Special rules apply to compensation arrangements of tax-exempt entities. If the arrangement does not comply with the rules, then the amount of compensation subject to the arrangement is taxed to the employee as soon as it is vested (even if the employee won’t receive the money in that year). The IRS just published proposed regulations modifying some of these special rules. The proposed guidance will impact paid time off arrangements, death and disability plans, severance policies, bonus plans, employment agreements, and deferred compensation arrangements of tax-exempt entities.

Here are a couple examples of how the modified rules may affect a tax-exempt entity’s compensation arrangements:

To ensure compliance with the new rules (and avoid unintentional tax consequences for employees):

The new rules will be effective after the final regulations are published. We expect the rules to be effective beginning in January 1, 2018, and they will apply to new arrangements and to current arrangements that continue after the effective date.

Every tax-exempt entity should review its employment agreements and any deferred compensation arrangements as soon as possible; modifying these arrangements can take a significant amount of time due to the required approval process. We also recommend budgeting for the review and modification of other affected arrangements (such as paid time off arrangements, death and disability plans, severance policies, bonus plans, and deferred compensation arrangements) in the next year. We can help with this process by providing customized estimates – please don’t hesitate to ask.

We’re happy to provide more information on the new rules and how they might impact specific plans.

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