The Good, the Bad, and the Tax-Exempt Organization: The New Tax Bill’s Effect on Benefits and Compensation Offered by Institutions of Higher Education
January 23, 2018
Authored by: Meredith Jacobowitz and Brian Berglund
On December 22, President Trump signed “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” (“Bill”) into law. The Bill was previously named the much-shorter “Tax Cuts and Jobs Act,” but was changed after a senator pointed out that the name violated an obscure Senate rule.
The new employee benefit and executive compensation provisions in the Bill affect both individuals and employers. The good news for colleges and universities is that the harshest employee benefit provisions directed at colleges and universities were not included in the final Bill. The bad news is that the executive compensation and fringe benefit changes directed at tax-exempt organizations are unfavorable to institutions of higher education.
THE GOOD: CHANGES EXCLUDED FROM THE FINAL BILL
The House passed a version of the Bill that would have repealed the exclusion from income for qualified tuition reductions provided by educational institutions to (i) employees and their spouses or dependents and (ii) graduate teaching assistants. The House’s version of the Bill also eliminated the exclusion for education assistance (up to $5,250 per year per employee) that was available to all employers.
Fortunately, both of these changes were eliminated in the final Bill.
THE BAD: EXCISE TAX ON EXCESS COMPENSATION PAID TO COVERED EMPLOYEES
The Bill places a 21% excise tax on the amount of annual compensation in excess of $1,000,000 paid to covered employees of most tax-exempt organizations, including tax-exempt institutions of higher education.