On-Demand: Section 4960 Excise Tax on Excess Compensation
October 28, 2020
Our speakers will provide an overview of IRC Section 4960, as well as related proposed regulations and how the new law will impact tax-exempt employers, including entities with common control.
Marie Arrigo:The IRS invited the general public to provide written comments on the proposed regulations. These written comments were due August 10th 2020. We expect the IRS to issue final regulations any day now. The final regulations will apply to taxable years beginning on or after the date they are published in the federal register. The regulations provide guidelines on a myriad of topics, how the excise tax is likely to be applied to companies and related foundations, determining a not-for-profits covered employees. What is counted in compensation subject to the excise tax? What is a related entity? And how to allocate the tax liability among related organizations. We will take a deeper dive on these subjects a little later on in the webcast.
But first, let's spend a little time discussing the background on the proposed regulations and how do these rules apply to non-for-profits and related for-profits. As mentioned earlier, internal revenue code section 4960 was enacted as part of the TCJA. Before TCJA, compensation paid by taxes and to organizations was subject to an excise tax on section 4950. Although this 4950, which was an excise tax to penalize excess benefits transactions in which an organization provides benefits to a disqualified person and that exceeds the reasonable fair market value of the services received. The disqualified person would be an insider, a founder, a board director, a substantial contributor, for example. For private foundations, so sub-dealing rules also come into play similarly to prevent an excess benefit from transmitting to the individual. And the overarching principle in the tax law is that compensation is supposed to be reasonable in nature.
Well, section 4960 imposes an excise tax equal to the highest corporate income tax rate on remuneration in excess of $1 million paid by a tax exempt organization to any one of its five highest compensated employees. And this rate is currently at 21%. Remuneration is defined as wages for federal income tax purposes and excludes ROTH contributions and certain retirement benefits, and generally includes amounts as they vest. If an employee has a grant of a legally binding right to vest remuneration, it will be considered to be remuneration paid. This tax is also imposed on excess parachute payments paid with respect to a covered employee of a taxing center organization.
And we're going to discuss excess parachute payments a little later on in the presentation. A covered employee is an individual who is one of the five highest compensated employees, including former employees of the applicable tax exempt organization, which by the way, that's called an ATEL for a taxable year or any individual who was a covered employee in any proceeding taxable year beginning after December 31 2016. Once an employee is considered a covered employee, she or he will always be a covered employee. And the applicable year means that it's a calendar year with or within the ATEO's taxable year.
Now, the definition of an employee is actually an interesting concept. And it includes under sections 3401 common law employees, offices or elected approved officials of government agencies and certain offices of cooperations. So a member of a board of directors is not an employee of the cooperation as long as that person is acting in his or her capacity as the director. If the organization is structured as a trust, and you do have the trust structure as an alternative structure for not-for-profits, you see a lot of that perhaps in the private foundation realm. Trustees who act in their capacity, in their fiduciary capacity would not be considered employees. But would an officer who is employed or works at a trust, a private foundation that's set up as a trust structure be considered an employee? I'm thinking probably yes. David and I have been talking about that, if he has any considerations on that.
But in any case, an ATEO is any organization which is exempt from taxation described in section 501(a), which includes 501(c) organizations, income excluded under section 115 for state and local governments or a political organization described under section 527. By the way, a foreign organization that receives substantially all of its support, and I'm not talking about gross investment income, but other support from its data creation outside of the US is not considered an ATEO.
The tax is imposed on employers and not on the covered employees. And section 4960 applies not only to compensation paid by an ATEO directly, but also to compensation paid by a related organization of that not-for-profit entity. A related authorization can be another ATEO or it could be a for-profit entity. And common control between organizations create related entities. Control means control by the organization or by one or more persons who control the organization. It can also be a supported or supporting organization. Control is a more than 50% test. So for non-stock cooperations, which are what most non-profits are, it would be more than 50% of the directors or trustees at the entity. For stock corporations, it is more than 50% of the stock of the cooperation by the ownership by vote or value. For a partnership, it's ownership of more than 50% of the profits interest or capital interest of the partnership.
And for a trust with a beneficial interest, it's more than 50% of that beneficial interest. Constructive ownership is certainly considered, and attribution rules would apply. There has been concern that the tax could be applied beyond what was intended by Congress, such as where a for-profit corporation's executive devotes work hours as a volunteer. So let me elaborate a little further on this. The proposed regulations follow notice 2019-09, which was issued on December 31 2018 and provided initial guidance on the application of section 4960. It define what is considered an ATEO, which is included in remuneration and who has considered covered employees as of an ATEO. It also focused on the allocation of liability for the excise tax among related organizations. Notice 2019-09 provided that the taxpayer may base their position on a reasonable good faith interpretation of the statute until further guidance is issued.
And the proposed regulations are generally consistent with the guidance provided on the notice, but include changes in part to address comments that were received. One major concern when the notice was issued was regarding employees of for-profit entities that provide services to ATEOs. The notice provided that the liability for the tax on excess remuneration would have to be allocated among all related entities. This raised many questions and concerns. Will the for-profit entities be subject to the excise tax space because of their relationship with a tax exempt organization? Will the closely held business of the founder of a private foundation be subject to the tax because of the relationship? This really was a big issue. If you think about it, you have a successful business person who owns a company and say they're paid $11 million of compensation. And they run, they control the company, they're owners of the company.
And they're also the founder of the private foundation that they established to take some of that wealth and do good with it. And so you have all of the person may be the president and CEO of his foundation. So there's a control relationship. Originally what was intimated with the notice is that you would have to combine all of that, the compensation of both entities. And since it's over $1 million, you would have a tax on the $10 million, and it would be the employer who would have to pay it. So this isn't a category of no good deed goes unpunished. And so there was a lot of concern about that. Now, these issues are addressed by the proposed regulations, which provide exceptions for certain employees of for-profit entities and who will not be treated as covered employees of the ATEO. And until the final regulations are issued, we can rely on this notice and/or good faith interpretation of the statute. So at this point, we're going to turn the program over to David. Now I'm turning the program over to David.
David Samuels:Thanks, Marie. I want to thank Marie and her colleagues at EisnerAmper for setting up this program and inviting me to participate. I've enjoyed a long relationship with this outstanding firm and their excellent non-profit group. We have a number of clients in common. And in recent years through a different group in the firm, the firm became the auditors for my law firm. And thanks to all of you, including but not limited to a few of my friends out there who I know have joined for attending here. Just a little bit about my background. I head up the exempt organizations group at my firm. I was at one point the deputy chief of the New York Attorney General's Charities Bureau, so I have a regulatory background. I have focused on non-profit law since that time and since joining a private practice in 1995. I'm the former chair and an active participant within New York City nonprofit organizations committee.
I'm an adjunct professor at New York Law School where I teach the course on charitable organizations. And frequently involved in programs to attorneys, accountants, other professionals on issues of interest in the nonprofit area. And again, I'm delighted to be here today. And if you have some questions, please put them in and we'll try to deal with them as we go. Now, as Marie has mentioned, I'm going to give a little background from my perspective on this, from the legal perspective before getting into the fixes that Marie was alluding to. This is hastily enacted federal legislation that we're dealing with regulations for. The legislation, including what we're focusing on an excise tax exempt organization compensation, which Marie has given an overview on. And this legislation had unintended consequences, I think it's fair to say causing great and understandable concern throughout the nonprofit sector, including for lawyers, accountants, professionals, executives, et cetera.
Now, I'm not trying to be political here, I emphasize when I say the following. This was legislation that was enacted without any congressional hearings of any kind to my knowledge. There was therefore limited ability of the nonprofit sector or anyone else to weigh in on issues of concern about the impact of the legislation or any potential drafting problems before the legislation was passed a few years ago. And there has been no cleanup legislation. So the only way to deal with this has been not by changes from an act of Congress, but from the proposed regulations, which as Marie said will soon be finalized. That's the only way it can be dealt with.
So since it falls on the IRS to address the legitimate concerns, which we're discussing, the IRS is limited in what it can do. Why? Because unlike Congress, the IRS cannot alter legislation. It can interpret it, it can give guidance on how it's going to be enforcing it. And that's basically what these regulations are. But it must take the original legislative intent into account by law, so there's only so much for better or worse that it can do. I also want to acknowledge before proceeding that on my preparation here, I reviewed excellent publicly available commentary on the proposed regs, which are really confusing, I must say.
So I've looked at commentary from the following very fine law firms, [Grun 00:19:18] Law Firm, Moon Law Group, Morgan Lewis, Patterson Belknap, Sherman & Sterling and Venable. This is my presentation, but I wanted to check what I am presenting against these excellent commentaries and be sure to give credit to those law firms. You certainly can find any of those online to amplify what we're talking about today. So first, I'm going to focus on one of the key concerns to which Marie already alluded. Section 4960 applies not only the compensation paid by a nonprofit organization directly, but also to compensation paid by a related organization of section nonprofit.
Therefore, this excise tax could conceivably be applicable in circumstances where a company executive, executive or employee, I'll use the term somewhat interchangeably. These are often executives, but not always. So it could apply where a company employee of a for-profit devotes a meaningful amount of time during work hours to the for-profit's affiliated non-profit even if the nonprofit pays little or nothing for those services. The executive of the for-profit is nevertheless receiving sufficient income from the for-profit to trigger the excise tax. And the for-profit is deemed a related organization of the nonprofit. There could be a large excise tax under the way the law is written where the nonprofit is actually paying little or nothing of the for-profit's executive compensation. If you can frame that concern, you can understand why there is concern. The for-profit's person is doing a lot of work for the nonprofit perhaps, being paid little or nothing by the nonprofit, and yet could trigger a very large excise tax payable, we're going to explain the allocations, but it could be payable even though the nonprofit is not paying much or anything.
So again, the excise tax could theoretically apply if the non-profit plays a small part or none of the compensation. So the IRS has proposed regulations as I'm going to explain, provide valuable and meaningful exceptions to avoid what would seem to be an unfortunate and unintended consequences of the federal legislation. And in so doing and addressing situations where the nonprofit, nonprofit means the ATEO, which is the technical term, I'll use those interchangeably. The regulations are destined situations where the for-profit related to the nonprofit was simply trying to support philanthropy through the nonprofit to which it is related. The regulations are avoiding or minimizing the situations where as Marie aptly pointed out, no good deed goes unpunished.
Marie and I have also discussed the unfortunate fact that despite these attempted fixes, some for-profits may decide or may have already decided to avoid any problems and risks and stop operating and supporting the nonprofits to which they were related. I certainly hope that's not happening, but it couldn't be, just don't know. So the basic situation here from the IRS, and focusing on the slide before you where an employee did not receive any compensation from the nonprofit and spent no more than a certain percentage of time working for the nonprofit. Little or no compensation depending, some relief is provided. So we've got two general exceptions both listed on this slide, which I'm going to talk about first. The limited hours exception. Generally, an employee is not considered a covered employee if his or her total hours of service for the applicable tax exempt organization or ATEO constitute less than 10% of the total work hours and not more than 100 hours annual.
So the idea here is to avoid the employee being deemed a covered employee so that an excise tax would have to be paid to the IRS based on the person's total compensation even if the compensation is paid primarily by the for-profit employer. Under this exception, again, where the employee is spending less than 10% of her total work hours working for the nonprofit, the ATEO. The employee is not a covered employee under the statute, which would make the excise tax applicable. In calculating whether an individual meets the 10% test, an ATEO may use a percentage of total days worked by the employee instead of tracking specific hours provided that the ATEO counts any day that the employee worked for at least one hour for the ATEO toward that percentage. From my perspective, that means it might be best as a practical matter that the employee limits the total number of days in which services are provided to the ATEO and therefore attempts a bunch of hours and fewer days. That's not required, but it might make it easier on the record keeping.
And under the safe harbor to which I've alluded, if she performs less than 100 hours of service for the nonprofit in addition to less than 10% of the total work hours, the acception should apply. So it is obviously important that the organizations, the for-profit and the ATEO and the employee keep careful track of total work hours, days, hours under the rags and hours worked for the non-profit and days to be sure that this is documented if the nonprofit and the potential covered employee are audited by the IRS on this. And this also relates to the allocation of the tax, that there's an allocation which we will explain in a little bit.
Now, to put this in further context, and as I will address a little later, the excise tax is only potentially applicable if the individual is considered one of the ATEO's five highest paid employees for a taxable year. And Marie already discussed the issue of the five highest paid employees. So the nature of this limited hours exception just to be clear is that if satisfied, the individual is not considered one of the ATEO's five highest paid employees and therefore the excise tax could not and would not be applicable. That's the limited hours exception. Now, the non-exempt funds exception, the other exception under these regulations is similar to the limited hours exception. Here the hours that can be devoted are a little bit more, rather than under 10%. Generally an employee who spends more than 10% but less than 50% of their time providing services to an ATEO is not a covered employee if she receives no compensation from the ATEO.
Again, this is similar to the limited funds exception. But note that under this exception as the same from the limited hours exception, there cannot be any compensation paid to the employee from the ATEO. And it should not be paid in my view directly or indirectly, and more on that in the moment. Now, the bar on any compensation from the nonprofit or ATEO can be accounted for by the fact that the employee is being permitted to devote here more time to the ATEO than under the limited funds exception. The trade-off is that all compensation must be paid by the for-profit employer and nothing by the ATEO. So you can do a bit more for the nonprofit, but nothing can be paid by the nonprofit. Now, this also means, and this is really important that there cannot be any sort of management services or other services agreement whereby the ATEO is paying the nonprofit for the services provided by the employee to the ATEO.
It has become increasingly common in my experience and with other practitioners for such service agreements to be used or services are being performed for nonprofits by an employee of a for-profit or another nonprofit organization, but such an approach cannot be used here. Therefore, the ATEO has some sort of services agreement or resources sharing agreement such as for back office, legal, or IT service things like that. The use of such an agreement could make an employee covered by the agreement ineligible for this non-exempt funds exception because they're getting paid albeit indirectly. As with the limited funds exception, it is obviously important to keep track of the hours, days devoted by the employee to the for-profit employer and the nonprofit.
Now, Marie mentioned the point which she has made to me that perhaps there could also be an exception of the nonprofit is in trust form rather than corporate form, which sometimes happens. Under this possible analysis, the person is not an employee of the trust, perhaps only a paid trustee. Would that also provide an exception? I'm frankly not sure the answer, and trust can have employees. So I'd be very careful about trying to go down that road, particularly if someone is paid, unless it is clear that the IRS will bless that approach.
Now, I've focused on maybe the most important part of what I'm presenting here in terms of relief and clarification, these two exceptions to deal with the concerns that Marie and I have both mentioned. But I also want to get into a couple of other subjects on the relief and clarification before turning it back to Marie. I skipped a slide, so I went back. So clarification for determining the five highest paid employees. In addition to what we've already discussed, keep in mind that ATEO must identify its covered employees, that is its five highest paid employees each year even if no employee earns more than $1 million. Now, it is reiterated in the proposed regulations that a member of the board of directors is not an employee in capacity as a director, as Marie also pointed out. That is if an individual provides services to the ATEO as a director and not in any other respect that individual is not an employee of the ATEO and is not considered one of the ATEO's covered employees.
Moreover, for ATEOs that are part of a group of related organizations, whether an employee is one of the five highest compensated employees of an ATEO is determined separately for each organization as opposed to the group as a whole. As a result, a group of related tax exempt organizations may have more than five covered employees whose compensation may trigger the excise tax because of the relationships. Similarly, an employee may be a covered employee of more than one ATEO in a related group of organizations for a taxable year. Also keep in mind, again, as Marie said, and this is really important that under the statute itself once a person is covered as an employee, she's always a covered employee and remains that way forever.
So each ATEO must maintain a running list of covered employees indefinitely on case the covered employee receives a compensation above one million at some point in the future or receives an excess parachute payment in the future, a subject we will be getting into more later. And finally on this slide, compensation paid to a licensed medical professional for the performance of medical services continues as under the statute to be exempt from the excess tax.
Finally, in this part, the proposed regulations provide rules that have the effect of grandfathering certain compensation. The grandfathering of a certain compensation involves the following. Any vested remuneration including vested but unpaid earnings accrued on deferred amounts treated as paid before January 2018 will not be subject to the excise tax under 4960. For an employee who has vested deferred compensation for years in which he or she was not a covered employee, that vested remuneration including vested but unpaid earnings that would have been treated as remuneration paid for a taxable year before such employee first became a covered employee is not remuneration subject to the excise tax under section 4960.
However, subsequent earnings that accrue on those vested amounts while the employee is a covered employee may be subject to the excise tax imposed under section 4960(a)(1). And as I turn it back to Marie, Marie, I know we have a question which I think is in your bailiwick. If the corporate tax rate is increased to 28%, will the excise tax rate also increase to 28%? You're covering the issue of the computation of the tax, so I'll leave that for you as part of your presentation.
Marie Arrigo:Okay. And I can answer that question. And section 4960 provides that excise tax to be used should be equal to the highest corporate income tax rate on remuneration. So the current highest corporate rate is 21%. If we have a change in the law that increases the rate to say 28%, then that's going to be the new rate for the excise tax on the compensation.
So we'll move on to the next section, which is to talk about the calculation for remuneration. And this is really a summary of what we've been talking about. And we're going to get to how you would compute this tax ultimately and the mechanics in terms of where you would report it. But in looking at remuneration, first of all, it's going to be as I mentioned before calendar year basis consistent with form 990 reporting. And it's based on calendar year compensation.
An ATEO must include remuneration provided to the employee of any related organization, including any of the for-profits and government entities for services performed as an employee of that organization. And related organizations, again, include any organization that controls, is controlled by, or is under common control with the ATEO and is a supporting, or is a supporting or supported organization. And control is based on a more than 50% control test that applies for stock and partnership interest and voting control or representation on a not-for-profit board. As mentioned previously, remuneration is for wages for federal income tax purposes except for Roth contributions and certain retirement benefits. And this differs from compensation on forms 990 or W2.
Remuneration is treated as paid when there is no substantive risk of forfeiture of the rights to the remuneration. And that really is what we've been talking about for a while now in terms of the remuneration. The other item that potentially will fall into the category of compensation for purposes of computing the 4960 tax is excess parachute payments. So excess parachute payments under this section is a payment to a covered employee. That's all you're looking at is just payments to a covered employee. It's going to be contingent on a separation from services and the present value of which equals or exceeds three times the covered employee's average annual compensation over the last five years is what you have to look at. And so the excess parachute payment is the excess of the parachute payment over the space allocated to such payment. Only an excess parachute payment paid by an ATEO is subject to the excise tax.
So if you have a payment made to a non ATEO, whether it's for-profit entity, for instance, that payment is not going to be subject to the excise tax. And the excise tax on any excess parachute payment paid by an ATEO to a covered employee it's on any amount even if the excess amount, the excess parachute payment amount is less than $1 million. So it could be $1, it could be $1 million , it could be $5 million. Whatever the number is, that's what's included. There's no numerical threshold to deal with. So that is the basis for the excess parachute payment.
Marie Arrigo:And before I turn it over to David, David, there's a question that came up, are churches and church controlled organizations exempt from 4960? And I don't know of any exception for churches or church controlled organizations. If they're under 501(c), I think that's where it would apply, would you agree?
David Samuels:I believe that's right, I'm not actually sure. That's a great question. And going through the regs, I didn't see any specific reference under 4960 through churches and church control organizations. Remember, churches and church controlled organizations don't have to file with the IRS. But that doesn't mean, generally again, I'm not talking about this statute because I'm not 100% sure. But generally churches and church controlled entities are not necessarily exempt from taxes that might be applicable even if they don't have to file, for example. If there's UBIT, Unrelated Business Income Tax, even if don't generally, don't they have to pay UBIT if there is unrelated business income? I'm quite sure about that.
Marie ArrigoI am very sure about that too. They're not required to file form 990. If the unrelated business income tax, the UBIT that they were subject to it for whatever activity they were conducting, then they would have to file form 990(t) and pay the tax. And so this tax, I think I may be stealing a little bit of your thunder, David, but I believe with this tax, with this excise tax, you would file a 4720 form. It's a separate form from the 990, and the employer would pay the tax off of that form. The 4720 is a form that's used for many of these excise taxes and penalty taxes for both public charities and for private foundations.
David Samuels:Exactly. So I think that's the right answer. Again, I'm not 100% sure, but I have seen no exception for churches and church controlled organizations. Obviously, the intent of this legislation overall was the feel that some nonprofits are paying maybe too much from the perspective of some legislators. So they want to impose taxes on the excess, what they consider to be the excess, over a million, the excise tax. So it may very well apply here also. All right, I don't see any other questions, but feel free to offer questions as we move on. We got a little bit more here to cover, but there will certainly be time for questions before we're finished, and we'll take them as we go. Now, I'm dealing with the allocation of excise tax, which sort of wraps up the main presentation. And there's some overlap here with what I've discussed and with what Marie has discussed already, and you'll see that as we go, as we wrap this up with this subject.
The proposed regulations provide rules for allocating liability for the excise tax among the related employers. As provided in 4960(c)(4)(c), in any case in which an ATEO includes remuneration from one or more related organizations as separate employers of the individual in determining the excise tax imposed by section 4960(a), each employer is liable for its proportional share of the excise tax. So there is an allocation, it's liability for a proportional share. And we go to the slide, liability for the excise tax is imposed on the employers of each covered employee. If an individual is paid by both an ATEO and a related organization, then each employer is liable for the excise tax in amount proportional to the remuneration paid by the employer as compared to the total remuneration paid by all employers to the covered employee.
So a numerator, there is a denominator, your percentage is your percentage based on the total amount. Where several related ATEOs may be liable for excise tax with respect to the same covered employee, double taxation is avoided through steps outlined in the proposed regs, which I'll get to briefly in a moment. Now specifically, if an employee is a covered employee of more than one ATEO, the proposed regulations provide that each ATEO calculates its liability under 4960(a)(1), taking into account remuneration paid to the employee by the organizations to which it is related. The proposed regulations also provide that rather than owing tax as both at ATEO and a related organization for the same remuneration paid to a covered employee, each employer is liable only for the greater of the excess tax, the greater of the excise tax it owe as an ATEO or the excise tax or it would owe as a related organization with respect to that covered employee. The greater of the two are not both.
And to go back to the form that Marie just mentioned, each employer liable for tax is responsible for separately reporting in paying its share of the tax on form 4720. The form that Marie mentioned in answering the question about churches. For calendar year ATEOs, the excise tax for the year 2020 will have to be paid on May 15 2021. This is for calendar year ATEOs, which is the due date for form 4720 without extensions. The due date for the tax payment is determined without regard to whether the employer files for an extension to file the form 4720. So whether you file for an extension or not, the taxes do. Marie, there's a question here before I conclude, have we seen any nonprofits look for alternatives to 4571 plans due to that tax? And I would not know.
Marie Arrigo:I would not know that either. That would be a question I'd refer to my employee benefits group at the firm. And David, I just want mention that that premise, what you just said about the 4720 and the payment that's it's due when the return is due, that that's true for any tax return. That's no different than the overarching that when you have a due date even if you file your own 1040, April 15th, that was the normal due date, that wasn't so normal this year. You would have to pay your estimated tax by that date even though you're filing the actual return later on if you've gotten an extension.
David Samuels:Right. Just reiterating, absolutely, Marie, that also applies here. Now. here's my conclusion. And I'm sorry I didn't get this part together to put on a slide, which I would have, so I'll go through this slowly. This comes straight from the federal regulations, the federal register. And you can look right at the regs. In order to calculate liability for the tax on excess remuneration, and this also deals with the issue of highest versus avoiding a double taxation. An ATEO may take the following five steps. First, and this is really a rehash of what we've gone over and explaining it as a step process, calculate the total remuneration paid other than any excess parachute payment to each covered employee, including remuneration from all related organizations.
The total tax liability for the ATEO and related organizations with respect to each covered employee is 21% for 2020 of the total remuneration paid to the covered employee that exceeds one million. So here in step one, you're doing the calculation as Marie explained the calculation. The total tax liability for the ATEO and the related organizations, 21% of the amount paid to the covered employee over $1 million for each covered employee. Step two calculate, and this is the allocation, calculate the share of the liability for each employer of the covered employee as the portion of the total tax liability that bears the same ratio to the total tax liability as the ratio of the amount of remuneration paid by the employer to the total remuneration calculated in step one.
I know that's a mouthful and straight from the regs, but you're doing it. Each employer is being calculated separately based on their proportional share. And then each related organization, this is step three, has to be advised of its share of the liability calculated in step two. So you aggregate the information. In step four, you obtain information on the ATEO share of the liability as related organization for a covered employee of another ATEO. If the ATEO is a related organization with respect to more than one other ATEO, treat the ATEO's highest share of the liability as a related organization, as its liability is related organization for the covered employee.
So you're doing this calculation from different directions, and then you're doing a comparison. Step five is comparing the ATEO's liability as an ATEO in step two to share its liability as related organization under step four. For each of the ATEO's covered employees, the share of the liability of the ATEO is in the ATEO reports the greater of the share calculated under step two or step four. So you're looking at this from different angles due to separate calculations. You don't have a double tax. Whichever comes out highest for the ATEO, that's the amount that you pay. I know that's a bit confusing, but if you put it all together, this is the way to avoid the double tax. Now, there's a question from my friend, Jim Rocco, are 457(f) plans or other non-qualified plans impacted by 4960, particularly when paid out? Again, Marie, I don't have the expertise and the benefits, so I'm just not sure.
Marie Arrigo:Yeah. The proposed regulations talked about certain retirement benefits being included that potentially could be, but we would have to talk to our other group about that because it's specifically for employee benefits.
David Samuels:These are good questions, but not just within the hearing of the two of us. Now. we welcome other questions, folks. We've got a little time here.
And if I could just add, and this is a great question that Marie put together here and helps explain. This is obviously tricky stuff. Again, the allocation, if under this example, and if it didn't fit in one of the exceptions that we talked about earlier. If say the entire 1.1 million had been paid by the for-profit, the for-profit would be responsible for the entire 21,000 tax because the for-profit paid the entire amount. Therefore, it would have 100% of the 21,000. If the percentage has changed, if let's say it was 100,000 by the ATEO and a million by the for-profit, under that scenario, the for-profit would be paying a little bit over 90% if I'm doing my math right and a little under 10% for the ATEO.
Either way you add the percentages, you do that numerator, denominator, the allocation, and it has to add up to the 21,000, which would come out to in any event. And then let's be clear if we weren't clear about it, the way this statute is written, the employee is never responsible for any of it. So the percentages, B, C or D could come into play depending on how the percentages work out and whether or not there's an allocation, and that's the way it works. Do we have more questions?
Marie Arrigo:And I think our conclusion is that we'll wait to see what happens with the final regulations, but this is a very tricky section of the code and one that has some really, it could be really impactful results. You have to kind of really watch this and make sure your situation, determine whether your situation is going to shoulder this tax. Any questions? Okay. I think they're all questioned out. So thank you everyone.