IRS clarifies exclusions from remuneration for section 4960 excise tax

Executive summary

On April 11, 2025, the IRS released Chief Counsel Advice (CCA) 202515014, dated May 31, 2024, clarifying the exclusion of section 403(b) elective deferrals and employee contributions to section 125 cafeteria plans from the definition of remuneration for purposes of computing the section 4960 excise tax on excess executive compensation imposed on exempt organizations. The IRS had not previously issued guidance on these items.

Background

Section 4960 imposes an excise tax on excess remuneration (payments in excess of $1 million) and excess parachute payments (certain compensation contingent upon a separation from service) paid to certain executives of exempt organizations and their related entities. These calculations can be complex, and there are gaps in existing guidance regarding the definition of includible compensation.

Overview

CCA 202515014 provides new insight into the IRS’s position regarding the definition of remuneration for purposes of the excise tax on executive compensation paid by exempt organizations. Section 4960 defines wages in reference to section 3401(a), excepting designated Roth contributions and including deferred compensation amounts required to be included in gross income under section 457(f). Section 3401(a) includes all remuneration for services performed by an employee for his employer, with enumerated exceptions.

The 4960 regulations do not include references to contributions to a section 403(b) plan (a type of retirement plan for certain exempt organization employees) or salary reduction payments to a section 125 cafeteria plan for employer-provided health insurance because section 3401(a) does not specifically exclude these amounts. However, the section 3402(a) income tax withholding rules exclude these benefits to the extent they are excludable from gross income.

Section 403(b) plan contributions

• Excludable from employee gross income and income tax withholding to the extent premiums and vested annual additions to not exceed limits under sections 402(g)(3) and 415. The contribution limit for 2025 is $23,500, with catch-up contributions of $7,500 for those ages 50 and older (or $11,250 in place of the $7,500 catch-up for those ages 60 to 63) in 2025.

Section 125 cafeteria plan contributions

• Excludable from employee gross income and income tax withholding if used to pay for health insurance premiums that meet the definitions in sections 105(b) or 106(a).

Conclusion

Because of the interplay between sections 3401 and 3402, the CCA concludes that both section 403(b) plan contributions and section 125 cafeteria plan contributions, to the extent excludable from income tax withholding, should also be treated as being excluded from the definition of remuneration under section 4960(c)(3). This clarification is in line with the position taken by many practitioners and taxpayers in computing section 4960 remuneration.