About 16% of Nonprofit Hospital Orgs Face New Excise Tax on Exec Pay

The top five highest paid employees of any nonprofit organization will pay a 21% excise tax on compensation above $1 million, so organizations are looking for ways to limit their tax liability.

There are about 400 nonprofit hospital organizations with one or more employees earning at least $1 million annually, the Wall Street Journal's Melanie Evans and Andrea Fuller reported this week, citing analysis of the organizations' most recent returns.

That means about 16% of the nonprofit hospital organizations in the U.S. are on course to be affected by the newly enacted excise tax on highly paid nonprofit employees. The GOP tax reform law, which President Donald Trump signed late last year, imposes a 21% tax on compensation above $1 million for each of a nonprofit organization's five highest-paid employees, effectively redefining "reasonable" compensation for such organizations.

Related: Nonprofits Don't Know What's Hit Them

Healthcare leaders are scrambling to tabulate how much the change will cost them, as their organizations look for ways to limit their tax liability.

“With all of the other pressures we have on [us] from an organizational perspective, it’s another one that we’ll have to evaluate and determine, how do we navigate through it?” Kevin Brown, president and CEO of the Atlanta-based nonprofit system Piedmont Healthcare, tells HealthLeaders Media.

Brown earned more than $1.8 million and Chief Operating Officer Gregory A. Hurst earned more than $1.9 million in reportable compensation from the organization in 2015, according to Piedmont's most recently available Form 990 filing. The 21% excise tax on those two pay checks alone would cost the system more than $350,000 per year moving forward.

Although the law applies to a nonprofit's top five earners, there's a catch that could result in some organizations paying the excise on more than five salaries each year.

"Once you become a covered employee, you're always a covered employee," attorney Bill Robinson, who specializes in compensation and benefits for the firm Baker Donelson, told HealthLeaders Media last month.

Largely because of deferred compensation, nonprofits will have to keep a "running list" of employees covered by this new excise tax provision—which has initiated some creative problem-solving.

A couple of options

Ralph DeJong, a partner with McDermott Will & Emery told the Journal that some health systems have moved to minimize the law's impact by hastening the vesting date for deferred compensation packages.

Others have considered consolidating the workforce from a number of related organizations under a unified payroll structure to reduce the number of highly compensated workers subject to the tax, DeJong said.

This idea to restructure could make a lot of sense for organizations like 59-hospital system Trinity Health, based in Michigan, which has 40 separate nonprofit entities. A system spokesperson told the Journal that as many as 15 of Trinity's officials could be subject to the tax.

Phoenix-based Banner Health, by contrast, had 11 employees who earned at least $1 million in 2015, the Journal noted. But only five of these executives would be initially subject to the tax because Banner's 28 hospitals are part of a single nonprofit entity.