that paid 79 percent of Employee F’s remuneration for applicable year 2022.

(B) Conclusion (ATEO 7) . Employee F may be one of ATEO 7’s five highest-compensated employees for taxable year 2022. Although ATEO 7 did not pay Employee F 10 percent or more of the total remuneration paid by ATEO 7 and all of its related organizations, no related ATEO paid more than 10 percent of Employee F’s remuneration, and ATEO 7 did not pay less remuneration to Employee F than at least one related ATEO. Thus, the limited services exception under paragraph (d)(2)(iv) of this section does not apply, and Employee F may be one of ATEO 7’s five highest-compensated employees because ATEO 7 paid Employee F more remuneration than any other related ATEO.

(C) Conclusion (ATEO 8, ATEO 9, and ATEO 10) . Employee F is disregarded for purposes of determining the five highest-compensated employees of ATEO 8, ATEO 9, and ATEO 10 for taxable year 2022 under paragraph (d)(2)(iv) of this section because none paid 10 percent or more of Employee F’s total remuneration, each had no related ATEO that paid at least 10 percent of Employee F’s total remuneration, and each paid less remuneration than at least one related ATEO (ATEO 7).

(e) Employee —(1) In general . Em- ployee means an employee as defined in section 3401(c) and §31.3401(c)-1. Section 31.3401(c)-1 generally defines an employee as any individual performing services if the relationship between the individual and the person for whom the individual performs services is the legal relationship of employer and employee. As set forth in §31.3401(c)-1, this includes common law employees, as well as

February 16, 2021 870 Bulletin No. 2021–7

officers and employees of government entities, whether or not elected. An employee generally also includes an officer of a corporation, but an officer of a corporation who as such does not perform any services or performs only minor services and who neither receives, nor is entitled to receive, any remuneration is not considered to be an employee of the corporation solely due to the individual’s status as an officer of the corporation. Whether an individual is an employee depends on the facts and circumstances.

(2) Directors . A director of a corporation (or an individual holding a substantially similar position in a corporation or other entity) in the individual’s capacity as such is not an employee of the corporation. See §31.3401(c)-1(f).

(3) Trustees . The principles of paragraph (e)(2) of this section apply by analogy to a trustee of any arrangement classified as a trust for Federal tax purposes in §301.7701-4(a).

(f) Employer —(1) In general . Employ- er means an employer within the meaning of section 3401(d), without regard to section 3401(d)(1) or (2), meaning generally the person or governmental entity for whom the services were performed as an employee. Whether a person or governmental entity is the employer depends on the facts and circumstances, but a person does not cease to be the employer through use of a payroll agent under section 3504, a common paymaster under section 3121(s), a person described in section 3401(d)(1) or (2), a certified professional employer organization under section 7705, or any similar arrangement. (2) Disregarded entities . In the case of a disregarded entity described in §301.7701-3, §301.7701-2(c)(2)(iv) does not apply; thus, the sole owner of the disregarded entity is treated as the employer of any individual performing services as an employee of the disregarded entity.

(g) Medical services —(1) Medical and veterinary services —(i) In general . Medical services means services directly performed by a licensed medical professional (as defined in paragraph (g)(2) of this section) for the diagnosis, cure, mitigation, treatment, or prevention of disease in humans or animals; services provided for the purpose of affecting any structure or function of the human or animal body;

and other services integral to providing such medical services. For purposes of section 4960, teaching and research services are not medical services except to the extent that they involve the services performed to directly diagnose, cure, mitigate, treat, or prevent disease or affect a structure or function of the body. Administrative services may be integral to directly providing medical services. For example, documenting the care and condition of a patient is integral to providing medical services, as is accompanying another licensed professional as a supervisor while that medical professional provides medical services. However, managing an organization’s operations, including scheduling, staffing, appraising employee performance, and other similar functions that may relate to a particular medical professional or professionals who perform medical services, is not integral to providing medical services. See §53.4960-2(a) (2)(ii) for rules regarding allocating remuneration paid to a medical professional who performs both medical services and other services.

(ii) Examples . The following examples illustrate the rules of this paragraph (g):

(A) Example 1 (Administrative tasks that are integral to providing medical services) —( 1 ) Facts . Employee A is a doctor who is licensed to practice medicine in the state in which Employee A’s place of employment is located. In the course of Employee A’s practice, Employee A treats patients and performs some closely-related administrative tasks, such as examining and updating patient records.

( 2 ) Conclusion . Employee A’s administrative tasks are integral to providing medical services and thus are medical services.

(B) Example 2 (Administrative tasks that are not integral to providing medical services) —( 1 ) Facts . Assume the same facts as in paragraph (g)(1)(ii)(A) ( 1 ) of this section (Example 1), except that Employee A also performs additional administrative tasks such as analyzing the budget, authorizing capital expenditures, and managing human resources for the organization by which Employee A is employed.

( 2 ) Conclusion . Employee A’s additional administrative tasks are not integral to providing medical services and thus are not medical services.

(C) Example 3 (Teaching duties that are and are not medical services) —( 1 ) Facts . Employee B is a medical doctor who is licensed to practice medicine in the state in which her place of employment, a university hospital, is located. Employee B’s duties include overseeing and teaching a group of resident physicians who have restricted licenses to practice medicine. Those duties include supervising and instructing the resident physicians while they treat patients and instruction in a classroom setting.

( 2 ) Conclusion . Employee B’s supervision and instruction of resident physicians during the course

of patient treatment are necessary for the treatment, and thus are medical services. Employee B’s classroom instruction is not necessary for patient treatment, and thus is not medical services.

(D) Example 4 (Research services that are and are not medical services) —( 1 ) Facts . Employee C is a licensed medical doctor who is employed to work on a research trial. Employee C provides an experimental treatment to patients afflicted by a disease and performs certain closely-related administrative tasks that ordinarily are performed by a medical professional in a course of patient treatment. As part of the research trial, Employee C also compiles and analyzes patient results and prepares reports and articles that would not ordinarily be prepared by a medical professional in the course of patient treatment.

( 2 ) Conclusion . Employee C’s services that are ordinarily performed by a medical professional in a course of treatment, including closely-related administrative tasks, are medical services. Because the compilation and analysis of patient results and the formulation of reports and articles are neither services ordinarily performed by a medical professional in a course of treatment nor necessary for such treatment, these services are not medical services.

(2) Definition of licensed medical pro- fessional . Licensed medical professional means an individual who is licensed under applicable state or local law to perform medical services, including as a doctor, nurse, nurse practitioner, dentist, veterinarian, or other licensed medical professional.

(h) Predecessor —(1) Asset acquisi- tions . If an ATEO (acquiror) acquires at least 80 percent of the operating assets or total assets (determined by fair market value on the date of acquisition) of another ATEO (target), then the target is a predecessor of the acquiror. For an acquisition of assets that occurs over time, only assets acquired within a 12-month period are taken into account to determine whether at least 80 percent of the target’s operating assets or total assets were acquired. However, this 12-month period is extended to include any continuous period that ends or begins on any day during which the acquiror has an arrangement to acquire directly or indirectly, assets of the target. Additions to the assets of target made as part of a plan or arrangement to avoid the application of this subsection to acquiror’s purchase of target’s assets are disregarded in applying this paragraph. This paragraph (h) (1) applies for purposes of determining whether an employee is a covered employee under paragraph (d)(1) of this section only with respect to a covered employee of the target who commences the

Bulletin No. 2021–7 871 February 16, 2021

performance of services for the acquiror (or a related organization with respect to the acquiror) within the period beginning 12 months before and ending 12 months after the date of the transaction as defined in paragraph (h)(7) of this section.

(2) Corporate reorganizations . A predecessor of an ATEO includes another separate ATEO the stock or assets of which are acquired in a corporate reorganization as defined in section 368(a)(1) (A), (C), (D), (E), (F), or (G) (including by reason of section 368(a)(2)).

(3) Predecessor change of form or of place of organization . An ATEO that restructured by changing its organizational form or place of organization (or both) is a predecessor of the restructured ATEO.

(4) ATEO that becomes a non-ATEO (i) General rule . An organization is a predecessor of an ATEO if it ceases to be an ATEO and then again becomes an ATEO effective on or before the predecessor end date. The predecessor end date is the date that is 36 months following the date that the organization’s Federal information return under section 6033 (or, for an ATEO described in paragraph (b)(1)(ii) or (iii) of this section, its Federal income tax return under section 6011(a)) is due (or would be due if the organization were required to file), excluding any extension, for the last taxable year for which the organization previously was an ATEO. If the organization becomes an ATEO again effective after the predecessor end date, then the former ATEO is treated as a separate organization that is not a predecessor of the current ATEO.

(ii) Intervening changes or entities . If an ATEO that ceases to be an ATEO (former ATEO) would be treated as a predecessor to an organization that becomes an ATEO before the predecessor end date (successor ATEO), and if the former ATEO would be treated as a predecessor to each intervening entity (if such intervening entities had been ATEOs) under the rules of this paragraph (h), then the former ATEO is a predecessor of the successor ATEO. For example, if ATEO 1 loses its tax-exempt status and then merges into Corporation X, Corporation X then merges into Corporation Y, and Corporation Y becomes an ATEO before the predecessor end date, then ATEO 1 is a predecessor of Corporation Y.

(5) Predecessor of a predecessor . A reference to a predecessor includes any predecessor or predecessors of such predecessor, as determined under these rules.

(6) Elections under sections 336(e) and 338 . For purposes of this paragraph (h), when an ATEO organized as a corporation makes an election to treat as an asset purchase either the sale, exchange, or distribution of stock pursuant to regulations under section 336(e) or the purchase of stock pursuant to regulations under section 338, the corporation that issued the stock is treated as the same corporation both before and after such transaction.

(7) Date of transaction . For purposes of this paragraph (h), the date that a transaction is treated as having occurred is the date on which all events necessary to complete the transaction described in the relevant provision have occurred.

(i) Related organization —(1) In gen- eral . Related organization means any person or governmental entity, domestic or foreign, that meets any of the following tests:

(i) Controls or controlled by test . The person or governmental entity controls, or is controlled by, the ATEO;

(ii) Controlled by same persons test . The person or governmental entity is controlled by one or more persons that control the ATEO;

(iii) Supported organization test . The person or governmental entity is a supported organization (as defined in section 509(f)(3)) with respect to the ATEO; (iv) Supporting organization test . The person or governmental entity is a supporting organization described in section 509(a)(3) with respect to the ATEO; or (v) VEBA test . With regard to an ATEO that is a voluntary employees’ beneficiary association (VEBA) described in section 501(c)(9), the person or governmental entity establishes, maintains, or makes contributions to such VEBA.

(2) Control —(i) In general . Control may be direct or indirect. For rules concerning application of the principles of section 318 in applying this paragraph (i) (2), see paragraph (i)(2)(vii) of this section.

(ii) Stock corporation . A person or governmental entity controls a stock corporation if it owns (by vote or value) more

than 50 percent of the stock in the stock corporation.

(iii) Partnership . A person or governmental entity controls a partnership if it owns more than 50 percent of the profits interests or capital interests in the partnership, determined in accordance with the rules and principles of §1.706-1(b)(4)(ii) for a partner’s interest in the profits of a partnership and §1.706-1(b)(4)(iii) for a partner’s interest in the capital of a partnership.

(iv) Trust . A person or governmental entity controls a trust if it owns more than 50 percent of the beneficial interests in the trust, determined by actuarial value.

(v) Nonstock organization —(A) In general . A person or governmental entity controls a nonstock organization if more than 50 percent of the trustees or directors of the nonstock organization are either representatives of, or directly or indirectly controlled by, the person or governmental entity. A nonstock organization is a nonprofit organization or other organization without owners and includes a governmental entity.

(B) Control of a trustee or director of a nonstock organization . A person or governmental entity controls a trustee or director of the nonstock organization if the person or governmental entity has the power (either at will or at regular intervals) to remove such trustee or director and designate a new one.

(C) Representatives . Trustees, directors, officers, employees, or agents of a person or governmental entity are deemed representatives of the person or governmental entity. However, an employee of a person or governmental entity (other than a trustee, director, or officer, or an employee who possesses at least the authority commonly exercised by an officer) who is a director or trustee of a nonstock organization (or acting in that capacity) will not be treated as a representative of the person or governmental entity if the employee does not act as a representative of the person or governmental entity and that fact is reported in the form and manner prescribed by the Commissioner in forms and instructions.

(vi) Brother-sister related organiza- tions . Under paragraph (i)(1)(ii) of this section, an organization is a related organization with respect to an ATEO if one or

February 16, 2021 872 Bulletin No. 2021–7

more persons control both the ATEO and the other organization. In the case of control by multiple persons, the control tests described in this paragraph (i)(2) of this section apply to the persons as a group. For example, if 1,000 individuals who are members of both ATEO 1 and ATEO 2 elect a majority of the board members of each organization, then ATEO 1 and ATEO 2 are related to each other because the same group of 1,000 persons controls both ATEO 1 and ATEO 2.

(vii) Section 318 principles —(A) In general . Section 318 (relating to constructive ownership of stock) applies in determining ownership of stock in a corporation. The principles of section 318 also apply for purposes of determining ownership of interests in a partnership or in a trust with beneficial interests. For example, applying the principles of section 318(a)(1)(A), an individual is considered to own the partnership interest or trust interest owned, directly or indirectly, by or for the family members specified in such section.

(B) Nonstock organizations —( 1 ) At- tribution of ownership interest from a nonstock organization to a controlling person . If a person or governmental entity controls a nonstock organization, the person or governmental entity is treated as owning a percentage of the stock (or partnership interest or beneficial interest in a trust) owned by the nonstock organization in accordance with the percentage of trustees or directors of the nonstock organization that are representatives of, or directly or indirectly controlled by, the person or governmental entity.

( 2 ) Attribution of ownership interest from a controlling person to a nonstock organization . If a person or governmental entity controls a nonstock organization, the nonstock organization is treated as owning a percentage of the stock (or partnership interest or beneficial interest in a trust) owned by the person or governmental entity in accordance with the percentage of trustees or directors of the nonstock organization that are representatives of, or directly or indirectly controlled by, the person or governmental entity.

( 3 ) Indirect control of a nonstock or- ganization through another nonstock or- ganization . If a person or governmental entity controls one nonstock organization

that controls a second nonstock organization, the person or governmental entity is treated as controlling the second nonstock organization if the product of the percentage of trustees or directors of the first nonstock organization that are representatives of, or directly or indirectly controlled by, the person or governmental entity, multiplied by the percentage of trustees or directors of the second nonstock organization that are representatives of, or directly or indirectly controlled by, the person or governmental entity or first nonstock organization, exceeds 50 percent. Similar principles apply to successive tiers of nonstock organizations.

( 4 ) Attribution of control of nonstock organization to family member . An individual’s control of a nonstock organization or of a trustee or director of a nonstock organization is attributed to the members of the individual’s family (as set forth in section 318(a)(1) and the regulations thereunder), subject to the limitation of section 318(a)(5)(B) and the regulations thereunder.

(3) Examples . The following examples illustrate the principles of this paragraph (i). For purposes of these examples, assume any entity referred to as “ATEO” is an ATEO and any entity referred to as “CORP” is not an ATEO.

(i) Example 1 (Related through a chain of con- trol) —(A) Facts . ATEO 1, ATEO 2, and ATEO 3 are nonstock organizations. ATEO 3 owns 80 percent of the stock (by value) of corporation CORP 1. Eighty percent of ATEO 2’s directors are representatives of ATEO 1. In addition, 80 percent of ATEO 3’s directors are representatives of ATEO 1.

(B) Conclusion . ATEO 1 is a related organization with respect to ATEO 2 (and vice versa) because more than 50 percent of ATEO 2’s directors are representatives of ATEO 1; thus, ATEO 1 controls ATEO 2. Based on the same analysis, ATEO 1 is also a related organization with respect to ATEO 3 (and vice versa). CORP 1 is a related organization with respect to ATEO 3 because, as the owner of more than 50 percent of CORP 1’s stock, ATEO 3 controls CORP 1. Applying the principles of section 318, ATEO 1 is deemed to own 64 percent of the stock of CORP 1 (80 percent of ATEO 3’s stock in CORP 1). Thus, CORP 1 is a related organization with respect to ATEO 1 because ATEO 1 controls CORP 1. ATEO 2 is a related organization with respect to ATEO 3, ATEO 3 is a related organization with respect to ATEO 2, and CORP 1 is a related organization with respect to ATEO 2 because ATEO 2, ATEO 3, and CORP 1 are all controlled by the same person (ATEO 1). (ii) Example 2 (Not related through a chain of control) —(A) Facts . ATEO 4, ATEO 5, and ATEO 6 are nonstock organizations. Sixty percent of ATEO

5’s directors are representatives of ATEO 4. In addition, 60 percent of ATEO 6’s directors are representatives of ATEO 5, but none are representatives of ATEO 4.

(B) Conclusion . ATEO 4 is a related organization with respect to ATEO 5 (and vice versa) because more than 50 percent of ATEO 5’s directors are representatives of ATEO 4; thus, ATEO 4 controls ATEO 5. Based on the same analysis, ATEO 6 is a related organization with respect to ATEO 5 (and vice versa). Applying the principles of section 318, ATEO 4 is deemed to control 36 percent of ATEO 6’s directors (60 percent of ATEO 5’s 60 percent control over ATEO 6). Because less than 50 percent of ATEO 6’s directors are representatives of ATEO 4, and absent any facts suggesting that ATEO 4 directly or indirectly controls ATEO 6, ATEO 4 and ATEO 6 are not related organizations with respect to each other.

§53.4960-2 Determination of remuneration paid for a taxable year.

(a) Remuneration— (1) In general . For purposes of section 4960, remuneration means any amount that is wages as defined in section 3401(a), excluding any designated Roth contribution (as defined in section 402A(c)) and including any amount required to be included in gross income under section 457(f). Remuneration includes amounts includible in gross income as compensation for services as an employee pursuant to a below-market loan described in section 7872(c)(1)(B) (i) (compensation-related loans) but does not include amounts excepted by section 7872(c)(3) ($10,000 de minimis exception). For example, see §1.7872‑15(e)(1) (i). Director’s fees paid by a corporation to a director of the corporation are not remuneration, provided that if the director is also an employee of the corporation, the director’s fees are excluded from remuneration only to the extent that they do not exceed fees paid to a director who is not an employee of the corporation or any related organization or, if there is no such director, they do not exceed reasonable director’s fees. Remuneration does not include any amount that vested or was paid by a taxpayer before the start of the taxpayer’s first taxable year that began on or after January 1, 2018.

(2) Exclusion of remuneration for med- ical services —(i) In general . Remunera- tion does not include the portion of any remuneration paid to a licensed medical professional that is for the performance of medical services by such professional.

Bulletin No. 2021–7 873 February 16, 2021

(ii) Allocation of remuneration for medical services and non-medical ser- vices . If, during an applicable year, an employer pays a covered employee remuneration for providing both medical services and non-medical services, the employer must make a reasonable, good faith allocation between the remuneration for medical services and the remuneration for non-medical services. For example, if a medical doctor receives current remuneration (or vests in remuneration under a deferred compensation plan) for providing medical services and administrative or management services, the employer must make a reasonable, good faith allocation between the remuneration for the medical services and the remuneration for the administrative or management services. For this purpose, if an employment agreement or similar written arrangement sets forth the remuneration to be paid for particular services, that allocation of remuneration applies unless the facts and circumstances demonstrate that the amount allocated to medical services is unreasonable for those services or that the allocation was established for purposes of avoiding application of the excise tax under section 4960. If some or all of the remuneration is not reasonably allocated in an employment agreement or similar arrangement, an employer may use any reasonable allocation method. For example, an employer may use a representative sample of 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 employee worked for the employer (and any related employer) for purposes of making a reasonable allocation of remuneration. Similarly, if some or all of the remuneration is not reasonably allocated in an employment agreement or other similar arrangement, an employer may use salaries or other remuneration paid by the employer or similarly situated employers for duties comparable to those the employee performs (for example, hospital administrator and physician) for purposes of making a reasonable allocation between remuneration for providing medical services and for providing non-medical services.

(iii) Examples . The following examples illustrate the rules of this paragraph (a)(2). For purposes of these examples, assume any entity referred to as “ATEO” is an ATEO.

(A) Example 1 (Allocation based on employment agreement) —( 1 ) Facts . Employee A is a covered employee of ATEO 1. Employee A is a licensed medical professional who provides patient care services for ATEO 1 and also provides management and administrative services to ATEO 1 as the manager of a medical practice group within ATEO 1. The employment agreement between ATEO 1 and Employee A specifies that of Employee A’s salary, 30 percent is allocable to Employee A’s services as manager of the medical practice group and 70 percent is allocable to Employee A’s services as a medical professional providing patient care services. The facts regarding Employee A’s employment indicate the employment agreement provides a reasonable allocation and that the allocation was not established for purposes of avoiding application of the excise tax.

( 2 ) Conclusion . Consistent with Employee A’s employment agreement, ATEO 1 must allocate 30 percent of Employee A’s salary to the provision of non-medical services and 70 percent of Employee A’s salary to the provision of medical services. Accordingly, only the 30 percent portion of Employee A’s salary allocated to the other, non-medical services is remuneration for purposes of paragraph (a) of this section.

(B) Example 2 (Allocation based on billing re- cords) —( 1 ) Facts . Assume the same facts as in paragraph (a)(2)(iii)(A) of this section (Example 1), except that the employment agreement does not allocate Employee A’s salary between medical and non-medical services performed by Employee A. Based on a representative sample of insurance and Medicare billing records, as well as time reports that Employee A submits to ATEO 1, ATEO 1 determines that Employee A spends 50 percent of her work hours providing patient care and 50 percent of her work hours performing administrative and management services. ATEO 1 allocates 50 percent of Employee A’s remuneration to medical services.

( 2 ) Conclusion . ATEO 1’s allocation of Employee A’s salary is a reasonable, good faith allocation. Accordingly, only the 50 percent portion of Employee A’s remuneration allocated to the non-medical services is remuneration for purposes of paragraph (a) of this section.

(b) Source of payment . For purposes of this section, the determination of the source of a payment of remuneration may involve the application of one or both of two separate rules described in this paragraph (b). Paragraph (b)(1) of this section addresses payments by a third party for services performed as an employee of a separate employer entity, while paragraph (b)(2) of this section addresses the application of section 4960(c)(4)(A) to treat certain remuneration paid by a related organization (after application of paragraph

(b)(1) of this section, if applicable) as paid by the ATEO.

(1) Remuneration paid by a third party for employment by an employer . Remuneration paid (or a grant of a legally binding right to nonvested remuneration) by a third-party payor (whether a related organization, payroll agent, agent designated under section 3504, certified professional employer organization under section 7705, or other entity) during an applicable year for services performed as an employee of an employer is remuneration paid (or payable) by the employer, except as otherwise provided in §53.4960-1(d)(2)(ii) and (iii).

(2) Remuneration paid by a related or- ganization for employment by the related organization . Pursuant to section 4960(c) (4)(A), remuneration paid (or a grant of a legally binding right to nonvested remuneration) by a related organization to an ATEO’s employee during an applicable year for services performed as an employee of the related organization is treated as remuneration paid (or payable) by the ATEO, except as otherwise provided in §53.4960-1(d)(2)(ii) and (iii).

(c) Applicable year in which remuner- ation is treated as paid —(1) In general . Remuneration that is a regular wage within the meaning of §31.3402(g)-1(a)(1)(ii) is treated as paid on the date it is actually or constructively paid and all other remuneration is treated as paid on the first date on which the remuneration is vested.

(2) Vested remuneration . Remuneration is vested if it is not subject to a substantial risk of forfeiture within the meaning of section 457(f)(3)(B) (regardless of whether the arrangement under which the remuneration is to be paid is deferred compensation described in section 457(f) or 409A). In general, an amount is subject to a substantial risk of forfeiture if entitlement to the amount is conditioned on the future performance of substantial services or upon the occurrence of a condition that is related to a purpose of the remuneration if the possibility of forfeiture is substantial. Except as provided in paragraph (c) (1) of this section, remuneration that is never subject to a substantial risk of forfeiture is considered paid on the first date the service provider has a legally binding right to the payment. For purposes of this section, a plan means a plan within

February 16, 2021 874 Bulletin No. 2021–7

paid remuneration means, for each applicable year, the amount of remuneration that the employer treated as paid in the applicable year or for a prior applicable year but that is not actually or constructively paid or otherwise includible in the employee’s gross income before the close of the applicable year. Actual or constructive payment or another event causing an amount of previously paid remuneration to be includible in the employee’s gross income thus reduces the amount of previously paid remuneration.

(iii) Earnings . Earnings means any increase in the vested present value of previously paid remuneration as of the close of the applicable year, regardless of whether the plan denominates the increase as earnings. For example, an increase in the vested account balance of a nonqualified deferred compensation plan based solely on the investment return of a predetermined actual investment (and disregarding any additional contributions) constitutes earnings. Similarly, an increase in the vested present value of a benefit under a nonqualified nonaccount balance plan due solely to the passage of time (and disregarding any additional benefit accruals) constitutes earnings. However, an increase in an account balance of a nonqualified deferred compensation plan due to a salary reduction contribution or an employer contribution does not constitute earnings (and therefore may not be offset with losses). Likewise, an increase in the benefit under a nonaccount balance plan due to an additional year of service or an increase in compensation that is reflected in a benefit formula does not constitute earnings.

(iv) Losses . Losses means any decrease in the vested present value of previously paid remuneration as of the close of the applicable year, regardless of whether the plan denominates that decrease as losses.

(v) Net earnings . Net earnings means, for each applicable year, the amount (if any) by which the earnings accrued for the applicable year on previously paid remuneration exceeds the sum of the losses accrued on previously paid remuneration for the applicable year and any net losses carried forward from a previous taxable year.

(vi) Net losses . Net losses means, for each applicable year, the amount (if any) by which the sum of the losses accrued

the meaning of §1.409A-1(c), an account balance plan means an account balance plan within the meaning of §1.409A‑1(c) (2)(i)(A), and a nonaccount balance plan means a nonaccount balance plan within the meaning of §1.409A‑1(c)(2)(i)(C). Net earnings on previously paid remuneration (described in paragraph (d)(2) of this section) that are not subject to a substantial risk of forfeiture are vested (and, thus, treated as paid) at the earlier of the date actually or constructively paid to the employee or the close of the applicable year in which they accrue. For example, the present value of a principal amount accrued to an employee’s account under an account balance plan (under which the earnings and losses attributed to the account are based solely on a predetermined actual investment as determined under §31.3121(v)(2)-1(d)(2)(i)(B) or a reasonable market interest rate) is treated as paid on the date vested, but the present value of any net earnings subsequently accrued on that amount (the increase in value due to the predetermined actual investment or a reasonable market interest rate) is treated as paid at the close of the applicable year in which they accrue. Similarly, while the present value of an amount accrued under a nonaccount balance (including earnings that accrued while the amount was nonvested) is treated as paid on the date it is first vested, the present value of the net earnings on that amount (the increase in the present value) is treated as paid at the close of the applicable year in which they accrue.

(3) Change in related status during the year . If a taxpayer becomes or ceases to be a related organization with respect to an ATEO during an applicable year, then only the remuneration paid by the taxpayer to an employee with respect to services performed as an employee of the related organization during the portion of the applicable year during which the employer is a related organization is treated as paid by the ATEO. If an amount is treated as paid due to vesting in the year the taxpayer becomes or ceases to be a related organization with respect to the ATEO, then the amount is treated as paid by the ATEO only if the amount becomes vested during the portion of the applicable year that the taxpayer is a related organization with respect to the ATEO.

(d) Amount of remuneration treated as paid —(1) In general . For each applicable year, the amount of remuneration treated as paid by the employer to a covered employee is the sum of regular wages within the meaning of §31.3402(g)‑1(a)(1)(ii) actually or constructively paid during the applicable year and the present value (as determined under paragraph (e) of this section) of all other remuneration that vested during the applicable year. The amount of remuneration that vests during an applicable year is determined on an employer-by-employer basis with respect to each covered employee.

(2) Earnings and losses on previous- ly paid remuneration —(i) In general . The amount of net earnings or losses on previously paid remuneration paid by an employer is determined on an employee-by-employee basis, such that amounts accrued with regard to one employee do not affect amounts accrued with regard to a different employee. Similarly, losses accrued on previously paid remuneration from one employer do not offset earnings accrued on previously paid remuneration from another employer. The amount of net earnings or losses on previously paid remuneration paid by the employer is determined on a net aggregate basis for all plans maintained by the employer in which the employee participates for each applicable year. For example, losses under an account balance plan may offset earnings under a nonaccount balance plan for the same applicable year maintained by the same employer for the same employee.

(ii) Previously paid remuneration (A) New covered employee . For an individual who was not a covered employee for any prior applicable year, previously paid remuneration means, for the applicable year for which the individual becomes a covered employee, the present value of vested remuneration that was not actually or constructively paid or otherwise includible in the employee’s gross income before the start of the applicable year plus any remuneration that vested during the applicable year but that is not actually or constructively paid or otherwise includible in the employee’s gross income before the close of the applicable year.

(B) Existing covered employee . For an individual who was a covered employee for any prior applicable year, previously

Bulletin No. 2021–7 875 February 16, 2021

on previously paid remuneration for the applicable year and any net losses carried forward from a previous taxable year exceed the earnings accrued for the applicable year on previously paid remuneration. Losses may only be used to offset earnings and thus do not reduce the remuneration treated as paid for an applicable year except to the extent of the earnings accrued for that applicable year. However, with regard to a covered employee, an employer may carry net losses forward to the next applicable year and offset vested earnings for purposes of determining net earnings or losses for that subsequent applicable year. For example, if a covered employee who participates in a nonaccount balance plan and an account balance plan vests in an amount of earnings under the nonaccount balance plan and has losses under the account balance plan that exceed the vested earnings treated as remuneration under the nonaccount balance plan, those excess losses are carried forward to the next applicable year and offset vested earnings for purposes of determining net earnings or losses for that applicable year. If, for the next applicable year, there are not sufficient earnings to offset the entire amount of losses carried forward from the previous year (and any additional losses), the offset process repeats for each subsequent applicable year until there are sufficient earnings for the applicable year to offset any remaining losses carried forward.

(3) Remuneration paid for a taxable year before the employee becomes a cov- ered employee —(i) In general . In accordance with the payment timing rules of paragraph (c) of this section, any remuneration that is vested but is not actually or constructively paid or otherwise includible in an employee’s gross income as of the close of the applicable year for the taxable year immediately preceding the taxable year in which the employee first becomes a covered employee of an ATEO is treated as previously paid remuneration for the taxable year in which the employee first becomes a covered employee. Net losses on this previously paid remuneration from any preceding applicable year do not carry forward to subsequent applicable years. However, net earnings and losses that vest on such previously paid remuneration in subsequent applicable

years are treated as remuneration paid for a taxable year for which the employee is a covered employee.

(ii) Examples . The following examples illustrate the rules of this paragraph (d)(3). For purposes of these examples, assume any organization described as “ATEO” is an ATEO.

(A) Example 1 (Earnings on pre-covered em- ployee remuneration) —( 1 ) Facts . ATEO 1 uses a taxable year beginning July 1 and ending June 30. Employee A becomes a covered employee of ATEO 1 for the taxable year beginning July 1, 2023, and ending June 30, 2024. During the 2022 applicable year, Employee A vests in $1 million of nonqualified deferred compensation. As of December 31, 2022, the present value of the amount deferred under the plan is $1.1 million. During the 2023 applicable year, ATEO 1 pays Employee A $1 million in regular wages. The present value as of December 31, 2023, of Employee A’s nonqualified deferred compensation is $1.3 million.

( 2 ) Conclusion (Taxable year beginning July 1, 2022, and ending June 30, 2023) . ATEO 1 pays Employee A $1.1 million of remuneration in the 2022 applicable year. This is comprised of $1 million of vested nonqualified deferred compensation, and $100,000 of earnings, all of which is treated as paid for the taxable year beginning July 1, 2022, and ending June 30, 2023.

( 3 ) Conclusion (Taxable year beginning July 1, 2023, and ending June 30, 2024) . ATEO 1 pays Employee A $1.2 million of remuneration in the 2023 applicable year. This is comprised of $1 million regular wages and $200,000 of earnings ($1.3 million present value as of December 31, 2023, minus $1.1 million previously paid remuneration as of December 31, 2022).

(B) Example 2 (Losses on pre-covered employee remuneration) —( 1 ) Facts . Assume the same facts as in paragraph (d)(3)(ii)(A) of this section (Example 1), except that the present value of the nonqualified deferred compensation as of December 31, 2022, is $900,000.

( 2 ) Conclusion (Taxable year beginning July 1, 2022, and ending June 30, 2023) . ATEO 1 pays Employee A $1 million of remuneration in the 2022 applicable year. This is comprised of $1 million of vested nonqualified deferred compensation. The present value of all vested deferred compensation as of December 31 of the 2022 applicable year ($900,000) is treated as previously paid remuneration for the next applicable year (as Employee A is a covered employee for the next taxable year). The $100,000 of losses accrued while Employee A was not a covered employee do not carry forward to the next applicable year.

( 3 ) Conclusion (Taxable year beginning July 1, 2023, and ending June 30, 2024) . ATEO 1 pays Employee A $1.4 million of remuneration in the 2023 applicable year. This is comprised of $1 million cash and $400,000 of earnings ($1.3 million present value as of December 31, 2023, minus $900,000 previously paid remuneration).

(e) Calculation of present value —(1) In general . The employer must determine

present value using reasonable actuarial assumptions regarding the amount, time, and probability that a payment will be made. For this purpose, a discount for the probability that an employee will die before commencement of benefit payments is permitted, but only to the extent that benefits will be forfeited upon death. The present value may not be discounted for the probability that payments will not be made (or will be reduced) because of the unfunded status of the plan; the risk associated with any deemed or actual investment of amounts deferred under the plan; the risk that the employer, the trustee, or another party will be unwilling or unable to pay; the possibility of future plan amendments; the possibility of a future change in the law; or similar risks or contingencies. The present value of the right to future payments as of the vesting date includes any earnings that have accrued as of the vesting date that are not previously paid remuneration.

(2) Treatment of future payment amount as present value for certain amounts . For purposes of determining the present value of remuneration that is scheduled to be actually or constructively paid within 90 days of vesting, the employer may treat the future amount that is to be paid as the present value at vesting.

(f) Examples . The following examples illustrate the rules of this section. For purposes of these examples, assume any entity referred to as “ATEO” is an ATEO, any entity referred to as “CORP” is not an ATEO, and all taxpayers use the calendar year as their taxable year.

(1) Example 1 (Account balance plan) —(i) Facts . Employee A is a covered employee of ATEO

Employee A participates in a nonqualified deferred compensation plan (the NQDC plan) in which the account balance is adjusted based on the investment returns on predetermined actual investments. On January 1, 2022, ATEO 1 credits $100,000 to Employee A’s account under the plan, subject to the requirement that Employee A remain employed through June 30, 2024. On June 30, 2024, the vested account balance is $110,000. Due to earnings or losses on the account balance, the closing account balance on each of the following dates is: $115,000 on December 31, 2024, $120,000 on December 31, 2025, $100,000 on December 31, 2026, and $110,000 on December 31, 2027. During 2028, Employee A defers an additional $10,000 under the plan, all of which is vested at the time of deferral. On December 31, 2028, the closing account balance is $125,000. In 2029, ATEO 1 pays $10,000 to Employee A under the plan. On December 31, 2029, the closing account balance is $135,000 due to earnings on the account balance.

February 16, 2021 876 Bulletin No. 2021–7

(ii) Conclusion (2022 and 2023 applicable years—nonvested amounts) . For 2022 and 2023, ATEO 1 is not treated as paying Employee A any remuneration attributable to Employee A’s participation in the NQDC plan because the amount deferred under the plan remains subject to a substantial risk of forfeiture within the meaning of section 457(f)(3) (B).

(iii) Conclusion (2024 applicable year—amounts in year of vesting) . For 2024, ATEO 1 is treated as paying Employee A $115,000 of remuneration attributable to Employee A’s participation in the NQDC plan, including $110,000 of remuneration on June 30, 2024, when the amount becomes vested, and an additional $5,000 of remuneration on December 31, 2024, which is earnings on the previously paid remuneration ($110,000).

(iv) Conclusion (2025 applicable year—earn- ings) . For 2025, ATEO 1 is treated as paying Employee A $5,000 of remuneration attributable to Employee A’s participation in the NQDC plan, which is the additional earnings on the previously paid remuneration ($115,000) as of December 31, 2025.

(v) Conclusion (2026 applicable year—losses) . For 2026, ATEO 1 is not treated as paying Employee A any remuneration attributable to Employee A’s participation in the NQDC plan because the present value of the previously paid remuneration ($120,000) decreased to $100,000 as of December 31, 2026. The $20,000 loss for 2026 does not reduce any amount previously treated as remuneration but is available for carryover to subsequent taxable years to offset earnings.

(vi) Conclusion (2027 applicable year—recov- ery of losses) . For 2027, ATEO 1 is not treated as paying Employee A any remuneration attributable to Employee A’s participation in the NQDC plan because the present value of the previously paid remuneration ($120,000) was $110,000 as of December 31, 2027. Due to increases on the account balance, ATEO 1 recovers $10,000 of the $20,000 of losses carried over from 2026. The net losses as of December 31, 2027, are $10,000, and none of the $10,000 in earnings during 2027 is treated as remuneration paid in 2027.

(vii) Conclusion (2028 applicable year—no re- covery of losses against additional deferrals of com- pensation) . For 2028, ATEO 1 is treated as paying Employee A $10,000 of remuneration attributable to Employee A’s participation in the NQDC plan. The additional $10,000 deferral is vested and thus is treated as remuneration paid on the date credited to Employee A’s account. This credit increases the amount of previously paid remuneration from $120,000 to $130,000. Additionally, due to earnings, ATEO 1 recovers $5,000 of the $10,000 loss carried over from 2027, none of which was remuneration paid for 2026, so that as of December 31, 2028, the net loss available for carryover to 2029 is $5,000.

(viii) Conclusion (2029 applicable year—dis- tributions, recovery of remainder of losses through earnings and additional earnings). For 2029, ATEO 1 is treated as paying Employee A $15,000 of remuneration attributable to Employee A’s participation in the NQDC plan. The $10,000 payment reduces the amount of previously paid remuneration (from $130,000 to $120,000) and the account balance (from $125,000 to $115,000). The present value of

the vested account balance increases by $20,000 (from $115,000 to $135,000) as of December 31, 2029. Therefore, due to earnings, ATEO 1 recovers the remaining $5,000 loss carried over from 2028 (the difference between the $120,000 previously paid remuneration before earnings and the $115,000 account balance before earnings) and is treated as paying Employee A an additional $15,000 of remuneration as earnings (the difference between the $135,000 account balance after earnings and the $120,000 previously paid remuneration after loss recovery).

(2) Example 2 (Nonaccount balance plan with earnings) —(i) Facts . ATEO 2 and CORP 2 are related organizations. Employee B is a covered employee of ATEO 2 and is also employed by CORP 2. On January 1, 2022, CORP 2 and Employee B enter into an agreement under which CORP 2 will pay Employee B $100,000 on December 31, 2025, if B remains employed by CORP 2 through January 1, 2024. Employee B remains employed by CORP 2 through January 1, 2024. On January 1, 2024, the present value based on reasonable actuarial assumptions of the $100,000 to be paid on December 31, 2025, is $75,000. On December 31, 2024, the present value of the $100,000 future payment increases to $85,000 due solely to the passage of time. On December 31, 2025, CORP 2 pays Employee B $100,000. (ii) Conclusion (2022 and 2023 applicable years—nonvested amounts) . For 2022 and 2023, CORP 2 is not treated as paying Employee B any remuneration attributable to the agreement because the amount deferred under the agreement remains subject to a substantial risk of forfeiture within the meaning of section 457(f)(3)(B).

(iii) Conclusion (2024 applicable year—amounts in year of vesting) . For 2024, CORP 2 is treated as paying Employee B $75,000 of remuneration attributable to the agreement on January 1, 2024, which is the present value on that date of the $100,000 payable on December 31, 2025. In addition, CORP 2 is treated as paying Employee B $10,000 of remuneration attributable to the agreement on December 31, 2024, which is earnings based on the increase in the present value of the previously paid remuneration (from $75,000 to $85,000) as of December 31, 2024.

(iv) Conclusion (2025 applicable year—earnings and distribution of previously paid remuneration) . For 2025, CORP 2 is treated as paying Employee B $15,000 in remuneration attributable to the agreement on December 31, 2025, which is earnings based on the increase in the present value of the previously paid remuneration (from $85,000 to $100,000) as of December 31, 2025. In addition, the $100,000 payment is treated as reducing the amount of previously paid remuneration ($100,000) to zero.

(3) Example 3 (Treatment of amount payable as present value at vesting) —(i) Facts . Employee C is a covered employee of ATEO 3. Under an agreement between ATEO 3 and Employee C, ATEO 3 agrees to pay Employee C $100,000 two months after the date Employee C meets a specified performance goal that is a substantial risk of forfeiture within the meaning of section 457(f)(3)(B). Employee C meets the performance goal on November 30, 2022, and ATEO 3 pays Employee C $100,000 on January 31, 2023. In accordance with §53.4960‑2(e)(2), because the payment is to be made within 90 days of vesting,

ATEO 3 elects to treat the full payment amount as the amount of remuneration paid at vesting.

(ii) Conclusion (2022 applicable year—election to treat amount payable within 90 days as paid at vesting) . For taxable year 2022, ATEO 3 is treated as paying Employee C $100,000 of remuneration attributable to the agreement. Employee C vests in the $100,000 payment in 2022 upon meeting the performance goal. Under the general rule, ATEO 3 would be treated as paying for the taxable year 2022 the present value as of November 30, 2022, of $100,000 payable on January 31, 2023 (two months after the date of vesting), with adjustments to the present value as of the end of the year. However, because ATEO 3 elected to treat the full $100,000 amount payable within 90 days of vesting as the remuneration paid, the $100,000 payable to Employee C in 2023 is treated as remuneration paid in 2022 (and no additional amount related to the $100,000 paid on January 31, 2023, is treated as remuneration paid in 2023). (4) Example 4 (Aggregation of remuneration from related organizations) —(i) Facts . Employee D is a covered employee of ATEO 4 and also an employee of CORP 4 and CORP 5. ATEO 4, CORP 4, and CORP 5 are related organizations. ATEO 4, CORP 4, and CORP 5 each pay Employee D $200,000 of salary during 2022 and 2023. On January 1, 2022, ATEO 4 promises to pay Employee D $120,000 on December 31, 2023, under a nonaccount balance plan, the right to which is vested and the present value of which is $100,000 on January 1, 2022. On January 1, 2022, CORP 4 and CORP 5 each contribute $100,000 on Employee D’s behalf to account balance plans of CORP 4 and CORP 5, respectively, under which all amounts deferred are vested. On December 31, 2022, the present value of the amounts deferred under the ATEO 4 plan is $110,000, the present value of the amounts deferred under the CORP 4 plan is $120,000, and the present value of the amounts deferred under the CORP 5 plan maintained is $90,000. On December 31, 2023, the present value of the amounts deferred under the ATEO 4 plan is $120,000, the present value of the amounts deferred under the CORP 4 plan is $130,000, and the present value of the amounts deferred under the CORP 5 plan is $110,000.

(ii) Conclusion (2022 applicable year) . For 2022, before aggregation of remuneration paid by related organizations, ATEO 4 is treated as paying Employee D $310,000 of remuneration ($200,000 salary + $100,000 upon vesting of deferred amounts

$10,000 net earnings on vested deferred amounts). CORP 4 is treated as paying Employee D $320,000 of remuneration ($200,000 salary + $100,000 upon vesting of deferred amounts + $20,000 net earnings on vested deferred amounts). CORP 5 is treated as paying Employee D $300,000 of remuneration ($200,000 salary + $100,000 upon vesting of deferred amounts) and has $10,000 of net losses on vested deferred amounts, which are carried forward to 2023. Thus, ATEO 4 is treated as paying $930,000 of remuneration to Employee D for the applicable year.

(iii) Conclusion (2023 applicable year) . For 2023, before aggregation of remuneration paid by related organizations, ATEO 4 is treated as paying Employee D $210,000 of remuneration ($200,000 salary + $10,000 earnings on previously paid re

Bulletin No. 2021–7 877 February 16, 2021

muneration). CORP 4 is treated as paying Employee D $210,000 of remuneration ($200,000 salary

$10,000 net earnings on previously paid remuneration). CORP 5 is treated as paying Employee D $210,000 of remuneration ($200,000 salary + $10,000 net earnings on previously paid remuneration after taking into account the loss carryforward). Thus, ATEO 4 is treated as paying $630,000 of remuneration to Employee D for the applicable year.

(5) Example 5 (Treatment of regular wages for a pay period spanning applicable years) —(i) Facts . ATEO 5 pays its employees’ salaries in accordance with a two-week payroll period that begins Sunday of the first week and ends Saturday of the second week. Payment occurs the Friday following the end of the payroll period. The last payroll period of 2023 ends on December 31, 2023. For the last payroll period, Employee E earns $8,000 of salary. In addition, ATEO 5 awards Employee E a $10,000 bonus that vests on December 31, 2023. ATEO 5 pays Employee E $18,000 on Friday, January 5, 2024, reflecting Employee E’s salary for the last payroll period of 2023 and the bonus, the right to which vested on December 31, 2023.

(ii) Conclusion (Regular wages) . The $8,000 of salary is regular wages within the meaning of §31.3402(g)-1(a)(1)(ii) because it is an amount paid at a periodic rate for the current payroll period. Thus, $8,000 is treated as remuneration paid on January 5, 2024 (when it is actually or constructively paid), and, therefore, is treated as remuneration paid in ATEO 5’s 2024 applicable year. (iii) Conclusion (Amounts other than regular wages) . The $10,000 bonus is not regular wages within the meaning of §31.3402(g)-1(a)(1)(ii) because it is not an amount paid at a periodic rate for the current payroll period. Thus, $10,000 is treated as remuneration paid on December 31, 2023 (when it is vested) and, therefore, is treated as remuneration paid in ATEO 5’s 2023 applicable year.

§53.4960-3 Determination of whether there is a parachute payment.

(a) Parachute payment —(1) In gen- eral . Except as otherwise provided in paragraph (a)(2) of this section (relating to payments excluded from the definition of a parachute payment), parachute payment means any payment in the nature of compensation made by an ATEO (or a predecessor of the ATEO) or a related organization to (or for the benefit of) a covered employee if the payment is contingent on the employee’s separation from employment with the employer, and the aggregate present value of the payments in the nature of compensation to (or for the benefit of) the individual that are contingent on the separation equals or exceeds an amount equal to 3-times the base amount.

(2) Exclusions . The following payments are not parachute payments:

(i) Certain qualified plans . A payment that is a contribution to or a distribution from a plan described in section 401(a) that includes a trust exempt from tax under section 501(a), an annuity plan described in section 403(a), a simplified employee pension (as defined in section 408(k)), or a simple retirement account described in section 408(p);

(ii) Certain annuity contracts . A payment made under or to an annuity contract described in section 403(b) or a plan described in section 457(b);

(iii) Compensation for medical ser- vices . A payment made to a licensed medical professional for the performance of medical services performed by such professional; and

(iv) Payments to non-HCEs . A payment made to an individual who is not a highly compensated employee (HCE) as defined in paragraph (a)(3) of this section.

(3) Determination of HCEs for purpos- es of the exclusion from parachute pay- ments . For purposes of this section, highly compensated employee or HCE means, with regard to an ATEO that maintains a qualified retirement plan or other employee benefit plan described in §1.414(q)‑1T, Q/A–1, any person who is a highly compensated employee within the meaning of section 414(q) and, with regard to an ATEO that does not maintain such a plan, any person who would be a highly compensated employee within the meaning of section 414(q) if the ATEO did maintain such a plan. For purposes of determining the group of highly compensated employees for a determination year, consistent with §1.414(q)-1T, Q/A–14(a)(1), the determination year calculation is made on the basis of the applicable plan year under §1.414(q)‑1T, Q/A–‍‍14(a)(2) of the plan or other entity for which a determination is made, and the look-back year calculation is made on the basis of the 12-month period immediately preceding that year. For an ATEO that does not maintain a plan described in §1.414(q)‑1T, Q/A–1, the rules are applied by analogy, substituting the calendar year for the plan year. Thus, for example, in 2022, an ATEO that does not maintain such a plan must use its employees’ 2021 annual compensation (as defined in §1.414(q)‑1T, Q/A–‍13, including any of the safe harbor definitions if applied consistently to all employees) to

determine which employees are HCEs for 2022, if any, for purposes of section 4960. If an employee is an HCE at the time of separation from employment, then for purposes of section 4960 any parachute payment that is contingent on the separation from employment (as defined in paragraph (d) of this section) is treated as paid to an HCE so that the exception from the term parachute payment under paragraph (a)(2)(iv) of this section does not apply, even if the payment occurs during one or more later taxable years (that is, taxable years after the taxable year during which the employee separated from employment).

(b) Payment in the nature of compen- sation —(1) In general . Any payment— in whatever form—is a payment in the nature of compensation if the payment arises out of an employment relationship, including holding oneself out as available to perform services and refraining from performing services. Thus, for example, a payment made under a covenant not to compete or a similar arrangement is a payment in the nature of compensation. A payment in the nature of compensation includes (but is not limited to) wages and salary, bonuses, severance pay, fringe benefits, life insurance, pension benefits, and other deferred compensation (including any amount characterized by the parties as interest or earnings thereon). A payment in the nature of compensation also includes cash when paid, the value of the right to receive cash, the value of accelerated vesting, or a transfer of property. The vesting of an option, stock appreciation right, or similar form of compensation as a result of a covered employee’s separation from employment is a payment in the nature of compensation. However, a payment in the nature of compensation does not include attorney’s fees or court costs paid or incurred in connection with the payment of any parachute payment or a reasonable rate of interest accrued on any amount during the period the parties contest whether a parachute payment will be made.

(2) Consideration paid by covered employee . Any payment in the nature of compensation is reduced by the amount of any money or the fair market value of any property (owned by the covered employee without restriction) that is (or will

February 16, 2021 878 Bulletin No. 2021–7

does not fail to be contingent on a separation from employment merely because the payment is conditioned upon the execution of a release of claims, noncompetition or nondisclosure provisions, or other similar requirements. See paragraph (d)(3) of this section for the treatment of a payment made pursuant to a covenant not to compete. If, after an involuntary separation from employment, the former employee continues to provide certain services as a nonemployee, payments for services rendered as a nonemployee are not payments that are contingent on a separation from employment to the extent those payments are reasonable and are not made on account of the involuntary separation from employment. Whether services are performed as an employee or nonemployee depends upon all the facts and circumstances. See §53.4960-1(e). For rules on determining whether payments are reasonable compensation for services, the rules of §1.280G-1, Q/A–40 through Q/A–42 (excluding Q/A–40(b) and Q/A–42(b)), and Q/A–44 are applied by analogy (substituting involuntary separation from employment for change in ownership or control).

(2) Employment agreements —(i) In general . If a covered employee involuntarily separates from employment before the end of a contract term and is paid damages for breach of contract pursuant to an employment agreement, the payment of damages is treated as a payment that is contingent on a separation from employment. An employment agreement is an agreement between an employee and employer that describes, among other things, the amount of compensation or remuneration payable to the employee for services performed during the term of the agreement.

(ii) Example . The following example illustrates the rules of this paragraph (d) (2). For purposes of this example, assume any entity referred to as “ATEO” is an ATEO.

(A) Example —( 1 ) Facts . Employee A, a covered employee, has a 3-year employment agreement with ATEO 1. Under the agreement, Employee A will receive a salary of $200,000 for the first year and, for each succeeding year, an annual salary that is $100,000 more than the previous year. The agreement provides that, in the event of A’s involuntary separation from employment without cause, Employee A will receive the remaining salary due under the agreement. At the beginning of the second year of

be) transferred by the covered employee in exchange for the payment.

(c) When payment is considered to be made —(1) In general . A payment in the nature of compensation is considered made in the taxable year in which it is includible in the covered employee’s gross income or, in the case of fringe benefits and other benefits that are excludable from income, in the taxable year the benefits are received. In the case of taxable non-cash fringe benefits provided in a calendar year, payment is considered made on the date or dates the employer chooses, but no later than December 31 of the calendar year in which the benefits are provided, except that when the fringe benefit is the transfer of personal property (either tangible or intangible) of a kind normally held for investment or the transfer of real property, payment is considered made on the actual date of transfer. If the fringe benefit is neither a transfer of personal property nor a transfer of real property, the employer may, in its discretion, treat the value of the benefit actually provided during the last two months of the calendar year as paid during the subsequent calendar year. However, an employer that treats the value of a benefit paid during the last two months of a calendar year as paid during the subsequent calendar year under this rule must treat the value of that fringe benefit as paid during the subsequent calendar year with respect to all employees who receive it.

(2) Transfers of section 83 property . A transfer of property in connection with the performance of services that is subject to section 83 is considered a payment made in the taxable year in which the property is transferred or would be includible in the gross income of the covered employee under section 83, disregarding any election made by the employee under section 83(b) or (i). Thus, in general, such a payment is considered made at the later of the date the property is transferred (as defined in §1.83-3(a)) to the covered employee or the date the property becomes substantially vested (as defined in §1.83‑3(b) and (j)). The amount of the payment is the compensation as determined under section 83, disregarding any amount includible in income pursuant to an election made by an employee under section 83(b).

(3) Stock options . An option (including an option to which section 421 applies) is treated as property that is transferred when the option becomes vested (regardless of whether the option has a readily ascertainable fair market value as defined in §1.83‑7(b)). For purposes of determining the timing and amount of any payment related to the option, the principles of §1.280G-1, Q/A–13 and any method prescribed by the Commissioner in published guidance of general applicability under §601.601(d)(2) apply.

(d) Payment contingent on an employ- ee’s separation from employment —(1) In general . 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 the employee’s involuntary separation from employment. A payment generally would be made in the absence of the employee’s involuntary separation from employment if it is substantially certain at the time of the involuntary separation from employment that the payment would be made whether or not the involuntary separation occurred. A payment the right to which is not subject to a substantial risk of forfeiture within the meaning of section 457(f)(3)(B) at the time of an involuntary separation from employment generally is a payment that would have been made in the absence of an involuntary separation from employment (and is therefore not contingent on a separation from employment), except that the increased value of an accelerated payment of a vested amount described in paragraph (f)(3) of this section resulting from an involuntary separation from employment is not treated as a payment that would have been made in the absence of an involuntary separation from employment. A payment the right to which is no longer subject to a substantial risk of forfeiture within the meaning of section 457(f)(3)(B) as a result of an involuntary separation from employment, including a payment the vesting of which is accelerated due to the separation from employment as described in paragraph (f)(3) of this section, is not treated as a payment that would have been made in the absence of an involuntary separation from employment (and thus is contingent on a separation from employment). A payment

Bulletin No. 2021–7 879 February 16, 2021

and circumstances demonstrate that it was the result of unilateral employer action that caused a material negative change to the employee’s relationship with the employer. Factors that may provide evidence of such a material negative change include a material reduction in the duties to be performed, a material negative change in the conditions under which the duties are to be performed, or a material reduction in the compensation to be received for performing such services.

(iii) Deemed material negative change . An involuntary separation from employment due to a material negative change is deemed to occur if the separation from employment occurs within 2 years following the initial existence of one or more of the following conditions arising without the consent of the employee:

(A) Material diminution of compensa- tion . A material diminution in the employee’s base compensation;

(B) Material diminution of responsibil- ity . A material diminution in the employee’s authority, duties, or responsibilities;

(C) Material diminution of authority of supervisor . A material diminution in the authority, duties, or responsibilities of the supervisor to whom the employee is required to report, including a requirement that an employee report to a corporate officer or employee instead of reporting directly to the board of directors (or similar governing body) of an organization;

(D) Material diminution of budget . A material diminution in the budget over which the employee retains authority;

(E) Material change of location . A material change in the geographic location at which the employee must perform services; or

(F) Other material breach . Any other action or inaction that constitutes a material breach by the employer of the agreement under which the employee provides services.

(3) Separation from employment . Except as otherwise provided in this paragraph, separation from employment has the same meaning as separation from service as defined in §1.409A-1(h). Pursuant to §1.409A-1(h), an employee generally separates from employment with the employer if the employee dies, retires, or otherwise has a termination of employment with the employer or experiences a

the agreement, ATEO 1 involuntarily terminates Employee A’s employment without cause and pays Employee A $700,000 representing the remaining salary due under the employment agreement ($300,000 for the second year of the agreement plus $400,000 for the third year of the agreement).

( 2 ) Conclusion . The $700,000 payment is treated as a payment that is contingent on a separation from employment.

(3) Noncompetition agreements . A payment under an agreement requiring a covered employee to refrain from performing services (for example, a covenant not to compete) is a payment that is contingent on a separation from employment if the payment would not have been made in the absence of an involuntary separation from employment. For example, a payment contingent on compliance in whole or in part with a covenant not to compete negotiated as part of a severance arrangement arising from an involuntary separation from employment is contingent on a separation from employment. Similarly, one or more payments contingent on compliance in whole or in part with a covenant not to compete not negotiated as part of a severance arrangement arising from an involuntary separation from employment but that provides for a payment specific to an involuntary separation from employment (and not voluntary separation from employment) is contingent on a separation from employment. Payments made under an agreement requiring a covered employee to refrain from performing services that are contingent on separation from employment are not treated as paid in exchange for the performance of services and are not excluded from parachute payments.

(4) Payment of amounts previously included in income or excess remuneration . Actual or constructive payment of an amount that was previously included in gross income of the employee is not a payment contingent on a separation from employment. For example, payment of an amount included in income under section 457(f)(1)(A) due to the lapsing of a substantial risk of forfeiture on a date before the separation from employment generally is not a payment that is contingent on a separation from employment, even if the amount is paid in cash or otherwise to the employee because of the separation from employment. In addition, actual or constructive receipt of an amount treated as excess remuneration under §53.4960-4(b)(1) is not a payment that is contingent on a separation from employment (and thus is not a parachute payment), even if the amount is paid to the employee because of the separation from employment.

(5) Window programs . A payment under a window program is contingent on a separation from employment. A window program is a program established by an employer in connection with an impending separation from employment to provide separation pay if the program is made available by the employer for a limited period of time (no longer than 12 months) to employees who separate from employment during that period or to employees who separate from service during that period under specified circumstances. A payment made under a window program is treated as a payment that is contingent on an employee’s separation from employment notwithstanding that the employee may not have had an involuntary separation from employment.

(6) Anti-abuse provision . Notwithstanding paragraphs (d)(1) through (5) of this section, if the facts and circumstances demonstrate that either the vesting or the payment of an amount (whether before or after an employee’s involuntary separation from employment) would not have occurred but for the involuntary nature of the separation from employment, the payment of the amount is contingent on a separation from employment. For example, an employer’s exercise of discretion to accelerate vesting of an amount shortly before an involuntary separation from employment may indicate that the acceleration of vesting was due to the involuntary nature of the separation from employment and was therefore contingent on the employee’s separation from employment. Similarly, payment of an amount in excess of an amount otherwise payable (for example, increased salary), shortly before or after an involuntary separation from employment, may indicate that the amount was paid because the separation was involuntary and was therefore contingent on the employee’s separation from employment. If an ATEO becomes a predecessor as a result of a reorganization or other transaction described in §53.4960-1(h), any payment to an employee by a successor organization that is contingent on the employee’s separation from employment with the predecessor ATEO is treated as paid by the predecessor ATEO.

(e) Involuntary separation from em- ployment —(1) In general . Involuntary separation from employment means a separation from employment due to the independent exercise of the employer’s unilateral authority to terminate the employee’s services, other than due to the employee’s implicit or explicit request, if the employee was willing and able to continue performing services as an employee. An involuntary separation from employment may include an employer’s failure to renew a contract at the time the contract expires, provided that the employee was willing and able to execute a new contract providing terms and conditions substantially similar to those in the expiring contract and to continue providing services. The determination of whether a separation from employment is involuntary is based on all the facts and circumstances.

(2) Separation from employment for good reason —(i) In general . Notwithstanding paragraph (e)(1) of this section, an employee’s voluntary separation from employment is treated as an involuntary separation from employment if the separation occurs under certain bona fide conditions (referred to herein as a separation from employment for good reason).

(ii) Material negative change required . A separation from employment for good reason is treated as an involuntary separation from employment if the relevant facts

February 16, 2021 880 Bulletin No. 2021–7

sufficient reduction in the level of services provided to the employer. For purposes of applying the rules regarding reductions in the level of services set forth in the definition of termination of employment in §1.409A-1(h)(1)(ii), the rules are modified for purposes of this paragraph such that an employer may not set the level of the anticipated reduction in future services that will give rise to a separation from employment, meaning that the default percentages set forth in §1.409A-1(h)(1)(ii) apply in all circumstances. Thus, an anticipated reduction of the level of service of less than 50 percent is not treated as a separation from employment, an anticipated reduction of more than 80 percent is treated as a separation from employment, and the treatment of an anticipated reduction between those two levels is determined based on the facts and circumstances. The measurement of the anticipated reduction of the level of service is based on the average level of service for the prior 36 months (or shorter period for an employee employed for less than 36 months). In addition, an employee’s separation from employment is determined without regard to §1.409A-1(h)(2) and (5) (application to independent contractors), since, for purposes of this section, only an employee may have a separation from employment, and a change from bona fide employee status to bona fide independent contractor status is also a separation from employment. See §53.4960-2(a)(1) regarding the treatment of an employee who also serves as a director of a corporation (or in a substantially similar position). The definition of separation from employment also incorporates the rules under §1.409A‑1(h)(1)(i) (addressing leaves of absence, including military leaves of absence), §1.409A‑1(h)(4) (addressing asset purchase transactions), and §1.409A‑1(h)(6) (addressing employees participating in collectively bargained plans covering multiple employers). The definition further incorporates the rules of §1.409A‑1(h)(3), under which an employee separates from employment only if the employee has a separation from employment with the employer and all employers that would be considered a single employer under section 414(b) and (c), except that the “at least 80 percent” rule under section 414(b) and (c) is used, rather than replacing it with “at least 50 percent.” Howev

er, for purposes of determining whether there has been a separation from employment, a purported ongoing employment relationship between a covered employee and an ATEO or a related organization is disregarded if the facts and circumstances demonstrate that the purported employment relationship is not bona fide, or the primary purpose of the establishment or continuation of the relationship is avoidance of the application of section 4960.

(f) Accelerated payment or accelerated vesting resulting from an involuntary sep- aration from employment —(1) In general . If a payment or the lapse of a substantial risk of forfeiture is accelerated as a result of an involuntary separation from employment, generally only the value due to the acceleration of payment or vesting is treated as contingent on a separation from employment, as described in paragraphs (f)(3) and (4) of this section, except as otherwise provided in this paragraph (f). For purposes of this paragraph (f), the terms vested and substantial risk of forfei- ture have the same meaning as provided in §53.4960-2(c)(2).

(2) Nonvested payments subject to a non-service vesting condition . If (without regard to a separation from employment) vesting of a payment would depend on an event other than the performance of services, such as the attainment of a performance goal, and that vesting event does not occur prior to the employee’s separation from employment and the payment vests due to the employee’s involuntary separation from employment, the full amount of the payment is treated as contingent on the separation from employment.

(3) Vested payments . If an involuntary separation from employment accelerates actual or constructive payment of an amount that previously vested without regard to the separation, the portion of the payment, if any, that is contingent on the separation from employment is the amount by which the present value of the accelerated payment exceeds the present value of the payment absent the acceleration. The payment of an amount otherwise due upon a separation from employment (whether voluntary or involuntary) is not treated as an acceleration of the payment unless the payment timing was accelerated due to the involuntary nature of the sepa

ration from employment. If the value of the payment absent the acceleration is not reasonably ascertainable, and the acceleration of the payment does not significantly increase the present value of the payment absent the acceleration, the present value of the payment absent the acceleration is the amount of the accelerated payment (so the amount contingent on the separation from employment is zero). If the present value of the payment absent the acceleration is not reasonably ascertainable but the acceleration significantly increases the present value of the payment, the future value of the payment contingent on the separation from employment is treated as equal to the amount of the accelerated payment. For purposes of this paragraph (f)(3), the acceleration of a payment by 90 days or less is not treated as significantly increasing the present value of the payment. For rules on determining present value, see paragraph (f)(6) and paragraphs (h), (i) and (j) of this section.

(4) Nonvested payments subject to a service vesting condition —(i) In general . If an involuntary separation from employment accelerates vesting of a payment, the portion of the payment that is contingent on separation from employment is the amount described in paragraph (f)(3) of this section (if any) plus the value of the lapse of the obligation to continue to perform services described in paragraph (f)(4)(ii) of this section (but the amount cannot exceed the amount of the accelerated payment, or, if the payment is not accelerated, the present value of the payment), to the extent that all of the following conditions are satisfied with respect to the payment:

(A) Vesting trigger . The payment vests as a result of an involuntary separation from employment;

(B) Vesting condition . Disregarding the involuntary separation from employment, the vesting of the payment was contingent only on the continued performance of services for the employer for a specified period of time; and

(C) Services condition . The payment is attributable, at least in part, to the performance of services before the date the payment is made or becomes certain to be made.

(ii) Value of the lapse of the obligation to continue to perform services . The value

Bulletin No. 2021–7 881 February 16, 2021

of the lapse of the obligation to continue to perform services is one percent of the amount of the accelerated payment multiplied by the number of full months between the date that the employee’s right to receive the payment is vested and the date that, absent the acceleration, the payment would have been vested. This paragraph (f)(4)(ii) applies to the accelerated vesting of a payment in the nature of compensation even if the time when the payment is made is not accelerated. In that case, the value of the lapse of the obligation to continue to perform services is one percent of the present value of the future payment multiplied by the number of full months between the date that the individual’s right to receive the payment is vested and the date that, absent the acceleration, the payment would have been vested.

(iii) Accelerated vesting of equity com- pensation . For purposes of this paragraph (f)(4), the acceleration of the vesting of a stock option or stock appreciation right (or similar arrangement) or the lapse of a restriction on restricted stock or a restricted stock unit (or a similar arrangement) is considered to significantly increase the value of the payment.

(5) Application to benefits under a non- qualified deferred compensation plan . In the case of a payment of benefits under a nonqualified deferred compensation plan, paragraph (f)(3) of this section applies to the extent benefits under the plan are vested without regard to the involuntary separation from employment, but the payment of benefits is accelerated due to the involuntary separation from employment. Paragraph (f)(4) of this section applies to the extent benefits under the plan are subject to the conditions described in paragraph (f)(4)(i) of this section. For any other payment of benefits under a nonqualified deferred compensation plan (such as a contribution made due to the employee’s involuntary separation from employment), the full amount of the payment is contingent on the employee’s separation from employment.

(6) Present value . For purposes of this paragraph (f), the present value of a payment is determined based on the payment date absent the acceleration and the date on which the accelerated payment is scheduled to be made. The amount that is treated as contingent on the separation

from employment is the amount by which the present value of the accelerated payment exceeds the present value of the payment absent the acceleration.

(7) Examples . See §1.280G Q/A–24(f) for examples that may be applied by analogy to illustrate the rules of this paragraph (f).

(g) Three-times-base-amount test for parachute payments —(1) In general . To determine whether payments in the nature of compensation made to a covered employee that are contingent on the covered employee separating from employment with the ATEO are parachute payments, the aggregate present value of the payments must be compared to the individual’s base amount. To do this, the aggregate present value of all payments in the nature of compensation that are made or to be made to (or for the benefit of) the same covered employee by an ATEO (or any predecessor of the ATEO) or related organization and that are contingent on the separation from employment must be determined. If this aggregate present value equals or exceeds the amount equal to 3-times the individual’s base amount, the payments are parachute payments. If this aggregate present value is less than the amount equal to 3-times the individual’s base amount, the payments are not parachute payments. See paragraphs (f)(6), (h), (i), and (j) of this section for rules on determining present value.

(2) Examples . The following examples illustrate the rules of this paragraph (g). For purposes of these examples, assume any entity referred to as “ATEO” is an ATEO.

(i) Example 1 (Parachute payment) —(A) Facts . Employee A is a covered employee and an HCE of ATEO 1. Employee A’s base amount is $200,000. Payments in the nature of compensation that are contingent on a separation from employment with ATEO 1 totaling $800,000 are made to Employee A on the date of Employee A’s separation from employment.

(B) Conclusion . The payments are parachute payments because they have an aggregate present value at the time of the separation from employment of $800,000, which is at least equal to 3-times Employee A’s base amount of $200,000 (3 x $200,000 = $600,000).

(ii) Example 2 (No parachute payment) —(A) Facts . Assume the same facts as in paragraph (g)(2) (i) of this section (Example 1), except that the payments contingent on Employee A’s separation from employment total $580,000.

(B) Conclusion . Because the aggregate present value of the payments ($580,000) is not at least equal

to 3-times Employee A’s base amount ($600,000), the payments are not parachute payments.

(h) Calculating present value —(1) In general . Except as otherwise provided in this paragraph (h), for purposes of determining if a payment contingent on a separation from employment exceeds 3-times the base amount, the present value of a payment is determined as of the date of the separation from employment or, if the payment is made prior to that date, the date on which the payment is made.

(2) Deferred payments . For purposes of determining whether a payment is a parachute payment, if a payment in the nature of compensation is the right to receive payments in a year (or years) subsequent to the year of the separation from employment, the value of the payment is the present value of the payment (or payments) calculated on the basis of reasonable actuarial assumptions and using the applicable discount rate for the present value calculation that is determined in accordance with paragraph (i) of this section.

(3) Health care . If the payment in the nature of compensation is an obligation to provide health care (including an obligation to purchase or provide health insurance), then, for purposes of this paragraph (h) and for applying the 3-times-baseamount test under paragraph (g) of this section, the present value of the obligation is calculated in accordance with generally accepted accounting principles. For purposes of paragraph (g) of this section and this paragraph (h), the obligation to provide health care is permitted to be measured by projecting the cost of premiums for health care insurance, even if no health care insurance is actually purchased. If the obligation to provide health care is made in coordination with a health care plan that the employer makes available to a group, then the premiums used for purposes of this paragraph (h)(3) may be the allocable portion of group premiums.

(i) Discount rate . Present value generally is determined by using a discount rate equal to 120 percent of the applicable Federal rate (determined under section 1274(d) and the regulations in part 1 under section 1274(d)), compounded semiannually. The applicable Federal rate to be used is the Federal rate that is in effect on the date as of which the present value is determined, using the period until the payment

February 16, 2021 882 Bulletin No. 2021–7

is expected to be made as the term of the debt instrument under section 1274(d). See paragraph (h) of this section for rules with respect to the date as of which the present value is determined. However, for any payment, the employer and the covered employee may elect to use the applicable Federal rate that is in effect on the date on which the parties entered into the contract that provides for the payment if that election is set forth in writing in the contract.

(j) Present value of a payment to be made in the future that is contingent on an uncertain future event or condition —(1) Treatment based on the estimated proba- bility of payment . In certain cases, it may be necessary to apply the 3-times-baseamount test to a payment that is contingent on separation from employment at a time when the aggregate present value of all the payments is uncertain because the time, amount, or right to receive one or more of the payments is also contingent on the occurrence of an uncertain future event or condition. In that case, the employer must reasonably estimate whether it will make the payment. If the employer reasonably estimates there is a 50-percent or greater probability that it will make the payment, the full amount of the payment is considered for purposes of the 3-timesbase-amount test and the allocation of the base amount. If the employer reasonably estimates there is a less than 50-percent probability that the payment will be made, the payment is not considered for either purpose.

(2) Correction of incorrect estimates . If an ATEO later determines that an estimate it made under paragraph (j)(1) of this section was incorrect, it must reapply the 3-times-base-amount test to reflect the actual time and amount of the payment. In reapplying the 3-times-base-amount test (and, if necessary, reallocating the base amount), the ATEO must determine the aggregate present value of payments paid or to be paid as of the date described in paragraph (h) of this section using the discount rate described in paragraph (i) of this section. This redetermination may affect the amount of any excess parachute payment for a prior taxable year. However, if, based on the application of the 3-times-base-amount test without regard to the payment described in this paragraph

(j), an ATEO has determined it will pay an employee an excess parachute payment or payments, then the 3-times-base-amount test does not have to be reapplied when a payment described in this paragraph (j) is made (or becomes certain to be made) if no base amount is allocated to that payment under §53.4960‑4(d)(5).

(3) Initial option value estimate . To the extent provided in published guidance of general applicability under §601.601(d) (2), an initial estimate of the value of an option subject to paragraph (c) of this section is permitted to be made, with the valuation subsequently redetermined and the 3-times-base-amount test reapplied. Until guidance is published under section 4960, published guidance of general applicability described in §601.601(d)(2) that is issued under section 280G applies by analogy.

(4) Examples . See §1.280G-1, Q/A– 33(d) for examples that may be applied by analogy to illustrate the rules of this paragraph (j).

(k) Base amount —(1) In general . A covered employee’s base amount is the average annual compensation for services performed as an employee of the ATEO (including compensation for services performed for a predecessor of the ATEO), and/or, if applicable, a related organization, with respect to which there has been a separation from employment, if the compensation was includible in the gross income of the individual for taxable years in the base period (including amounts that were excluded under section 911) or that would have been includible in the individual’s gross income if the individual had been a United States citizen or resident. See paragraph (l) of this section for the definition of base period and for examples of base amount computations.

(2) Short or incomplete taxable years . If the base period of a covered employee includes a short taxable year or less than all of a taxable year of the employee, compensation for the short or incomplete taxable year must be annualized before determining the average annual compensation for the base period. In annualizing compensation, the frequency with which payments are expected to be made over an annual period must be taken into account. Thus, any amount of compensation for a short or incomplete taxable year that rep

resents a payment that will not be made more often than once per year is not annualized.

(3) Excludable fringe benefits . Because the base amount includes only compensation that is includible in gross income, the base amount does not include certain items that may constitute parachute payments. For example, payments in the form of excludable fringe benefits or excludable health care benefits are not included in the base amount but may be treated as parachute payments.

(4) Section 83(b) income . The base amount includes the amount of compensation included in income under section 83(b) during the base period. (l) Base period —(1) In general . The base period of a covered employee is the covered employee’s 5 most-recent taxable years ending before the date on which the separation from employment occurs. However, if the covered employee was not an employee of the ATEO for this entire 5-year period, the individual’s base period is the portion of the 5-year period during which the covered employee performed services for the ATEO, a predecessor, or a related organization.

(2) Determination of base amount if employee separates from employment in the year hired . If a covered employee commences services as an employee and experiences a separation from employment in the same taxable year, the covered employee’s base amount is the annualized compensation for services performed for the ATEO (or a predecessor or related organization) that was not contingent on the separation from employment and either was includible in the employee’s gross income for that portion of the employee’s taxable year prior to the employee’s separation from employment (including amounts that were excluded under section 911) or would have been includible in the employee’s gross income if the employee had been a United States citizen or resident.

(3) Examples . The following examples illustrate the rules of paragraph (k) of this section and this paragraph (l). For purposes of these examples, assume any entity referred to as “ATEO” is an ATEO, any entity referred to as “CORP” is not an ATEO, and all employees are HCEs of their respective employers.

Bulletin No. 2021–7 883 February 16, 2021

(b) Amounts subject to tax —(1) Excess remuneration —(i) In general . Excess re- muneration means the amount of remuneration paid by an ATEO to any covered employee during an applicable year in excess of $1 million, as determined under §53.4960-2.

(ii) Exclusion for excess parachute payments . Excess remuneration does not include any amount that is an excess parachute payment as defined in paragraph (b) (2) of this section.

(2) Excess parachute payment . Excess parachute payment means an amount equal to the excess (if any) of the amount of any parachute payment paid by an ATEO, a predecessor of the ATEO, or a related organization, or on behalf of any such person, during the taxable year over the portion of the base amount allocated to such payment.

(c) Calculation of liability for tax on excess remuneration —(1) In general . For each taxable year, an employer is liable for the tax on excess remuneration paid in the applicable year ending with or within the employer’s taxable year. If, for the taxable year, remuneration paid during an applicable year by an ATEO or one or more related organizations to a covered employee is taken into account in determining the tax imposed on excess remuneration for that taxable year, then each employer is liable for the tax in an amount that bears the same ratio to the total tax determined under section 4960(a) as the amount of remuneration paid by the employer to the covered employee (including remuneration paid by the employer as described in §53.4960‑2(b)(1), but disregarding remuneration treated as paid by the employer under §53.4960-2(b)(2)), bears to the total amount of remuneration paid by the ATEO under §53.4960‑2 (including remuneration treated as paid by the ATEO under §53.4960-2(b)(2)).

(2) Calculation if liability is allocated from more than one ATEO with regard to an individual . If liability for the tax on excess remuneration is allocated to an employer from more than one ATEO in a taxable year with regard to an individual that is a covered employee of each ATEO, then the employer is liable for the tax only in the capacity in which it is liable for the greatest amount of the tax with respect to that individual for the taxable year. For

(i) Example 1 (Calculation with salary defer- rals) —(A) Facts . Employee A, a covered employee of ATEO 1, receives an annual salary of $500,000 per year during the 5-year base period. Employee A defers $100,000 of salary each year under a nonqualified deferred compensation plan (none of which is includible in Employee A’s income until paid in cash to Employee A).

(B) Conclusion . Employee A’s base amount is $400,000 (($400,000 x 5) / 5).

(ii) Example 2 (Calculation for less-than-5-year base period) —(A) Facts . Employee B, a covered employee of ATEO 1, was employed by ATEO 1 for 2 years and 4 months preceding the year in which Employee B separates from employment. Employee B’s compensation includible in gross income was $100,000 for the 4-month period, $420,000 for the first full year, and $450,000 for the second full year.

(B) Conclusion . Employee B’s base amount is $390,000 (((3 x $100,000) + $420,000 + $450,000) / 3). Any compensation Employee B receives in the year of separation from employment is not included in the base amount calculation.

(iii) Example 3 (Calculation for less-than-5- year base period with signing bonus) —(A) Facts . Assume the same facts as in paragraph (l)(3)(ii)(A) of this section (Example 2), except that Employee B also received a $60,000 signing bonus when Employee B’s employment with ATEO 1 commenced at the beginning of the 4-month period.

(B) Conclusion . Employee B’s base amount is $410,000 ((($60,000 + (3 x $100,000)) + $420,000

$450,000) / 3). Pursuant to paragraph (k)(2) of this section, because the bonus is a payment that will not be paid more often than once per year, the bonus is not taken into account in annualizing Employee B’s compensation for the 4-month period.

(iv) Example 4 (Effect of non-employee com- pensation) —(A) Facts . Employee C, a covered employee of ATEO 1, was not an employee of ATEO 1 for the full 5-year base period. In 2024 and 2025, Employee C is only a director of ATEO 1 and receives $30,000 per year for services as a director. On January 1, 2026, Employee C becomes an officer and covered employee of ATEO 1. Employee C’s includible compensation for services as an officer of ATEO 1 is $250,000 for each of 2026 and 2027, and $300,000 for 2028. In 2028, Employee C separates from employment with ATEO 1.

(B) Conclusion . Employee C’s base amount is $250,000 ((2 x $250,000) / 2). The $30,000 of director’s fees paid to Employee C in each of 2024 and 2025 is not included in Employee C’s base amount calculation because it was not for services performed as an employee of ATEO 1.

§53.4960-4 Liability for tax on excess remuneration and excess parachute payments.

(a) Liability, reporting, and payment of excise taxes— (1) Liability. For each taxable year, with respect to each covered employee, the taxpayer is liable for tax at the rate imposed under section 11 on the sum of the excess remuneration allocated

to the taxpayer under paragraph (c) of this section and, if the taxpayer is an ATEO, any excess parachute payment paid by the taxpayer or a predecessor during the taxable year.

(2) Reporting and payment . The excise tax imposed by section 4960 is reported as provided in §§53.6011-1(b) and 53.6071‑1(i) and paid in the form and manner prescribed by the Commissioner.

(3) Arrangements between an ATEO and a related organization . Calculation of, and liability for, the excise tax imposed by section 4960 is separate from, and unaffected by, any arrangement that an ATEO and any related organization may have for bearing the cost of any liability for the excise tax imposed by section 4960.

(4) Certain foreign related organi- zations . A related organization that is a foreign organization described in section 4948(b) that either is exempt from tax under section 501(a) or is a taxable private foundation (section 4948(b) related organization) is not liable for the excise tax imposed by section 4960. A foreign organization is an organization not created or organized in the United States or in any possession thereof, or under the law of the United States, any State, the District of Columbia, or any possession of the United States. See section 4948(b) and §53.49481. For purposes of this paragraph (a)(4) and the application of section 4960 to a taxable year, an organization’s status as a section 4948(b) related organization is determined at the end of its taxable year. However, remuneration that the section 4948(b) related organization pays to a covered employee of an ATEO must be taken into account by the ATEO and other related organizations for purposes of section 4960 generally, including for purposes of determining the five highest-compensated employees and the total remuneration paid to a covered employee. For example, if an ATEO and its related organization that is a section 4948(b) related organization each paid $600,000 remuneration to a covered employee during the applicable year, then the related organization would not be liable for the tax that would otherwise be allocable to it, and the ATEO would be liable for tax on $100,000 (50 percent of the $200,000 excess remuneration paid to the employee).

(5) [Reserved].

February 16, 2021 884 Bulletin No. 2021–7

example, assume ATEO 1 is a related organization to both ATEO 2 and ATEO 3 and pays excess remuneration to Employee D, and Employee D is a covered employee of ATEO 1, ATEO 2, and ATEO 3. In this case, ATEO 1’s liability for the tax on excess remuneration to Employee D is the highest of its liability as an ATEO, as a related organization to ATEO 2, or as a related organization to ATEO 3.

(3) Calculation if liability is allocat- ed from an ATEO with a short applicable year . If liability for the tax on excess remuneration paid to an individual is allocated to an employer from an ATEO with a short applicable year under §53.49601(c)(3), then the liability with respect to the excess remuneration paid to that individual is allocated in accordance with the principles of this paragraph (c) adjusted as necessary to avoid, to the extent possible, duplication of application of the excise tax. The Commissioner may provide additional guidance of general applicability, published in the Internal Revenue Bulletin (see §601.601(d)(2) of this chapter), on the application of this paragraph (c) (3) to particular circumstances, including circumstances involving an ATEO with a short applicable year that has one or more related organizations and the ATEO’s short applicable year and the preceding applicable year both end with or within the related organization’s taxable year, such that the ATEO and related organizations are liable for the tax for multiple applicable years ending with or within the employer’s taxable year.

(4) Examples. The following examples illustrate the rules of this paragraph (c). For purposes of these examples, assume that the rate of excise tax under section 4960 is 21 percent, that any entity that is referred to as “ATEO” is an ATEO, that any entity referred to as “CORP” is not an ATEO and is not a publicly held corporation within the meaning of section 162(m) (2) or a covered health insurance provider within the meaning of section 162(m)(6) (C), that no related organization is a section 4948(b) related organization, all taxpayers use the calendar year as their taxable year unless otherwise stated, and that no parachute payments are made in any of the years at issue.

(i) Example 1 (Remuneration from multiple em- ployers) —(A) Facts . ATEO 1 and CORP 1 are related organizations. Employee A is a covered employee

of ATEO 1 and an employee of CORP 1. In the 2022 applicable year, ATEO 1 pays Employee A $1.2 million of remuneration, and CORP 1 pays A $800,000 of remuneration. Remuneration paid by each employer is for services performed by Employee A solely as an employee of that employer.

(B) Conclusion . For the 2022 taxable year, ATEO 1 is treated as paying Employee A $2 million of remuneration, $1 million of which is excess remuneration. The total excise tax is $210,000 (21 percent x $1 million). ATEO 1 paid 3/5 of Employee A’s total remuneration ($1.2 million / $2 million); thus, ATEO 1 is liable for 3/5 of the excise tax, which is $126,000. CORP 1 paid 2/5 of Employee A’s total remuneration ($800,000 / $2 million); thus, CORP 1 is liable for 2/5 of the excise tax, which is $84,000.

(ii) Example 2 (Application when taxpayers have different taxable years) —(A) Facts . Assume the same facts as in paragraph (c)(4)(i) of this section ( Example 1 ), except that CORP 2 uses a taxable year beginning July 1 and ending June 30.

(B) Conclusion . The conclusion is the same as the conclusion in paragraph (c)(4)(i) of this section ( Example 1 ), except that ATEO 1 is liable for the tax for its taxable year starting January 1, 2022, and ending December 31, 2022, and CORP 1 is liable for the tax for its taxable year beginning July 1, 2022, and ending June 30, 2023 (the taxable year with or within which ATEO 1’s 2022 applicable year ends).

(iii) Example 3 (Multiple liabilities for same ap- plicable year due to multiple ATEOs) —(A) Facts . The following facts are all with respect to the 2023 applicable year: ATEO 5 owns 60 percent of the stock of CORP 2. Sixty percent of ATEO 4’s directors are representatives of ATEO 3. In addition, 60 percent of ATEO 5’s directors are representatives of ATEO 4, but none are representatives of ATEO 3. Employee B is a covered employee of ATEO 3, ATEO 4, and ATEO 5 and is an employee of CORP 2. ATEO 3, ATEO 4, ATEO 5, and CORP 2 each pay Employee B $1.2 million of remuneration in the applicable year. ATEO 4’s related organizations are ATEO 3 and ATEO 5. ATEO 3’s only related organization is ATEO 4. ATEO 5’s related organizations are ATEO 4 and CORP 2.

(B) Calculation (ATEO 3) . Under ATEO 3’s calculation as an ATEO for the 2023 applicable year, ATEO 3 is treated as paying Employee B a total of $2.4 million in remuneration ($1.2 million from ATEO 3 + $1.2 million from ATEO 4). The total excise tax is $294,000 (21 percent X $1.4 million). ATEO 3 and ATEO 4 each paid 1/2 of Employee B’s total remuneration ($1.2 million / $2.4 million); thus, under ATEO 3’s calculation, ATEO 3 and ATEO 4 each would be liable for 1/2 of the excise tax, which is $147,000.

(C) Calculation (ATEO 4) . Under ATEO 4’s calculation as an ATEO for the 2023 applicable year, ATEO 4 is treated as paying Employee B a total of $3.6 million in remuneration for the 2022 applicable year ($1.2 million from ATEO 3 + $1.2 million from ATEO 4 + $1.2 million from ATEO 5). The total excise tax is $546,000 (21 percent X $2.6 million). ATEO 3, ATEO 4, and ATEO 5 each paid 1/3 of the total remuneration to Employee B ($1.2 million / $3.6 million); thus, under ATEO 4’s calculation, ATEO 3, ATEO 4, and ATEO 5 each would be liable for 1/3 of the excise tax, which is $182,000.

(D) Calculation (ATEO 5) . Under ATEO 5’s calculation as an ATEO for the 2023 applicable year, ATEO 5 is treated as paying Employee B a total of $3.6 million in remuneration ($1.2 million from ATEO 4 + $1.2 million from ATEO 5 + $1.2 million from CORP 2). The total excise tax is $546,000 (21 percent X $2.6 million). ATEO 4, ATEO 5, and CORP 2 each paid 1/3 of the total remuneration to Employee B ($1.2 million / $3.6 million); thus, under ATEO 5’s calculation, ATEO 4, ATEO 5, and CORP 2 each would be liable for 1/3 of the excise tax, which is $182,000.

(E) Conclusion (Liability of ATEO 3) . For the 2023 applicable year, ATEO 3 is liable for $182,000 of excise tax as a related organization under ATEO 4’s calculation, which is greater than the $147,000 of excise tax under ATEO 3’s own calculation. Thus, ATEO 3’s excise tax liability with respect to Employee B is $182,000 for its 2023 taxable year.

(F) Conclusion (Liability of ATEO 4) . For the 2023 applicable year, ATEO 4 is liable as a related organization for $147,000 of excise tax according to ATEO 3’s calculation, for $182,000 according to ATEO 4’s own calculation, and for $182,000 according to ATEO 5’s calculation. Thus, ATEO 4’s excise tax liability with respect to Employee B is $182,000 for its 2023 taxable year.

(G) Conclusion (Liability of ATEO 5) . For the 2023 applicable year, ATEO 5 is liable as a related organization for $182,000 of excise tax under ATEO 4’s calculation, and is liable for $182,000 of excise tax under ATEO 5’s own calculation. Thus, ATEO 5’s excise tax liability with respect to Employee B is $182,000 for its 2023 taxable year.

(H) Conclusion (Liability of CORP 2) . For the 2023 applicable year, CORP 2 is liable as a related organization for $182,000 of excise tax according to ATEO 5’s calculation only. Thus, CORP 2’s excise tax liability with respect to Employee B is $182,000 for its 2023 taxable year.

(d) Calculation of liability for excess parachute payments —(1) In general . Except as provided in paragraph (d)(3) of this section, only excess parachute payments made by or on behalf of an ATEO are subject to tax under this section. However, parachute payments made by related organizations that are not made by or on behalf of an ATEO are taken into account for purposes of determining the total amount of excess parachute payments.

(2) Computation of excess parachute payments —(i) Calculation . The amount of an excess parachute payment is the excess of the amount of any parachute payment made by an ATEO, a predecessor of the ATEO, or a related organization, or on behalf of any such person, over the portion of the covered employee’s base amount that is allocated to the payment. The portion of the base amount allocated to any parachute payment is the amount that bears the same ratio to the base amount as the present value of the parachute pay

Bulletin No. 2021–7 885 February 16, 2021

ment bears to the aggregate present value of all parachute payments made or to be made to (or for the benefit of) the same covered employee. Thus, the portion of the base amount allocated to any parachute payment is determined by multiplying the base amount by a fraction, the numerator of which is the present value of the parachute payment and the denominator of which is the aggregate present value of all parachute payments.

(ii) Examples . The following examples illustrate the rules of this paragraph (d) (2). For purposes of these examples, assume any entity referred to as “ATEO” is an ATEO and all employees are HCEs of their respective employers.

(A) Example 1 (Compensation from related or- ganizations) —( 1 ) Facts . ATEO 1 and ATEO 2 are related organizations. Employee A is a covered employee of ATEO 1 and an employee of ATEO 2 who has an involuntary separation from employment with ATEO 1 and ATEO 2. Employee A’s base amount is $200,000 with respect to ATEO 1 and $400,000 with respect to ATEO 2. A receives $1 million from ATEO 1 contingent upon Employee A’s involuntary separation from employment from ATEO 1 and $1 million from ATEO 2 contingent upon Employee A’s involuntary separation from employment from ATEO 2.

( 2 ) Conclusion . Employee A has a base amount of $600,000 ($200,000 + $400,000). The two $1 million payments are parachute payments because their aggregate present value is at least 3-times Employee A’s base amount (3 x $600,000 = $1.8 million). The portion of the base amount allocated to each parachute payment is $300,000 (($1 million / $2 million) x $600,000). Thus, the amount of each excess parachute payment is $700,000 ($1 million – $300,000).

(B) Example 2 (Multiple parachute payments) ( 1 ) Facts . Employee B is a covered employee of ATEO 3 with a base amount of $200,000 who is entitled to receive two parachute payments: one of $200,000 and the other of $900,000. The $200,000 payment is made upon separation from employment, and the $900,000 payment is to be made on a date in a future taxable year. The present value of the $900,000 payment is $800,000 as of the date of the separation from employment.

( 2 ) Conclusion . The portion of the base amount allocated to the first payment is $40,000 (($200,000 present value of the parachute payment / $1 million present value of all parachute payments) x $200,000 total base amount) and the portion of the base amount allocated to the second payment is $160,000 (($800,000 present value of the parachute payment / $1 million present value of all parachute payments) x $200,000 total base amount). Thus, the amount of the first excess parachute payment is $160,000 ($200,000 − $40,000) and that the amount of the second excess parachute payment is $740,000 ($900,000 − $160,000).

(3) Reallocation when the payment is disproportionate to base amount . In accordance with section 4960(d), the Com

missioner may treat a parachute payment as paid by an ATEO if the facts and circumstances indicate that the ATEO and other payors of parachute payments structured the payments in a manner primarily to avoid liability under section 4960. For example, if an ATEO would otherwise be treated as paying a portion of an excess parachute payment in an amount that is materially lower in proportion to the total excess parachute payment than the proportion that the amount of average annual compensation paid by the ATEO (or any predecessor) during the base period bears to the total average annual compensation paid by the ATEO (or any predecessor) and any related organization (or organizations), and the lower amount is offset by payments from a non-ATEO or an unrelated ATEO, this may indicate that that the parachute payments were structured in a manner primarily to avoid liability under section 4960.

(4) Election to prepay tax. An ATEO may prepay the excise tax under paragraph (a)(1) of this section on any excess parachute payment for the taxable year of the separation from employment or any later taxable year before the taxable year in which the parachute payment is actually or constructively paid. However, an employer may not prepay the excise tax on a payment to be made in cash if the present value of the payment is not reasonably ascertainable under §31.3121(v) (2)‑1(e)(4) or on a payment related to health coverage. Any prepayment must be based on the present value of the excise tax that would be due for the taxable year in which the employer will pay the excess parachute payment, and be calculated using the discount rate equal to 120 percent of the applicable Federal rate (determined under section 1274(d) and the regulations in part 1 under section 1274) and the tax rate in effect under section 11 for the year in which the excise tax is paid. For purposes of projecting the future value of a payment that provides for interest to be credited at a variable interest rate, the employer may make a reasonable assumption regarding the variable rate. An employer is not required to adjust the excise tax paid merely because the actual future interest rates are not the same as the rate used for purposes of projecting the future value of the payment.

(5) Liability after a redetermination of total parachute payments . If an ATEO determines that an estimate made under §53.4960-3(j)(1) was incorrect, it must reapply the 3-times-base-amount test to reflect the actual time and amount of the payment. In reapplying the 3-times-baseamount test (and, if necessary, reallocating the base amount), the ATEO must determine the correct base amount allocable to any parachute payment paid in the taxable year. See §1.280G-1, Q/A–33(d) for examples that may be applied by analogy to illustrate the rules of this paragraph (d) (5).

(6) Examples. The following examples illustrate the rules of this paragraph (d). For purposes of these examples, assume any entity referred to as “ATEO” is an ATEO, any entity referred to as “CORP” is not an ATEO, and all employees are HCEs of their respective employers.

(i) Example 1 (Excess parachute payment paid by a non-ATEO) —(A) Facts . ATEO 1 and CORP 1 are related organizations that are treated as the same employer for purposes of §53.4960-3(e)(3) (defining separation from employment) and are both calendar year taxpayers. For 2022 through 2026, ATEO 1 and CORP 1 each pay Employee A $250,000 of compensation per year for services performed as an employee of each organization ($500,000 total per year). In 2027, ATEO 1 and CORP 1 each pay Employee A $1 million payment ($2 million total) that is contingent on Employee A’s separation from employment with both ATEO 1 and CORP 1, all of which is remuneration, and no other compensation. Employee A is a covered employee of ATEO 1 in 2027.

(B) Conclusion . Employee A’s base amount in 2027 is $500,000 (Employee A’s average annual compensation from both ATEO 1 and CORP 1 for the previous 5 years). ATEO 1 makes a parachute payment of $2 million in 2027, the amount paid by both ATEO 1 and CORP 1 that is contingent on Employee A’s separation from employment with ATEO 1 and all organizations that are treated as the same employer under §53.4960-3(e)(3). Employee A’s $2 million payment exceeds 3-times the base amount ($1.5 million). ATEO 1 makes a $1.5 million excess parachute payment (the amount by which $2 million exceeds the $500,000 base amount). However, ATEO 1 is liable for tax only on the excess parachute payment paid by ATEO 1 ($1 million parachute payment – $250,000 base amount = $750,000) that is subject to tax under §53.4960-4(a). CORP 1 is not liable for tax under §53.4960-4(a) in 2027.

(ii) Example 2 (Election to prepay tax on excess parachute payments and effect on excess remunera- tion) —(A) Facts . Employee B is a covered employee of ATEO 2 with a base amount of $200,000 who is entitled to receive two parachute payments from ATEO 2, one of $200,000 and the other of $900,000. The $200,000 payment is made upon separation from employment, and the $900,000 payment is to be made on a date in a future taxable year. The pres

February 16, 2021 886 Bulletin No. 2021–7

ent value of the $900,000 payment is $800,000 as of the date of the separation from employment. ATEO 2 elects to prepay the excise tax on the $900,000 future parachute payment (of which $740,000 is an excess parachute payment). The tax rate under section 11 is 21 percent for the taxable year the excise tax is paid and, using a discount rate determined under §53.4960-3(i), the present value of the $155,400 ($740,000 x 21 percent) excise tax on the $740,000 future excess parachute payment is $140,000.

(B) Conclusion . The excess parachute payment is thus $800,000 ($200,000 plus $800,000 present value of the $900,000 future payment, less $200,000 base amount), with $40,000 of the base amount allocable to the $200,000 payment and $160,000 of the base amount allocable to the $900,000 payment. To prepay the excise tax on the $740,000 future excess parachute payment, the employer must satisfy its $140,000 obligation under section 4960 with respect to the future payment, in addition to the $33,600 excise tax ($160,000 x 21 percent) on the $160,000 excess parachute payment made upon separation

from employment. For purposes of determining the amount of excess remuneration (if any) under section 4960(a)(1), the amount of remuneration paid by the employer to the covered employee for the taxable year of the separation from employment is reduced by the $900,000 of total excess parachute payments ($160,000 + $740,000).

§53.4960-5 [ Reserved].

§53.4960-6 Applicability date .

(a) General applicability date . Sections 53.4960-0 through 53.4960-4 apply to taxable years beginning after December 31, 2021. Taxpayers may choose to apply §§53.4960-0 through 53.4960-4 to taxable years beginning after December 31, 2017, and on or before December 31, 2021, pro

vided the taxpayer applies §§53.4960-0 through 53.4960-4 in their entirety and in a consistent manner.

(b) [Reserved].

Sunita Lough, Deputy Commissioner for Services

and Enforcement.

Approved: January 9, 2021.

David J. Kautter, Assistant Secretary of the Treasury

(Tax Policy).

(Filed by the Office of the Federal Register on January 15, 2021; 4:15pm and published in the issue of the Federal Register for January 19, 2021 86 F.R. 6196)

Bulletin No. 2021–7 887 February 16, 2021