Internal Revenue Bulletin 2021-7 (PDF rendition): IRS Notices

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Bulletin No. 2021–7
February 16, 2021
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
EXCISE TAX, EXEMPT
ORGANIZATIONS
T.D. 9938, page 838.
Section 4960 imposes an excise tax on remuneration in ex-
cess of $1 million and excess parachute payments paid by
an applicable tax-exempt organization (and its related organi-
zation(s)) to a covered employee. These regulations explain
how to determine the amount of remuneration paid, whether
there is an excess parachute payment, what is an excess
parachute payment, what is an applicable tax-exempt organi-
zation, what is a related organization, and how to determine
an organization’s covered employees, and how to report and
pay the tax. REG-122345-18. Published January 19, 2021.
INCOME TAX
Notice 2021-10, page 888.
This notice provides additional relief under section
7508A of the Internal Revenue Code (Code) for qual-
ified opportunity funds (QOFs) and their investors in
response to the ongoing Coronavirus Disease 2019
(COVID-19) pandemic. This notice also provides addi-
tional relief pursuant to section 1400Z-2(f)(3) and In-
come Tax Regulations under section 1400Z-2 of the
Code (section 1400Z-2 regulations). Specifically, this
notice extends the relief for QOFs and their investors
provided by Notice 2020-39, 2020-26 I.R.B. 984.
Finding Lists begin on page ii.

The IRS Mission
Provide America’s taxpayers top-quality service by helping
them understand and meet their tax responsibilities and en-
force the law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing of-
ficial rulings and procedures of the Internal Revenue Service
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stantive rulings necessary to promote a uniform application
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The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B,
Legislation and Related Committee Reports.
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To the extent practicable, pertinent cross references to these
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February 16, 2021 Bulletin No. 2021–7

Part I
26 CFR 53.4960-0 through 53.4960-6
T.D. 9938
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1 and 53
Tax on Excess Tax-Exempt
Organization Executive
Compensation
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document sets forth
final regulations under section 4960 of
the Internal Revenue Code (Code), which
imposes an excise tax on remuneration
in excess of $1,000,000 and any excess
parachute payment paid by an applicable
tax-exempt organization to any covered
employee. The regulations affect certain
tax-exempt organizations and certain en-
tities that are treated as related to those
organizations. DATES: Effective Date:
These final regulations are effective on
January 15, 2021.
Applicability Dates: For dates of applica-
bility, see §53.4960-6.
FOR FURTHER INFORMATION
CONTACT: William McNally at (202)
317-5600 or Patrick Sternal at (202) 317-
5800 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document amends the Founda-
tion and Similar Excise Tax Regulations
(26 CFR part 53) by adding final regula-
tions under section 4960. Section 4960
was added to the Code by section 13602
of the Tax Cuts and Jobs Act, Pub. L.
115–97, 131 Stat. 2054, 2157 (TCJA).
Section 4960(a) generally provides that
an applicable tax-exempt organization
(ATEO) that pays to a covered employee
remuneration in excess of $1 million for
a taxable year or any excess parachute
payment is subject to an excise tax on the
amount of the excess remuneration (as de-
scribed in section IV of the Summary of
Comments and Explanation of Revisions,
titled “Excess Remuneration”) plus ex-
cess parachute payments paid during that
taxable year at a rate equal to the rate of
tax imposed on corporations under section
11 (currently 21 percent). Section 4960 is
effective for taxable years beginning after
December 31, 2017.
An ATEO is defined in section 4960(c)
(1) as any organization that for the tax-
able year is exempt from taxation under
section 501(a) as well as certain other
tax-exempt organizations. A covered em-
ployee is defined in section 4960(c)(2)
as any employee (including any former
employee) of an ATEO if the employee is
one of the five highest-compensated em-
ployees of the organization for the taxable
year or any preceding taxable year begin-
ning after December 31, 2016. Section
4960(c)(4)(A) provides that remuneration
paid to a covered employee by an ATEO
includes any remuneration paid with re-
spect to employment of such employee
by any related person or governmental
entity. Section 4960(c)(4)(B) defines a
related person or governmental entity as
an entity that controls, or is controlled by,
the ATEO; is controlled by one or more
persons that control the ATEO; or is a
supported or supporting organization as
described in sections 509(f)(3) and 509(a)
(3), respectively. An excess parachute
payment is defined in section 4960(c)(5)
(A) as an amount equal to the excess of
any parachute payment over the portion
of the base amount (as described in sec-
tion V.D. of the Summary of Comments
and Explanation of Revisions, titled
“Three-Times-Base-Amount Test”) allo-
cated to such payment; section 4960(c)(5)
(B) defines a parachute payment as any
payment in the nature of compensation
to a covered employee if the payment is
contingent on the employee’s separation
from employment with the employer and
the aggregate present value of such pay-
ments exceeds 3-times the base amount.
On December 31, 2018, the Depart-
ment of the Treasury (Treasury Depart-
ment) and the Internal Revenue Service
(IRS) issued Notice 2019-09 (2019-04
I.R.B. 403), setting forth initial guidance
on the application of section 4960. On
June 11, 2020, the Treasury Department
and the IRS published proposed regula-
tions on section 4960 in the Federal Reg-
ister (REG-122345-18, 85 FR 35746) (the
proposed regulations). The statutory pro-
visions and the initial guidance provided
by Notice 2019-09 are described in detail
in the proposed regulations.
The Treasury Department and the IRS
received written comments on the pro-
posed regulations. No public hearing was
requested or held. All written comments
received in response to the proposed
regulations are available at www.regu-
lations.gov or upon request. Comments
received that are outside of the scope of
the proposed regulations generally are
not addressed in this preamble but may
be considered in connection with future
guidance projects. After consideration of
the relevant comments received, the pro-
posed regulations under section 4960 are
adopted as final regulations as modified
by this Treasury Decision. The major ar-
eas of comment and the revisions to the
proposed regulations are discussed in the
Summary of Comments and Explanation
of Revisions. With respect to provisions
in the proposed regulations on which no
comments were received or for which
comments were received prior to the is-
suance of the proposed regulations, the
preamble to the proposed regulations may
provide additional information.
Summary of Comments and
Explanation of Revisions
These final regulations provide guid-
ance on the excise tax imposed by section
4960 and the entities that are subject to the
tax.
I. Scope of Final Regulations
These final regulations retain the basic
approach and structure of the proposed
regulations, with certain revisions. These
final regulations restate certain statutory
February 16, 2021 838 Bulletin No. 2021–7

definitions and define various terms set
forth in section 4960. These final regula-
tions also provide rules for determining:
the amount of remuneration paid for a
taxable year for purposes of identifying
covered employees and calculating the
excise tax; whether excess remuneration
has been paid and in what amount; wheth-
er a parachute payment has been paid and
in what amount; the allocation of liability
for the excise tax among related organiza-
tions; and the date of applicability of these
final regulations. These definitions and
rules apply solely for purposes of section
4960.
II. Definitions
A. Applicable Tax-Exempt Organization
These final regulations adopt the defi-
nition of “applicable tax-exempt orga-
nization” or “ATEO” as set forth in the
proposed regulations. Consistent with sec-
tion 4960(c)(1), the proposed regulations
provided that an “applicable tax-exempt
organization” or “ATEO” includes an or-
ganization that is exempt from tax under
section 501(a); is a farmers’ cooperative
organization described in section 521(b)
(1); has income excluded from taxation
under section 115(1); or is a political or-
ganization described in section 527(e)(1).
In response to comments on Notice
2019-09 regarding the applicability of
the excise tax imposed by section 4960 to
certain Federal instrumentalities, section
II.A. of the Explanation of Provisions of
the proposed regulations, titled “Appli-
cable Tax-Exempt Organization,” stated
that the Treasury Department and the IRS
consider all Federal instrumentalities de-
scribed in section 501(c)(1) to be included
in the statutory ATEO definition as an or-
ganization exempt from tax under section
501(a) and thus subject to section 4960.
However, the Treasury Department and
the IRS requested comments regarding the
application of section 4960 to Federal in-
strumentalities. One commenter request-
ed that these final regulations confirm
that Federal instrumentalities described
under section 501(c)(1)(A)(i), for which
the enabling acts provide for exemption
from all current and future Federal taxes
are not subject to tax under section 4960.
These final regulations do not address this
issue but reserve §53.4960-1(b)(3) and
§53.4960-4(a)(5) for future rules to ad-
dress these Federal instrumentalities. The
Treasury Department and the IRS will
continue to consider whether section 4960
should apply to Federal instrumentalities
for which the enabling acts provide for ex-
emption from all current and future Feder-
al taxes. Until further guidance is issued,
a Federal instrumentality for which an en-
abling act provides for exemption from all
current and future Federal taxes may treat
itself as not subject to tax under section
4960 as an ATEO or related organization.
However, if that Federal instrumentality is
a related organization of an ATEO, remu-
neration it pays must be taken into account
by that ATEO.
B. Applicable Year
Section 4960(a)(1) refers to remunera-
tion paid “for the taxable year,” but does
not specify which taxpayer’s taxable year
is referenced, what it means for remuner-
ation to be paid “for” a taxable year, or
how to measure remuneration if an ATEO
and a related organization have different
taxable years. The proposed regulations
provided that remuneration is treated as
paid for a taxable year if it is paid during
the applicable year, and that the applicable
year is defined as the calendar year ending
with or within an ATEO’s taxable year.
The proposed regulations provided rules
for determining the applicable year of an
organization with respect to the taxable
year in which the organization becomes
an ATEO or ceases to be an ATEO, includ-
ing rules addressing short applicable years
that may arise in these situations and rules
addressing related organizations with dif-
ferent taxable years. No comments were
received on those proposed rules, and
these final regulations adopt those rules
without change.
C. Employee
Section 4960(a) imposes a tax on ex-
cess remuneration and any excess para-
chute payment paid by an ATEO for the
taxable year with respect to employment
of a covered employee. Section 4960(c)
(2) defines a “covered employee” as an
employee (including any former employ-
ee) of the ATEO who meets certain other
conditions. Accordingly, the excise tax
imposed by section 4960(a) applies only
with respect to a current or former em-
ployee of the ATEO.
The proposed regulations defined “em-
ployee” by reference to the definition of
“employee” for purposes of Federal in-
come tax withholding in section 3401(c)
and the regulations thereunder. Specifi-
cally, the proposed regulations cross-ref-
erenced the definition of “employee”
in §31.3401(c)-1, which includes com-
mon-law employees, officers or elected
or appointed officials of governments, or
agencies or instrumentalities thereof, and
certain officers of corporations. The pro-
posed regulations restated certain rules
from §31.3401(c)-1 that are particularly
relevant to section 4960, including the
rules that a member of a board of directors
of a corporation is not an employee of the
corporation (in the member’s capacity as a
director), and that an officer is an employ-
ee of the entity for which the officer serves
as an officer (unless the officer performs
no services or only minor services and
neither receives, nor is entitled to receive,
any remuneration for such services). For
further discussion, see section II.E. of this
Summary of Comments and Explanation
of Revisions, titled “Covered Employee.”
No comments were received on those pro-
posed rules, and these final regulations
adopt those provisions of the proposed
regulations without change.
One commenter requested clarification
regarding the source of the remuneration
that is considered for purposes of apply-
ing the minor services exception to the
rule that treats a corporation’s officer as
an employee. The minor services excep-
tion in Prop. §53.4960-1(e)(1) incorpo-
rated the standard in §31.3401(c)-1 and
provided that “an officer of a corporation
who as such does not perform any services
or performs only minor services and who
neither receives, nor is entitled to receive,
any remuneration is not considered to be
an employee of the corporation solely due
to the individual’s status as an officer of
the corporation.” The commenter stated
that it is unclear whether an individual
qualifies for the exception if he or she re-
ceives remuneration from a related person
or governmental entity for services per-
formed for an organization other than the
ATEO and also volunteers his or her time
Bulletin No. 2021–7 839 February 16, 2021

February 16, 2021 840 Bulletin No. 2021–7
as an officer of the ATEO (and performs
no services or only minor services for
the ATEO). The commenter recommend-
ed that these final regulations clarify that
the relevant remuneration for purposes of
meeting the minor services exception is
only remuneration paid by the ATEO. The
minor services exception applies if an in-
dividual is not paid (nor is entitled to be
paid) remuneration based “solely” on the
individual’s status as an officer. Thus, the
source of the remuneration is not relevant,
but rather the standard is whether the indi-
vidual received any remuneration for the
minor services as an officer regardless of
the source of the remuneration. Therefore,
the Treasury Department and the IRS have
concluded that this clarification of the mi-
nor services exception in these final regu-
lations is unnecessary.
For a discussion of how this definition
of “employee” and other rules address
employees of non-ATEO related organi-
zations performing limited or temporary
services for the related ATEO (in partic-
ular, while also receiving compensation
from the non-ATEO related organization),
see section II.E.5. of this Summary of
Comments and Explanation of Revisions,
titled “Volunteer Services and Other Ex-
ceptions.”
D. Employer
Section 4960(b) provides that the em-
ployer is liable for the tax imposed under
section 4960(a). Similar to the definition
of “employee,” the proposed regulations
defined “employer” by reference to the
definition of “employer” for purposes of
Federal income tax withholding in section
3401(d) and the regulations thereunder,
without regard to the special rules in sec-
tion 3401(d)(1) and (2). Accordingly, con-
trol of the payment of wages would not be
relevant for determining whether an entity
is the employer for section 4960 purposes.
Further, the proposed regulations provided
that a person or governmental entity does
not avoid status as an employer of an em-
ployee by using a third-party payor to pay
remuneration to that employee. Third-par-
ty payors include a payroll agent, an agent
under section 3504, a common paymaster,
a statutory employer under section 3401(d)
(1), or a certified professional employer
organization under section 7705 (which is
an “employer” only for purposes of sub-
title C of the Code). Similarly, consistent
with existing principles for determining
the employer, under certain facts and cir-
cumstances, a management company may
also be acting as a third-party payor for the
employees of its ATEO client, rather than
as the common law employer of the em-
ployees. Thus, the proposed regulations
provided that remuneration that is paid to
an individual by a separate organization
for services the individual performed as
an employee of the ATEO would be remu-
neration paid by the ATEO to its employee
for purposes of section 4960, whether or
not the separate organization is related to
the ATEO. In addition, the proposed reg-
ulations provided that the sole owner of
an entity that is disregarded as separate
from its owner under §301.7701-2(c)(2)
(i) would be treated as the employer of
any employee of the disregarded entity,
notwithstanding that the entity is regarded
for subtitle C purposes under §301.7701-
2(c)(2)(iv). No comments were received
on these provisions of the proposed reg-
ulations, and these final regulations adopt
them without change.
E. Covered Employee
1. In General
Section 4960(c)(2) defines “covered
employee” as any individual who is one
of the five highest-compensated employ-
ees of the ATEO for a taxable year or was
a covered employee of the ATEO (or any
predecessor) for any preceding taxable
year beginning after December 31, 2016.
Thus, once an employee is a covered em-
ployee of an ATEO, the employee con-
tinues to be a covered employee for all
subsequent taxable years of that ATEO.
The proposed regulations provided that
whether an employee is one of the five
highest-compensated employees of an
ATEO is determined separately for each
ATEO and not for an entire group of re-
lated organizations. As a result, a group of
related ATEOs could have more than five
“five highest-compensated employees”
for a taxable year. Similarly, an employ-
ee could be a covered employee of more
than one ATEO in a related group of orga-
nizations for a taxable year. No comments
were received on these provisions of the
proposed regulations, and these final reg-
ulations adopt them without change.
2. Aggregation of Remuneration Paid By
the ATEO and Its Related Organizations
For Purposes of Determining the Five
Highest-Compensated Employees
For purposes of determining wheth-
er an employee is one of an ATEO’s five
highest-compensated employees for a
taxable year, the proposed regulations
provided that remuneration paid by the
ATEO during the ATEO’s applicable year
is aggregated with remuneration paid
by any related organization during the
ATEO’s applicable year, including remu-
neration paid by a related taxable organi-
zation or governmental entity, for services
performed as an employee of that related
organization. Remuneration for which
a deduction is disallowed under section
162(m) generally is not considered for
purposes of determining whether excess
remuneration is paid for a taxable year,
but that remuneration is considered for
purposes of determining an ATEO’s five
highest-compensated employees.
One commenter suggested that, for
purposes of determining an ATEO’s five
highest-compensated employees, these
final regulations should consider only re-
muneration paid (directly or indirectly) by
an ATEO for services provided by an em-
ployee to the ATEO, rather than aggregat-
ing all remuneration paid to the individual
for services the individual provides as an
employee of the ATEO and as an employ-
ee of any related organization, including
a related non-ATEO (for example, a tax-
able organization). The commenter rea-
soned that aggregating remuneration for
purposes of determining covered employ-
ee status is not required by the statutory
text and is unnecessary to comply with
Congressional intent to achieve parity be-
tween ATEOs and publicly held corpora-
tions that are subject to the section 162(m)
deduction disallowance for compensation
paid to a covered employee in excess of $1
million. The commenter also reasoned that
because only an ATEO can have a “cov-
ered employee” under section 4960(c)(2),
the reference to the “five highest-compen-
sated employees of the organization” (em-
phasis in comment) in section 4960(c)(2)
(A) should be read to include only com-

Bulletin No. 2021–7 841 February 16, 2021
pensation paid by the ATEO, directly or
indirectly (for example, by reimbursing
another entity), for services provided by
the employee to the ATEO, regardless of
the payor. The commenter asserted that
the language in section 4960(c)(4)(A),
which provides that “remuneration of a
covered employee by an [ATEO] shall in-
clude any remuneration paid with respect
to employment of such employee by any
related person or governmental entity”
(emphasis in comment) should not over-
ride a plain reading of section 4960(c)(2),
which refers only to employment with the
ATEO. The commenter further reasoned
that section 4960(c)(4)(A) applies after a
determination of the ATEO’s covered em-
ployees has already been made, and thus it
is circular to read section 4960(c)(4)(A) as
requiring inclusion of remuneration paid
to a covered employee of an ATEO by a
related person or governmental entity for
purposes of determining an ATEO’s high-
est-compensated employees (and, thus, its
covered employees).
While the Treasury Department and the
IRS acknowledge that alternative interpre-
tations as to whether sections 4960(c)(2)
and (c)(4)(A) take into account remuner-
ation paid by a related organization for
purposes of determining an ATEO’s cov-
ered employees may be reasonable, for the
reasons set forth below, these final regula-
tions adopt the relevant provisions of the
proposed regulations without change and
do not adopt the commenter’s recommen-
dation. Section 4960 does not define the
“five highest-compensated employees” of
an ATEO. The ambiguity in this term is
highlighted by the fact that the only pro-
vision in the statute that references “com-
pensation” is section 4960(c)(2), which
defines “covered employee” as one of
the “5 highest compensated employees”;
the statute otherwise uses the defined
terms “remuneration” and “parachute
payment” for purposes of determining
the excise tax imposed by section 4960.
In addition, there is no discussion in the
legislative history describing how Con-
gress intended an ATEO to determine its
five highest-compensated employees. The
Treasury Department and the IRS have
concluded that the commenter’s suggest-
ed interpretation—that only remuneration
paid by the ATEO for services performed
for the ATEO should be considered for
purposes of determining who is a covered
employee—would raise significant tax
administration issues and the potential for
abuse in circumstances in which an indi-
vidual provides services to, and receives
compensation from, the ATEO and one
or more related organizations during the
applicable year. In these cases, it may be
difficult to determine the proper allocation
of the compensation among the organiza-
tions to which the individual provides the
services and whether the allocation was
properly based on the value of the services
provided. Due to the highly factual nature
of this analysis and the potential for dif-
fering conclusions on one or more of these
issues, the commenter’s suggested rule
would result in an unpredictable standard
to be applied by taxpayers and the IRS
and would raise the potential for abusive
mischaracterizations of the nature of the
services and compensation provided.
The commenter further asserted that
the requirement to aggregate compensa-
tion paid by the ATEO and all related or-
ganizations is not required to ensure par-
ity with the rules for identifying covered
employees under section 162(m). Under
§§1.162-27(c)(2)(ii) and 1.162-33(c)(1)
(ii)(B), the amount of compensation used
to identify the covered employees who are
the three most highly compensated exec-
utive officers (other than the principal ex-
ecutive officer and the principal financial
officer) for the taxable year is determined
pursuant to the executive compensa-
tion disclosure rules under the Securities
Exchange Act of 1934. Under 17 CFR
§229.402(a)(2), the amount of compen-
sation paid to an employee by a publicly
held corporation is measured by reference
to remuneration paid by the registrant and
remuneration paid by the registrant’s sub-
sidiaries, and is not limited to remunera-
tion for services provided to the registrant.
Although the provisions of sections 4960
and 162(m) are similar in many respects,
there is no indication in the legislative his-
tory that sections 162(m) and 4960 are in-
tended to apply in the same manner in all
situations. Further, the section 162(m) and
section 4960 statutory language and the
application of the rules differ significantly
in many respects that would not allow that
strict parity. Regardless of the conclusion
that the sections 162(m) and 4960 rules
do not allow for strict parity, the Treasury
Department and the IRS have concluded
that the aggregation of compensation paid
by all related entities in identifying cov-
ered employees is more analogous to the
rules under section 162(m) than consider-
ing only remuneration for services provid-
ed to the ATEO.
Thus, while the Treasury Department
and the IRS considered several alterna-
tives for determining the ATEO’s five
highest-compensated employees, includ-
ing the alternative proposed by the com-
menter, the Treasury Department and the
IRS ultimately concluded that including
remuneration paid by all related organi-
zations is appropriate and that it is more
administrable to use a single standard for
identifying covered employees and com-
puting the excise tax, if any, imposed by
section 4960(a)(1). However, to mitigate
the effect of requiring the aggregation of
remuneration paid by an ATEO and all
related organizations for purposes of de-
termining the ATEO’s covered employ-
ees, these final regulations retain the lim-
ited hours, nonexempt funds, and limited
services exceptions (discussed in section
II.E.5. of this Summary of Comments and
Explanation of Revisions, titled “Volun-
teer Services and Other Exceptions”).
3. Remuneration for Medical Services
Consistent with section 4960(c)(3)(B)
and the proposed regulations, these final
regulations provide that for purposes of
identifying an ATEO’s five highest-com-
pensated employees for a taxable year,
remuneration paid during the applicable
year for medical services is not taken into
account. For a discussion of the rules for
determining the remuneration paid for
medical or veterinary services and for
allocating remuneration to medical and
non-medical services, see section II.F. of
this Summary of Comments and Expla-
nation of Revisions, titled “Medical Ser-
vices.”
4. Covered Employee Status Continues
for all Subsequent Taxable Years
In accordance with section 4960(c)(2),
the proposed regulations provided that a
covered employee includes any employ-
ee (including any former employee) of
an ATEO who was a covered employ-

February 16, 2021 842 Bulletin No. 2021–7
ee of the organization (or a predecessor)
for any preceding taxable year beginning
after December 31, 2016. In response to
the proposed regulations, one commenter
suggested that the Treasury Department
and the IRS reconsider the rule that an
individual who is a covered employee of
an ATEO (or of a predecessor ATEO) for
one taxable year remains a covered em-
ployee of that ATEO (and any successor
ATEOs) for all subsequent taxable years.
The commenter suggested that an ATEO
should be relieved of the burden of con-
tinuing to include an employee among its
covered employees when a consolidation
or restructuring of a tax-exempt organiza-
tion results in changes to the employee’s
job responsibilities and compensation, if
it no longer furthers the purpose of the
statute to include the employee among
its covered employees. The commenter
asserted that the requirement that an indi-
vidual remain a covered employee for all
subsequent years, even after the employ-
ment relationship has ended, creates a po-
tentially excessive administrative burden
for the ATEO. These final regulations do
not adopt this suggestion because that rule
would be inconsistent with the statutory
language.
5. Volunteer Services and Other
Exceptions
The proposed regulations provided
certain exceptions to the definition of
“covered employee” and the rules for
identifying the five highest-compensated
employees of an ATEO. Several com-
menters supported the inclusion of the ex-
ceptions provided in Prop. §53.4960-1(d)
(2)(ii), (iii), and (iv). These final regula-
tions adopt these exceptions with certain
modifications in response to comments as
discussed later in this section.
The exceptions to the definition of
“covered employee” in the proposed
regulations were provided in response to
comments on Notice 2019-09 express-
ing concern that the rules for identifying
an ATEO’s five highest-compensated
employees in the notice would subject a
non-ATEO to the excise tax on remunera-
tion it pays to an employee who performs
limited or temporary services for a related
ATEO and who typically receives remu-
neration only from the non-ATEO. The
exceptions were intended to ensure that
certain employees of a related non-ATEO
providing services as an employee of an
ATEO are not treated as one of the five
highest-compensated employees of the
ATEO, and thus considered a covered
employee, if certain conditions related to
the individuals’ remuneration or hours of
service are met. To avoid manipulation of
the rules through the deferral of compen-
sation, in determining whether an employ-
ee is one of the five highest-compensated
employees, the proposed regulations pro-
vided that a grant of a legally binding right
to vested remuneration is considered to be
remuneration paid, and any grant of a le-
gally binding right to nonvested remuner-
ation by the ATEO (or a related ATEO),
for example under a deferred compensa-
tion plan or arrangement, disqualifies the
ATEO from claiming a relevant exception.
No comments were received on those pro-
posed rules, and these final regulations
adopt those rules without change.
a. No Remuneration and Non-
Employment Exceptions
The proposed regulations provided that
the remuneration paid to an individual who
is never an employee of an ATEO is not
considered for purposes of section 4960.
For example, an individual who, under all
the facts and circumstances, performs ser-
vices for an ATEO solely as a bona fide
independent contractor is not an employee
of the ATEO, and thus is not considered
for purposes of determining the ATEO’s
five highest-compensated employees.
Similarly, an individual who, under all the
facts and circumstances, performs services
solely as a bona fide employee of a related
organization, including a related organiza-
tion that provides services to the ATEO, is
not an employee of the ATEO, and thus is
not considered for purposes of determin-
ing the ATEO’s five highest-compensated
employees. No comments were received
on those provisions of the proposed reg-
ulations, and these final regulations adopt
them without change.
The proposed regulations further pro-
vided that, for purposes of determining
an ATEO’s five highest-compensated em-
ployees for a taxable year, an employee is
disregarded if neither the ATEO nor any
related organization pays remuneration or
grants a legally binding right to nonvested
remuneration for services the individual
performed as an employee of the ATEO or
any related organization. Thus, if none of
an ATEO’s employees received remunera-
tion from the ATEO or from a related or-
ganization, then the ATEO has no covered
employees. Benefits excluded from gross
income are not considered remuneration,
including expense allowances and reim-
bursements under an accountable plan
(see §1.62-2) and most insurance for lia-
bility arising from service with an ATEO,
such as directors and officers liability in-
surance (see §1.132-5(r)(3)). These final
regulations adopt these provisions of the
proposed regulations without change.
In section II.E.2. of the Explanation of
Provisions of the proposed regulations,
titled “Volunteer Services and Similar Ex-
ceptions,” the Treasury Department and
the IRS requested comments on whether
certain taxable benefits, such as employ-
er-provided parking in excess of the val-
ue excluded under section 132, should be
disregarded for purposes of determining
whether an individual receives remu-
neration for services and what standards
should apply to identify those benefits. No
comments were received on this issue. Be-
cause taxable fringe benefits that are wag-
es within the meaning of section 3401(a)
are included in the statutory definition
of remuneration, these final regulations
adopt the provisions of the proposed reg-
ulations providing that these amounts are
considered for purposes of determining
an ATEO’s five highest-compensated em-
ployees and for purposes of applying the
exceptions from covered employee status.
For a discussion of comments received
on the exclusion of taxable fringe ben-
efits from the definition of remuneration
for purposes other than the determination
of the five highest-compensated employ-
ees, see section III.A. of this Summary of
Comments and Explanation of Revisions,
titled “In General” under “Remuneration.”
b. Limited Hours Exception
These final regulations adopt the “lim-
ited hours” exception as provided in the
proposed regulations for purposes of de-
termining an ATEO’s five highest-com-
pensated employees. Under this exception,
an employee of an ATEO is disregarded

Bulletin No. 2021–7 843 February 16, 2021
for purposes of determining the ATEO’s
five highest-compensated employees for a
taxable year if neither the ATEO nor any
related ATEO pays remuneration or grants
a legally binding right to nonvested re-
muneration to the employee for services
performed for the ATEO and the employ-
ee performs only limited hours of service
for the ATEO. For purposes of this excep-
tion, an ATEO is not treated as paying an
amount paid to an individual by a related
organization that employs the individual,
so long as the ATEO does not reimburse
the payor. An employee qualifies for this
exception only if the hours of service the
employee performs as an employee of the
ATEO and all related ATEOs comprise
10 percent or less of the employee’s total
hours of service for the ATEO and all re-
lated organizations during the applicable
year. For purposes of this rule, an employ-
ee who performs fewer than 100 hours
of service as an employee of an ATEO
(and all related ATEOs) during an appli-
cable year is treated as having worked no
more than 10 percent of the employee’s
total hours for the ATEO (and all related
ATEOs).
One commenter recommended that
these final regulations replace the 10 per-
cent hours of service threshold in the lim-
ited hours exception with the 50 percent
hours of service threshold that is used for
the nonexempt funds exception (discussed
later in this section) because the 10 percent
threshold fails to capture many common
arrangements between ATEOs and taxable
related organizations controlled by the
ATEO (“controlled taxable related organi-
zations”) that are not structured to avoid
the excise tax imposed by section 4960.
These final regulations do not adopt this
suggestion because the limited hours ex-
ception was intended to address arrange-
ments in which services are sufficiently
limited so that the arrangements resemble
volunteer arrangements. This exception
therefore has a much lower hours of ser-
vice threshold than the nonexempt funds
exception but may be used by a broader
group of ATEOs. Further, the Treasury
Department and the IRS have concluded
that adopting the commenter’s suggestion
would be inconsistent with the legislative
intent of section 4960. As explained in
section II.E.2 of the Explanation of Pro-
visions of the proposed regulations, titled
“Volunteer Services and Similar Excep-
tions,” the legislative history indicates
that Congress intended to tax excessive
compensation paid to covered employ-
ees from tax-exempt funds.
1
Consistent
with this intent, the proposed regulations
provided a nonexempt funds exception,
which applies if certain criteria are sat-
isfied, but does not apply if an ATEO’s
controlled taxable related organization
pays remuneration to an employee of the
ATEO. The Treasury Department and the
IRS reasoned that a controlled taxable re-
lated organization that pays remuneration
to an employee for services provided to
an ATEO uses the ATEO’s funds to do so,
either because the controlled taxable relat-
ed organization’s assets are, effectively,
the ATEO’s assets, or because the pay-
ment reduces the related organization’s
assets, which in turn reduces the value of
the ATEO’s interest in the related orga-
nization. The Treasury Department and
the IRS consider the funds of an ATEO’s
controlled taxable related organization as,
in substance, equivalent to tax-exempt
funds, and thus the use of such funds to
compensate an individual for services pro-
vided to an ATEO is in substance the use
of tax-exempt funds.
2
One commenter expressed concern
about the “cliff” nature of the proposed
limited hours exception (as well as the
nonexempt funds and limited services
exceptions), noting that exceeding the
thresholds even slightly may result in
the employee being a covered employee
for the applicable year and all subsequent
applicable years. The commenter recom-
mended that these final regulations allow
a 3-year (or longer) measurement period
to qualify for the limited hours exception
or the other exceptions, primarily to pre-
vent the ATEO from inadvertently failing
to satisfy the exception.
A 3-year measurement period would
reduce the potential for inadvertent fail-
ures for an employer intending to be at or
below the threshold for every applicable
year. However, for an employer that in-
tends to meet the limited hours exception
during only one applicable year, the sug-
gested 3-year standard would effectively
raise the 10 percent hours of service lim-
it to 30 percent and create a new “cliff”
at that 30 percent threshold. In addition,
permitting a 3-year measurement period
would create additional complexity and
burdens for taxpayer compliance and
tax administration. For these reasons,
the Treasury Department and the IRS do
not adopt this suggestion. However, the
modification to the nonexempt funds ex-
ception described later in this section, ex-
panding the measurement period to two
applicable years, is intended to address
some of the commenter’s concerns with
respect to inadvertent failures to meet the
requirements of the nonexempt funds ex-
ception.
Another commenter recommended that
Example 5 in the provisions of the pro-
posed regulations, which illustrated the
application of the limited hours exception
(Prop. §53.4960-1(d)(3)(v)), be modified
to eliminate from the facts that ATEO 5
does not control CORP 3, as control of an-
other corporation by an ATEO is irrelevant
for purposes determining whether the re-
quirements of this exception are met, and
thus irrelevant to the conclusion in that ex-
ample. The commenter further suggested
that this fact be moved to Example 8 in the
proposed regulations, which illustrated
the application of the separate nonexempt
funds exception (Prop. §53.4960-1(d)(3)
(viii)), since control of another corpo-
ration by an ATEO is relevant for deter-
mining whether the requirements of that
exception are met, and thus relevant to
the conclusion in that example. The Trea-
sury Department and the IRS agree with
the commenter’s suggestion, and modi-
fied Example 5 in these final regulations
describing the limited hours exception
(§53.4960-1(d)(3)(v)) accordingly. How-
ever, because of changes to the nonexempt
funds exception as described later in this
Summary of Comments and Explanation
of Revisions, these final regulations re-
place Example 8 (§53.4960-1(d)(3)(viii))
with a new example.
1
H. Rep. 115–409, 115th Cong., 1st Sess. 333 (Nov. 13, 2017).
2
In a similar context, §53.4958-4(a)(2) treats excessive compensation paid to a disqualified person with respect to an applicable tax-exempt organization by a controlled entity of the organi-
zation as excessive compensation paid by the organization, and thus as an excess benefit transaction.

February 16, 2021 844 Bulletin No. 2021–7
c. Nonexempt Funds Exception
As previously discussed, the proposed
regulations also provided a “nonexempt
funds” exception for employees of a re-
lated non-ATEO organization who may
perform a large portion of their overall
services as an employee of the ATEO un-
der certain circumstances. Under the non-
exempt funds exception, an employee is
disregarded for purposes of determining
an ATEO’s five highest-compensated em-
ployees for a taxable year provided that
none of the ATEO, any related ATEO, or
any controlled taxable related organiza-
tion, pays the employee of the ATEO any
remuneration or grants a legally binding
right to nonvested remuneration to the
employee. When applying these require-
ments for the nonexempt funds exception,
the ATEO is not treated as paying remu-
neration that is paid by a related organi-
zation that also employs the individual,
so long as the ATEO does not reimburse
the payor. Further, to prevent indirect pay-
ment of remuneration by the ATEO, a re-
lated ATEO, or controlled taxable related
organization, no related organization that
paid remuneration to the individual may
provide services for a fee to the ATEO,
related ATEO, or any controlled taxable
related organization.
To satisfy the nonexempt funds excep-
tion, the proposed regulations also stated
that the employee must have provided
services primarily to a taxable related or-
ganization or other non-ATEO (other than
a controlled taxable related organization
of the ATEO) during the applicable year.
For this purpose, an employee is treated as
having provided services primarily to the
taxable related organization or other non-
ATEO (other than a controlled taxable
related organization of the ATEO) only
if the employee provided services to the
taxable related organization or other non-
ATEO for more than 50 percent of the em-
ployee’s total hours worked for the ATEO
and all related organizations (including
ATEOs) during the applicable year.
One commenter expressed concern
that, for purposes of the nonexempt funds
exception, the requirement limiting the
employee’s hours worked for the ATEO
and all related ATEOs to not more than
50 percent of the total hours worked for
the ATEO and all related organizations
during an applicable year was too restric-
tive and may result in inadvertent failures.
The Treasury Department and the IRS
acknowledge the issues presented by this
comment. These final regulations modify
the exception by expanding the measure-
ment period from one applicable year to
two applicable years (that is, the current
applicable year and the preceding applica-
ble year are treated as a single measure-
ment period) for purposes of determining
whether an employee provided services to
the ATEO and all related ATEOs for not
more than 50 percent of the employee’s
total hours worked as an employee of the
ATEO and all related organizations during
the applicable year and the prior applica-
ble year. This modification provides addi-
tional flexibility for situations in which an
employee “rotates” to an ATEO for a peri-
od that extends longer than six months, or
when an employee unexpectedly provides
services beyond six months in an applica-
ble year.
Another commenter recommended that
the nonexempt funds exception be mod-
ified to prohibit the provision of services
for a fee to a taxable entity only if the
ATEO actually owns a controlling interest
in the taxable entity, as opposed to being
attributed the ownership interest under the
section 318 attribution principles, which
were incorporated into the definitions of
a related organization and control. The
commenter asserted that the related or-
ganizations requirement under the pro-
posed nonexempt funds exception (Prop.
§53.4960-1(d)(2)(iii)(A)(3)), which incor-
porates the section 318 attribution princi-
ples, is unduly restrictive, and would have
unintended results, as illustrated by the
following example. An individual who is
the sole shareholder of two taxable cor-
porations (Corporation 1 and Corporation
2) also controls an ATEO (by having the
power to appoint a majority of the ATEO’s
board of directors); Corporation 1 pro-
vides administrative services for a fee to
Corporation 2; employee of Corporation
1 provides services only to Corporation 1
and does not provide any services to the
ATEO. Under these facts, Corporation 2 is
deemed to be controlled by the ATEO be-
cause, for purposes of determining wheth-
er an ATEO controls an organization un-
der Prop. §53.4960-1(i)(2)(vii)(B)(2), if
a person controls an ATEO, the ATEO is
treated as owning a percentage of the stock
owned by that person in accordance with
the percentage of directors of the ATEO
that are controlled by that person. Because
the related organizations requirement pro-
hibits the payment of a fee by a related or-
ganization to a controlled taxable related
organization for services performed by an
employee of the controlled taxable related
organization, and because Corporation 1
is providing services for a fee to Corpo-
ration 2, which is deemed to be controlled
by the ATEO, no employee of Corporation
1 could meet the requirements of the pro-
posed nonexempt funds exception. The
commenter suggested that this result is
inappropriate because the sharing of ser-
vices between two taxable corporations in
which an ATEO has no actual ownership
interest would not circumvent the legisla-
tive intent of section 4960. The Treasury
Department and the IRS agree with the
commenter’s recommendation. Accord-
ingly, these final regulations modify the
attribution rules as they apply for purpos-
es of determining eligibility for the non-
exempt funds exception by disregarding
the application of downward attribution in
applying section 318(a)(3) to corporations
and other entities and in applying section
318 principles to nonstock organizations.
This modification applies only for pur-
poses of applying the nonexempt funds
exception and does not apply for purposes
of determining whether an organization is
a related organization generally.
d. Limited Services Exception
The proposed regulations provided a
“limited services” exception, under which
an employee is not considered for purpos-
es of determining an ATEO’s five high-
est-compensated employees for a taxable
year if, during the applicable year, the
ATEO paid less than 10 percent of the
employee’s total remuneration during the
applicable year for services performed as
an employee of the ATEO and all related
organizations. However, if an employee
would not be considered for purposes of
determining the five highest-compensat-
ed employees of any ATEO in an ATEO’s
group of related organizations because no
ATEO in the group paid at least 10 per-
cent of the total remuneration paid by the
group during the applicable year, then this

Bulletin No. 2021–7 845 February 16, 2021
exception does not apply to the ATEO that
paid the employee the most remuneration
during that applicable year. No comments
were received on that proposed rule, and
these final regulations retain that rule
without change.
F. Medical Services
Section 4960(c)(3)(B) provides that re-
muneration for purposes of section 4960
does not include the portion of any remu-
neration paid to a licensed medical profes-
sional (including a veterinarian) that is for
the performance of medical or veterinary
services by such professional. Section
4960(c)(5)(C)(iii) provides a substantial-
ly similar exception from the definition of
“parachute payment.” The proposed regu-
lations provided rules relating to medical
services and licensed medical profession-
als. No comments were received on those
rules in the proposed regulations, and
these final regulations adopt the rules in
the proposed regulations without change.
For further discussion of these rules, see
section II.F. of the Explanation of Provi-
sions of the proposed regulations, titled
“Medical Services.”
These final regulations also adopt the
rule in the proposed regulations that a “li-
censed medical professional” is an indi-
vidual who is licensed under state or local
law to perform medical services. In addi-
tion to doctors, nurses, and veterinarians,
a licensed medical professional generally
would include dentists and nurse prac-
titioners and may include other medical
professionals, depending on the applicable
state or local law. For a discussion of other
issues related to remuneration for medical
or veterinary services, including a rule
for allocating remuneration received for a
combination of medical and non-medical
services, see section III.B. of this Summa-
ry of Comments and Explanation of Re-
visions, titled “Remuneration Related to
Medical Services.”
G. Predecessor Organization
Section 4960(c)(2)(B) provides that a
covered employee includes any employee
who was a covered employee of the ATEO
(or any predecessor) for any preceding
taxable year beginning after December 31,
2016. Because a covered employee, under
section 4960(c)(2), must be (or have been)
an employee of an ATEO, the predecessor
must also have been an ATEO at the time
the individual was employed by the prede-
cessor to be a covered employee. Thus, an
individual who is a covered employee of
an ATEO (or of an ATEO predecessor of
an ATEO) for one taxable year remains a
covered employee of that ATEO (and any
successor ATEOs) for subsequent taxable
years.
The proposed regulations defined “pre-
decessor” by reference to several enumer-
ated categories of organizational changes,
including acquisitions, mergers, other re-
organizations, and changes in tax-exempt
status. A predecessor ATEO ordinarily is
an ATEO that has transferred, by any of
several legal means, its assets and opera-
tions to another pre-existing or newly cre-
ated ATEO (the successor of the predeces-
sor ATEO). No comments were received
with respect to the proposed rules. These
final regulations adopt the definition of
predecessor as provided in the proposed
regulations without change. For further
information concerning these rules, see
section II.G. of the Explanation of Pro-
visions of the proposed regulations, titled
“Predecessor Organization.”
H. Related Organization
Section 4960(c)(4)(A) provides that
remuneration paid to a covered employ-
ee by an ATEO includes any remunera-
tion paid with respect to employment of
the employee by any related person or
governmental entity,
3
and includes in the
definition of “remuneration” any remuner-
ation paid by the employer ATEO, related
ATEOs, and related non-ATEOs (includ-
ing taxable entities, nonprofit entities that
are not ATEOs, and governmental entities
that are not ATEOs). Section 4960(c)(4)
(B) defines a “related organization” of an
ATEO as a person or governmental en-
tity that controls, or is controlled by, the
ATEO; is controlled by one or more per-
sons that control the ATEO; is a support-
ed organization or a supporting organiza-
tion (as defined in sections 509(f)(3) and
509(a)(3), respectively) during the taxable
year of the ATEO, or, in the case of an
ATEO that is a voluntary employees’ ben-
eficiary association described in section
501(c)(9) (VEBA), establishes, maintains,
or makes contribution to the VEBA.
Section 4960(c)(4) does not define
“control” for purposes of identifying re-
lated organizations. To determine which
persons are related organizations under
section 4960(c)(4)(B), the proposed regu-
lations generally adopted the definition of
‘‘control’’ set forth in section 512(b)(13)
(D) and §1.512(b)-1(l)(4). Section II.H.
of the Explanation of Provisions of the
proposed regulations, titled “Related Or-
ganization,” explained that this standard
(and its ‘‘greater than 50 percent’’ thresh-
old) was intended to align the definition
of ‘‘related organization’’ for purposes of
section 4960 with the definition of ‘‘relat-
ed organization’’ for purposes of the an-
nual reporting requirements on Form 990,
“Return of Organization Exempt From
Income Tax,” and with other exempt orga-
nization control tests.
One commenter recommended that
these final regulations instead define
“control” based on the controlled group
rules in section 414(b) and (c) and the
regulations thereunder, which include an
80 percent control test. The commenter
suggested that the section 414(b) and (c)
controlled group test was more appropri-
ate for a number of reasons: the purpose
of section 414(b) and (c) is to treat relat-
ed parties as a single employer (the same
purpose as section 4960(c)(4)(C)), where-
as the purpose of section 512(b)(13) is to
tax abusive transactions; the regulations
under section 512(b)(13) do not reflect
statutory revisions; the control definition
under section 512(b)(13) is overinclusive;
and using the Form 990 test for control
does not reduce administrative burdens
because the Form 990 rules for identifying
an ATEO’s highest-compensated employ-
ees and calculating compensation differ
significantly from the section 4960 rules.
These final regulations do not adopt the
suggestion in this comment. Instead, these
final regulations adopt the rules in the pro-
posed regulations, which align the defini-
3
The proposed and final regulations refer to related persons and governmental entities collectively as related organizations.

February 16, 2021 846 Bulletin No. 2021–7
tion of control with the definition in the
Form 990 instructions, which, in turn, is
generally based on the section 512(b)(13)
standards. The Treasury Department and
the IRS have concluded that this defini-
tion of control is more appropriate and ad-
ministrable because the Form 990 control
definition and the section 512(b)(13) rules
are familiar to and used by exempt orga-
nizations. Similarly, an 80 percent control
threshold, while used in section 414(b)
and (c), as well as in regulations under
section 162(m), generally is not a standard
used for purposes of tax administration
related to exempt organizations, whereas
the 50 percent control threshold is a con-
trol test familiar to exempt organizations.
See, for example, the instructions to Form
990; §§1.509(a)-4(g)(1)(i); 1.509(a)-4(j)
(1); 56.4911-7(b); 53.4941(d)-1(b)(5);
53.4943-3(b)(3)(ii); 53.4958-4(a)(2)(ii)
(B); and 53.4968-3(b). In addition, sec-
tion 509(a)(3) supporting organizations
and their section 509(f)(3) supported or-
ganizations are defined as related organi-
zations under section 4960(c)(4)(B); the
adoption of an 80 percent control thresh-
old would be incongruous with the lower
standards of control for such organiza-
tions under §1.509(a)-4 (particularly in
the case of Type III supporting organiza-
tions, for which control is not required).
Further, the legislative history states that
the purpose for enacting section 4960 is
to deter “excessive compensation,”
4
indi-
cating an intent to deter arguably abusive
practices, and the Treasury Department
and the IRS have determined that use of a
higher control threshold would allow po-
tentially abusive compensation arrange-
ments among organizations that are relat-
ed to a lesser degree.
5
For these reasons,
and the reasons set forth in section II.H.
of the Explanation of Provisions of the
proposed regulations, titled “Related Or-
ganization,” these final regulations adopt
the rules regarding the overall definition
of “control” in the proposed regulations
without change.
To determine control of a nonstock
organization, the proposed regulations
provided rules similar to other regu-
lations dealing with control of tax-ex-
empt organizations (§§1.512(b)-1(l)(4)
(i)(b), 53.4958-4(a)(2)(ii)(B)(1)(iii), and
1.414(c)-5(b))
6
that provide that a person
is considered to control a nonstock organi-
zation under either a “removal power” test
or a “representative” test. No comments
were received addressing the “remov-
al power” test, and the final regulations
adopt these rules from the proposed reg-
ulations without change. Comments were
received on the “representative” test, and
in particular the manner in which the pro-
posed regulations would address certain
situations involving “accidental control.”
Under the representative test, a person
or governmental entity generally controls
a nonstock organization if more than 50
percent of the nonstock organization’s di-
rectors or trustees are also trustees, direc-
tors, officers, agents, or employees of the
person or governmental entity. Unlike the
representative test in §§1.512(b)-1(l)(4)
(i)(b), 53.4958-4(a)(2)(ii)(B)(1)(iii), and
1.414(c)-5(b), the proposed regulations
expressly included an officer of the person
or governmental entity as a representative
for purposes of determining control of a
nonstock organization.
In response to Notice 2019-09, a com-
menter raised the issue of “accidental con-
trol” presented by the representative test
in which, for example, control of an orga-
nization by an employer may be found be-
cause a few lower-level employees of the
employer serve on the board of directors
of the organization. The proposed regu-
lations addressed this issue by permitting
a nonstock organization (or its putative
controlling person or governmental enti-
ty) to qualify for an exception from con-
trol status if the employees of the person
or governmental entity that are directors
or trustees of the nonstock organization
are not trustees, directors, officers, or em-
ployees with the powers of a director or
officer, of the person or governmental en-
tity and are not acting as representatives of
the person or governmental entity in their
service with the nonstock organization. A
nonstock organization that relies on this
exception must report its reliance on this
exception on the applicable Form 990 and
provide supporting details.
Another commenter on the proposed
regulations stated that compliance with
this exception to avoid “accidental con-
trol” under the representative test places
additional reporting burdens on exempt
organizations and recommended that these
final regulations remove “employees”
altogether from the list of deemed repre-
sentatives and instead focus the represen-
tative test on the actual decision-makers
in the organization. The commenter sug-
gested that an expansive list of deemed
representatives, including employees, is
more justifiable with an 80 percent con-
trol threshold. These final regulations do
not adopt the commenter’s suggestions.
The Treasury Department and the IRS
have concluded that a rule that treats as
non-officers any employees not defined
as officers under the organization’s or-
ganizing documents may be subject to
abuse because employees frequently func-
tion as officers, even if they do not have
that title. Further, a rule that treats any
employee without the title of officer as
a non-officer would be inconsistent with
other Code provisions addressing exempt
organizations, which generally treat as an
officer any person with similar powers.
See, for, sections 4946(b)(1), 4955(f)(2)
(A), 4958(f)(2), 4965(d)(1), and 4966(d)
(3)(A). In addition, an employee of an
organization (such as a department head)
may serve ex officio on the board of anoth-
er organization, and, in substance, serve in
a representative capacity. Similarly, the
facts of other arrangements in which an
employee serves on another organization’s
board may demonstrate that the employee
is serving as a representative of the em-
ployer. Finally, the percentage threshold
of control is not necessarily relevant to the
determination of whether the individual is
serving in a representative capacity—an
employer with less than a specific thresh-
old percentage may still have reasons to
have an employee represent its interests
4
H. Rep. 115–409, supra, at 333.
5
The imposition of excise tax under section 4960 is not determinative as to whether the remuneration paid to the covered employee is excessive or unreasonable compensation for purposes of
sections 4941 or 4958. Similarly, there is no presumption, inference, or basis for concluding that remuneration paid to a covered employee that is not subject to excise tax under section 4960
is reasonable compensation for purposes of determining liability for excise tax under sections 4941 or 4958.
6
See also the representative test in section 4911(f)(2)(B)(i) for determining affiliated organizations.

Bulletin No. 2021–7 847 February 16, 2021
on another organization’s board of direc-
tors. For these reasons, these final regula-
tions adopt without change the representa-
tive rules in the proposed regulations.
The proposed regulations also ad-
dressed the status of foreign organizations
as ATEOs, excluding them from ATEO
status if described in section 4948(b) and
the regulations thereunder. The Treasury
Department and the IRS requested com-
ments on whether a foreign related organi-
zation described in section 4948(b) should
be exempt from tax imposed by section
4960(c)(4)(C) and, if so, whether remu-
neration paid by such an organization
should nonetheless be taken into account
for purposes of determining excess remu-
neration and allocating liability among the
ATEO and related organizations that are
subject to the excise tax imposed by sec-
tion 4960. No comments were received on
these issues. However, the Treasury De-
partment and the IRS have concluded that
it is appropriate to address these issues in
these final regulations.
Chapter 42 of the Code applies gen-
erally to private foundations and other
tax-exempt organizations and the excise
taxes in chapter 42 generally are payable
by exempt organizations and in some cas-
es by persons associated with them. How-
ever, under section 4948(b), sections 507
and 508 and chapter 42 do not apply to a
foreign organization that has not received
substantial support (other than gross in-
vestment income) from United States
sources. Section 509(d) defines support for
purposes of chapter 42 as including gifts,
gross receipts from an activity that is not
an unrelated trade or business under sec-
tion 513, net income from unrelated busi-
ness activities, gross investment income,
tax revenues levied for the benefit of the
organization, and the value of services
or facilities furnished by a governmental
unit without charge—a breadth of items
that support a tax-exempt organization.
Section 4948(b) is thus concerned with
foreign private foundations (including
entities treated as private foundations for
purposes of chapter 42) and other tax-ex-
empt organizations that have received suf-
ficient support from United States sources
to warrant subjection to taxation and vari-
ous prohibitions under chapter 42. There-
fore, the Treasury Department and the IRS
have determined that it is appropriate to
exclude from taxation under section 4960
as a related organization any foreign orga-
nization that is both described in section
4948(b) and is either exempt from tax
under section 501(a)
7
or a taxable private
foundation.
8
Such organizations excluded
from the excise tax imposed by section
4960 are referred to as “section 4948(b)
related organizations.”
While chapter 42 taxes are inapplica-
ble to section 4948(b) related organiza-
tions, those organizations’ activities that
otherwise would have resulted in chapter
42 taxes may have other consequences.
For example, section 4948(c) in certain
circumstances imposes loss of exemption
on an exempt organization described in
section 4948(b) that engages in activities
that would result in chapter 42 taxes for
domestic organizations. Therefore, the
Treasury Department and the IRS have
determined that the remuneration paid to
a covered employee of an ATEO by a sec-
tion 4948(b) related organization must be
taken into account by the ATEO and any
related organizations subject to the excise
tax imposed by section 4960 for purposes
of determining an ATEO’s (and related or-
ganizations’) liability under section 4960
and the ATEO’s five highest-compensat-
ed employees, even though the section
4948(b) related organization is not subject
to the excise tax imposed by section 4960
on the excess remuneration that is other-
wise allocable to that organization. These
final regulations also clarify that for pur-
poses of applying the exclusion from sta-
tus as an ATEO or a related organization,
whether the foreign organization meets
the requirements of section 4948(b) is de-
termined at the end of the organization’s
taxable year.
III. Remuneration
A. In General
Consistent with section 4960(c)(3)
(A), the proposed regulations defined
“remuneration” as wages under section
3401(a) (meaning generally amounts sub-
ject to Federal income tax withholding),
but excluding designated Roth contribu-
tions under section 402A(c) and including
amounts required to be included in gross
income under section 457(f). Remuner-
ation does not include certain retirement
benefits, including payments that are con-
tributions to or distributions from a trust
described in section 401(a); payments
under or to an annuity plan described in
section 403(a) at the time of payment;
payments described in section 402(h)(1)
and (2) if, at the time of the payment, it
is reasonable to believe that the employee
will be entitled to an exclusion under that
section for the payment; payments under
an arrangement to which section 408(p)
applies; or payments under or to an eligi-
ble deferred compensation plan described
in section 457(b) and maintained by an
eligible employer described in section
457(e)(1)(A) (governmental employer) at
the time of payment. See section 3401(a)
(12). Remuneration includes a parachute
payment, but excess remuneration does
not include a parachute payment that is
an excess parachute payment. These final
regulations adopt these rules provided in
the proposed regulations without change.
One commenter recommended that, for
purposes of computing the excise tax, sec-
tion 4960(c)(4)(A) should be interpreted
to include only remuneration related to the
employment of an employee by an ATEO,
which would include remuneration paid
by a related person or related governmen-
tal entity with respect to an ATEO or by
any other third party, but only if the pay-
ment related to the employee’s employ-
ment by the ATEO. The commenter stated
that this suggested interpretation would
ensure that all remuneration with respect
to a covered employee’s employment by
an ATEO, including remuneration paid by
a related organization of an ATEO with re-
spect to services performed for the ATEO,
would be included in computing the tax
under section 4960(a). The commenter
asserted that the suggested interpretation
would avoid the unintended result, caused
by the proposed regulations, of subjecting
7
Some types of exempt organizations are limited to domestic organizations, such as section 501(c)(10) fraternal organizations.
8
A private foundation that loses its exemption under section 501(c)(3) remains a taxable private foundation until its private foundation status is terminated under section 507. See sections
509(b) and 4940(b).

February 16, 2021 848 Bulletin No. 2021–7
to the excise tax remuneration that is paid
by persons who are not ATEOs for an in-
dividual’s services that are unrelated to an
ATEO.
The Treasury Department and the IRS
have concluded that the more natural
reading of the statute is that remuneration
paid to a covered employee of an ATEO
includes remuneration paid by a relat-
ed organization with respect to services
performed as an employee for the related
organization. In addition, adoption of the
commenter’s suggestion could raise the
potential for abuse because it relies on an
ability to identify the specific recipient
of services that an employee provides to
multiple entities and determine the rela-
tive value of the services or allocate the
compensation to the entities under a rea-
sonable allocation method. Specifically,
given the facts and circumstances analysis
that in many cases may be difficult and
burdensome to administer, adoption of
the suggestion could provide an opening
for related taxpayers to coordinate their
activities to mischaracterize the employer
of an individual with respect to some or
all services provided to a related organiza-
tion, or to misallocate portions of the total
remuneration paid by the related taxpay-
ers to the individual as paid for services
provided as an employee of a related or-
ganization, so that all the related entities
avoid any liability under section 4960
while still providing what would other-
wise be excess remuneration to the indi-
vidual as an employee of an ATEO. While
this type of identification and allocation
may be needed for other tax purposes,
including in some cases the allocation of
liability under section 4960, those appli-
cations do not involve a situation such as
this in which all the entities may benefit
from the mischaracterizations through the
avoidance of the potential liability. Thus,
the interpretation provided in these final
regulations also is consistent with the ex-
ercise of authority in section 4960(d) to
prevent avoidance of the tax imposed by
section 4960 by providing compensation
through a third party. Further, adoption of
the commenter’s suggestion could raise is-
sues regarding the role of section 4960(c)
(6), the statutory provision coordinating
the application of section 162(m) and sec-
tion 4960, given the impact that adoption
of the suggestion would have on the scope
of circumstances to which that provision
may apply. For these reasons, these final
regulations do not limit the application
of section 4960(c)(4)(A) to remuneration
paid solely with respect to employment
by an ATEO or for services provided to an
ATEO, as suggested by the commenter.
The commenter also suggested that
these final regulations not treat remunera-
tion paid by a related organization as paid
by the ATEO if a covered employee is not
employed by an ATEO at any time during
an applicable year. For example, in cir-
cumstances in which a covered employee
of an ATEO performs services for a relat-
ed non-ATEO but provides no services for
the ATEO during an applicable year, the
commenter suggested that compensation
for those services not be treated as remu-
neration under section 4960. These final
regulations do not adopt this suggestion.
Section 4960(c)(2)(B) provides that once
an individual is a covered employee of
an ATEO (or any predecessor), the em-
ployee remains a covered employee for
all subsequent years. Section 4960(c)(4)
(A) provides that “remuneration of a cov-
ered employee by an [ATEO]” includes
“any remuneration paid with respect to
employment of such employee by any
related person or governmental entity.”
The Treasury Department and the IRS
have concluded that the better interpre-
tation of section 4960(c)(2)(B) and (c)(4)
(A), when read together, is that compen-
sation paid to a covered employee by a
related organization during an applicable
year is remuneration for purposes of sec-
tion 4960, even if the covered employee
does not perform services as an employee
of the ATEO during the applicable year.
In addition, the commenter’s suggestion
also raises administrability issues similar
to those that would arise if only remuner-
ation for services provided to the ATEO
were taken into account. If an employee
provides services to different members of
a group of related organizations from year
to year, it may be difficult to determine
what remuneration is allocable to services
provided to each group member. There-
fore, the commenter’s suggestion would
be similarly difficult and burdensome to
administer and could raise the potential
for abuse.
The same commenter also suggested
that these final regulations apply the sub-
stance of the limited hours and nonexempt
funds exceptions for purposes of deter-
mining remuneration paid. These final
regulations do not adopt this suggestion
because the Treasury Department and the
IRS have concluded that the statute does
not provide the authority to apply these ex-
ceptions to the definition of remuneration.
The statute does not define compensation
for purposes of identifying the five high-
est-compensated employees, and thus the
statute permits flexibility in the rules for
determining the five highest-compensated
employees. In contrast, section 4960(c)(3)
(A) defines remuneration as wages within
the meaning of section 3401(a) (with cer-
tain specified modifications) paid by an
ATEO and section 4960(c)(4)(A) provides
that “remuneration of a covered employ-
ee by an [ATEO] shall include any remu-
neration paid with respect to employment
of such employee by any related person
or governmental entity.” These statutory
provisions do not provide the flexibility to
adopt the commenter’s suggestion to in-
clude the exceptions applicable to the de-
termination of a covered employee in the
definition of remuneration.
Another commenter requested that
these final regulations limit the scope of
the definition of remuneration to include
only regular employee wages, as defined
in section 3401(a), and to exclude taxable
fringe benefits from the section 4960 defi-
nition of remuneration. The commenter
asserted that certain taxable fringe bene-
fits, such as paid parking above the exclud-
able limit and reimbursement of childcare
expenses, are not the type of remuneration
that was intended to be taxed under section
4960. The commenter further suggested
that the inclusion of taxable fringe ben-
efits in remuneration would have an ad-
verse effect on certain employers’ ability
to attract and retain key employees. These
final regulations do not adopt this com-
menter’s suggestion because it would be
inconsistent with the statutory provisions.
Section 4960(c)(3)(A) defines remunera-
tion as amounts that are “wages” within
the meaning of section 3401(a). Section
3401(a) defines “wages” as all remunera-
tion for services performed by an employ-
ee for his employer, including the cash
value of all remuneration (including ben-
efits) paid in any medium other than cash,
with certain specific exclusions. Taxable

Bulletin No. 2021–7 849 February 16, 2021
fringe benefits, including parking above
the excludable limit and reimbursement of
childcare expenses, are not excluded from
wages under section 3401(a). In addition,
section 4960(c)(3) specifically excludes
other type of wages, such as designated
Roth contributions and remuneration for
medical services, indicating a legislative
intent for all other types of wages to be
included. For these reasons, the Treasury
Department and the IRS have determined
that providing further exclusions such as
those suggested would be inconsistent
with the statute and these final regulations
do not adopt this suggestion.
The proposed regulations clarified that
remuneration includes any amount inclu-
dible in gross income as compensation
under section 7872 and the regulations
thereunder. For example, under §1.7872-
15(e)(1)(i), a below-market split-dollar
loan between an employer and employee
generally is treated as a compensation-re-
lated loan, and thus any imputed transfer
from the employer to the employee gen-
erally is a payment of compensation. Al-
though section 7872(f)(9) provides that
no amount shall be withheld under chap-
ter 24 of the Code with respect to any
amount treated as transferred or retrans-
ferred under section 7872(a) or received
under section 7872(b), those amounts are
“remuneration ... for services performed
by an employee for his employer” within
the meaning of section 3401(a) and are not
specifically excluded from wages under
section 3401(a). Thus, those amounts are
remuneration as defined in section 4960(c)
(3)(A). ATEOs that are private founda-
tions or section 509(a)(3) supporting or-
ganizations should consider, before en-
tering into these arrangements, that loans
(including transactions treated as loans for
Federal tax purposes, such as split-dollar
arrangements) to certain employees may
constitute an act of self-dealing under sec-
tion 4941 or an excess benefit transaction
under section 4958(c)(3).
A commenter recommended that
these final regulations, or alternatively
the preamble to these final regulations,
confirm that remuneration does not in-
clude amounts that are not includible in
gross income pursuant to the $10,000 de
minimis exception under section 7872(c)
(3). Under that exception, the foregone
interest attributable to any day on which
the aggregate outstanding amount of
loans between the borrower and lender
does not exceed $10,000 is not includi-
ble in gross income. These final regula-
tions adopt the commenter’s suggestion
and clarify that, in accordance with sec-
tion 7872, these de minimis amounts are
not remuneration for purposes of section
4960. Other than this comment that re-
sulted in this clarification, no further
comments were received on those pro-
visions of the proposed regulations, and
these final regulations adopt them with-
out further changes.
B. Remuneration Related to Medical
Services
Remuneration that is paid to a licensed
medical professional for medical ser-
vices is excluded from the definition of
“remuneration” for purposes of section
4960. (See section II.F. of the Summary
of Comments and Explanation of Revi-
sions, titled “Medical Services,” for a
further discussion of the scope of this ex-
ception.) When an employer pays remu-
neration to an employee for both medical
services (including related services, such
as medical recordkeeping) and other ser-
vices, the employer must allocate that
remuneration between remuneration paid
for medical services or for other services.
These final regulations adopt the proposed
regulations, with minor clarifications, and
permit taxpayers to use a reasonable, good
faith method to allocate remuneration be-
tween these two categories of services.
For this purpose, taxpayers may rely on a
reasonable allocation set forth in an em-
ployment agreement allocating remuner-
ation between medical services and other
services. If some or all of the remunera-
tion is not reasonably allocated in an em-
ployment agreement, taxpayers must use
another reasonable method of allocation.
For example, allocating remuneration to
medical services based on the portion of
the total hours the employee worked for
the employer providing medical services
(determined based on records such as
patient, insurance, Medicare/Medicaid
billing records, or internal time reporting
mechanisms) would be a reasonable meth-
od.
In section III.B. of the Explanation of
Provisions of the proposed regulations,
titled “Remuneration Related to Medical
Services,” the Treasury Department and
the IRS requested comments on other rea-
sonable methods of allocating remunera-
tion between medical services and other
services. One commenter recommended
that an employer be permitted to make a
reasonable, good faith allocation between
remuneration for providing medical ser-
vices and remuneration for providing non-
medical services, not only with respect
to current remuneration but also with re-
spect to contributions and earnings under
a deferred compensation plan. These final
regulations adopt this recommendation
and clarify that an employer may make a
reasonable, good faith allocation between
remuneration for medical and nonmed-
ical services, regardless of the form of
compensation, and that an employer may
apply the same principles with respect to
contributions and earnings under a de-
ferred compensation plan.
C. When Remuneration Is Treated as
Paid
The proposed regulations addressed
when remuneration is treated as paid for
purposes of section 4960. The flush lan-
guage at the end of section 4960(a) pro-
vides that, for purposes of section 4960(a),
remuneration is treated as paid when
there is no substantial risk of forfeiture
of the rights to the remuneration within
the meaning of section 457(f)(3)(B). Al-
though section 4960(a) cross-references
the definition of “substantial risk of forfei-
ture” in section 457(f)(3)(B), the rule un-
der section 4960(a) providing that remu-
neration is treated as paid when there is no
substantial risk of forfeiture of the rights
to the remuneration is neither limited to
remuneration that is otherwise subject
to section 457(f) nor limited to amounts
paid pursuant to a nonqualified deferred
compensation arrangement. The proposed
regulations provided that, for purposes of
section 4960(a), all forms of remuneration
except for “regular wages” as described
in the next paragraph are treated as paid
when the remuneration is not subject to a
substantial risk of forfeiture. These final
regulations adopt this payment timing rule
provided in the proposed regulations with
certain modifications, as discussed in fur-
ther detail in this section.

February 16, 2021 850 Bulletin No. 2021–7
To clarify when remuneration that is
never subject to a substantial risk of for-
feiture is treated as paid, the proposed
regulations provided that remuneration
that is a “regular wage” within the mean-
ing of §31.3402(g)-1(a)(ii) is treated as
paid at the time of actual or constructive
payment. A “regular wage” is defined
in §31.3402(g)-1(a)(ii) as remuneration
“paid at a regular hourly, daily, or sim-
ilar periodic rate (and not an overtime
rate) for the current payroll period or
at a predetermined fixed determinable
amount for the current payroll period.”
These final regulations adopt these rules
provided in the proposed regulations
without change. Because the final reg-
ulations provide that remuneration that
is a regular wage within the meaning of
§31.3402(g)-1(a)(1)(ii) is treated as paid
when actually or constructively paid,
an employer will not need to determine
amounts of regular wages that vested in
the preceding year for purposes of section
4960. For example, if a pay period begins
December 25, 2022, and ends January 7,
2023, and the salary for that period is not
actually paid until January 14, 2023, then
the salary for the pay period is treated as
paid in 2023, and the employer need not
treat any amount as remuneration paid in
2022 due to vesting in 2022.
The proposed regulations treated
an amount that is not regular wages as
paid when it is no longer subject to a
substantial risk of forfeiture within the
meaning of section 457(f)(3)(B) and re-
ferred to such an amount as “vested.”
The Treasury Department and the IRS is-
sued proposed regulations under section
457(f) in 2016 (81 FR 40548 (June 22,
2016)), upon which taxpayers may rely
for periods before the applicability date
of the final section 457(f) regulations.
Under Prop. §1.457-12(e)(1), an amount
of compensation is subject to a substan-
tial risk of forfeiture only if entitlement
to the amount is conditioned on the fu-
ture performance of substantial services,
or upon the occurrence of a condition
that is related to a purpose of the com-
pensation if the possibility of forfeiture
is substantial. See Prop. §1.457-12(e)(3)
for examples of the rules relating to sub-
stantial risk forfeiture. These final reg-
ulations adopt the rules provided in the
proposed regulations, including the defi-
nition of “substantial risk of forfeiture”
in Prop. §1.457-12(e)(1). Any changes to
the proposed regulations under section
457(f) when finalized will be considered
for purposes of section 4960, and further
guidance may be issued, if appropriate,
including any transition guidance that
may be needed to take into account peri-
ods before and after the applicability date
of the definition of substantial risk of
forfeiture under the final section 457(f)
regulations.
In section III.C. of the Explanation of
Provisions of the proposed regulations,
titled “When Remuneration Is Treated
as Paid,” the Treasury Department and
the IRS invited comments regarding any
burdens that could be avoided through a
short-term deferral rule and how such a
rule could be designed to avoid permit-
ting inappropriate avoidance of the tax.
One commenter recommended that these
final regulations extend the rule for “reg-
ular wages” as defined in §31.3402(g)-
1(a) to amounts that are not treated as de-
ferred compensation under §1.409A-1(b)
(4) or Prop. §1.457-12(d)(2) because
such amounts are paid within the “short-
term deferral” period. The commenter
suggested that other remuneration that
falls outside the definition of “regular
wages” be treated as remuneration when
actually or constructively paid, including
benefits under bona fide severance pay
plans and death and disability plans, as
well as annual bonuses, long-term incen-
tive pay, business expense reimburse-
ments, and noncash fringe benefits. The
commenter noted that such amounts are
treated as wages for other reporting pur-
poses, including Federal Insurance Con-
tributions Act (FICA) wage reporting,
when actually or constructively paid, and
thus the rules under the proposed regu-
lations result in a timing mismatch. The
commenter asserted that this recommen-
dation would substantially reduce the
administrative burden and potential for
errors created by the broad timing rule
in the proposed regulations, yet affect a
limited range of remuneration.
Another commenter recommended
that these final regulations provide that
the short-term deferral exception to the
definition of deferred compensation for
section 457(f) apply to section 4960
such that the year of inclusion for in-
come tax purposes matches the year of
inclusion for section 4960 purposes. The
commenter interpreted the statutory ref-
erence to wages under section 3401(a)
and amounts included in income under
section 457(f) as providing not only a
substantive rule but also a timing rule,
meaning the amount must either be wag-
es within the meaning of section 3401(a)
paid during that year or be an amount
included in income under section 457(f)
during that year in order to be treated as
remuneration paid in that year. Accord-
ing to the commenter, since amounts that
meet the definition of a short-term de-
ferral for purposes of section 457(f) are
neither wages under section 3401(a) nor
includible in income under section 457(f)
in the year of vesting, those amounts
should be treated as remuneration for
purposes of section 4960 only in the year
actually paid.
Further, the commenter noted that ap-
plying a short-term deferral rule would
simplify administration for employers
because the determination of remunera-
tion would more closely track the deter-
mination of wages for Form W-2, “Wage
and Tax Statement,” reporting. The com-
menter acknowledged the concern stated
in section III.C. of the Explanation of
Provisions of the proposed regulations,
titled “When Remuneration Is Treated
as Paid,” that a short-term deferral rule
would permit an ATEO to select the year
in which remuneration would be subject
to tax under section 4960, but observed
that an individual may become a covered
employee during the section 457(f) short-
term deferral period after the year of
vesting, and thus the proposed rule could
actually result in amounts not being sub-
ject to the excise tax. The commenter
also observed that treating short-term
deferrals as remuneration in the year of
vesting requires that those amounts be
present-valued and that earnings be in-
cluded in remuneration in the subsequent
year, resulting in additional complexity
for ATEOs. Finally, the commenter sug-
gested that an employer be permitted to
include an amount in remuneration in the
year of vesting or include the amount in
the year of payment, as is permitted for
FICA tax purposes under §31.3121(v)
(2)-1(b)(3)(iii), and require that employ-
ers apply consistent treatment of amounts

Bulletin No. 2021–7 851 February 16, 2021
with respect to its selection of the timing
of FICA taxation of short-term deferrals
and timing of the treatment as remunera-
tion for purposes of section 4960.
These final regulations do not adopt
the commenter’s suggestions to apply a
“short-term deferral” rule. Rather, these
final regulations adopt the applicable pro-
visions of the proposed regulations with-
out change. Under section 4960(c)(3), an
amount must either be wages under sec-
tion 3401(a) or be includible in income
under section 457(f) in order to be remu-
neration under section 4960. However, the
rules under section 4960(c)(3) determine
whether an amount is remuneration, not
when the remuneration is considered to be
paid. The flush language at the end of sec-
tion 4960(a) provides that, for purposes of
section 4960(a), remuneration is treated
as paid when there is no substantial risk
of forfeiture, as defined in section 457(f)
(3)(B), of the rights to the remuneration.
Section 3401(a) primarily focuses on
whether, not when, amounts are includible
in wages; the basic timing rule for wage
inclusion appears in regulations under
section 3402(a), not section 3401(a). Spe-
cifically, §31.3402(a)-1(b) provides that
wages are paid when actually or construc-
tively paid and explains what it means for
an amount to be constructively paid. Thus,
the cross-reference to section 3401(a) (and
not section 3402(a)) in section 4960(c)(3)
establishes the scope of the term “remu-
neration” without regard to timing, but
the flush language in section 4960(a) es-
tablishes the timing rule that applies to
all forms of remuneration. In addition to
being inconsistent with the statutory lan-
guage addressing the timing of the pay-
ment of remuneration, allowing a short-
term deferral rule similar to the rule in
§1.409A-1(b)(4) and Prop. §1.457-12(d)
(2) could permit an employer to determine
the taxable year in which the amount is
treated as paid, which could be used not
only to manipulate the application of sec-
tion 4960(a) to the remuneration paid, but
also to manipulate the identification of
covered employees.
This application of the statutory lan-
guage results in circumstances in which
the amount of remuneration paid for pur-
poses of section 4960 is not the same as
the amount reported in any box on Form
W-2 for an applicable year. However, as
described later in this section, these final
regulations address the administrative
burden of calculating the present value of
vested but unpaid amounts by expanding
the ability to include at vesting the full
amount that is to be paid in circumstanc-
es in which there is a short delay between
vesting and payment.
These final regulations adopt the rule
set forth in the proposed regulations that
provided that an amount of remuneration
treated as paid generally is the present
value of the remuneration on the date on
which the covered employee vests in the
right to payment of the remuneration. The
employer must determine the present val-
ue using reasonable actuarial assumptions
regarding the amount, time, and probabil-
ity that the payment will be made. These
final regulations do not provide rules for
the determination of present value. How-
ever, an employer may determine the
present value using the rules set forth in
Prop. §1.457-12(c)(1). The Treasury De-
partment and the IRS anticipate that final
regulations addressing the determination
of present value for purposes of section
4960 will be issued when final regulations
under section 457(f) are issued. Until ac-
tually or constructively paid or otherwise
includible in gross income of the employ-
ee, any amount treated as paid at vesting
is referred to as “previously paid remuner-
ation.”
To reduce the administrative burden of
determining the present value of remuner-
ation in certain circumstances that would
involve minimal discounting, these final
regulations adopt the rule provided in the
proposed regulations that the employer
may treat the entire amount to be paid on a
future date (without making a present val-
uation determination) as the present value
on the date of vesting. However, these fi-
nal regulations do not limit the application
of this rule to amounts that are paid un-
der a nonaccount balance plan described
in §1.409A-1(c)(2)(i)(C), but instead this
rule applies to any vested amount that is
scheduled to be paid within 90 days. For
example, an employer is not required to
discount an annual bonus of $10,000 that
vests on December 31, 2022, and is sched-
uled to be paid on February 15, 2023, to
reflect the delay in actual payment, but in-
stead may treat $10,000 as remuneration
paid in 2022.
D. Earnings and Losses
These final regulations generally adopt
the proposed regulations and provide spe-
cific rules for the treatment of earnings
and losses on previously paid remunera-
tion. In general, these rules are intended to
minimize administrative burdens in deter-
mining the amount of earnings and losses
treated as paid for an applicable year, as
well as in determining the amount of earn-
ings and losses across multiple compensa-
tion arrangements.
The proposed regulations provided that
net earnings on previously paid remuner-
ation are treated as vested (and therefore
paid) on the last day of the applicable year
in which they are accrued unless other-
wise actually or constructively paid before
that date. For example, the present value
of vested remuneration accrued to an em-
ployee’s account under an account bal-
ance plan described in §1.409A-1(c)(2)(i)
(A) (under which the earnings and losses
attributed to the account are based solely
on a predetermined actual investment or
a reasonable market interest rate) is treat-
ed as paid on the date accrued to the em-
ployee’s account and, until subsequently
actually or constructively paid, is treated
as previously paid remuneration. In addi-
tion, at the end of each applicable year in
which there is previously paid remunera-
tion remaining in the covered employee’s
account balance, the present value of any
net earnings accrued on that previously
paid remuneration (the increase in present
value due to the application of a predeter-
mined actual investment or a reasonable
market interest rate) is treated as remu-
neration paid in that applicable year. This
remuneration is then treated as previously
paid remuneration for subsequent applica-
ble years until actually or constructively
paid.
Similarly, the proposed regulations
provided that the present value of a vest-
ed, fixed amount of remuneration under
a nonaccount balance plan described in
§1.409A-1(c)(2)(i)(C) is treated as paid
on the date of vesting and subsequently
treated as previously paid remuneration
until actually or constructively paid. In
addition, at the end of each applicable
year in which previously paid remu-
neration remains as part of the covered
employee’s benefit under the plan, the

February 16, 2021 852 Bulletin No. 2021–7
net increase in the present value of that
amount during the year due solely to the
passage of time constitutes earnings and
is treated as remuneration paid. For this
purpose, earnings and losses from one
plan or arrangement are aggregated with
earnings and losses from any other plan
or arrangement in which the employ-
ee participates that is provided by the
same employer (but not across arrange-
ments provided by related but separate
employers). For purposes of determin-
ing earnings and losses, previously paid
remuneration under a plan or arrange-
ment is reduced by the amount actually
or constructively paid under the plan or
arrangement. These final regulations fur-
ther illustrate the operation of these rules
through examples.
One commenter recommended that
these final regulations permit, but not re-
quire, related employers to determine net
earnings on previously paid remuneration
on an aggregate basis by treating all earn-
ings and losses on the previously paid re-
muneration of related employers as paid
by the ATEO. The commenter explained
that in groups of related taxable and
tax-exempt organizations, related orga-
nizations often provide separate deferred
compensation plans to their employees.
Therefore, an individual employee who
works (or has worked) for multiple re-
lated employers might have several de-
ferred compensation plans, which often
differ considerably, with some being
nonaccount balance plans and others be-
ing account balance plans that may offer
very different investment options. As a
result, an individual employee might ac-
crue significant earnings in a year under
some deferred compensation plans but in-
cur significant losses in others. The com-
menter therefore suggested that these final
regulations permit aggregation of losses
with earnings among related employers
to avoid the inappropriate inflation of re-
muneration in certain circumstances. Any
concerns about manipulation due to per-
mitting aggregation could be addressed by
requiring employers to aggregate (or not
aggregate) earnings and losses consistent-
ly from year to year, with changes allowed
only infrequently—for example, every 3
years—unless in response to changes in
the composition of the group of related
organizations.
These final regulations do not adopt
the commenter’s suggestion to permit the
aggregation of earnings and losses among
related organizations. The commenter’s
suggestions would be feasible among re-
lated organizations only if they agreed to
either aggregate or disaggregate arrange-
ments as to all employees and also to co-
ordinate and integrate their remuneration
calculations across the separate plans
and arrangements that each employer es-
tablished to permit timely and accurate
calculations for each covered employee
(and employees that may become covered
employees) who participated in more than
one employer arrangement. Even if this
was feasible for a particular year, the reg-
ulatory framework would need to account
for the entry and departure of members
of the group of related organizations and
how the aggregation or disaggregation
would account for those events. This re-
gime would be complex and burdensome
for taxpayers and the IRS to administer
and is not warranted due to the limited po-
tential benefits. In addition, the aggrega-
tion of earnings and losses across related
employers would implicate the statutory
allocation of the liability for the tax on ex-
cess remuneration under section 4960(c)
(4)(C), since the aggregation of earnings
and losses would impact the relative re-
muneration paid by the separate employ-
ers.
E. Request for a Grandfathering Rule
One commenter suggested that these
final regulations provide for grandfather-
ing of employee remuneration contracts
executed on or before November 2, 2017,
so that amounts paid under such contracts
would not be treated as remuneration for
purposes of section 4960. The commenter
reasoned that the grandfathering of em-
ployee remuneration contracts executed
on or before November 2, 2017, would
help certain employers in overcoming
challenges in hiring executives, and that
the legislative history of the TCJA failed
to consider the differences between
tax-exempt employers and their taxable
counterparts. The final regulations do not
adopt the commenter’s suggested rule.
Section 13602(c) of TCJA, which added
section 4960 to the Code, did not provide
for a grandfathering rule and there is no
indication in the legislative history that
Congress intended that one be adopted
by regulation. In contrast, section 13601
of TCJA amended section 162(m) of the
Code and provided an explicit grandfa-
thering rule. Under these circumstances,
the Treasury Department and the IRS do
not find it appropriate to provide a grand-
fathering rule. However, these final regu-
lations provide rules that have the effect
of grandfathering remuneration that vest-
ed before the taxpayer’s first taxable year
beginning after December 31, 2017.
Section III.E. of the Explanation of
Provisions of the proposed regulations,
titled “Request for a Grandfather Rule,”
explained that one of the consequences of
treating remuneration as paid at the time
the remuneration vests is that any remu-
neration that vested prior to the first day
of the first taxable year of the ATEO be-
ginning after December 31, 2017, is not
considered remuneration for purposes
of section 4960. One commenter recom-
mended that the Treasury Department and
the IRS explicitly reflect this rule in these
final regulations. In response to this com-
ment, these final regulations provide that
any vested remuneration, including vested
but unpaid earnings accrued on deferred
amounts, that is treated as paid before the
effective date of section 4960 (January 1,
2018, for a calendar year employer) is not
subject to the excise tax imposed under
section 4960(a)(1). All earnings on those
vested amounts that accrue or vest after
the effective date, however, are treated as
remuneration paid for purposes of section
4960(a)(1).
Similarly, for an employee who has
vested compensation from years prior to
the taxable year in which the employee
first became a covered employee, these
final regulations adopt the rule in the pro-
posed regulations providing that vested
remuneration (including vested but unpaid
earnings) that would have been treated as
remuneration paid for a taxable year be-
fore the taxable year in which an employ-
ee first became a covered employee under
section 4960 is not remuneration subject to
the excise tax imposed by section 4960(a)
(1) for the first taxable year in which the
employee becomes a covered employee
or any subsequent year. However, subse-
quent earnings that accrue on those vested
amounts when the employee is a covered

Bulletin No. 2021–7 853 February 16, 2021
employee are treated as remuneration paid
for purposes of section 4960(a)(1).
F. Remuneration Paid to a Covered
Employee for Which a Deduction Is
Disallowed Under Section 162(m)
Section 4960(c)(6) provides that re-
muneration for which a deduction is
disallowed under section 162(m) is not
taken into account for purposes of sec-
tion 4960. Thus, remuneration that is
paid to a covered employee of an ATEO
who is also a covered employee of a re-
lated “publicly held corporation” or an
applicable individual of a related “cov-
ered health insurance provider” (as de-
fined in section 162(m)(2) and (m)(6)
(C), respectively), for which a deduction
is disallowed under section 162(m), gen-
erally is not treated as remuneration for
purposes of determining whether remu-
neration has been paid. However, that
remuneration is taken into account for
purposes of determining the ATEO’s five
highest-compensated employees. See
section II.E. of this Summary of Com-
ments and Explanation of Revisions, ti-
tled “Covered Employee.”
As discussed in section III.F. of the
Explanation of Provisions of the pro-
posed regulations, titled “Remuneration
Paid to a Covered Employee for Which a
Deduction Is Disallowed Under Section
162(m),” the application of this provision
raises significant issues stemming large-
ly from the difference in timing between
the payment of remuneration under sec-
tion 4960 (when the right to the amount
vests), and the availability of a deduction
that may be restricted by section 162(m)
(generally when the amount is paid).
Section III.F. of the Explanation of Pro-
visions of the proposed regulations, titled
“Remuneration Paid to a Covered Em-
ployee for Which a Deduction Is Disal-
lowed Under Section 162(m),” described
two possible approaches for addressing
these circumstances and requested com-
ments on those approaches. The Treasury
Department and the IRS continue to con-
sider the issues raised by this provision
in section 4960(c)(6) requiring coordina-
tion with section 162(m), including the
comments submitted, but have not yet
determined the appropriate manner of
implementation. Accordingly, these final
regulations do not address the coordina-
tion of sections 4960 and 162(m) in these
circumstances, but instead reserve a sec-
tion of these final regulations as a place
for future guidance.
Until that future guidance is issued,
taxpayers may use a reasonable, good faith
approach with respect to the coordination
of sections 4960 and 162(m) in circum-
stances in which it is not known whether
a deduction for the remuneration will be
disallowed under section 162(m) by the
due date (including any extension) of the
relevant Form 4720. For this purpose, a
reasonable, good faith approach must have
a reasonable basis for anticipating that the
compensation that a particular employee
will be paid in the future may be subject
to the deduction limitations of section
162(m). For example, it is not reasonable
for this purpose to anticipate that an ATEO
may become a public corporation by the
date the compensation will be paid absent
facts indicating that is a realistic potential-
ity. Additionally, until further guidance is
issued, the two approaches regarding de-
ferred compensation described in section
III.F. of the Explanation of Provisions of
the proposed regulations, titled “Remu-
neration Paid to a Covered Employee for
Which a Deduction Is Disallowed Under
Section 162(m),” will be treated as rea-
sonable, good faith approaches. However,
a third approach suggested by a comment-
er, under which section 162(m) would not
disallow a taxpayer’s deduction for remu-
neration that the taxpayer treated as excess
remuneration under section 4960 in a pre-
vious taxable year, will not be treated as a
reasonable, good faith approach, because
such an approach would be inconsistent
with section 162(m) and the regulations
thereunder.
IV. Excess Remuneration
In general, the excise tax imposed
under section 4960(a)(1) is based on the
remuneration paid (other than any excess
parachute payment) by an ATEO for the
taxable year with respect to employment
of any covered employee in excess of
$1 million. Consistent with the proposed
regulations, these final regulations refer
to this amount as “excess remuneration.”
The $1 million threshold provided in sec-
tion 4960(a)(1) is not adjusted for infla-
tion, and an amount subject to tax under
section 4960(a)(2) as an excess parachute
payment is not subject to tax under section
4960(a)(1) as excess remuneration.
As provided in section 4960(c)(4)(C),
if an individual performs services as an
employee for two or more related organi-
zations during an applicable year, one or
more of which is an ATEO, each employer
is liable for its proportionate share of the
excise tax. These final regulations adopt
the rules provided in the proposed regula-
tions for allocating liability for the excise
tax among the employers. For this pur-
pose, remuneration that is paid by a sep-
arate organization (whether related to the
ATEO or not) for services performed as an
employee of the ATEO is treated as remu-
neration paid by the ATEO. For a further
discussion of when amounts are treated as
paid by an ATEO, see section VI of this
Summary of Comments and Explanation
of Revisions, titled “Calculation, Report-
ing, and Payment of the Tax.”
V. Excess Parachute Payments
A. In General
The proposed regulations set forth rules
with respect to excess parachute payments
under section 4960. No comments were
received on these rules, and these final
regulations adopt them without change.
Section 4960(a)(2) imposes an excise tax
on any excess parachute payment. Section
4960(c)(5)(A) provides that “excess para-
chute payment” means an amount equal to
the excess of any parachute payment over
the portion of the base amount allocated
to such payment. Section 4960(c)(5)(B)
provides that “parachute payment” means
any payment in the nature of compensa-
tion to (or for the benefit of) a covered em-
ployee if the payment is contingent on the
employee’s separation from employment
with the employer and the aggregate pres-
ent value of the payments in the nature of
compensation to (or for the benefit of) the
individual that are contingent on the sepa-
ration equals or exceeds an amount equal
to 3-times the base amount. Under section
4960(c)(5)(C), certain retirement plan
payments, certain payments to licensed
medical professionals, and payments to
an individual who is not a “highly com-
pensated employee” (HCE) as defined in

February 16, 2021 854 Bulletin No. 2021–7
section 414(q) are not excess parachute
payments.
9
The excess parachute payment rules
under section 4960 are modeled after
section 280G, but section 4960(c)(5)(B)
defines “parachute payment” different-
ly than section 280G(b)(2). The section
4960 definition refers to payments con-
tingent on an employee’s separation from
employment, whereas the section 280G
definition refers to payments contingent
on a change in the ownership or effective
control of a corporation (or in the owner-
ship of a substantial portion of the assets
of the corporation). While these final reg-
ulations incorporate many of the concepts
found in the rules under §1.280G-1, with
modifications to reflect the statutory dif-
ferences between sections 280G and 4960,
they do not incorporate other rules under
§1.280G-1 because those rules address is-
sues that do not arise under section 4960.
In addition, many provisions in these fi-
nal regulations do not have parallel rules
under §1.280G-1 because they address is-
sues that arise under section 4960, but not
under section 280G.
The following sections provide a gen-
eral overview of these final regulations
for purposes of calculating the excise tax
imposed under section 4960(a)(2), noting
certain similarities and differences be-
tween these final regulations and the rules
under §1.280G-1. For more information
concerning these rules, including addi-
tional similarities and differences with
the rules under section 280G, see section
V of the Explanation of Provisions of the
proposed regulations, titled “Excess Para-
chute Payments.”
B. Definitions Related to Excess
Parachute Payments
These final regulations define “excess
parachute payment” and the term “para-
chute payment” for purposes of section
4960. Any payment in the nature of com-
pensation made by an ATEO (or any pre-
decessor or related organization) to a cov-
ered employee that is contingent on the
employee’s separation from employment
is taken into account for purposes of the
parachute payment calculation, assuming
no exclusion applies. Those combined
payments constitute a parachute payment
if the aggregate present value of all such
payments made to an individual equals
or exceeds 3-times the individual’s base
amount. A parachute payment is an excess
parachute payment to the extent it exceeds
one-times the individual’s base amount al-
located to the payment.
These final regulations define a “pay-
ment in the nature of compensation”
based on §1.280G-1, Q/A–11 and Q/A–
14. In general, any payment arising out of
an employment relationship is a payment
in the nature of compensation. A payment
in the nature of compensation is reduced,
however, by any consideration paid by
the covered employee in exchange for the
payment.
C. Payments Contingent on a Separation
from Employment
1. In General
Although section 4960 does not define
what it means for a payment to be con-
tingent on a separation from employment,
these final regulations generally treat a
payment as contingent on an employee’s
separation from employment only if there
is an involuntary separation from em-
ployment. If the payment is subject to a
substantial risk of forfeiture (defined in
a manner consistent with section 457(f))
that lapses upon an involuntary separa-
tion from employment, and the separation
causes the risk of forfeiture to lapse, the
payment is contingent on separation from
employment.
2. Requirement of Involuntary Separation
from Employment
Separation from employment (whether
voluntary or involuntary) often is used in
compensation arrangements as a trigger to
pay vested compensation. For example, it
is typical for a nonqualified deferred com-
pensation plan to provide that a payment
or a series of payments will be made or be-
gin upon a separation from employment,
including separation from employment
resulting from death or disability. The
vested amounts that are to be paid after a
separation from employment generally are
not treated as contingent on a separation
from employment because the amounts
will never be subject to forfeiture or oth-
erwise not paid (even if an employee does
not voluntarily or involuntarily terminate
employment during the employee’s life-
time, the payments will be made upon the
employee’s death). In these cases, the sep-
aration from employment functions only
as a payment timing event and is neither
a contingent event that may not occur nor
a precondition to entitlement to the pay-
ment.
3. Definition of “Involuntary Separation
from Employment”
If an amount is payable solely upon an
involuntary separation from employment,
then it is a payment contingent on an event
that may not occur and that is a precon-
dition to entitlement to the payment. The
definition of an “involuntary separation
from employment” set forth in these fi-
nal regulations is modeled after the defi-
nition of an “involuntary separation from
service” in §1.409A-1(n)(1), which also
was the model for the definition of an “in-
voluntary severance from employment”
under Prop. §1.457-11(d)(2). A separa-
tion from employment for good reason is
treated as an involuntary separation from
employment for purposes of section 4960
if certain conditions are met. For this pur-
pose, these regulations generally adopt the
standards set forth in §1.409A-1(n)(2) and
Prop. §1.457-11(d)(2)(ii).
These final regulations generally adopt
the standards of the section 409A regula-
tions for purposes of determining whether
there has been a separation from employ-
ment, except that for purposes of section
4960 a bona fide change from employee
to independent contractor status is treated
as a separation from employment. Be-
cause the section 409A regulations do not
9
Under section 414(q), a “highly compensated employee” generally is defined as any employee who was a five-percent owner at any time during the year or the preceding year or who had
compensation from the employer in the preceding year in excess of an inflation-adjusted amount. Notice 2019-59 (2019-47 I.R.B. 1091) and Notice 2020-79 (2020-46 I.R.B 1014), provide
that the inflation-adjusted amounts for 2020 and 2021 are $130,000 and $130,000, respectively. See section 414(q) and the regulations thereunder for additional rules, including the availability
of an election to treat no more than the top 20 percent of an employer’s employees as highly compensated employees by reason of their compensation.

Bulletin No. 2021–7 855 February 16, 2021
provide a standard for determining when
an involuntary change of status from em-
ployee to independent contractor results
in a separation from employment, in sec-
tion V.C.3. of the Explanation of Provi-
sions of the proposed regulations, titled
“Definition of ‘Involuntary Separation
from Employment,’” the Treasury Depart-
ment and the IRS requested comments on
whether additional guidance is needed on
this issue. No comments were received in
response to that request. Consistent with
the proposed regulations, these final reg-
ulations provide that a separation from
employment occurs in the case of a bona
fide and involuntary change of status from
employee to independent contractor in cir-
cumstances in which the change in status
otherwise meets the requirements for an
involuntary separation from employment.
With respect to when an employee oth-
erwise has terminated employment, these
final regulations adopt rules based on the
section 409A regulations. Specifically,
these regulations adopt the standards of
§1.409A-1(h)(1)(ii), providing that an an-
ticipated reduction in the level of services
of more than 80 percent is treated as a sep-
aration from employment, an anticipated
reduction in the level of services of less
than 50 percent is not treated as a separa-
tion from employment, and the treatment
of an anticipated reduction between these
two levels will depend on the facts and cir-
cumstances. The measurement of the an-
ticipated reduction in the level of services
is based on the average level of bona fide
services performed over the immediately
preceding 3 years (or shorter period for
an employee employed for less than 3 full
prior years). However, these regulations
do not adopt the rule in §1.409A-1(h)(1)
(ii), under which an employer may mod-
ify the level of the anticipated reduction
in future services that will be considered
to result in a separation from employment.
4. When a Payment Is Contingent on
Separation from Employment
In defining when a payment is con-
tingent on separation from employment,
these final regulations do not focus solely
on whether the payment would not have
been made but for a separation from em-
ployment, but also take into consideration
whether the separation from employment
accelerates the right to payment or the
lapse of a substantial risk of forfeiture
with respect to the right to payment. Gen-
erally, if the payment or the lapse of a sub-
stantial risk of forfeiture is accelerated as
a result of an involuntary separation from
employment (such as a payment that oth-
erwise would have vested and been paid
had the employee remained employed for
a subsequent period), then the value of any
accelerated payment plus the value of any
lapse of the substantial risk of forfeiture is
treated as contingent on a separation from
employment (since the employer would
not have provided the increased value in
the absence of an involuntary separation
from employment).
However, if the lapse of the substantial
risk of forfeiture is dependent on an event
other than the performance of services,
such as the attainment of a performance
goal, and if that event does not occur
prior to the employee’s separation from
employment, but the payment vests due
to the employee’s involuntary separation
from employment, then the full amount of
the payment is treated as contingent on the
separation from employment.
As discussed in section V.C.4. of the
Explanation of Provisions of the proposed
regulations, titled “When a Payment Is
Contingent on Separation from Employ-
ment,” a payment the right to which is not
subject to a substantial risk of forfeiture
within the meaning of section 457(f)(3)
(B) at the time of an involuntary separa-
tion from employment generally is not
contingent on a separation from employ-
ment (since the right to the payment is not
triggered by the separation from employ-
ment). However, the increased value of a
payment accelerated due to the involuntary
separation from employment, and the val-
ue of accelerated vesting due to the invol-
untary separation from employment, each
generally are treated as a payment contin-
gent on a separation from employment. In
addition, a payment for damages due to
the breach of an employment agreement
that is related to an involuntary separation
from employment generally constitutes a
payment contingent on a separation from
employment, and a payment for compli-
ance with a noncompetition agreement or
similar arrangement may, in certain situa-
tions, constitute a payment contingent on
a separation from employment.
Actual or constructive payment of an
amount that was previously includible in
gross income is not a payment contingent
on a separation from employment. For ex-
ample, a payment of deferred compensa-
tion after an involuntary separation from
employment that vested based on years of
service completed before the involuntary
separation from employment generally is
not a payment that is contingent on a sep-
aration from employment because the sep-
aration from employment may affect the
time of, but not the right to, the payment
(although the value of an acceleration of
the payment may be contingent on a sepa-
ration from employment).
Unlike Q/A–25 and Q/A–26 of
§1.280G-1, these regulations do not pro-
vide a presumption that a payment made
pursuant to an agreement entered into or
modified within 12 months of a separa-
tion from employment is a payment that
is contingent on a separation from em-
ployment. However, as discussed later in
this section, if the facts and circumstances
demonstrate that either the vesting or the
payment of an amount would not have oc-
curred but for the involuntary nature of the
separation from employment, the amount
will be treated as a payment contingent on
a separation from employment.
In addition, these final regulations do
not provide a rule similar to §1.280G-1,
Q/A–9 (exempting reasonable compen-
sation for services rendered on or after a
change in ownership or control from the
definition of “parachute payment”), which
would exclude reasonable compensation
for services provided after a separation
from employment. In most cases, the is-
sue of whether payments made after a sep-
aration from employment are reasonable
compensation for services will not arise
because the employee will not provide
services after the separation from employ-
ment. However, if the employee continues
to provide services (including as a bona
fide independent contractor) after an in-
voluntary separation from employment,
payments for those services are not con-
tingent on the involuntary separation from
employment to the extent those payments
are reasonable and are not made due to the
involuntary nature of the separation from
employment.
Notwithstanding the foregoing, if the
facts and circumstances demonstrate that

February 16, 2021 856 Bulletin No. 2021–7
either vesting or payment of an amount
(whether before or after an involuntary
separation from employment) would not
have occurred but for the involuntary na-
ture of the separation from employment,
the amount will be treated as contingent
on a separation from employment. For
example, an employer’s exercise of dis-
cretion to accelerate vesting of an amount
shortly before an involuntary separation
from employment may indicate that the
acceleration of vesting was due to the in-
voluntary nature of the separation from
employment and was therefore contingent
on the employee’s separation from em-
ployment.
In section V.C.4. of the Explanation of
Provisions of the proposed regulations, ti-
tled “When a Payment Is Contingent on
Separation from Employment,” the Trea-
sury Department and the IRS requested
comments on whether there are addition-
al types of payments made in connection
with separation from employment and
the extent to which these final regulations
under section 4960 should be modified to
ensure appropriate classification of those
payments as contingent or not contingent
on separation from employment. No com-
ments were received in response to this
request, and no modifications have been
made in the final regulations.
D. Three-Times-Base-Amount Test
Section 4960(c)(5) provides rules for
determining the tax on any excess para-
chute payment imposed under section
4960(a)(2). Section 4960(c)(5)(B) pro-
vides that a payment is a parachute pay-
ment only if the aggregate present value
of the payments in the nature of compen-
sation to (or for the benefit of) an indi-
vidual that are contingent on a separation
from employment equals or exceeds an
amount equal to 3-times the base amount.
Section 4960(c)(5)(D) provides that rules
similar to the rules of section 280G(b)
(3) apply for purposes of determining
the base amount, and section 4960(c)(5)
(E) provides that rules similar to the rules
of section 280G(d)(3) and (4) apply for
purposes of present value determinations.
Section 280G(b)(3) provides that “base
amount” means an individual’s annual-
ized includible compensation for the base
period. Section 280G(d)(2) defines “base
period” as the period consisting of the 5
most-recent taxable years of the service
provider ending before the date on which
the change in ownership or control occurs
or the portion of such period during which
the individual performed personal ser-
vices for the corporation.
These final regulations provide that the
“base amount” is the average annual com-
pensation as an employee of the ATEO
(including services performed as an em-
ployee of a predecessor or related organi-
zation) for the taxable years in the “base
period.” The base period is the 5 most-re-
cent taxable years during which the indi-
vidual was an employee of the ATEO (or
predecessor or related organization) or the
portion of the 5-year period during which
the employee was an employee of the
ATEO (or predecessor or related organi-
zation).
These final regulations provide rules
for determining whether a payment is an
excess parachute payment, including rules
for applying the 3-times-base-amount
test. The rules for determining the base
amount, base period, and present value,
including determining the present value of
payments that are contingent on uncertain
future events, are based on the rules un-
der §1.280G-1, Q/A–30 through Q/A–36
(substituting an involuntary separation
from employment for a change in control).
These final regulations describe when a
payment in the nature of compensation is
considered made for purposes of section
4960(a)(2), based on the rules in §1.280G-
1, Q/A–11 through Q/A–14. Consistent
with the rules provided under §1.280G-1,
Q/A–12(a), these final regulations provide
that the transfer of section 83 property
generally is considered a payment made
in the taxable year in which the fair mar-
ket value of the property would be inclu-
dible in the gross income of the covered
employee under section 83, disregarding
any election made by the employee under
section 83(b) or (i). In addition, similar to
the rules provided under §1.280G-1, Q/A–
13(a), these regulations generally provide
that stock options are treated as property
transferred on the date of vesting (regard-
less of whether the option has a “readily
ascertainable value” as defined in §1.83-
7(b)). For purposes of determining the
timing and amount of any payment related
to an option, the principles of §1.280G-1,
Q/A–13 and Rev. Proc. 2003-68 (2003-2
C.B. 398) apply.
E. Computation of Excess Parachute
Payments
Consistent with section 4960(c)(5)
(A), these final regulations provide that an
“excess parachute payment” is an amount
equal to the excess of any parachute pay-
ment over the portion of the base amount
allocated to the payment. The portion of
the base amount allocated to any para-
chute payment is the amount that bears
the same ratio to the base amount as the
present value of the parachute payment
bears to the aggregate present value of all
parachute payments to be made to the cov-
ered employee. The rules on allocation of
the base amount in these regulations are
based on §1.280G-1, Q/A–38.
VI. Calculation, Reporting, and Payment
of the Tax
ATEOs (and any related non-ATEO or-
ganizations) are liable for the excise tax
imposed by section 4960 only if they pay a
covered employee sufficient remuneration
to trigger the tax. An ATEO is not subject
to the excise tax under section 4960(a)
(1) unless the ATEO (together with any
related organizations) pays more than $1
million of remuneration to a covered em-
ployee for a taxable year. An ATEO can-
not make an excess parachute payment
subject to the excise tax under section
4960(a)(2) if the employer does not have
any HCEs under section 414(q)
10
for the
taxable year. If both of these situations ap-
ply to an ATEO, the ATEO is not liable for
any excise tax under section 4960 for that
taxable year.
These final regulations generally adopt
the proposed rules regarding the entity
that is liable for the excise tax under sec-
tion 4960 and how that excise tax is cal-
culated. These regulations provide that
10
See footnote 9.

Bulletin No. 2021–7 857 February 16, 2021
the employer, as determined under section
3401(d), without regard to paragraph (d)
(1) or (d)(2), is liable for the excise tax im-
posed under section 4960. Further, as au-
thorized by section 4960(d), a payment by
the employer may be treated as remuner-
ation or a parachute payment if, based on
the facts and circumstances, the payment
is structured such that it has the effect of
avoiding the tax applicable under section
4960. For example, the excise tax under
section 4960 would apply with respect to
an individual who is an employee of an
ATEO or related organization but who is
incorrectly classified as an independent
contractor. Similarly, the excise tax under
section 4960 would apply to an amount
paid to a limited liability company or oth-
er entity owned all or in part by an em-
ployee (or owned by another entity unre-
lated to the ATEO or related organization)
for services performed by an employee of
the ATEO or related organization if the
arrangement would otherwise have the ef-
fect of avoiding the tax applicable under
section 4960. For a further discussion of
the definition of “employer” see section
II.D. of this Summary of Comments and
Explanation of Revisions, titled “Employ-
er.”
A. Calculation of Tax on Excess
Remuneration
An individual may perform services
as an employee of an ATEO and as an
employee of one or more related organi-
zations during the same applicable year,
in which case remuneration paid for the
taxable year is aggregated for purposes
of determining whether excess remunera-
tion has been paid. To address these cases,
these final regulations adopt the proposed
rules for allocating liability for the excise
tax among the related employers. As pro-
vided in section 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 proportionate share of the excise
tax. In contrast, a payment to an individu-
al for performing services as an employee
of an ATEO that is made by a third-party
payor (whether the payor is related to the
ATEO or not) is remuneration paid by the
ATEO for section 4960 purposes and thus
is included with any remuneration paid di-
rectly by the ATEO (and the related liabil-
ity is not allocated to the other organiza-
tion). If a covered employee is employed
by one employer when the legally binding
right to the remuneration is granted and by
a different employer at vesting, then the
covered employee’s employer at vesting
is treated as paying the remuneration, pro-
vided the employment relationship is bona
fide and not a means to avoid tax under
section 4960. A related organization may
become (or cease to be) related during the
applicable year, in which case only re-
muneration the related organization pays
(or is treated as paying due to vesting) to
the ATEO’s covered employee during the
portion of the applicable year that it is a
related organization is treated as paid by
the ATEO for the taxable year, as provided
in section 4960(c)(4)(A).
If an employee is a covered employee
of more than one ATEO, these final regu-
lations provide that each ATEO calculates
its liability under section 4960(a)(1), tak-
ing into account remuneration paid to the
employee by the organizations to which
it is related. These regulations also pro-
vide that, rather than owing tax as both
an ATEO and a related organization for
the same remuneration paid to a covered
employee, each employer is liable only
for the greater of the excise tax for which
it would be liable as an ATEO or the ex-
cise tax it would be liable for as a relat-
ed organization with respect to that cov-
ered employee (and if there is more than
one related group of organizations, then
for the group that results in the greatest
amount of tax). These regulations provide
that these same allocation principles apply
in the case of the allocation of liability in
situations involving an ATEO or related
organization with a short taxable year,
and should be applied in a manner that
avoids, to the extent possible, duplicative
taxation of remuneration paid to the same
individual. Because the application of the
allocation rules may prove complicated in
situations involving short taxable years,
especially if those situations also involve
multiple short taxable years or differing
taxable years among the group constitut-
ing the ATEO and its related organiza-
tions, the regulations further provide that
the Commissioner may prescribe guid-
ance of general applicability addressing
how the allocation rules apply in particu-
lar circumstances involving short taxable
years.
Under section 4960(b) and (c)(4)(C),
the employer or employers are liable for
the excise tax imposed by section 4960.
Related organizations must obtain infor-
mation from each other on remuneration
paid to covered employees in order to cal-
culate the tax and their share of the liabili-
ty. One commenter noted that there may be
situations in which an employer is unable
to obtain complete information on the re-
muneration and benefits paid by other em-
ployers. The commenter requested guid-
ance on relief from penalties or interest
for an error if the employer made a bona
fide attempt to obtain the necessary infor-
mation when it became aware of the error
and requested guidance on what would be
a bona fide attempt for this purpose. If an
ATEO or related organization fails to pay
tax it is liable for due to failure to obtain
information on remuneration paid by oth-
er organizations within the related group,
it may be liable for a civil penalty under
section 6651 (and in some cases, criminal
penalties). Section 6651 includes an ex-
ception for reasonable cause. Guidance as
to reasonable cause for penalty relief, and
therefore the guidance requested by this
commenter, is beyond the scope of these
final regulations, and therefore is not ad-
dressed in these final regulations.
B. Calculation of Tax on an Excess
Parachute Payment
These final regulations adopt the pro-
posed regulations with respect to the rules
for the calculation of tax on an excess
parachute payment. With respect to the
calculation of, and liability for, the tax on
excess parachute payments, the proposed
regulations differed in one respect from
the guidance provided in Q/A–1 of Notice
2019-09. Notice 2019-09 provided that
an ATEO or related organization may be
liable for the tax on an excess parachute
payment based on the aggregate parachute
payments made by the ATEO and its relat-
ed organizations, including parachute pay-
ments based on separation from employ-
ment from a related organization. As in
the proposed regulations, these final reg-
ulations provide that only an excess para-

February 16, 2021 858 Bulletin No. 2021–7
chute payment paid by an ATEO is subject
to the excise tax on excess parachute pay-
ments. However, consistent with the pro-
vision in section 4960(c)(5)(D) that rules
similar to section 280G(b)(3) apply for
purposes of determining the base amount
under section 4960, payments from all re-
lated organizations (including payments
from non-ATEOs) are considered for pur-
poses of determining the base amount and
total payments in the nature of compen-
sation that are contingent on the covered
employee’s separation from employment
with the employer. See §1.280G-1, Q/A–
34. Generally, this means that a covered
employee’s base amount calculation in-
cludes remuneration from the ATEO and
all related organizations, and that a cov-
ered employee’s parachute payment cal-
culation includes all payments (made by
the ATEO and all related organizations)
that are contingent on the employee’s in-
voluntary separation from employment.
However, only an ATEO is subject to the
excise tax on excess parachute payments
it makes to a covered employee. A non-
ATEO that pays an amount that would
otherwise be an excess parachute payment
is not subject to the excise tax. These reg-
ulations further provide that, based on the
facts and circumstances, the Commission-
er may reallocate excess parachute pay-
ments to an ATEO if it is determined that
excess parachute payments were made by
a non-ATEO for the purpose of avoiding
the tax under section 4960. Step by step
instructions for calculating the tax on ex-
cess parachute payments were provided in
section VI.B. of the Explanation of Pro-
visions of the proposed regulations, titled
“Calculation of Tax on an Excess Para-
chute Payment.”
C. Reporting and Payment of the Tax
These final regulations adopt without
change the rules provided in the pro-
posed regulations relating to the report-
ing and payment of the excise tax. Under
§§53.6011-1 and 53.6071-1, the excise tax
under section 4960 is reported on Form
4720, “Return of Certain Excise Taxes
Under Chapters 41 and 42 of the Internal
Revenue Code,” which is the form gener-
ally used for reporting and paying chapter
42 taxes. The reporting and payment of
any applicable taxes are due when pay-
ments of chapter 42 taxes are ordinarily
due (the 15th day of the 5th month after
the end of the taxpayer’s taxable year—
May 15 for a calendar year employer),
subject to an extension of time for filing
returns and making payments
11
that gen-
erally applies. Because section 6655 has
not been amended to include section 4960,
no quarterly payments of estimated excise
tax imposed by section 4960 are required
under section 6655.
These final regulations require that the
excise tax imposed by section 4960 be
reported and paid in the form and man-
ner prescribed by the Commissioner, and
§53.6011-1 requires that every person (in-
cluding a governmental entity) liable for
the excise tax imposed by section 4960
shall file Form 4720, “Return of Certain
Excise Taxes Under Chapters 41 and 42 of
the Internal Revenue Code.” Notice 2019-
09, Q/A–33(a) required each employer li-
able for the excise tax imposed by section
4960 to file a separate Form 4720 to report
its share of liability. Two commenters rec-
ommended allowing related employers to
file a joint Form 4720, as has been per-
mitted in §53.6011-1(c) for private foun-
dations and their disqualified persons and
foundation managers. In addition to being
beyond the scope of these regulations, per-
mitting joint filing of Form 4720 is incom-
patible with electronic filing of Form 4720
that is required for certain tax-exempt or-
ganizations under the Taxpayer First Act,
Pub. L. 116–25. See Notice 2021-01.
These final regulations also provide
that an employer may elect to prepay the
excise tax imposed under section 4960(a)
(2) for excess parachute payments in the
year of separation from employment or
any taxable year prior to the year in which
the parachute payment is actually paid.
This prepayment rule for the tax applica-
ble to excess parachute payments is sim-
ilar to the rule in §1.280G-1, Q/A–11(c),
under which a disqualified employee may
elect to prepay the excise tax under sec-
tion 4999 based on the present value of the
excise tax that would be owed by the em-
ployee when the parachute payments are
actually made.
VII. Applicability Date
These final regulations were proposed
to apply to taxable years beginning af-
ter December 31 of the calendar year in
which the Treasury decision adopting
these rules as final regulations is pub-
lished in the Federal Register. The Trea-
sury Department and the IRS requested
comments on the burdens anticipated and
the timeframe expected to be necessary to
implement these final regulations (taking
into account that the statutory provisions
are already effective).
One commenter recommended that
these final regulations apply to taxable
years beginning after December 31 of the
calendar year that ends at least six months
after the date on which these final regula-
tions are published in the Federal Register
in order for ATEOs and related organiza-
tion to have sufficient time to understand
and apply these final regulations. The
Treasury Department and the IRS agree
with this recommendation, and therefore
these final regulations apply to taxable
years beginning after December 31, 2021
(with the first applicable year generally
being the 2022 calendar year).
The guidance provided in these final
regulations and the proposed regulations
generally is consistent with the guidance
provided in Notice 2019-09. Until the ap-
plicability date of these final regulations,
taxpayers may rely on the guidance pro-
vided in Notice 2019-09 in its entirety or
on the proposed regulations in their entire-
ty. Alternatively, taxpayers may choose to
apply these final regulations to taxable
years beginning after December 31, 2017,
and on or before December 31, 2021, pro-
vided they apply the final regulations in
their entirety and in a consistent manner.
Until the applicability date of these final
regulations, taxpayers may also base their
positions upon a reasonable, good faith
interpretation of the statute that includes
consideration of any relevant legislative
history. Whether a taxpayer’s position that
11
The tentative tax, an estimate, must be paid by the due date of Form 4720 without extensions and may be paid with Form 8868, “Application for Automatic Extension of Time To File an
Exempt Organization Return.”

Bulletin No. 2021–7 859 February 16, 2021
is inconsistent with Notice 2019-09, the
proposed regulations, or these final regu-
lations constitutes a reasonable, good faith
interpretation of the statute generally will
be determined based upon all of the rel-
evant facts and circumstances, including
whether the taxpayer has applied the po-
sition consistently and the extent to which
the taxpayer has resolved interpretive is-
sues based on consistent principles and in
a consistent manner. Notwithstanding the
previous sentence, the preamble to No-
tice 2019-09 describes certain positions
that the Treasury Department and the IRS
have concluded are not consistent with a
reasonable, good faith interpretation of
the statutory language, and the proposed
regulations and these final regulations re-
flect this view. For a description of each
of these positions, see section VII of the
Explanation of Provisions of the proposed
regulations, titled “Proposed Applicability
Date.”
Special Analyses
I. Regulatory Planning and Review
Executive Orders 13771, 13563, and
12866 direct agencies to assess costs and
benefits of available regulatory alterna-
tives and, if regulation is necessary, to se-
lect regulatory approaches that maximize
net benefits (including potential econom-
ic, environmental, public health and safety
effects, distributive impacts, and equity).
Executive Order 13563 emphasizes the
importance of quantifying both costs and
benefits, of reducing costs, of harmoniz-
ing rules, and of promoting flexibility. The
Executive Order 13771 designation for
this rule is “regulatory.”
The regulations have been designated
as subject to review under Executive Or-
der 12866 pursuant to the Memorandum
of Agreement (April 11, 2018) between
the Treasury Department and the Office of
Management and Budget (OMB) regard-
ing review of tax regulations. The Office
of Information and Regulatory Affairs
(OIRA) has designated the rulemaking as
significant under section 1(c) of the Mem-
orandum of Agreement. Accordingly,
OMB has reviewed the regulations.
A. Background
1. The Excise Tax Under Section 4960
Section 4960 was added to the Code
by TCJA. Section 4960(a) subjects excess
remuneration above $1 million and excess
parachute payments that an ATEO pays to a
covered employee to an excise tax equal to
the rate of tax imposed on corporations un-
der section 11 (21 percent for 2020). Before
TCJA, compensation paid by tax-exempt
organizations was not subject to an excise
tax, although section 4958 applies an ex-
cise tax to penalize excess benefit transac-
tions in which an “applicable tax-exempt
organization“ (as defined in section 4958)
provides a benefit to a disqualified person
that exceeds the reasonable fair market val-
ue of the services received.
Section 4960 defines an “ATEO” as any
organization which is exempt from taxation
under section 501(a), is a farmers’ coop-
erative organization described in section
521(b)(1), has income excluded from tax-
ation under section 115(1), or is a political
organization described in section 527(e)(1).
Covered employees of an ATEO include the
five highest-compensated employees of the
organization for the taxable year and any
employee or former employee who was a
covered employee of the organization (or
predecessor) for any preceding taxable year
beginning after December 31, 2016.
“Remuneration” means “wages” as
defined in section 3401(a) (excluding des-
ignated Roth contributions) and includes
amounts required to be included in gross
income under section 457(f). Section
4960 excludes from remuneration any
amount paid to a licensed medical profes-
sional for medical or veterinary services
provided. Remuneration also includes
payments with respect to employment
of a covered employee by any person or
government entity related to the ATEO. A
person or governmental entity is treated as
related to the ATEO if that person or gov-
ernmental entity controls, or is controlled
by, the ATEO, is controlled by one or
more persons which control the ATEO, is
a “supported organization” (as defined in
section 509(f)(3)) during the taxable year
with respect to the ATEO, is a supporting
organization described in section 509(a)
(3) during the taxable year with respect
to the ATEO, or in the case of an organi-
zation which is a voluntary employees’
beneficiary association (VEBA) under
section 501(c)(9), established, maintains,
or makes contribution to such VEBA.
2. Notice 2019-09 and the Proposed and
Final Regulations
Notice 2019-09 provided taxpayers
with initial guidance on the application
of section 4960, including that taxpayers
may base their positions on a reasonable,
good faith interpretation of the statute
until further guidance is issued. On June
11, 2020, the Treasury Department and
the IRS published proposed regulations
on section 4960 in the Federal Regis-
ter (REG-122345-18, 85 FR 35746) (the
proposed regulations). The Treasury De-
partment and the IRS received comments
responding to the proposed regulations,
which were considered in these final reg-
ulations, published here. The comments
primarily discussed the treatment of em-
ployees of a related organization who also
provide services to the ATEO, suggesting
various exceptions for these situations.
Comments also addressed the possibility
of a grandfather rule for compensation to
be paid under arrangements in place prior
to the effective date of section 4960, treat-
ment of deferred compensation as remu-
neration, the definition of “control,” and
which organizations are ATEOs.
B. Baseline
The Treasury Department and the IRS
have assessed the benefits and costs of the
final regulations relative to a no-action
baseline reflecting anticipated Federal in-
come tax-related behavior in the absence
of these regulations.
C. Affected Entities
The final regulations affect an estimat-
ed 261,000 ATEOs and 77,000 non-ATEO
related organizations of ATEOs that in his-
torical filings report substantial executive
compensation.
12

Of the roughly 261,000
12
The methods and data used to estimate the number of affected entities are discussed in detail in the Paperwork Reduction Act special analysis.

February 16, 2021 860 Bulletin No. 2021–7
such ATEOs based on filings for tax year
2017, 239,000 are section 501(a) exempt
organizations (including 23,000 private
foundations), 19,000 are section 115 state
and local instrumentalities, 2,000 are sec-
tion 527 political organizations, 600 are
exempt farmers’ cooperative organiza-
tions described in section 521(b)(1), and
200 are federal instrumentalities (although
the Treasury Department and the IRS will
continue to consider whether federal in-
strumentalities are ATEOs).
D. Economic Analysis
This section describes the key econom-
ic effects of the provisions of these final
regulations.
1. Clarifications
Most provisions of these final regu-
lations clarify aspects of the excise tax
imposed by section 4960, minimizing the
burdens entities bear to comply with sec-
tion 4960, and have little other economic
impact. Clarifications reduce uncertainty,
lowering the effort required to infer which
organizations, employees, and payments
are subject to the excise tax and the poten-
tial for conflict if entities and tax admin-
istrators interpret provisions differently.
Examples of provisions of these final reg-
ulations that are primarily clarifications
include the definition of “control,” treat-
ment of deferred compensation and vest-
ing, and which organizations are ATEOs.
2. “Volunteer” Exceptions
Several commenters expressed con-
cern that highly-paid employees of a non-
ATEO performing services for a related
ATEO without receiving compensation
from the ATEO may be subject to the ex-
cise tax. To avoid the excise tax, individu-
als might cease performing such services,
or ATEOs might dissolve their relation-
ships with related non-ATEOs, reducing
donations from related non-ATEOs.
The final regulations include excep-
tions to the definitions of “employee”
and “covered employees” (specifically to
the rules for determining the five highest
compensated employees for purposes of
identifying covered employees) to address
such situations. With respect to the first
exception, the regulations define “em-
ployee” consistent with section 3401(c),
in particular adopting the rule that a direc-
tor is not an employee in the capacity as
a director and an officer performing mi-
nor or no services and not receiving any
remuneration for those services is not an
employee.
The general rule provides that employ-
ees of a related non-ATEO are not consid-
ered for purposes of determining the five
highest-compensated employees if they
are never employees of the ATEO. In addi-
tion, individuals who receive no remuner-
ation (or grant of a legally binding right to
remuneration) from the ATEO or a related
organization cannot be among the ATEO’s
five highest-compensated employees.
Under the exceptions, an ATEO’s five
highest-compensated employees also ex-
clude an employee of the ATEO who re-
ceives no remuneration from the ATEO
and performs only limited hours of ser-
vice for the ATEO, which means that no
more than 10 percent of total annual hours
worked for the ATEO and related organi-
zations are for services performed for the
ATEO. An employee who performs fewer
than 100 hours of services as an employee
of an ATEO and its related ATEOs is treat-
ed as having worked less than 10 percent
of total hours for the ATEO and related
ATEOs. An employee who is not compen-
sated by an ATEO, related ATEO, or any
taxable related organization controlled by
the ATEO and who primarily (more than
50 percent of total hours worked) provides
services to a related non-ATEO is also dis-
regarded. In response to comments on the
proposed regulations expressing concern
that this exception did not provide suf-
ficient flexibility for situations in which
an employee of a non-ATEO performs
services for a related ATEO as a tempo-
rary assignment, these final regulations
provide that the 50 percent of total hours
worked threshold can be computed over
a period of two consecutive years, rather
than a single year. This modification ex-
pands the exception to provide additional
flexibility. An employee is also disregard-
ed if an ATEO paid less than 10 percent
of the employee’s total remuneration for
services performed for the ATEO and all
related organizations, and the ATEO had
at least one related ATEO during the ap-
plicable year. Additionally, if neither the
ATEO nor any related ATEO paid more
than 10 percent of the employee’s total re-
muneration, then the ATEO that paid the
highest percent of remuneration does not
meet this exception.
Consider, for example, a corporate em-
ployee making $2 million per year who
spends 5 percent of her time (roughly one
day each month) working for the corpora-
tion’s foundation, a related ATEO, without
receiving compensation from the ATEO
and who would be a covered employee of
the ATEO absent the exceptions. Without
the exceptions, her compensation in ex-
cess of $1 million from the corporation,
which is a related party of the foundation,
is subject to a 21 percent excise tax, or
$210,000 in excise tax liability. The ex-
ceptions (either of the first two could ap-
ply here) remove that liability and the in-
centive it provides to stop providing such
services or to dissolve the relationship
between the ATEO and the related organi-
zation. The exceptions support a transfer
of substantial value (5 percent of the em-
ployee’s salary, or $100,000) that might
otherwise not take place.
Commenters on the proposed regula-
tions suggested other ways in which the
exceptions could be expanded. The Trea-
sury Department and the IRS considered
these suggested expansions of the excep-
tions and concluded that the suggestions
were inconsistent with the statute and
legislative history or would enable orga-
nizations to circumvent the excise tax in
situations where an individual performs
services for an ATEO on more than a
volunteer basis, creating the potential for
abuse and increasing the costs of adminis-
tering the excise tax. Therefore, these final
regulations do not adopt the suggested ex-
pansions of the exceptions.
The exceptions in these final regula-
tions may have a substantial impact on
donations relative to a no-action baseline,
although the magnitude of the potential
impact depends on how often the excep-
tions apply and on how responsive orga-
nizations and employees are to the excise
tax, both of which are uncertain.
The exceptions apply only in particular
circumstances: for example, the employee
must be employed by a related organiza-
tion (typically an organization that con-
trols or is controlled by the ATEO), the
employee must be highly compensated,

Bulletin No. 2021–7 861 February 16, 2021
and the employee’s work for the ATEO
must be sufficiently minimal. Historically,
many ATEOs report employees with com-
pensation from related organizations. An
estimated 8,500 ATEOs filing Form 990 in
tax year 2017 reported both compensation
of $500,000 or more for any person and
any compensation from related organiza-
tions. These ATEOs are estimated to have
an average of 18 non-ATEO related or-
ganizations based on information report-
ed on Form 990 Schedule R, yielding an
estimated 154,000 non-ATEO related or-
ganizations, of which half, or 77,000, are
estimated to employ a covered employee
of the ATEO. The fraction of the 154,000
non-ATEO related organizations with em-
ployees to whom the exceptions apply
(and who are thus not covered employees
of the ATEO) is uncertain, but perhaps
half the related organizations, or 77,000,
have such an employee.
This entity count omits a substantial
number of private foundations which may
have employees who receive no compen-
sation from the ATEO but who are high-
ly compensated by related organizations,
because while the ATEO count used in
these estimates includes approximately
100 private foundations that have histor-
ically reported employee compensation of
$500,000 or more on Form 990-PF, Form
990-PF (unlike Form 990) does not include
information on employee compensation
received from related organizations. The
exceptions are particularly likely to apply
to donations to foundations related to non-
ATEO businesses, as companies are high-
ly likely to be related organizations of a
company’s foundation, many family foun-
dations are controlled by the same fami-
ly that controls a private business, and
executives of the related business often
provide services to the foundation without
payment from the foundation. Because of
these facts, looking at pre-TCJA tax forms
may underestimate the number of entities
potentially affected by the exceptions. In
the U.S. in 2015, there were about 2,000
company foundations responsible for $5.5
billion in giving, and 42,000 family foun-
dations.
13
It is reasonable to assume that
about half of these foundations, or 22,000,
have a related business with an employee
to whom the exceptions apply.
Under reasonable assumptions about
the response of donated services to the
excise tax, the exceptions may restore
substantial donations (transfers) of ser-
vices that the excise tax could potentially
otherwise eliminate. Totaling both private
foundations and other ATEOs, roughly
99,000 related organizations are estimated
to have employees to whom the excep-
tions apply. If the excise tax would have
reduced services that are donated under
the exceptions by an average of just over
$5,000 per related organization, the total
transfer reduction exceeds $500 million.
Absent the exceptions, organizations
may also avoid the excise tax by dissolv-
ing the relationship between the ATEO
and non-ATEO, which may affect dona-
tions of money as well as services. Con-
sidering only corporate foundations and
setting aside other ATEOs, if such disso-
lutions would lead to a two percent reduc-
tion in the $5.5 billion in corporate giving
that would otherwise take place through
related foundations, the reduction exceeds
$100 million. The Treasury Department
and the IRS requested but did not receive
comments on the impact of the exceptions
on the dissolution of relationships be-
tween ATEOs and related organizations.
It is plausible that these final regula-
tions restore substantial economic activity
relative to regulatory alternatives, under
which the excise tax would discourage
highly-compensated employees of related
non-ATEOs from providing services to a
related ATEO without compensation from
the ATEO and discourage relationships
between ATEOs and non-ATEOs.
3. Summary
This analysis suggests that these fi-
nal regulations will reduce compliance
burden on affected entities by providing
clarifications and, through the exceptions,
increase services provided to ATEOs
without compensation from the ATEO by
a small but potentially economically sig-
nificant amount ($100 million or more),
relative to regulatory alternatives. The
Treasury Department and the IRS request-
ed but did not receive comments on the
economic impact of these proposed regu-
lations (in particular, comments providing
data, other evidence, or models that pro-
vide insight).
II. Paperwork Reduction Act
The collections of information in these
final regulations are in §53.4960-1(d), (h),
and (i); §53.4960-2(a), (c) and (d); and
§53.4960-4(a) and (d). This information is
required to determine an ATEO’s “covered
employees” as defined in section 4960(c)
(2); to calculate remuneration in excess of
$1 million as described in section 4960(c)
(3); to determine remuneration from relat-
ed organizations and allocation of liability
as described in section 4960(c)(4); and to
determine any excess parachute payments
to covered employees described in section
4960(c)(5).
The IRS intends that the burden of the
collections of information will be reflect-
ed in the burden associated with Form
4720, under OMB approval number 1545-
0047. The burden associated with Form
4720 is included in the aggregated burden
estimates for OMB control number 1545-
0047, which represents a total estimated
burden time for all forms and schedules of
52.450 million hours and total estimated
burden in dollars of $1.497 billion (esti-
mated for fiscal year 2021). The overall
burden estimates provided for 1545-0047
are aggregate amounts that relate to all
information collections associated with
that OMB control number. This estimate
is therefore unrelated to the future calcula-
tions needed to assess the burden imposed
by these regulations. To guard against
over-counting the burden imposed, the
Treasury Department and the IRS urge
readers to recognize that these burden es-
timates are aggregates for the applicable
types of filers. For purposes of the Paper-
work Reduction Act, the Treasury Depart-
ment and the IRS have not estimated the
burden, including that of any new infor-
mation collections, related to the require-
ments under these final regulations. Fu-
ture burden estimates under OMB control
number 1545-0047 would capture chang-
es made by TCJA and changes that arise
out of discretionary authority exercised in
the regulations.
The expected burden associated with
section 4960 compliance (including Form
13
http://data.foundationcenter.org/

February 16, 2021 862 Bulletin No. 2021–7
4720 preparation and filing) for ATEOs as
described in section 4960(c)(1) and relat-
ed organizations as described in section
4960(c)(4)(B) is listed below:
Estimated number of respondents:
337,888
Estimated average annual burden hours
per response: 0.20 hours
Estimated total annual burden:
$3,569,632 (2020)
Estimated frequency of collection: An-
nual
In the proposed regulations, the Trea-
sury Department and the IRS requested
comments on all aspects of information
collection burdens related to the proposed
regulations, including estimates for how
much time it would take to comply with
the paperwork burdens previously de-
scribed in this section for each relevant
form and ways for the IRS to minimize the
paperwork burden. The Treasury Depart-
ment and the IRS did not receive any com-
ments on these issues. Revisions (if any)
to these forms that reflect the information
collections included in these final regu-
lations will be made available for public
comment at https://apps.irs.gov/app/pick-
list/list/draftTaxForms.html and will not
be finalized until after these forms have
been approved by OMB under the PRA.
Comments on these forms can be submit-
ted at https://www.irs.gov/forms-pubs/
comment-on-tax-forms-and-publications.
The current status of the PRA submis-
sions related to section 4960 are provided
in the following table.
FormType of Filer
OMB
Number(s)
Status
Form 4720
Tax-exempt organizations and their
related organizations, including for-
profit and government entities
1545-0047
Published in the Federal Register on 11/12/20.
Public comment period closes on 1/11/21.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless it dis-
plays a valid control number assigned by
the Office of Management and Budget.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law.
Generally, tax returns and return infor-
mation are confidential, as required by 26
U.S.C. 6103.
III. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibil-
ity Act (RFA) (5 U.S.C. chapter 6), it is
hereby certified that these final regula-
tions will not have a significant economic
impact on a substantial number of small
entities. In the proposed regulations, the
Treasury Department and the IRS invited
comments on the impact this rule would
have on small entities. The Treasury De-
partment and the IRS did not receive any
comments on this issue.
The Regulatory Flexibility Act (5
U.S.C. 601 et seq.) (RFA) generally de-
fines a ‘‘small entity’’ as (1) a proprietary
firm meeting the size standards of the
Small Business Administration (SBA)
(13 CFR 121.201), (2) a nonprofit organi-
zation that is not dominant in its field, or
(3) a small government jurisdiction with a
population of less than 50,000. (States and
individuals are not included in the defini-
tion of “small entity.”) The Treasury De-
partment and the IRS estimate that these
final regulations will affect 324,000 small
entities, 73,000 of which are proprietary
firms meeting the size standards of the
SBA and 251,000 of which are nonprof-
it organizations that are not dominant in
their fields or small government jurisdic-
tions with a population of less than 50,000.
The Treasury Department and the IRS
estimated the number of ATEOs, based
primarily on Form 990 data for filers with
at least one employee (and thus having
a burden, at a minimum, of maintaining
annual lists of covered employees), as
261,118, and the number of non-ATEO re-
lated organizations employing at least one
covered employee of an ATEO as 76,770,
for a total of 337,888 affected entities. The
SBA defines a small business as an inde-
pendent business having fewer than 500
employees. (See A Guide for Government
Agencies, How to Comply with the Regu-
latory Flexibility Act, Appendix B
14
). Tax
data available to the Treasury Department
and the IRS include employee counts for
only half the affected entities, as employ-
ee counts are included on Form 990, but
not on other forms including Form 990-
EZ and 990-PF. An examination of tax
data from 2016 shows that for filers for
whom employee counts were available
and who had at least one employee, 96.5
percent had fewer than 500 employees.
Similarly, there are no bright lines in the
available data to distinguish small non-
profit organizations that are not dominant
in their field. An examination of non-tax
data shows that a similar proportion, ap-
proximately 96 percent, of all incorporat-
ed cities, towns, and villages in 2014 had a
population of less than 50,000, which may
serve as a proxy for small government
jurisdictions generally.
15
By applying the
96 percent estimate to all entities affected
by section 4960, the Treasury Department
and the IRS estimate that 324,000 small
entities are affected by these regulations.
However, the Treasury Department and
the IRS have determined that the rules
regarding an ATEO’s covered employees
will not have a significant economic im-
pact on affected small entities as described
later in this discussion of the RFA.
Section 4960 imposes the excise tax
on ATEOs and their related organizations
14
https://advocacy.sba.gov/2017/08/31/a-guide-for-government-agencies-how-to-comply-with-the-regulatory-flexibility-act/
15
See https://www.statista.com/statistics/241695/number-of-us-cities-towns-villages-by-population-size/

Bulletin No. 2021–7 863 February 16, 2021
to the extent they pay certain compen-
sation to a covered employee. Because
covered employee status is permanent,
every ATEO must determine its five high-
est-compensated employees for the tax-
able year—even if the ATEO is not sub-
ject to the tax for that taxable year—and
maintain a list of covered employees. Ac-
cordingly, these final rules likely will af-
fect a substantial number of small entities,
especially nonprofit entities that are not
dominant in their fields.
The Treasury Department and the IRS
estimate that the vast majority of ATEOs,
particularly small ATEOs, can determine
their five highest-compensated employ-
ees for the taxable year under the method
provided in these final rules very quickly
and at negligible cost using information
already collected in the normal course of
business. The time necessary to determine
an ATEO’s five highest-compensated em-
ployees is positively correlated with the
size of the entity (that is, the smaller the
entity, the less time such a determination
should take). Larger ATEOs may need
more time, but it is estimated that this
determination will take less than seven
hours. The burden for making this deter-
mination is estimated to fall on the small
number of larger ATEOs. Putting these
two groups together, the total estimated
cost for all 261,118 ATEOs to make these
determinations is $1,255,760 per year, av-
eraging $4.81 per ATEO. Thus, it is here-
by certified that these final regulations
will not have a significant economic im-
pact on a substantial number of small en-
tities within the meaning of section 601(6)
of the Regulatory Flexibility Act (5 U.S.C.
601 et seq.) (RFA).
Pursuant to section 7805(f) of the
Code, the proposed regulations preceding
these final regulations were submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small entities and
no comments were received.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates
Reform Act of 1995 requires that agencies
assess anticipated costs and benefits and
take certain other actions before issuing a
final rule that includes any Federal man-
date that may result in expenditures in any
one year by a state, local, or tribal govern-
ment, in the aggregate, or by the private
sector, of $100 million in 1995 dollars,
updated annually for inflation. This final
rule does not include any Federal mandate
that may result in expenditures by state,
local, or tribal governments, or by the pri-
vate sector in excess of that threshold.
V. Executive Order 13132: Federalism
Executive Order 13132 (titled “Fed-
eralism”) prohibits an agency from
publishing any rule that has federalism
implications if the rule either imposes
substantial, direct compliance costs on
state and local governments, and is not
required by statute, or preempts state law,
unless the agency meets the consultation
and funding requirements of section 6 of
the Executive Order. This final rule does
not have federalism implications that are
not required by the statute and does not
impose substantial direct compliance
costs on state and local governments or
preempt state law within the meaning of
the Executive Order.
VI. Congressional Review Act
The Administrator of OIRA has deter-
mined that this is a major rule for purpos-
es of the Congressional Review Act (5
U.S.C. 801 et seq.) (CRA). Under section
801(3) of the CRA, a major rule takes ef-
fect 60 days after the rule is published in
the Federal Register.
Notwithstanding this requirement, sec-
tion 808(2) of the CRA allows agencies to
dispense with the requirements of section
801 when the agency for good cause finds
that such procedure would be impractica-
ble, unnecessary, or contrary to the public
interest and the rule shall take effect at such
time as the agency promulgating the rule
determines. Pursuant to section 808(2) of
the CRA, the Treasury Department and the
IRS find, for good cause, that a 60-day de-
lay in the effective date is unnecessary and
contrary to the public interest.
Following the addition of section 4960
to the Code by TCJA, the Treasury De-
partment and the IRS published the pro-
posed regulations setting forth guidance
on all aspects of the law, including certain
exceptions to the definition of “employee”
and “covered employee” for purposes of
identifying covered employees. The ma-
jority of comments received in response
to the proposed regulations requested ad-
ditional clarifications or modifications of
the rules for these exceptions. In response,
these final regulations include certain
clarifications and modifications to the pro-
posed rules. The clarifications and modi-
fications in these final regulations reduce
both uncertainty and the burden associat-
ed with application of these rules.
In response to certain commenter re-
quests that the applicability date of the
final regulations be delayed after publi-
cation of the regulations as final in the
Federal Register so that ATEOs and re-
lated organizations have sufficient time
to understand and apply these final reg-
ulations, these final regulations apply to
taxable years beginning after December
31, 2021. However, until the applicabil-
ity date, taxpayers may choose to apply
these final regulations to taxable years
beginning after December 31, 2017,
and on or before December 31, 2021,
provided the taxpayer applies them in
their entirety and in a consistent manner.
Therefore, ATEOs and related organiza-
tions that wish to apply these regulations
prior to the applicability date will need
to know that these final regulations are
effective before incurring necessary costs
to timely comply with these final regu-
lations. In particular, certainty that these
rules are effective is essential to taxpay-
ers so that they can determine whether
and to what extent the excise tax imposed
by section 4960 applies to an organiza-
tion and which employees are covered
employees, given that taxpayers will be-
gin preparing their 2020 tax returns in
early 2021. Further, for these potentially
affected taxpayers, certainty with respect
to these rules is necessary for them to
proceed with several aspects of their op-
erations, including employee hiring and
retention, designing of compensatory
arrangements, recordkeeping, and main-
taining relationships between related
non-ATEOs and ATEOs—including with
respect to donating of services. Further,
the COVID-19 pandemic has affected
many ATEOs, and providing addition-
al clarification regarding these rules, in
particular with respect to the exceptions
for purposes of determining covered em-
ployees, will better enable ATEOs and

February 16, 2021 864 Bulletin No. 2021–7
related organizations to perform financial
and operational planning tasks for the
tax year as they anticipate the easing of
restrictions that have severely impacted
their operations during the COVID-19
pandemic. Consistent with Executive Or-
der 13924 (May 19, 2020), the Treasury
Department and the IRS have therefore
determined that an expedited effective
date of these final regulations will pro-
vide critical guidance on what the law re-
quires for taxpayers to determine wheth-
er the excise tax imposed by section 4960
applies, which employees may be consid-
ered to be covered employees, and what
actions are required under the law as a
result. Accordingly, the Treasury Depart-
ment and the IRS have determined that
the rules in this Treasury decision will
take effect on the date of filing for public
inspection in the Federal Register.
Statutory Authority
The regulations are adopted pursuant
to the authority contained in sections 7805
and 4960.
Drafting Information
The principal authors of the regulations
are William McNally and Patrick Sternal
of the Office of Associate Chief Counsel
(Employee Benefits, Exempt Organiza-
tions, and Employment Taxes). However,
other personnel from the Treasury Depart-
ment and the IRS participated in the de-
velopment of the regulations.
Statement of Availability
IRS Revenue Procedures, Revenue
Rulings, Notices, and other guidance cit-
ed in this preamble are published in the
Internal Revenue Bulletin (or Cumulative
Bulletin) and are available from the Su-
perintendent of Documents, U.S. Govern-
ment Publishing Office, Washington, DC
20402, or by visiting the IRS website at
https://www.irs.gov.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and record-
keeping requirements
26 CFR Part 53
Excise taxes, Foundations, Invest-
ments, Lobbying, Reporting and record-
keeping requirements
Amendments to the Regulations
Accordingly, the Department of the
Treasury and the Internal Revenue Ser-
vice amend 26 CFR parts 1 and 53 as
follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 ***
Par. 2. Section 1.338-1 is amended by
revising paragraph (b)(2)(i) to read as fol-
lows:
§1.338-1 General principles; status of
old target and new target.
* * * * *
(b) * * *
(2) * * *
(i) The rules applicable to employ-
ee benefit plans (including those plans
described in sections 79, 104, 105, 106,
125, 127, 129, 132, 137, and 220), qual-
ified pension, profit-sharing, stock bonus
and annuity plans (sections 401(a) and
403(a)), simplified employee pensions
(section 408(k)), tax qualified stock op-
tion plans (sections 422 and 423), welfare
benefit funds (sections 419, 419A, 512(a)
(3), and 4976), voluntary employees’
beneficiary associations (section 501(c)
(9) and the regulations thereunder), and
tax on excess tax-exempt organization
executive compensation (section 4960)
and the regulations in part 53 under sec-
tion 4960;
*****
PART 53—FOUNDATION AND
SIMILAR EXCISE TAXES
Par. 3. The authority citation for part 53
is revised to read in part as follows:
Authority: 26 U.S.C. 7805; 4960.
*****
Par. 4. Sections 53.4960-0 through
53.4960-6 are added to read as follows:
*****
53.4960-0 Table of contents.
53.4960-1 Scope and definitions.
53.4960-2 Determination of remunera-
tion paid for a taxable year.
53.4960-3 Determination of whether
there is a parachute payment.
53.4960-4 Liability for tax on excess
remuneration and excess parachute pay-
ments.
53.4960-5 Coordination with section
162(m) [reserved].
53.4960-6 Applicability date.
*****
§53.4960-0 Table of contents.
§53.4960-1 Scope and definitions
(a) Scope.
(b) Applicable tax-exempt organiza-
tion.
(1) In general.
(i) Section 501(a) organization.
(ii) Section 521 farmers’ cooperative.
(iii) Section 115(1) organization.
(iv) Section 527 political organization.
(2) Certain foreign organizations.
(3) [Reserved].
(c) Applicable year.
(1) In general.
(2) Examples.
(3) Short applicable years.
(i) In general
(ii) Initial year of ATEO status.
(iii) Year of termination of ATEO sta-
tus.
(A) Termination on or before the close
of the calendar year ending with or within
the taxable year of termination.
(B) Termination after the close of the
calendar year ending in the taxable year of
termination.
(4) Examples.
(d) Covered employee.
(1) In general.
(2) Five highest-compensated employ-
ees.
(i) In general.
(ii) Limited hours exception.
(A) In general.
(1) Remuneration requirement.
(2) Hours of service requirement.
(B) Certain payments disregarded.
(C) Safe harbor.
(iii) Nonexempt funds exception.
(A) In general.

Bulletin No. 2021–7 865 February 16, 2021
(1) Remuneration requirement.
(2) Hours of service requirement.
(3) Related organizations requirement.
(B) Certain payments disregarded.
(iv) Limited services exception.
(A) Remuneration requirement.
(B) Related ATEO requirement.
(1) Ten percent remuneration condi-
tion.
(2) Less remuneration condition.
(3) Examples.
(e) Employee.
(1) In general.
(2) Directors.
(3) Trustees.
(f) Employer.
(1) In general.
(2) Disregarded entities.
(g) Medical services.
(1) Medical and veterinary services.
(i) In general.
(ii) Examples.
(2) Definition of licensed medical pro-
fessional.
(h) Predecessor.
(1) Asset acquisitions.
(2) Corporate reorganizations.
(3) Predecessor change of form or of
place of organization.
(4) ATEO that becomes a non-ATEO.
(i) General rule.
(ii) Intervening changes or entities.
(5) Predecessor of a predecessor.
(6) Elections under sections 336(e) and
338.
(7) Date of transaction.
(i) Related organization.
(1) In general.
(i) Controls or controlled by test.
(ii) Controlled by same persons test.
(iii) Supported organization test.
(iv) Supporting organization test.
(v) VEBA test.
(2) Control.
(i) In general.
(ii) Stock corporation.
(iii) Partnership.
(iv) Trust.
(v) Nonstock organization.
(A) In general.
(B) Control of a trustee or director of a
nonstock organization.
(C) Representatives.
(vi) Brother-sister related organiza-
tions.
(vii) Section 318 principles.
(A) In general.
(B) Nonstock organizations.
(1) Attribution of ownership interest
from a nonstock organization to a con-
trolling person.
(2) Attribution of ownership interest
from a controlling person to a nonstock
organization.
(3) Indirect control of a nonstock orga-
nization through another nonstock organi-
zation.
(4) Attribution of control of nonstock
organization to family member.
(3) Examples.
§53.4960-2 Determination of
remuneration paid for a taxable year
(a) Remuneration.
(1) In general
(2) Exclusion of remuneration for med-
ical services.
(i) In general.
(ii) Allocation of remuneration for
medical services and non-medical ser-
vices.
(iii) Examples.
(b) Source of payment.
(1) Remuneration paid by third parties
for employment by an employer.
(2) Remuneration paid by a related or-
ganization for employment by the related
organization.
(c) Applicable year in which remunera-
tion is treated as paid.
(1) In general.
(2) Vested remuneration.
(3) Change in related status during the
year.
(d) Amount of remuneration treated as
paid.
(1) In general.
(2) Earnings and losses on previously
paid remuneration.
(i) In general.
(ii) Previously paid remuneration.
(A) New covered employee.
(B) Existing covered employee.
(iii) Earnings.
(iv) Losses.
(v) Net earnings.
(vi) Net losses.
(3) Remuneration paid for a taxable
year before the employee becomes a cov-
ered employee.
(i) In general.
(ii) Examples.
(e) Calculation of present value.
(1) In general.
(2) Treatment of future payment amount
as present value for certain amounts.
(f) Examples.
§53.4960-3 Determination of whether
there is a parachute payment
(a) Parachute payment.
(1) In general.
(2) Exclusions.
(i) Certain qualified plans.
(ii) Certain annuity contracts.
(iii) Compensation for medical ser-
vices.
(iv) Payments to non-HCEs.
(3) Determination of HCEs for purpos-
es of the exclusion from parachute pay-
ments.
(b) Payment in the nature of compen-
sation.
(1) In general.
(2) Consideration paid by covered em-
ployee.
(c) When payment is considered to be
made.
(1) In general.
(2) Transfers of section 83 property.
(3) Stock options.
(d) Payment contingent on an employ-
ee’s separation from employment.
(1) In general.
(2) Employment agreements.
(i) In general.
(ii) Example.
(3) Noncompetition agreements.
(4) Payment of amounts previously in-
cluded in income or excess remuneration.
(5) Window programs.
(6) Anti-abuse provision.
(e) Involuntary separation from em-
ployment.
(1) In general.
(2) Separation from employment for
good reason.
(i) In general.
(ii) Material negative change required.
(iii) Deemed material negative change.
(A) Material diminution of compensa-
tion.
(B) Material diminution of responsibil-
ity.
(C) Material diminution of authority of
a supervisor.
(D) Material diminution of a location.
(E) Material change of location.
(F) Other material breach.

February 16, 2021 866 Bulletin No. 2021–7
(3) Separation from employment.
(f) Accelerated payment or accelerated
vesting resulting from an involuntary sep-
aration from employment.
(1) In general.
(2) Nonvested payments subject to a
non-service vesting condition.
(3) Vested payments.
(4) Nonvested payments subject to a
service vesting condition.
(i) In general.
(A) Vesting trigger.
(B) Vesting condition.
(C) Services condition.
(ii) Value of the lapse of the obligation
to continue to perform services.
(iii) Accelerated vesting of equity com-
pensation.
(5) Application to benefits under a non-
qualified deferred compensation plan.
(6) Present value.
(7) Examples.
(g) Three-times-base-amount test for
parachute payments.
(1) In general.
(2) Examples.
(h) Calculating present value.
(1) In general.
(2) Deferred payments.
(3) Health care.
(i) Discount rate.
(j) Present value of a payment to be
made in the future that is contingent on an
uncertain future event or condition.
(1) Treatment based on the estimated
probability of payment.
(2) Correction of incorrect estimates.
(3) Initial option value estimate.
(4) Examples.
(k) Base amount.
(1) In general.
(2) Short or incomplete taxable years.
(3) Excludable fringe benefits.
(4) Section 83(b) income.
(l) Base period.
(1) In general.
(2) Determination of base amount if
employee separates from employment in
the year hired.
(3) Examples.
§53.4960-4 Liability for tax on excess
remuneration and excess parachute
payments
(a) Liability, reporting, and payment of
excise taxes.
(1) Liability.
(2) Reporting and payment.
(3) Arrangements between an ATEO
and a related organization.
(4) Certain foreign related organiza-
tions.
(5) [Reserved].
(b) Amounts subject to tax.
(1) Excess remuneration.
(i) In general.
(ii) Exclusion for excess parachute
payments.
(2) Excess parachute payment.
(c) Calculation of liability for tax on
excess remuneration.
(1) In general.
(2) Calculation if liability is allocated
from more than one ATEO with respect to
an individual.
(3) Calculation if liability is allocated
from an ATEO with a short applicable
year.
(4) Examples.
(d) Calculation of liability for excess
parachute payments.
(1) In general.
(2) Computation of excess parachute
payments.
(3) Reallocation when the payment is
disproportionate to base amount.
(4) Election to prepay tax.
(5) Liability after a redetermination of
total parachute payments.
(6) Examples.
§53.4960-5 [Reserved]
§53.4960-6 Applicability date
(a) General applicability date.
(b) [Reserved].
§53.4960-1 Scope and definitions.
(a) Scope. This section provides defini-
tions for purposes of section 4960, this sec-
tion, and §§53.4960-2 through 53.4960-6.
Section 53.4960-2 provides definitions and
rules for determining the amount of remu-
neration paid for a taxable year. Section
53.4960-3 provides definitions and rules
for determining whether a parachute pay-
ment is paid. Section 53.4960-4 provides
definitions and rules for calculating the
amount of excess remuneration paid for a
taxable year, excess parachute payments
paid in a taxable year, and liability for the
excise tax. Section 53.4960-5 is reserved
for rules on the coordination of sections
4960 and 162(m). Section 53.4960-6 pro-
vides rules regarding the applicability date
for the regulations in §§53.4960-1 through
53.4960 -5. The rules and definitions pro-
vided in this section through §53.4960-6
apply solely for purposes of section 4960
unless specified otherwise.
(b) Applicable tax-exempt organiza-
tion—(1) In general. Applicable tax-ex-
empt organization or ATEO means any
organization that is one of the following
types of organizations:
(i) Section 501(a) organization. The
organization is exempt from taxation un-
der section 501(a) (except as provided in
paragraph (b)(2) or (b)(3) of this section);
(ii) Section 521 farmers’ cooperative.
The organization is a farmers’ cooperative
organization described in section 521(b)
(1);
(iii) Section 115(1) organization. The
organization has income excluded from
taxation under section 115(1); or
(iv) Section 527 political organization.
The organization is a political organiza-
tion described in section 527(e)(1).
(2) Certain foreign organizations. Any
foreign organization described in section
4948(b) that either is exempt from tax un-
der section 501(a) or is a taxable private
foundation (section 4948(b) organization)
is not an ATEO. A foreign organization is
an organization not created or organized
in the United States or in any possession
thereof, or under the law of the United
States, any State, the District of Columbia,
or any possession of the United States.
See section 4948(b) and §53.4948-1. For
purposes of this paragraph (b)(2) and the
application of section 4960 to a taxable
year, an organization’s status as a section
4948(b) organization is determined at the
end of its taxable year.
(3) [Reserved].
(c) Applicable year—(1) In general.
Applicable year means the calendar year
ending with or within the ATEO’s taxable
year. See §53.4960-4 regarding how an
ATEO’s applicable year affects the liabili-
ty of related organizations.
(2) Examples. The following examples
illustrate the rules of paragraph (c)(1) of
this section.
(i) Example 1 (Calendar year taxpayer)—(A)
Facts. ATEO 1 uses the calendar year as its taxable
year and became an ATEO before 2022.

Bulletin No. 2021–7 867 February 16, 2021
(B) Conclusion. ATEO 1’s applicable year for
its 2022 taxable year is the period from January 1,
2022, through December 31, 2022 (that is, the 2022
calendar year).
(ii) Example 2 (Fiscal year taxpayer)—(A)
Facts. ATEO 2 uses a taxable year that starts July 1
and ends June 30 and became an ATEO before 2022.
(B) Conclusion. ATEO 2’s applicable year for the
taxable year beginning July 1, 2022, and ending June
30, 2023, is the 2022 calendar year.
(3) Short applicable years—(i) In general. An
ATEO may have an applicable year that does not
span the entire calendar year for the initial taxable
year that the organization is an ATEO or for the
taxable year in which the taxpayer ceases to be an
ATEO. The beginning and end dates of the applica-
ble year in the case of an ATEO’s change in status
depend on when the change in status occurs.
(ii) Initial year of ATEO status. For the taxable
year in which an ATEO first becomes an ATEO,
applicable year means the period beginning on the
date the ATEO first becomes an ATEO and ending
on the last day of the calendar year ending with or
within such taxable year (or, if earlier, the date of ter-
mination of ATEO status, as described in paragraph
(c)(3)(ii)(A) of this section). If the taxable year in
which an ATEO first becomes an ATEO ends before
the end of the calendar year in which the ATEO first
becomes an ATEO, then there is no applicable year
for the ATEO’s first taxable year; however, for the
ATEO’s next taxable year, applicable year means the
period beginning on the date the ATEO first becomes
an ATEO and ending on December 31 of the calendar
year (or, if earlier, the date of termination of ATEO
status, as described in paragraph (c)(3)(ii)(A) of this
section).
(iii) Year of termination of ATEO status—(A)
Termination on or before the close of the calendar
year ending with or within the taxable year of termi-
nation. If an ATEO has a termination of ATEO status
during the taxable year and the termination of ATEO
status occurs on or before the close of the calendar
year ending with or within such taxable year, then,
for the taxable year of termination of ATEO status,
applicable year means the period starting January
1 of the calendar year of the termination of ATEO
status and ending on the date of the termination of
ATEO status.
(B) Termination after the close of the calendar
year ending in the taxable year of termination. If
an ATEO has a termination of ATEO status during
the taxable year and the termination of ATEO sta-
tus occurs after the close of the calendar year ending
within such taxable year, then, for the taxable year
of the termination of ATEO status, applicable year
means both the calendar year ending within such
taxable year and the period beginning January 1 of
the calendar year of the termination of ATEO status
and ending on the date of the termination of ATEO
status. Both such applicable years are treated as sep-
arate applicable years. See §53.4960-4(b)(2)(ii) for
rules regarding calculation of the tax in the event
there are multiple applicable years associated with
a taxable year.
(4) Examples. The following exam-
ples illustrate the rules of paragraph (c)
(3) of this section. For purposes of these
examples, assume any entity referred to
as “ATEO” is an ATEO and any entity re-
ferred to as “CORP” is not an ATEO.
(i) Example 1 (Taxable year of formation ending
after December 31)—(A) Facts. ATEO 1, ATEO 2,
and CORP 1 are related organizations that all use
a taxable year that starts July 1 and ends June 30.
ATEO 1 is recognized as a section 501(c)(3) orga-
nization by the IRS on May 8, 2023, effective as of
October 1, 2022. ATEO 2 became an ATEO in 2017.
(B) Conclusion (ATEO 1). ATEO 1’s applicable
year for the taxable year beginning October 1, 2022,
and ending June 30, 2023, is the period beginning
October 1, 2022, and ending December 31, 2022. For
purposes of determining the amount of remuneration
paid by ATEO 1 and all related organizations for
ATEO 1’s taxable year beginning October 1, 2022,
and ending June 30, 2023, (including for purposes
of determining ATEO 1’s covered employees), only
remuneration paid between October 1, 2022, and De-
cember 31, 2022, is taken into account. Thus, any
remuneration paid by ATEO 1, ATEO 2, and CORP
1 before October 1, 2022, is disregarded for purposes
of ATEO 1’s applicable year associated with its ini-
tial taxable year.
(C) Conclusion (ATEO 2). ATEO 2’s applicable
year for its taxable year beginning July 1, 2022, and
ending June 30, 2023, is the 2022 calendar year.
Thus, any remuneration paid by ATEO 1, ATEO 2,
and CORP 1 during the 2022 calendar year is taken
into account for purposes of determining ATEO 2’s
covered employees and remuneration paid for ATEO
2’s taxable year ending June 30, 2023.
(ii) Example 2 (Taxable year of formation end-
ing before December 31)—(A) Facts. Assume the
same facts as in paragraph (c)(4)(i)(A) of this section
(Example 1), except that ATEO 1 is recognized as a
section 501(c)(3) organization effective as of March
15, 2023.
(B) Conclusion. ATEO 1 has no applicable year
for the taxable year starting March 15, 2023, and
ending June 30, 2023, because no calendar year ends
(or termination of ATEO status occurs) with or with-
in the taxable year. ATEO 1’s applicable year for the
taxable year ending June 30, 2024, is the period be-
ginning March 15, 2023, and ending December 31,
2023. For purposes of determining the amount of
remuneration paid by ATEO 1 and all related orga-
nizations for ATEO 1’s taxable year ending June 30,
2024 (including for purposes of determining ATEO
1’s covered employees), only remuneration paid be-
tween March 15, 2023, and December 31, 2023, is
taken into account. The conclusion for ATEO 2 is
the same as in paragraph (c)(4)(i)(C) of this section
(Example 1).
(iii) Example 3 (Termination before the close of
the calendar year ending in the taxable year of ter-
mination)—(A) Facts. Assume the same facts as in
paragraph (c)(4)(i)(A) of this section (Example 1). In
addition, ATEO 1 has a termination of ATEO status
on September 30, 2024.
(B) Conclusion. For ATEO 1’s taxable year be-
ginning July 1, 2024, and ending September 30,
2024, ATEO 1’s applicable year is the period be-
ginning January 1, 2024, and ending September 30,
2024.
(iv) Example 4 (Termination after the close of
the calendar year ending in the taxable year of ter-
mination)—(A) Facts. Assume the same facts as in
paragraph (c)(4)(i)(A) of this section (Example 1). In
addition, ATEO 1 has a termination of ATEO status
on March 31, 2025.
(B) Conclusion. For ATEO 1’s taxable year be-
ginning July 1, 2024, and ending March 31, 2025,
ATEO 1 has two applicable years: the 2024 calendar
year, and the period beginning on January 1, 2025,
and ending on March 31, 2025.
(d) Covered employee—(1) In general.
For each taxable year, covered employee
means any individual who is one of the
five highest-compensated employees of
the ATEO for the taxable year or was a
covered employee of the ATEO (or any
predecessor) for any preceding taxable
year beginning after December 31, 2016.
(2) Five highest-compensated employ-
ees—(i) In general. Except as otherwise
provided in this paragraph (d)(2), an indi-
vidual is one of an ATEO’s five highest-
compensated employees for the taxable
year if the individual is among the five
employees of the ATEO with the high-
est amount of remuneration paid during
the applicable year, as determined under
§53.4960-2. However, remuneration for
which the deduction is disallowed by rea-
son of section 162(m) is taken into account
for purposes of determining an ATEO’s
five highest-compensated employees. The
five highest-compensated employees of an
ATEO for the taxable year are identified
on the basis of the total remuneration paid
during the applicable year to the employ-
ee for services performed as an employee
of the ATEO or any related organization.
An ATEO may have fewer than five high-
est-compensated employees for a taxable
year if it has fewer than five employees
other than employees who are disregarded
under paragraphs (d)(2)(ii) through (iv) of
this section. For purposes of this paragraph
(d)(2), a grant of a legally binding right
(within the meaning of §1.409A-1(b)) to
vested remuneration is considered to be
remuneration paid as of the date of grant,
as described in §53.4960-2(c)(2), and a
person or governmental entity is consid-
ered to grant a legally binding right to
nonvested remuneration if the person or
governmental entity grants a legally bind-
ing right to remuneration that is not vested
within the meaning of §53.4960-2(c)(2).
An employee is disregarded for purpos-
es of determining an ATEO’s five high-
est-compensated employees for a taxable
year if, during the applicable year, neither
the ATEO nor any related organization

February 16, 2021 868 Bulletin No. 2021–7
paid remuneration or granted a legally
binding right to nonvested remuneration
to the individual for services the individu-
al performed as an employee of the ATEO
or any related organization.
(ii) Limited hours exception—(A) In
general. An individual is disregarded for
purposes of determining an ATEO’s five
highest-compensated employees for a tax-
able year if all of the following require-
ments are met:
(1) Remuneration requirement. Nei-
ther the ATEO nor any related ATEO paid
remuneration or granted a legally bind-
ing right to nonvested remuneration to
the individual for services the individual
performed as an employee of the ATEO
during the applicable year; and
(2) Hours of service requirement. The
individual performed services as an em-
ployee of the ATEO and all related ATEOs
for no more than 10 percent of the total
hours the individual worked as an em-
ployee of the ATEO and any related orga-
nizations during the applicable year. An
ATEO may instead make this determina-
tion based on the total days the individual
worked as an employee of the ATEO and
all related ATEOs as a percentage of the
total days worked as an employee of the
ATEO and all related organizations, pro-
vided that for purposes of the calculation,
any day that the individual worked at least
one hour as an employee of the ATEO or a
related ATEO is treated as a day worked as
an employee of the ATEO and not for any
other organization.
(B) Certain payments disregarded. For
purposes of paragraph (d)(2)(ii)(A)(1) of
this section, a payment of remuneration
made to the individual by a related orga-
nization that is an employer of the indi-
vidual and for which the related organiza-
tion is neither entitled to reimbursement
by the ATEO nor entitled to any other
consideration from the ATEO is not con-
sidered remuneration paid by the ATEO
under §53.4960-2(b)(1), and a payment
of remuneration made to the individual
by a related organization is not treated
as remuneration paid by the ATEO under
§53.4960-2(b)(2).
(C) Safe harbor. For purposes of para-
graph (d)(2)(ii)(A)(2) of this section, an
individual is treated as having performed
services as an employee of the ATEO and
all related ATEOs for no more than 10
percent of the total hours the individual
worked as an employee of the ATEO and
all related organizations during the appli-
cable year if the employee performed no
more than 100 hours of service as an em-
ployee of the ATEO and all related ATEOs
during the applicable year.
(iii) Nonexempt funds exception—(A)
In general. An individual is disregarded
for purposes of determining an ATEO’s
five highest-compensated employees for a
taxable year if all the following require-
ments are met:
(1) Remuneration requirement. Neither
the ATEO, nor any related ATEO, nor any
taxable related organization controlled
by the ATEO, or by one or more related
ATEOs, either alone or together with the
ATEO, paid remuneration or granted a
legally binding right to nonvested remu-
neration to the individual for services the
individual performed as an employee of
an ATEO during the applicable year and
the preceding applicable year. For this
purpose, whether a taxable related orga-
nization is controlled by the ATEO (or
one or more related ATEOs) is determined
without regard to paragraph (i)(2)(vii)(B)
(2) of this section and without regard to
section 318(a)(3) for purposes of applying
paragraph (i)(2)(vii)(A) of this section, so
that an interest in a corporation or non-
stock entity is not attributed downward in
determining control of the corporation or
nonstock entity;
(2) Hours of service requirement.
The individual performed services as an
employee of the ATEO and any related
ATEOs for not more than 50 percent of
the total hours worked as an employee of
the ATEO and any related organizations
during the applicable year and the preced-
ing applicable year. An ATEO may instead
make this determination based on the total
days the individual worked as an employ-
ee of the ATEO and all related ATEOs as a
percentage of the total days worked as an
employee of the ATEO and all related or-
ganizations, provided that for purposes of
the calculation, any day that the individual
worked at least one hour as an employee
of the ATEO or a related ATEO is treat-
ed as a day worked as an employee of the
ATEO and not for any other organization;
and
(3) Related organizations require-
ment. No related organization that paid
remuneration or granted a legally bind-
ing right to nonvested remuneration to
the individual during the applicable year
and the preceding applicable year provid-
ed services for a fee to the ATEO, to any
related ATEO, or to any taxable related or-
ganization controlled by the ATEO or by
one or more related ATEOs, either alone
or together with the ATEO, during the ap-
plicable year and the preceding applicable
year. For purposes of this paragraph (d)(2)
(iii)(A)(3), whether a taxable related or-
ganization is controlled by the ATEO (or
one or more related ATEOs) is determined
without regard to paragraph (i)(2)(vii)(B)
(2) of this section and without regard to
section 318(a)(3) for purposes of applying
paragraph (i)(2)(vii)(A) of this section, so
that an interest in a corporation or non-
stock entity is not attributed downward in
determining control of the corporation or
nonstock entity.
(B) Certain payments disregarded. For
purposes of paragraph (d)(2)(iii)(A)(1) of
this section, a payment of remuneration
made to an individual by a related organi-
zation that is an employer of the individ-
ual and for which the related organization
is neither entitled to reimbursement by the
ATEO nor entitled to any other consid-
eration from the ATEO is not considered
remuneration paid by the ATEO under
§53.4960-2(b)(1) and a payment of remu-
neration made to the individual by a relat-
ed organization is not treated as paid by
the ATEO under §53.4960-2(b)(2).
(iv) Limited services exception. An
individual is disregarded for purposes of
determining an ATEO’s five highest-com-
pensated employees for a taxable year
even though the ATEO paid remuner-
ation to the individual if, disregarding
§53.4960-2(b)(2), all of the following re-
quirements are met:
(A) Remuneration requirement. The
ATEO did not pay 10 percent or more
of the individual’s total remuneration for
services performed as an employee of the
ATEO and all related organizations during
the applicable year; and
(B) Related ATEO requirement. The
ATEO had at least one related ATEO
during the applicable year and one of the
following conditions applies:
(1) Ten percent remuneration condi-
tion. A related ATEO paid at least 10 per-
cent of the remuneration paid by the ATEO

Bulletin No. 2021–7 869 February 16, 2021
and any related organizations during the
applicable year; or
(2) Less remuneration condition. No
related ATEO paid at least 10 percent of
the total remuneration paid by the ATEO
and any related organizations and the
ATEO paid less remuneration to the in-
dividual than at least one related ATEO
during the applicable year.
(3) Examples. The following examples
illustrate the rules of this paragraph (d).
For purposes of these examples, assume
any entity referred to as “ATEO” is an
ATEO, any entity referred to as “CORP”
is not an ATEO and is not a publicly held
company within the meaning of section
162(m)(2) unless otherwise stated, and
each taxpayer uses the calendar year as its
taxable year.
(i) Example 1 (Employee of two related
ATEOs)—(A) Facts. ATEO 1 and ATEO 2 are relat-
ed organizations and have no other related organiza-
tions. Both employ Employee A during calendar year
2022 and pay remuneration to Employee A for Em-
ployee A’s services. During 2022, Employee A per-
formed services for 1,000 hours as an employee of
ATEO 1 and 1,000 hours as an employee of ATEO 2.
(B) Conclusion. Employee A may be a covered
employee of both ATEO 1 and ATEO 2 as one of the
five highest-compensated employees for taxable year
2022 under paragraph (d)(2)(i) of this section be-
cause the exceptions in paragraphs (d)(2)(ii) through
(iv) of this section do not apply. Because they are
related organizations, ATEO 1 and ATEO 2 must
each include the remuneration paid to Employee A
by the other during each of their applicable years in
determining their respective five highest-compensat-
ed employees for taxable year 2022.
(ii) Example 2 (Employee of an ATEO and a
related non-ATEO)—(A) Facts. Assume the same
facts as in paragraph (d)(3)(i) of this section (Exam-
ple 1), except that ATEO 1 is instead CORP 1.
(B) Conclusion (CORP 1). For taxable year
2022, CORP 1 is not an ATEO and therefore does
not need to identify covered employees.
(C) Conclusion (ATEO 2). Employee A may be a
covered employee of ATEO 2 as one of its five high-
est-compensated employees for taxable year 2022
under paragraph (d)(2)(i) of this section because no
exception in paragraphs (d)(2)(ii) through (iv) of
this section applies. ATEO 2 must include the remu-
neration paid to Employee A by CORP 1 during its
applicable year in determining ATEO 2’s five high-
est-compensated employees for taxable year 2022.
(iii) Example 3 (Amounts for which a deduction
is disallowed under section 162(m) are taken into
account for purposes of determining the five high-
est-compensated employees)—(A) Facts. CORP 2
is a publicly held corporation within the meaning
of section 162(m)(2) and is a related organization
of ATEO 3. ATEO 3 is a corporation that is part of
CORP 2’s affiliated group (as defined in section
1504, without regard to section 1504(b)) and has no
other related organizations. Employee B is a covered
employee (as defined in section 162(m)(3)) of CORP
2 and an employee of ATEO 3. In 2022, CORP 2 paid
Employee B $8 million of remuneration for services
provided as an employee of CORP 2 and ATEO 3
paid Employee B $500,000 of remuneration for ser-
vices provided as an employee of ATEO 3. $7.5 mil-
lion of the remuneration is compensation for which
a deduction is disallowed pursuant to section 162(m)
(1).
(B) Conclusion. The $7.5 million of remunera-
tion for which a deduction is disallowed under sec-
tion 162(m)(1) is taken into account for purposes
of determining ATEO 3’s five highest-compensated
employees. Thus, ATEO 3 is treated as paying Em-
ployee B $8.5 million of remuneration for purposes
of determining its five highest-compensated employ-
ees.
(iv) Example 4 (Employee disregarded due to
receiving no remuneration)—(A) Facts. Employee
C is an officer of ATEO 4 who performs more than
minor services for ATEO 4. In 2022, neither ATEO
4 nor any related organization paid remuneration or
granted a legally binding right to any nonvested re-
muneration to Employee C. ATEO 4 paid premiums
for insurance for liability arising from Employee C’s
service with ATEO 4, which is properly treated as
a working condition fringe benefit excluded from
gross income under §1.132-5.
(B) Conclusion. Even though Employee C is an
employee of ATEO 4, Employee C is disregarded for
purposes of determining ATEO 4’s five highest-com-
pensated employees for taxable year 2022 under
paragraph (d)(2)(i) of this section because neither
ATEO 4 nor any related organization paid Employ-
ee C any remuneration (nor did they grant a legally
binding right to nonvested remuneration) in applica-
ble year 2022. The working condition fringe benefit
is not wages within the meaning of section 3401(a),
as provided in section 3401(a)(19), and thus is not
remuneration within the meaning of §53.4960-2(a).
(v) Example 5 (Limited hours exception)—(A)
Facts. ATEO 5 and CORP 3 are related organiza-
tions. ATEO 5 has no other related organizations.
Employee D is an employee of CORP 3. As part of
Employee D’s duties at CORP 3, Employee D serves
as an officer of ATEO 5. Only CORP 3 paid remuner-
ation (or granted a legally binding right to nonvest-
ed remuneration) to Employee D and ATEO 5 did
not reimburse CORP 3 for any portion of Employee
D’s remuneration in any manner. During 2022, Em-
ployee D provided services as an employee for 2,000
hours to CORP 3 and 200 hours to ATEO 5.
(B) Conclusion. Even though Employee D is an
employee of ATEO 5 because Employee D provided
more than minor services as an officer, Employee D
is disregarded for purposes of determining ATEO 5’s
five highest-compensated employees for taxable year
2022. Employee D is disregarded under paragraph
(d)(2)(ii) of this section because only CORP 3 paid
Employee D any remuneration or granted a legally
binding right to nonvested remuneration in applica-
ble year 2022 and Employee D provided services as
an employee of ATEO 5 for 200 hours, which is not
more than ten percent of the 2,200 total hours (2,000
+ 200 = 2,200) worked as an employee of ATEO 5
and all related organizations.
(vi) Example 6 (Limited hours exception)—(A)
Facts. Assume the same facts as in paragraph (d)(3)
(v) of this section (Example 5), except that ATEO 5
also provides a reasonable allowance for expenses
incurred by Employee D in executing Employee D’s
duties as an officer of ATEO 5, which is properly ex-
cluded from gross income under an accountable plan
described in §1.62-2.
(B) Conclusion. The conclusion is the same as
in paragraph (d)(3)(v)(B) of this section (Example
5). Specifically, even though Employee D is an em-
ployee of ATEO 5 because Employee D provided
more than minor services for ATEO 5, Employee
D is disregarded for purposes of determining ATEO
5’s five highest-compensated employees for taxable
year 2022 under paragraph (d)(2)(ii) of this section
because the expense allowance under the account-
able plan is excluded from wages within the mean-
ing of section 3401(a), as provided in §31.3401(a)-4,
and thus is not remuneration within the meaning of
§53.4960-2(a).
(vii) Example 7 (No exception applies due to
source of payment)—(A) Facts. Assume the same
facts as in paragraph (d)(3)(v) of this section (Ex-
ample 5), except that ATEO 5 has a contractual ar-
rangement with CORP 3 to reimburse CORP 3 for
the hours of service Employee D provides to ATEO
5 during applicable year 2022 by paying an amount
equal to the total remuneration received by Employ-
ee D from both ATEO 5 and CORP 3, multiplied by
a fraction equal to the hours of service Employee D
provided ATEO 5 over Employee D’s total hours of
service to both ATEO 5 and CORP 3.
(B) Conclusion. Employee D may be one of
ATEO 5’s five highest-compensated employees for
taxable year 2022 under paragraph (d)(2)(i) of this
section because the exceptions in paragraphs (d)(2)
(ii) through (iv) of this section do not apply. Pursuant
to the contractual arrangement between CORP 3 and
ATEO 5, ATEO 5 reimburses CORP 3 for a portion
of Employee D’s remuneration during applicable
year 2022; thus, the exceptions under paragraphs (d)
(2)(ii) and (iii) of this section do not apply. Further,
while ATEO 5 paid Employee D less than 10 per-
cent of the total remuneration from ATEO 5 and all
related organizations (200 hours of service to ATEO
5 / 2,200 hours of service to ATEO 5 and all related
organizations = 9 percent), it had no related ATEO;
thus, the limited services exception under paragraph
(d)(2)(iv) of this section does not apply.
(viii) Example 8 (Nonexempt funds exception for
part-time services)—(A) Facts. ATEO 6 and CORP
4 are related organizations. ATEO 6 has no other
related organizations and does not control CORP 4.
During applicable year 2022, Employee E provided
2,000 hours of services as an employee of CORP 4
and 0 hours of services as an employee of ATEO 6;
during applicable year 2023, Employee E provided
1,100 hours of services as an employee of CORP 4
and 900 hours of services as an employee of ATEO
6; during applicable year 2024, Employee E provid-
ed 1,100 hours of services as an employee of CORP
4 and 900 hours of services as an employee of ATEO
6. ATEO 6 neither paid any remuneration to Employ-
ee E nor paid a fee for services to CORP 4 during any
applicable year. No exception under paragraphs (d)
(2)(i), (ii), or (iv) applies to Employee E.
(B) Conclusion (2023). Employee E is disre-
garded for purposes of determining ATEO 6’s five
highest-compensated employees for taxable year
2023 under paragraph (d)(2)(iii) of this section be-

February 16, 2021 870 Bulletin No. 2021–7
cause for applicable years 2022 and 2023, Employee
E provided services as an employee of ATEO 6 for
not more than 50 percent of the total hours Employee
E provided services as an employee of ATEO 6 and
CORP 4 (900 hours / 4,000 hours), and ATEO 6 nei-
ther paid any remuneration to Employee E nor paid
a fee for services to CORP 4 during applicable years
2022 and 2023.
(C) Conclusion (2024). Employee E is disre-
garded for purposes of determining ATEO 6’s five
highest-compensated employees for taxable year
2024 under paragraph (d)(2)(iii) of this section be-
cause for applicable years 2023 and 2024, Employee
E provided services as an employee of ATEO 6 for
not more than 50 percent of the total hours Employ-
ee E provided services as an employee of ATEO 6
and CORP 4 (1,800 hours / 4,000 hours), and ATEO
6 neither paid any remuneration to Employee E nor
paid a fee for services to CORP 4 during applicable
years 2023 and 2024.
(ix) Example 9 (Nonexempt funds for full-time
services in one applicable year)—(A) Facts. As-
sume the same facts as in paragraph (d)(3)(viii) of
this section (Example 8), except that during applica-
ble year 2022, Employee E provided services as an
employee for 2,000 hours to CORP 4 and for 0 hours
to ATEO 6; during applicable year 2023, Employ-
ee E provided services as an employee for 0 hours
to CORP 4 and 2,000 hours to ATEO 6; and during
applicable year 2024, Employee E resumes employ-
ment with CORP 4 so that Employee E provided ser-
vices as an employee for 2,000 hours to CORP 4 and
0 hours to ATEO 6.
(B) Conclusion (2023). Employee E is disre-
garded for purposes of determining ATEO 6’s five
highest-compensated employees for taxable year
2023 under paragraph (d)(2)(iii) of this section be-
cause for applicable years 2022 and 2023, Employee
E provided services as an employee of ATEO 6 for
not more than 50 percent of the total hours Employ-
ee E provided services as an employee of ATEO 6
and CORP 4 (2,000 hours / 4,000 hours), and ATEO
6 neither paid any remuneration to Employee E nor
paid a fee for services to CORP 4 during applicable
years 2022 and 2023.
(C) Conclusion (2024). Employee E is disre-
garded for purposes of determining ATEO 6’s five
highest-compensated employees for taxable year
2024 under paragraph (d)(2)(iii) of this section be-
cause for applicable years 2023 and 2024, Employee
E provided services as an employee of ATEO 6 for
not more than 50 percent of the total hours Employee
E provided services as an employee of ATEO 6 and
CORP 4 (2,000 hours / 4,000 hours for ATEO 6 and
CORP 4), and ATEO 6 neither paid any remuneration
to Employee E nor paid a fee for services to CORP 4
during applicable years 2023 and 2024.
(x) Example 10 (Nonexempt funds exception for
full-time services across two applicable years)—(A)
Facts. Assume the same facts as in paragraph (d)
(3)(viii)(A) of this section (Example 8), except that
during applicable year 2022, Employee E provided
services as an employee for 2,000 hours to CORP 4
and for 0 hours to ATEO 6; during applicable year
2023, Employee E provided services as an employ-
ee for 600 hours to CORP 4 and for 1,400 hours to
ATEO 6; and during applicable year 2024, Employee
E provided services as an employee for 1,400 hours
to CORP 4 and for 600 hours to ATEO 6.
(B) Conclusion (2023). Employee E is disre-
garded for purposes of determining ATEO 6’s five
highest-compensated employees for taxable year
2023 under paragraph (d)(2)(iii) of this section be-
cause for applicable years 2022 and 2023, Employee
E provided services as an employee of ATEO 6 for
not more than 50 percent of the total hours Employee
E provided services as an employee of ATEO 6 and
CORP 4 (1,400 hours / 4,000 hours), and ATEO 6
neither paid any remuneration to Employee E, nor
paid a fee for services to CORP 4 during applicable
years 2022 and 2023.
(C) Conclusion (2024). Employee E is disre-
garded for purposes of determining ATEO 6’s five
highest-compensated employees for taxable year
2024 under paragraph (d)(2)(iii) of this section be-
cause for applicable years 2023 and 2024, Employee
E provided services as an employee of ATEO 6 for
not more than 50 percent of the total hours Employee
E provided services as an employee of ATEO 6 and
CORP 4 (2,000 hours / 4,000 hours), and ATEO 6
neither paid any remuneration to Employee E, nor
paid a fee for services to CORP 4 during applicable
years 2023 and 2024.
(xi) Example 11 (Failure under the nonexempt
funds exception)—(A) Facts. Assume the same facts
as in paragraph (d)(3)(viii)(A) of this section (Ex-
ample 8), except that during applicable year 2022,
Employee E provided services as an employee for
2,000 hours to CORP 4 and for 0 hours to ATEO 6;
during applicable year 2023, Employee E provided
services as an employee for 600 hours to CORP 4
and for 1,400 hours to ATEO 6; and during applica-
ble year 2024, Employee E provided services as an
employee for 1,300 hours to CORP 4 and for 700
hours to ATEO 6.
(B) Conclusion (2023). Employee E is disre-
garded for purposes of determining ATEO 6’s five
highest-compensated employees for taxable year
2023 under paragraph (d)(2)(iii) of this section be-
cause for applicable years 2022 and 2023, Employee
E provided services as an employee of ATEO 6 for
less than 50 percent of the total hours Employee E
provided services as an employee of ATEO 6 and
CORP 4 (1,400 hours / 4,000 hours), and ATEO 6
neither paid any remuneration to Employee E, nor
paid a fee for services to CORP 4 during applicable
years 2022 and 2023.
(C) Conclusion (2024). Employee E may be a
covered employee of ATEO 6 as one of its five high-
est-compensated employees for taxable year 2024
because the requirements under paragraph (d)(2)(iii)
are not met and no other exception applies. For ap-
plicable years 2023 and 2024, Employee E provided
services as an employee of ATEO 6 for more than 50
percent of the total hours Employee E provided ser-
vices as an employee of ATEO 6 and CORP 4 (2,100
hours / 4,000 hours).
(xii) Example 12 (Limited services exception)—
(A) Facts. ATEO 7, ATEO 8, ATEO 9, and ATEO 10
are a group of related organizations, none of which
have any other related organizations. During 2022,
Employee F is an employee of ATEO 7, ATEO 8,
ATEO 9, and ATEO 10. During applicable year
2022, ATEO 7 paid 5 percent of Employee F’s remu-
neration, ATEO 8 paid 10 percent of Employee F’s
remuneration, ATEO 9 paid 25 percent of Employ-
ee F’s remuneration, and ATEO 10 paid 60 percent
of Employee F’s remuneration. No exception under
paragraph (d)(2)(i), (ii), or (iii) applies to Employee
F for any of ATEO 7, ATEO 8, ATEO 9, or ATEO 10.
(B) Conclusion (ATEO 7). Employee F is disre-
garded for purposes of determining ATEO 7’s five
highest-compensated employees for taxable year
2022 under paragraph (d)(2)(iv) of this section be-
cause ATEO 7 paid less than 10 percent of Employee
F’s total remuneration from ATEO 7 and all related
organizations during applicable year 2022, and an-
other related ATEO paid at least 10 percent of that
total remuneration.
(C) Conclusion (ATEO 8, ATEO 9, and ATEO
10). Employee F may be a covered employee of
ATEO 8, ATEO 9, and ATEO 10 as one of their
respective five highest-compensated employees
for their taxable years 2022 because each of those
ATEOs paid 10 percent or more of Employee F’s re-
muneration during the 2022 applicable year. Thus,
the limited services exception under paragraph (d)(2)
(iv) of this section does not apply.
(xiii) Example 13 (Limited services exception if
no ATEO paid at least 10 percent of remuneration)—
(A) Facts. Assume the same facts as in paragraph (d)
(3)(xii) of this section (Example 12), except that for
applicable year 2022, ATEO 7 paid 6 percent of F’s
remuneration, ATEO 8, ATEO 9, and ATEO 10 each
paid 5 percent of Employee F’s remuneration, and
Employee F also works as an employee of CORP 5,
a related organization of ATEO 7, ATEO 8, ATEO 9,
and ATEO 10 that paid 79 percent of Employee F’s
remuneration for applicable year 2022.
(B) Conclusion (ATEO 7). Employee F may be
one of ATEO 7’s five highest-compensated employ-
ees for taxable year 2022. Although ATEO 7 did
not pay Employee F 10 percent or more of the total
remuneration paid by ATEO 7 and all of its related
organizations, no related ATEO paid more than 10
percent of Employee F’s remuneration, and ATEO 7
did not pay less remuneration to Employee F than at
least one related ATEO. Thus, the limited services
exception under paragraph (d)(2)(iv) of this sec-
tion does not apply, and Employee F may be one of
ATEO 7’s five highest-compensated employees be-
cause ATEO 7 paid Employee F more remuneration
than any other related ATEO.
(C) Conclusion (ATEO 8, ATEO 9, and ATEO
10). Employee F is disregarded for purposes of de-
termining the five highest-compensated employees
of ATEO 8, ATEO 9, and ATEO 10 for taxable year
2022 under paragraph (d)(2)(iv) of this section be-
cause none paid 10 percent or more of Employee
F’s total remuneration, each had no related ATEO
that paid at least 10 percent of Employee F’s total
remuneration, and each paid less remuneration than
at least one related ATEO (ATEO 7).
(e) Employee—(1) In general. Em-
ployee means an employee as defined in
section 3401(c) and §31.3401(c)-1. Sec-
tion 31.3401(c)-1 generally defines an
employee as any individual performing
services if the relationship between the
individual and the person for whom the
individual performs services is the legal
relationship of employer and employee.
As set forth in §31.3401(c)-1, this in-
cludes common law employees, as well as

Bulletin No. 2021–7 871 February 16, 2021
officers and employees of government en-
tities, whether or not elected. An employ-
ee generally also includes an officer of a
corporation, but an officer of a corporation
who as such does not perform any services
or performs only minor services and who
neither receives, nor is entitled to receive,
any remuneration is not considered to be
an employee of the corporation solely due
to the individual’s status as an officer of
the corporation. Whether an individual is
an employee depends on the facts and cir-
cumstances.
(2) Directors. A director of a corpora-
tion (or an individual holding a substan-
tially similar position in a corporation or
other entity) in the individual’s capacity as
such is not an employee of the corpora-
tion. See §31.3401(c)-1(f).
(3) Trustees. The principles of para-
graph (e)(2) of this section apply by anal-
ogy to a trustee of any arrangement clas-
sified as a trust for Federal tax purposes in
§301.7701-4(a).
(f) Employer—(1) In general. Employ-
er means an employer within the meaning
of section 3401(d), without regard to sec-
tion 3401(d)(1) or (2), meaning general-
ly the person or governmental entity for
whom the services were performed as an
employee. Whether a person or govern-
mental entity is the employer depends on
the facts and circumstances, but a person
does not cease to be the employer through
use of a payroll agent under section
3504, a common paymaster under sec-
tion 3121(s), a person described in section
3401(d)(1) or (2), a certified profession-
al employer organization under section
7705, or any similar arrangement.
(2) Disregarded entities. In the case
of a disregarded entity described in
§301.7701-3, §301.7701-2(c)(2)(iv) does
not apply; thus, the sole owner of the dis-
regarded entity is treated as the employer
of any individual performing services as
an employee of the disregarded entity.
(g) Medical services—(1) Medical
and veterinary services—(i) In general.
Medical services means services directly
performed by a licensed medical profes-
sional (as defined in paragraph (g)(2) of
this section) for the diagnosis, cure, miti-
gation, treatment, or prevention of disease
in humans or animals; services provided
for the purpose of affecting any structure
or function of the human or animal body;
and other services integral to providing
such medical services. For purposes of
section 4960, teaching and research ser-
vices are not medical services except to
the extent that they involve the services
performed to directly diagnose, cure, mit-
igate, treat, or prevent disease or affect
a structure or function of the body. Ad-
ministrative services may be integral to
directly providing medical services. For
example, documenting the care and con-
dition of a patient is integral to providing
medical services, as is accompanying an-
other licensed professional as a supervisor
while that medical professional provides
medical services. However, managing
an organization’s operations, including
scheduling, staffing, appraising employee
performance, and other similar functions
that may relate to a particular medical
professional or professionals who perform
medical services, is not integral to provid-
ing medical services. See §53.4960-2(a)
(2)(ii) for rules regarding allocating re-
muneration paid to a medical professional
who performs both medical services and
other services.
(ii) Examples. The following examples
illustrate the rules of this paragraph (g):
(A) Example 1 (Administrative tasks that are
integral to providing medical services)—(1) Facts.
Employee A is a doctor who is licensed to practice
medicine in the state in which Employee A’s place
of employment is located. In the course of Em-
ployee A’s practice, Employee A treats patients and
performs some closely-related administrative tasks,
such as examining and updating patient records.
(2) Conclusion. Employee A’s administrative
tasks are integral to providing medical services and
thus are medical services.
(B) Example 2 (Administrative tasks that are not
integral to providing medical services)—(1) Facts.
Assume the same facts as in paragraph (g)(1)(ii)(A)
(1) of this section (Example 1), except that Employ-
ee A also performs additional administrative tasks
such as analyzing the budget, authorizing capital ex-
penditures, and managing human resources for the
organization by which Employee A is employed.
(2) Conclusion. Employee A’s additional admin-
istrative tasks are not integral to providing medical
services and thus are not medical services.
(C) Example 3 (Teaching duties that are and are
not medical services)—(1) Facts. Employee B is a
medical doctor who is licensed to practice medicine
in the state in which her place of employment, a
university hospital, is located. Employee B’s duties
include overseeing and teaching a group of resident
physicians who have restricted licenses to practice
medicine. Those duties include supervising and in-
structing the resident physicians while they treat pa-
tients and instruction in a classroom setting.
(2) Conclusion. Employee B’s supervision and
instruction of resident physicians during the course
of patient treatment are necessary for the treatment,
and thus are medical services. Employee B’s class-
room instruction is not necessary for patient treat-
ment, and thus is not medical services.
(D) Example 4 (Research services that are and
are not medical services)—(1) Facts. Employee C is
a licensed medical doctor who is employed to work
on a research trial. Employee C provides an exper-
imental treatment to patients afflicted by a disease
and performs certain closely-related administrative
tasks that ordinarily are performed by a medical
professional in a course of patient treatment. As part
of the research trial, Employee C also compiles and
analyzes patient results and prepares reports and arti-
cles that would not ordinarily be prepared by a med-
ical professional in the course of patient treatment.
(2) Conclusion. Employee C’s services that are
ordinarily performed by a medical professional in
a course of treatment, including closely-related ad-
ministrative tasks, are medical services. Because the
compilation and analysis of patient results and the
formulation of reports and articles are neither ser-
vices ordinarily performed by a medical professional
in a course of treatment nor necessary for such treat-
ment, these services are not medical services.
(2) Definition of licensed medical pro-
fessional. Licensed medical professional
means an individual who is licensed under
applicable state or local law to perform
medical services, including as a doctor,
nurse, nurse practitioner, dentist, veteri-
narian, or other licensed medical profes-
sional.
(h) Predecessor—(1) Asset acquisi-
tions. If an ATEO (acquiror) acquires at
least 80 percent of the operating assets
or total assets (determined by fair mar-
ket value on the date of acquisition) of
another ATEO (target), then the target is
a predecessor of the acquiror. For an ac-
quisition of assets that occurs over time,
only assets acquired within a 12-month
period are taken into account to deter-
mine whether at least 80 percent of the
target’s operating assets or total assets
were acquired. However, this 12-month
period is extended to include any contin-
uous period that ends or begins on any
day during which the acquiror has an
arrangement to acquire directly or indi-
rectly, assets of the target. Additions to
the assets of target made as part of a plan
or arrangement to avoid the application
of this subsection to acquiror’s purchase
of target’s assets are disregarded in ap-
plying this paragraph. This paragraph (h)
(1) applies for purposes of determining
whether an employee is a covered em-
ployee under paragraph (d)(1) of this sec-
tion only with respect to a covered em-
ployee of the target who commences the

February 16, 2021 872 Bulletin No. 2021–7
performance of services for the acquiror
(or a related organization with respect to
the acquiror) within the period beginning
12 months before and ending 12 months
after the date of the transaction as defined
in paragraph (h)(7) of this section.
(2) Corporate reorganizations. A pre-
decessor of an ATEO includes anoth-
er separate ATEO the stock or assets of
which are acquired in a corporate reor-
ganization as defined in section 368(a)(1)
(A), (C), (D), (E), (F), or (G) (including by
reason of section 368(a)(2)).
(3) Predecessor change of form or of
place of organization. An ATEO that re-
structured by changing its organizational
form or place of organization (or both) is a
predecessor of the restructured ATEO.
(4) ATEO that becomes a non-ATEO—
(i) General rule. An organization is a pre-
decessor of an ATEO if it ceases to be an
ATEO and then again becomes an ATEO
effective on or before the predecessor end
date. The predecessor end date is the date
that is 36 months following the date that
the organization’s Federal information re-
turn under section 6033 (or, for an ATEO
described in paragraph (b)(1)(ii) or (iii) of
this section, its Federal income tax return
under section 6011(a)) is due (or would be
due if the organization were required to
file), excluding any extension, for the last
taxable year for which the organization
previously was an ATEO. If the organi-
zation becomes an ATEO again effective
after the predecessor end date, then the
former ATEO is treated as a separate or-
ganization that is not a predecessor of the
current ATEO.
(ii) Intervening changes or entities. If
an ATEO that ceases to be an ATEO (for-
mer ATEO) would be treated as a prede-
cessor to an organization that becomes
an ATEO before the predecessor end
date (successor ATEO), and if the former
ATEO would be treated as a predecessor
to each intervening entity (if such inter-
vening entities had been ATEOs) under the
rules of this paragraph (h), then the former
ATEO is a predecessor of the successor
ATEO. For example, if ATEO 1 loses its
tax-exempt status and then merges into
Corporation X, Corporation X then merg-
es into Corporation Y, and Corporation Y
becomes an ATEO before the predecessor
end date, then ATEO 1 is a predecessor of
Corporation Y.
(5) Predecessor of a predecessor. A
reference to a predecessor includes any
predecessor or predecessors of such pre-
decessor, as determined under these rules.
(6) Elections under sections 336(e)
and 338. For purposes of this paragraph
(h), when an ATEO organized as a cor-
poration makes an election to treat as an
asset purchase either the sale, exchange,
or distribution of stock pursuant to regu-
lations under section 336(e) or the pur-
chase of stock pursuant to regulations
under section 338, the corporation that
issued the stock is treated as the same
corporation both before and after such
transaction.
(7) Date of transaction. For purposes
of this paragraph (h), the date that a trans-
action is treated as having occurred is the
date on which all events necessary to com-
plete the transaction described in the rele-
vant provision have occurred.
(i) Related organization—(1) In gen-
eral. Related organization means any per-
son or governmental entity, domestic or
foreign, that meets any of the following
tests:
(i) Controls or controlled by test. The
person or governmental entity controls, or
is controlled by, the ATEO;
(ii) Controlled by same persons test.
The person or governmental entity is con-
trolled by one or more persons that control
the ATEO;
(iii) Supported organization test. The
person or governmental entity is a sup-
ported organization (as defined in section
509(f)(3)) with respect to the ATEO;
(iv) Supporting organization test. The
person or governmental entity is a sup-
porting organization described in section
509(a)(3) with respect to the ATEO; or
(v) VEBA test. With regard to an ATEO
that is a voluntary employees’ beneficiary
association (VEBA) described in section
501(c)(9), the person or governmental en-
tity establishes, maintains, or makes con-
tributions to such VEBA.
(2) Control—(i) In general. Control
may be direct or indirect. For rules con-
cerning application of the principles of
section 318 in applying this paragraph (i)
(2), see paragraph (i)(2)(vii) of this sec-
tion.
(ii) Stock corporation. A person or
governmental entity controls a stock cor-
poration if it owns (by vote or value) more
than 50 percent of the stock in the stock
corporation.
(iii) Partnership. A person or govern-
mental entity controls a partnership if it
owns more than 50 percent of the profits
interests or capital interests in the partner-
ship, determined in accordance with the
rules and principles of §1.706-1(b)(4)(ii)
for a partner’s interest in the profits of a
partnership and §1.706-1(b)(4)(iii) for a
partner’s interest in the capital of a part-
nership.
(iv) Trust. A person or governmental
entity controls a trust if it owns more than
50 percent of the beneficial interests in the
trust, determined by actuarial value.
(v) Nonstock organization—(A) In
general. A person or governmental entity
controls a nonstock organization if more
than 50 percent of the trustees or directors
of the nonstock organization are either
representatives of, or directly or indirectly
controlled by, the person or governmental
entity. A nonstock organization is a non-
profit organization or other organization
without owners and includes a govern-
mental entity.
(B) Control of a trustee or director
of a nonstock organization. A person or
governmental entity controls a trustee
or director of the nonstock organization
if the person or governmental entity has
the power (either at will or at regular in-
tervals) to remove such trustee or director
and designate a new one.
(C) Representatives. Trustees, direc-
tors, officers, employees, or agents of a
person or governmental entity are deemed
representatives of the person or govern-
mental entity. However, an employee of
a person or governmental entity (other
than a trustee, director, or officer, or an
employee who possesses at least the au-
thority commonly exercised by an officer)
who is a director or trustee of a nonstock
organization (or acting in that capacity)
will not be treated as a representative of
the person or governmental entity if the
employee does not act as a representative
of the person or governmental entity and
that fact is reported in the form and man-
ner prescribed by the Commissioner in
forms and instructions.
(vi) Brother-sister related organiza-
tions. Under paragraph (i)(1)(ii) of this
section, an organization is a related orga-
nization with respect to an ATEO if one or

Bulletin No. 2021–7 873 February 16, 2021
more persons control both the ATEO and
the other organization. In the case of con-
trol by multiple persons, the control tests
described in this paragraph (i)(2) of this
section apply to the persons as a group.
For example, if 1,000 individuals who
are members of both ATEO 1 and ATEO
2 elect a majority of the board members
of each organization, then ATEO 1 and
ATEO 2 are related to each other because
the same group of 1,000 persons controls
both ATEO 1 and ATEO 2.
(vii) Section 318 principles—(A) In
general. Section 318 (relating to con-
structive ownership of stock) applies in
determining ownership of stock in a cor-
poration. The principles of section 318
also apply for purposes of determining
ownership of interests in a partnership or
in a trust with beneficial interests. For ex-
ample, applying the principles of section
318(a)(1)(A), an individual is considered
to own the partnership interest or trust in-
terest owned, directly or indirectly, by or
for the family members specified in such
section.
(B) Nonstock organizations—(1) At-
tribution of ownership interest from a
nonstock organization to a controlling
person. If a person or governmental en-
tity controls a nonstock organization, the
person or governmental entity is treated as
owning a percentage of the stock (or part-
nership interest or beneficial interest in a
trust) owned by the nonstock organization
in accordance with the percentage of trust-
ees or directors of the nonstock organiza-
tion that are representatives of, or directly
or indirectly controlled by, the person or
governmental entity.
(2) Attribution of ownership interest
from a controlling person to a nonstock
organization. If a person or governmental
entity controls a nonstock organization,
the nonstock organization is treated as
owning a percentage of the stock (or part-
nership interest or beneficial interest in a
trust) owned by the person or governmen-
tal entity in accordance with the percent-
age of trustees or directors of the nonstock
organization that are representatives of,
or directly or indirectly controlled by, the
person or governmental entity.
(3) Indirect control of a nonstock or-
ganization through another nonstock or-
ganization. If a person or governmental
entity controls one nonstock organization
that controls a second nonstock organiza-
tion, the person or governmental entity is
treated as controlling the second nonstock
organization if the product of the percent-
age of trustees or directors of the first non-
stock organization that are representatives
of, or directly or indirectly controlled by,
the person or governmental entity, multi-
plied by the percentage of trustees or di-
rectors of the second nonstock organiza-
tion that are representatives of, or directly
or indirectly controlled by, the person or
governmental entity or first nonstock or-
ganization, exceeds 50 percent. Similar
principles apply to successive tiers of non-
stock organizations.
(4) Attribution of control of nonstock
organization to family member. An in-
dividual’s control of a nonstock orga-
nization or of a trustee or director of a
nonstock organization is attributed to the
members of the individual’s family (as set
forth in section 318(a)(1) and the regula-
tions thereunder), subject to the limitation
of section 318(a)(5)(B) and the regula-
tions thereunder.
(3) Examples. The following examples
illustrate the principles of this paragraph
(i). For purposes of these examples, as-
sume any entity referred to as “ATEO”
is an ATEO and any entity referred to as
“CORP” is not an ATEO.
(i) Example 1 (Related through a chain of con-
trol)—(A) Facts. ATEO 1, ATEO 2, and ATEO 3 are
nonstock organizations. ATEO 3 owns 80 percent of
the stock (by value) of corporation CORP 1. Eighty
percent of ATEO 2’s directors are representatives of
ATEO 1. In addition, 80 percent of ATEO 3’s direc-
tors are representatives of ATEO 1.
(B) Conclusion. ATEO 1 is a related organization
with respect to ATEO 2 (and vice versa) because
more than 50 percent of ATEO 2’s directors are
representatives of ATEO 1; thus, ATEO 1 controls
ATEO 2. Based on the same analysis, ATEO 1 is also
a related organization with respect to ATEO 3 (and
vice versa). CORP 1 is a related organization with
respect to ATEO 3 because, as the owner of more
than 50 percent of CORP 1’s stock, ATEO 3 controls
CORP 1. Applying the principles of section 318,
ATEO 1 is deemed to own 64 percent of the stock of
CORP 1 (80 percent of ATEO 3’s stock in CORP 1).
Thus, CORP 1 is a related organization with respect
to ATEO 1 because ATEO 1 controls CORP 1. ATEO
2 is a related organization with respect to ATEO 3,
ATEO 3 is a related organization with respect to
ATEO 2, and CORP 1 is a related organization with
respect to ATEO 2 because ATEO 2, ATEO 3, and
CORP 1 are all controlled by the same person (ATEO
1).
(ii) Example 2 (Not related through a chain of
control)—(A) Facts. ATEO 4, ATEO 5, and ATEO
6 are nonstock organizations. Sixty percent of ATEO
5’s directors are representatives of ATEO 4. In ad-
dition, 60 percent of ATEO 6’s directors are repre-
sentatives of ATEO 5, but none are representatives
of ATEO 4.
(B) Conclusion. ATEO 4 is a related organiza-
tion with respect to ATEO 5 (and vice versa) be-
cause more than 50 percent of ATEO 5’s directors
are representatives of ATEO 4; thus, ATEO 4 con-
trols ATEO 5. Based on the same analysis, ATEO
6 is a related organization with respect to ATEO 5
(and vice versa). Applying the principles of sec-
tion 318, ATEO 4 is deemed to control 36 percent
of ATEO 6’s directors (60 percent of ATEO 5’s 60
percent control over ATEO 6). Because less than 50
percent of ATEO 6’s directors are representatives of
ATEO 4, and absent any facts suggesting that ATEO
4 directly or indirectly controls ATEO 6, ATEO 4
and ATEO 6 are not related organizations with re-
spect to each other.
§53.4960-2 Determination of
remuneration paid for a taxable year.
(a) Remuneration—(1) In general. For
purposes of section 4960, remuneration
means any amount that is wages as de-
fined in section 3401(a), excluding any
designated Roth contribution (as defined
in section 402A(c)) and including any
amount required to be included in gross
income under section 457(f). Remunera-
tion includes amounts includible in gross
income as compensation for services as
an employee pursuant to a below-market
loan described in section 7872(c)(1)(B)
(i) (compensation-related loans) but does
not include amounts excepted by section
7872(c)(3) ($10,000 de minimis excep-
tion). For example, see §1.7872-15(e)(1)
(i). Director’s fees paid by a corporation
to a director of the corporation are not re-
muneration, provided that if the director
is also an employee of the corporation,
the director’s fees are excluded from re-
muneration only to the extent that they
do not exceed fees paid to a director who
is not an employee of the corporation or
any related organization or, if there is no
such director, they do not exceed reason-
able director’s fees. Remuneration does
not include any amount that vested or was
paid by a taxpayer before the start of the
taxpayer’s first taxable year that began on
or after January 1, 2018.
(2) Exclusion of remuneration for med-
ical services—(i) In general. Remunera-
tion does not include the portion of any
remuneration paid to a licensed medical
professional that is for the performance of
medical services by such professional.

February 16, 2021 874 Bulletin No. 2021–7
(ii) Allocation of remuneration for
medical services and non-medical ser-
vices. If, during an applicable year, an
employer pays a covered employee re-
muneration for providing both medical
services and non-medical services, the
employer must make a reasonable, good
faith allocation between the remuneration
for medical services and the remuneration
for non-medical services. For example, if
a medical doctor receives current remu-
neration (or vests in remuneration under
a deferred compensation plan) for provid-
ing medical services and administrative or
management services, the employer must
make a reasonable, good faith allocation
between the remuneration for the medical
services and the remuneration for the ad-
ministrative or management services. For
this purpose, if an employment agreement
or similar written arrangement sets forth
the remuneration to be paid for particular
services, that allocation of remuneration
applies unless the facts and circumstances
demonstrate that the amount allocated to
medical services is unreasonable for those
services or that the allocation was estab-
lished for purposes of avoiding applica-
tion of the excise tax under section 4960.
If some or all of the remuneration is not
reasonably allocated in an employment
agreement or similar arrangement, an em-
ployer may use any reasonable allocation
method. For example, an employer may
use a representative sample of records,
such as patient, insurance, and Medicare/
Medicaid billing records or internal time
reporting mechanisms to determine the
time spent providing medical services,
and then allocate remuneration to medical
services in the proportion such time bears
to the total hours the employee worked for
the employer (and any related employer)
for purposes of making a reasonable allo-
cation of remuneration. Similarly, if some
or all of the remuneration is not reason-
ably allocated in an employment agree-
ment or other similar arrangement, an
employer may use salaries or other remu-
neration paid by the employer or similarly
situated employers for duties comparable
to those the employee performs (for ex-
ample, hospital administrator and physi-
cian) for purposes of making a reasonable
allocation between remuneration for pro-
viding medical services and for providing
non-medical services.
(iii) Examples. The following exam-
ples illustrate the rules of this paragraph
(a)(2). For purposes of these examples,
assume any entity referred to as “ATEO”
is an ATEO.
(A) Example 1 (Allocation based on employment
agreement)—(1) Facts. Employee A is a covered
employee of ATEO 1. Employee A is a licensed med-
ical professional who provides patient care services
for ATEO 1 and also provides management and ad-
ministrative services to ATEO 1 as the manager of a
medical practice group within ATEO 1. The employ-
ment agreement between ATEO 1 and Employee A
specifies that of Employee A’s salary, 30 percent is
allocable to Employee A’s services as manager of the
medical practice group and 70 percent is allocable
to Employee A’s services as a medical professional
providing patient care services. The facts regarding
Employee A’s employment indicate the employment
agreement provides a reasonable allocation and that
the allocation was not established for purposes of
avoiding application of the excise tax.
(2) Conclusion. Consistent with Employee A’s
employment agreement, ATEO 1 must allocate 30
percent of Employee A’s salary to the provision of
non-medical services and 70 percent of Employee
A’s salary to the provision of medical services. Ac-
cordingly, only the 30 percent portion of Employee
A’s salary allocated to the other, non-medical ser-
vices is remuneration for purposes of paragraph (a)
of this section.
(B) Example 2 (Allocation based on billing re-
cords)—(1) Facts. Assume the same facts as in
paragraph (a)(2)(iii)(A) of this section (Example
1), except that the employment agreement does not
allocate Employee A’s salary between medical and
non-medical services performed by Employee A.
Based on a representative sample of insurance and
Medicare billing records, as well as time reports that
Employee A submits to ATEO 1, ATEO 1 determines
that Employee A spends 50 percent of her work
hours providing patient care and 50 percent of her
work hours performing administrative and manage-
ment services. ATEO 1 allocates 50 percent of Em-
ployee A’s remuneration to medical services.
(2) Conclusion. ATEO 1’s allocation of Employ-
ee A’s salary is a reasonable, good faith allocation.
Accordingly, only the 50 percent portion of Employ-
ee A’s remuneration allocated to the non-medical
services is remuneration for purposes of paragraph
(a) of this section.
(b) Source of payment. For purposes
of this section, the determination of the
source of a payment of remuneration may
involve the application of one or both of
two separate rules described in this para-
graph (b). Paragraph (b)(1) of this section
addresses payments by a third party for
services performed as an employee of a
separate employer entity, while paragraph
(b)(2) of this section addresses the appli-
cation of section 4960(c)(4)(A) to treat
certain remuneration paid by a related or-
ganization (after application of paragraph
(b)(1) of this section, if applicable) as paid
by the ATEO.
(1) Remuneration paid by a third party
for employment by an employer. Remu-
neration paid (or a grant of a legally bind-
ing right to nonvested remuneration) by a
third-party payor (whether a related orga-
nization, payroll agent, agent designated
under section 3504, certified profession-
al employer organization under section
7705, or other entity) during an applicable
year for services performed as an employ-
ee of an employer is remuneration paid (or
payable) by the employer, except as other-
wise provided in §53.4960-1(d)(2)(ii) and
(iii).
(2) Remuneration paid by a related or-
ganization for employment by the related
organization. Pursuant to section 4960(c)
(4)(A), remuneration paid (or a grant of a
legally binding right to nonvested remu-
neration) by a related organization to an
ATEO’s employee during an applicable
year for services performed as an employ-
ee of the related organization is treated
as remuneration paid (or payable) by the
ATEO, except as otherwise provided in
§53.4960-1(d)(2)(ii) and (iii).
(c) Applicable year in which remuner-
ation is treated as paid—(1) In general.
Remuneration that is a regular wage with-
in the meaning of §31.3402(g)-1(a)(1)(ii)
is treated as paid on the date it is actually
or constructively paid and all other remu-
neration is treated as paid on the first date
on which the remuneration is vested.
(2) Vested remuneration. Remunera-
tion is vested if it is not subject to a sub-
stantial risk of forfeiture within the mean-
ing of section 457(f)(3)(B) (regardless
of whether the arrangement under which
the remuneration is to be paid is deferred
compensation described in section 457(f)
or 409A). In general, an amount is subject
to a substantial risk of forfeiture if entitle-
ment to the amount is conditioned on the
future performance of substantial services
or upon the occurrence of a condition that
is related to a purpose of the remuneration
if the possibility of forfeiture is substan-
tial. Except as provided in paragraph (c)
(1) of this section, remuneration that is
never subject to a substantial risk of for-
feiture is considered paid on the first date
the service provider has a legally bind-
ing right to the payment. For purposes of
this section, a plan means a plan within

Bulletin No. 2021–7 875 February 16, 2021
the meaning of §1.409A-1(c), an account
balance plan means an account balance
plan within the meaning of §1.409A-1(c)
(2)(i)(A), and a nonaccount balance plan
means a nonaccount balance plan within
the meaning of §1.409A-1(c)(2)(i)(C).
Net earnings on previously paid remu-
neration (described in paragraph (d)(2) of
this section) that are not subject to a sub-
stantial risk of forfeiture are vested (and,
thus, treated as paid) at the earlier of the
date actually or constructively paid to the
employee or the close of the applicable
year in which they accrue. For example,
the present value of a principal amount
accrued to an employee’s account under
an account balance plan (under which the
earnings and losses attributed to the ac-
count are based solely on a predetermined
actual investment as determined under
§31.3121(v)(2)-1(d)(2)(i)(B) or a reason-
able market interest rate) is treated as paid
on the date vested, but the present value of
any net earnings subsequently accrued on
that amount (the increase in value due to
the predetermined actual investment or a
reasonable market interest rate) is treated
as paid at the close of the applicable year
in which they accrue. Similarly, while the
present value of an amount accrued under
a nonaccount balance (including earnings
that accrued while the amount was non-
vested) is treated as paid on the date it is
first vested, the present value of the net
earnings on that amount (the increase in
the present value) is treated as paid at the
close of the applicable year in which they
accrue.
(3) Change in related status during the
year. If a taxpayer becomes or ceases to
be a related organization with respect to
an ATEO during an applicable year, then
only the remuneration paid by the taxpay-
er to an employee with respect to services
performed as an employee of the related
organization during the portion of the ap-
plicable year during which the employer
is a related organization is treated as paid
by the ATEO. If an amount is treated as
paid due to vesting in the year the taxpay-
er becomes or ceases to be a related or-
ganization with respect to the ATEO, then
the amount is treated as paid by the ATEO
only if the amount becomes vested during
the portion of the applicable year that the
taxpayer is a related organization with re-
spect to the ATEO.
(d) Amount of remuneration treated as
paid—(1) In general. For each applicable
year, the amount of remuneration treated
as paid by the employer to a covered em-
ployee is the sum of regular wages with-
in the meaning of §31.3402(g)-1(a)(1)(ii)
actually or constructively paid during the
applicable year and the present value (as
determined under paragraph (e) of this
section) of all other remuneration that
vested during the applicable year. The
amount of remuneration that vests during
an applicable year is determined on an
employer-by-employer basis with respect
to each covered employee.
(2) Earnings and losses on previous-
ly paid remuneration—(i) In general.
The amount of net earnings or losses on
previously paid remuneration paid by an
employer is determined on an employ-
ee-by-employee basis, such that amounts
accrued with regard to one employee do
not affect amounts accrued with regard
to a different employee. Similarly, losses
accrued on previously paid remuneration
from one employer do not offset earnings
accrued on previously paid remuneration
from another employer. The amount of
net earnings or losses on previously paid
remuneration paid by the employer is
determined on a net aggregate basis for
all plans maintained by the employer in
which the employee participates for each
applicable year. For example, losses under
an account balance plan may offset earn-
ings under a nonaccount balance plan for
the same applicable year maintained by
the same employer for the same employee.
(ii) Previously paid remuneration—
(A) New covered employee. For an indi-
vidual who was not a covered employee
for any prior applicable year, previously
paid remuneration means, for the applica-
ble year for which the individual becomes
a covered employee, the present value of
vested remuneration that was not actually
or constructively paid or otherwise inclu-
dible in the employee’s gross income be-
fore the start of the applicable year plus
any remuneration that vested during the
applicable year but that is not actually or
constructively paid or otherwise includi-
ble in the employee’s gross income before
the close of the applicable year.
(B) Existing covered employee. For an
individual who was a covered employee
for any prior applicable year, previously
paid remuneration means, for each appli-
cable year, the amount of remuneration
that the employer treated as paid in the
applicable year or for a prior applicable
year but that is not actually or construc-
tively paid or otherwise includible in the
employee’s gross income before the close
of the applicable year. Actual or construc-
tive payment or another event causing an
amount of previously paid remuneration
to be includible in the employee’s gross
income thus reduces the amount of previ-
ously paid remuneration.
(iii) Earnings. Earnings means any in-
crease in the vested present value of previ-
ously paid remuneration as of the close of
the applicable year, regardless of whether
the plan denominates the increase as earn-
ings. For example, an increase in the vest-
ed account balance of a nonqualified de-
ferred compensation plan based solely on
the investment return of a predetermined
actual investment (and disregarding any
additional contributions) constitutes earn-
ings. Similarly, an increase in the vested
present value of a benefit under a nonqual-
ified nonaccount balance plan due solely
to the passage of time (and disregarding
any additional benefit accruals) consti-
tutes earnings. However, an increase in an
account balance of a nonqualified deferred
compensation plan due to a salary reduc-
tion contribution or an employer contri-
bution does not constitute earnings (and
therefore may not be offset with losses).
Likewise, an increase in the benefit under
a nonaccount balance plan due to an ad-
ditional year of service or an increase in
compensation that is reflected in a benefit
formula does not constitute earnings.
(iv) Losses. Losses means any decrease
in the vested present value of previously
paid remuneration as of the close of the
applicable year, regardless of whether the
plan denominates that decrease as losses.
(v) Net earnings. Net earnings means,
for each applicable year, the amount (if
any) by which the earnings accrued for
the applicable year on previously paid re-
muneration exceeds the sum of the losses
accrued on previously paid remuneration
for the applicable year and any net losses
carried forward from a previous taxable
year.
(vi) Net losses. Net losses means, for
each applicable year, the amount (if any)
by which the sum of the losses accrued

February 16, 2021 876 Bulletin No. 2021–7
on previously paid remuneration for the
applicable year and any net losses carried
forward from a previous taxable year ex-
ceed the earnings accrued for the applica-
ble year on previously paid remuneration.
Losses may only be used to offset earnings
and thus do not reduce the remuneration
treated as paid for an applicable year ex-
cept to the extent of the earnings accrued
for that applicable year. However, with re-
gard to a covered employee, an employer
may carry net losses forward to the next
applicable year and offset vested earnings
for purposes of determining net earnings
or losses for that subsequent applicable
year. For example, if a covered employee
who participates in a nonaccount balance
plan and an account balance plan vests in
an amount of earnings under the nonac-
count balance plan and has losses under
the account balance plan that exceed the
vested earnings treated as remuneration
under the nonaccount balance plan, those
excess losses are carried forward to the
next applicable year and offset vested
earnings for purposes of determining net
earnings or losses for that applicable year.
If, for the next applicable year, there are
not sufficient earnings to offset the entire
amount of losses carried forward from the
previous year (and any additional losses),
the offset process repeats for each subse-
quent applicable year until there are suf-
ficient earnings for the applicable year to
offset any remaining losses carried for-
ward.
(3) Remuneration paid for a taxable
year before the employee becomes a cov-
ered employee—(i) In general. In accor-
dance with the payment timing rules of
paragraph (c) of this section, any remu-
neration that is vested but is not actually
or constructively paid or otherwise inclu-
dible in an employee’s gross income as
of the close of the applicable year for the
taxable year immediately preceding the
taxable year in which the employee first
becomes a covered employee of an ATEO
is treated as previously paid remuneration
for the taxable year in which the employ-
ee first becomes a covered employee. Net
losses on this previously paid remunera-
tion from any preceding applicable year
do not carry forward to subsequent appli-
cable years. However, net earnings and
losses that vest on such previously paid
remuneration in subsequent applicable
years are treated as remuneration paid for
a taxable year for which the employee is a
covered employee.
(ii) Examples. The following examples
illustrate the rules of this paragraph (d)(3).
For purposes of these examples, assume
any organization described as “ATEO” is
an ATEO.
(A) Example 1 (Earnings on pre-covered em-
ployee remuneration)—(1) Facts. ATEO 1 uses a
taxable year beginning July 1 and ending June 30.
Employee A becomes a covered employee of ATEO
1 for the taxable year beginning July 1, 2023, and
ending June 30, 2024. During the 2022 applicable
year, Employee A vests in $1 million of nonqualified
deferred compensation. As of December 31, 2022,
the present value of the amount deferred under the
plan is $1.1 million. During the 2023 applicable year,
ATEO 1 pays Employee A $1 million in regular wag-
es. The present value as of December 31, 2023, of
Employee A’s nonqualified deferred compensation is
$1.3 million.
(2) Conclusion (Taxable year beginning July 1,
2022, and ending June 30, 2023). ATEO 1 pays Em-
ployee A $1.1 million of remuneration in the 2022
applicable year. This is comprised of $1 million of
vested nonqualified deferred compensation, and
$100,000 of earnings, all of which is treated as paid
for the taxable year beginning July 1, 2022, and end-
ing June 30, 2023.
(3) Conclusion (Taxable year beginning July 1,
2023, and ending June 30, 2024). ATEO 1 pays Em-
ployee A $1.2 million of remuneration in the 2023
applicable year. This is comprised of $1 million reg-
ular wages and $200,000 of earnings ($1.3 million
present value as of December 31, 2023, minus $1.1
million previously paid remuneration as of Decem-
ber 31, 2022).
(B) Example 2 (Losses on pre-covered employee
remuneration)—(1) Facts. Assume the same facts as
in paragraph (d)(3)(ii)(A) of this section (Example
1), except that the present value of the nonqualified
deferred compensation as of December 31, 2022, is
$900,000.
(2) Conclusion (Taxable year beginning July
1, 2022, and ending June 30, 2023). ATEO 1 pays
Employee A $1 million of remuneration in the 2022
applicable year. This is comprised of $1 million of
vested nonqualified deferred compensation. The
present value of all vested deferred compensation
as of December 31 of the 2022 applicable year
($900,000) is treated as previously paid remunera-
tion for the next applicable year (as Employee A is
a covered employee for the next taxable year). The
$100,000 of losses accrued while Employee A was
not a covered employee do not carry forward to the
next applicable year.
(3) Conclusion (Taxable year beginning July 1,
2023, and ending June 30, 2024). ATEO 1 pays Em-
ployee A $1.4 million of remuneration in the 2023
applicable year. This is comprised of $1 million cash
and $400,000 of earnings ($1.3 million present value
as of December 31, 2023, minus $900,000 previous-
ly paid remuneration).
(e) Calculation of present value—(1)
In general. The employer must determine
present value using reasonable actuarial
assumptions regarding the amount, time,
and probability that a payment will be
made. For this purpose, a discount for the
probability that an employee will die be-
fore commencement of benefit payments
is permitted, but only to the extent that
benefits will be forfeited upon death. The
present value may not be discounted for
the probability that payments will not be
made (or will be reduced) because of the
unfunded status of the plan; the risk asso-
ciated with any deemed or actual invest-
ment of amounts deferred under the plan;
the risk that the employer, the trustee, or
another party will be unwilling or un-
able to pay; the possibility of future plan
amendments; the possibility of a future
change in the law; or similar risks or con-
tingencies. The present value of the right
to future payments as of the vesting date
includes any earnings that have accrued as
of the vesting date that are not previously
paid remuneration.
(2) Treatment of future payment amount
as present value for certain amounts. For
purposes of determining the present val-
ue of remuneration that is scheduled to be
actually or constructively paid within 90
days of vesting, the employer may treat
the future amount that is to be paid as the
present value at vesting.
(f) Examples. The following exam-
ples illustrate the rules of this section. For
purposes of these examples, assume any
entity referred to as “ATEO” is an ATEO,
any entity referred to as “CORP” is not an
ATEO, and all taxpayers use the calendar
year as their taxable year.
(1) Example 1 (Account balance plan)—(i)
Facts. Employee A is a covered employee of ATEO
1. Employee A participates in a nonqualified deferred
compensation plan (the NQDC plan) in which the ac-
count balance is adjusted based on the investment re-
turns on predetermined actual investments. On Jan-
uary 1, 2022, ATEO 1 credits $100,000 to Employee
A’s account under the plan, subject to the require-
ment that Employee A remain employed through
June 30, 2024. On June 30, 2024, the vested account
balance is $110,000. Due to earnings or losses on the
account balance, the closing account balance on each
of the following dates is: $115,000 on December 31,
2024, $120,000 on December 31, 2025, $100,000
on December 31, 2026, and $110,000 on December
31, 2027. During 2028, Employee A defers an addi-
tional $10,000 under the plan, all of which is vested
at the time of deferral. On December 31, 2028, the
closing account balance is $125,000. In 2029, ATEO
1 pays $10,000 to Employee A under the plan. On
December 31, 2029, the closing account balance is
$135,000 due to earnings on the account balance.

Bulletin No. 2021–7 877 February 16, 2021
(ii) Conclusion (2022 and 2023 applicable
years—nonvested amounts). For 2022 and 2023,
ATEO 1 is not treated as paying Employee A any
remuneration attributable to Employee A’s participa-
tion in the NQDC plan because the amount deferred
under the plan remains subject to a substantial risk
of forfeiture within the meaning of section 457(f)(3)
(B).
(iii) Conclusion (2024 applicable year—amounts
in year of vesting). For 2024, ATEO 1 is treated as
paying Employee A $115,000 of remuneration attrib-
utable to Employee A’s participation in the NQDC
plan, including $110,000 of remuneration on June
30, 2024, when the amount becomes vested, and an
additional $5,000 of remuneration on December 31,
2024, which is earnings on the previously paid remu-
neration ($110,000).
(iv) Conclusion (2025 applicable year—earn-
ings). For 2025, ATEO 1 is treated as paying Em-
ployee A $5,000 of remuneration attributable to Em-
ployee A’s participation in the NQDC plan, which is
the additional earnings on the previously paid remu-
neration ($115,000) as of December 31, 2025.
(v) Conclusion (2026 applicable year—losses).
For 2026, ATEO 1 is not treated as paying Em-
ployee A any remuneration attributable to Employ-
ee A’s participation in the NQDC plan because the
present value of the previously paid remuneration
($120,000) decreased to $100,000 as of December
31, 2026. The $20,000 loss for 2026 does not reduce
any amount previously treated as remuneration but is
available for carryover to subsequent taxable years
to offset earnings.
(vi) Conclusion (2027 applicable year—recov-
ery of losses). For 2027, ATEO 1 is not treated as
paying Employee A any remuneration attributable
to Employee A’s participation in the NQDC plan be-
cause the present value of the previously paid remu-
neration ($120,000) was $110,000 as of December
31, 2027. Due to increases on the account balance,
ATEO 1 recovers $10,000 of the $20,000 of losses
carried over from 2026. The net losses as of Decem-
ber 31, 2027, are $10,000, and none of the $10,000
in earnings during 2027 is treated as remuneration
paid in 2027.
(vii) Conclusion (2028 applicable year—no re-
covery of losses against additional deferrals of com-
pensation). For 2028, ATEO 1 is treated as paying
Employee A $10,000 of remuneration attributable
to Employee A’s participation in the NQDC plan.
The additional $10,000 deferral is vested and thus
is treated as remuneration paid on the date credit-
ed to Employee A’s account. This credit increases
the amount of previously paid remuneration from
$120,000 to $130,000. Additionally, due to earnings,
ATEO 1 recovers $5,000 of the $10,000 loss carried
over from 2027, none of which was remuneration
paid for 2026, so that as of December 31, 2028, the
net loss available for carryover to 2029 is $5,000.
(viii) Conclusion (2029 applicable year—dis-
tributions, recovery of remainder of losses through
earnings and additional earnings). For 2029, ATEO
1 is treated as paying Employee A $15,000 of remu-
neration attributable to Employee A’s participation
in the NQDC plan. The $10,000 payment reduces
the amount of previously paid remuneration (from
$130,000 to $120,000) and the account balance
(from $125,000 to $115,000). The present value of
the vested account balance increases by $20,000
(from $115,000 to $135,000) as of December 31,
2029. Therefore, due to earnings, ATEO 1 recovers
the remaining $5,000 loss carried over from 2028
(the difference between the $120,000 previously
paid remuneration before earnings and the $115,000
account balance before earnings) and is treated as
paying Employee A an additional $15,000 of re-
muneration as earnings (the difference between the
$135,000 account balance after earnings and the
$120,000 previously paid remuneration after loss
recovery).
(2) Example 2 (Nonaccount balance plan with
earnings)—(i) Facts. ATEO 2 and CORP 2 are relat-
ed organizations. Employee B is a covered employee
of ATEO 2 and is also employed by CORP 2. On Jan-
uary 1, 2022, CORP 2 and Employee B enter into an
agreement under which CORP 2 will pay Employee
B $100,000 on December 31, 2025, if B remains
employed by CORP 2 through January 1, 2024.
Employee B remains employed by CORP 2 through
January 1, 2024. On January 1, 2024, the present
value based on reasonable actuarial assumptions of
the $100,000 to be paid on December 31, 2025, is
$75,000. On December 31, 2024, the present value
of the $100,000 future payment increases to $85,000
due solely to the passage of time. On December 31,
2025, CORP 2 pays Employee B $100,000.
(ii) Conclusion (2022 and 2023 applicable
years—nonvested amounts). For 2022 and 2023,
CORP 2 is not treated as paying Employee B any
remuneration attributable to the agreement because
the amount deferred under the agreement remains
subject to a substantial risk of forfeiture within the
meaning of section 457(f)(3)(B).
(iii) Conclusion (2024 applicable year—amounts
in year of vesting). For 2024, CORP 2 is treated as
paying Employee B $75,000 of remuneration attrib-
utable to the agreement on January 1, 2024, which is
the present value on that date of the $100,000 pay-
able on December 31, 2025. In addition, CORP 2 is
treated as paying Employee B $10,000 of remuner-
ation attributable to the agreement on December 31,
2024, which is earnings based on the increase in the
present value of the previously paid remuneration
(from $75,000 to $85,000) as of December 31, 2024.
(iv) Conclusion (2025 applicable year—earnings
and distribution of previously paid remuneration).
For 2025, CORP 2 is treated as paying Employee B
$15,000 in remuneration attributable to the agree-
ment on December 31, 2025, which is earnings based
on the increase in the present value of the previously
paid remuneration (from $85,000 to $100,000) as of
December 31, 2025. In addition, the $100,000 pay-
ment is treated as reducing the amount of previously
paid remuneration ($100,000) to zero.
(3) Example 3 (Treatment of amount payable as
present value at vesting)—(i) Facts. Employee C is
a covered employee of ATEO 3. Under an agreement
between ATEO 3 and Employee C, ATEO 3 agrees
to pay Employee C $100,000 two months after the
date Employee C meets a specified performance
goal that is a substantial risk of forfeiture within the
meaning of section 457(f)(3)(B). Employee C meets
the performance goal on November 30, 2022, and
ATEO 3 pays Employee C $100,000 on January 31,
2023. In accordance with §53.4960-2(e)(2), because
the payment is to be made within 90 days of vesting,
ATEO 3 elects to treat the full payment amount as the
amount of remuneration paid at vesting.
(ii) Conclusion (2022 applicable year—election
to treat amount payable within 90 days as paid at
vesting). For taxable year 2022, ATEO 3 is treated
as paying Employee C $100,000 of remuneration at-
tributable to the agreement. Employee C vests in the
$100,000 payment in 2022 upon meeting the perfor-
mance goal. Under the general rule, ATEO 3 would
be treated as paying for the taxable year 2022 the
present value as of November 30, 2022, of $100,000
payable on January 31, 2023 (two months after the
date of vesting), with adjustments to the present val-
ue as of the end of the year. However, because ATEO
3 elected to treat the full $100,000 amount payable
within 90 days of vesting as the remuneration paid,
the $100,000 payable to Employee C in 2023 is treat-
ed as remuneration paid in 2022 (and no additional
amount related to the $100,000 paid on January 31,
2023, is treated as remuneration paid in 2023).
(4) Example 4 (Aggregation of remuneration
from related organizations)—(i) Facts. Employee
D is a covered employee of ATEO 4 and also an
employee of CORP 4 and CORP 5. ATEO 4, CORP
4, and CORP 5 are related organizations. ATEO
4, CORP 4, and CORP 5 each pay Employee D
$200,000 of salary during 2022 and 2023. On Jan-
uary 1, 2022, ATEO 4 promises to pay Employee
D $120,000 on December 31, 2023, under a nonac-
count balance plan, the right to which is vested and
the present value of which is $100,000 on January
1, 2022. On January 1, 2022, CORP 4 and CORP
5 each contribute $100,000 on Employee D’s behalf
to account balance plans of CORP 4 and CORP 5,
respectively, under which all amounts deferred are
vested. On December 31, 2022, the present value
of the amounts deferred under the ATEO 4 plan is
$110,000, the present value of the amounts deferred
under the CORP 4 plan is $120,000, and the pres-
ent value of the amounts deferred under the CORP
5 plan maintained is $90,000. On December 31,
2023, the present value of the amounts deferred un-
der the ATEO 4 plan is $120,000, the present value
of the amounts deferred under the CORP 4 plan is
$130,000, and the present value of the amounts de-
ferred under the CORP 5 plan is $110,000.
(ii) Conclusion (2022 applicable year). For
2022, before aggregation of remuneration paid by
related organizations, ATEO 4 is treated as paying
Employee D $310,000 of remuneration ($200,000
salary + $100,000 upon vesting of deferred amounts
+ $10,000 net earnings on vested deferred amounts).
CORP 4 is treated as paying Employee D $320,000
of remuneration ($200,000 salary + $100,000 upon
vesting of deferred amounts + $20,000 net earnings
on vested deferred amounts). CORP 5 is treated
as paying Employee D $300,000 of remuneration
($200,000 salary + $100,000 upon vesting of de-
ferred amounts) and has $10,000 of net losses on
vested deferred amounts, which are carried forward
to 2023. Thus, ATEO 4 is treated as paying $930,000
of remuneration to Employee D for the applicable
year.
(iii) Conclusion (2023 applicable year). For
2023, before aggregation of remuneration paid by
related organizations, ATEO 4 is treated as paying
Employee D $210,000 of remuneration ($200,000
salary + $10,000 earnings on previously paid re-

February 16, 2021 878 Bulletin No. 2021–7
muneration). CORP 4 is treated as paying Employ-
ee D $210,000 of remuneration ($200,000 salary
+ $10,000 net earnings on previously paid remu-
neration). CORP 5 is treated as paying Employee
D $210,000 of remuneration ($200,000 salary +
$10,000 net earnings on previously paid remunera-
tion after taking into account the loss carryforward).
Thus, ATEO 4 is treated as paying $630,000 of re-
muneration to Employee D for the applicable year.
(5) Example 5 (Treatment of regular wages for
a pay period spanning applicable years)—(i) Facts.
ATEO 5 pays its employees’ salaries in accordance
with a two-week payroll period that begins Sunday
of the first week and ends Saturday of the second
week. Payment occurs the Friday following the end
of the payroll period. The last payroll period of 2023
ends on December 31, 2023. For the last payroll pe-
riod, Employee E earns $8,000 of salary. In addition,
ATEO 5 awards Employee E a $10,000 bonus that
vests on December 31, 2023. ATEO 5 pays Employ-
ee E $18,000 on Friday, January 5, 2024, reflecting
Employee E’s salary for the last payroll period of
2023 and the bonus, the right to which vested on De-
cember 31, 2023.
(ii) Conclusion (Regular wages). The $8,000
of salary is regular wages within the meaning of
§31.3402(g)-1(a)(1)(ii) because it is an amount paid
at a periodic rate for the current payroll period. Thus,
$8,000 is treated as remuneration paid on January 5,
2024 (when it is actually or constructively paid), and,
therefore, is treated as remuneration paid in ATEO
5’s 2024 applicable year.
(iii) Conclusion (Amounts other than regular
wages). The $10,000 bonus is not regular wages
within the meaning of §31.3402(g)-1(a)(1)(ii) be-
cause it is not an amount paid at a periodic rate for
the current payroll period. Thus, $10,000 is treated
as remuneration paid on December 31, 2023 (when
it is vested) and, therefore, is treated as remuneration
paid in ATEO 5’s 2023 applicable year.
§53.4960-3 Determination of whether
there is a parachute payment.
(a) Parachute payment—(1) In gen-
eral. Except as otherwise provided in
paragraph (a)(2) of this section (relating
to payments excluded from the defini-
tion of a parachute payment), parachute
payment means any payment in the na-
ture of compensation made by an ATEO
(or a predecessor of the ATEO) or a re-
lated organization to (or for the benefit
of) a covered employee if the payment is
contingent on the employee’s separation
from employment with the employer, and
the aggregate present value of the pay-
ments in the nature of compensation to
(or for the benefit of) the individual that
are contingent on the separation equals or
exceeds an amount equal to 3-times the
base amount.
(2) Exclusions. The following pay-
ments are not parachute payments:
(i) Certain qualified plans. A payment
that is a contribution to or a distribution
from a plan described in section 401(a)
that includes a trust exempt from tax under
section 501(a), an annuity plan described
in section 403(a), a simplified employee
pension (as defined in section 408(k)), or
a simple retirement account described in
section 408(p);
(ii) Certain annuity contracts. A pay-
ment made under or to an annuity contract
described in section 403(b) or a plan de-
scribed in section 457(b);
(iii) Compensation for medical ser-
vices. A payment made to a licensed med-
ical professional for the performance of
medical services performed by such pro-
fessional; and
(iv) Payments to non-HCEs. A pay-
ment made to an individual who is not a
highly compensated employee (HCE) as
defined in paragraph (a)(3) of this section.
(3) Determination of HCEs for purpos-
es of the exclusion from parachute pay-
ments. For purposes of this section, highly
compensated employee or HCE means,
with regard to an ATEO that maintains a
qualified retirement plan or other employ-
ee benefit plan described in §1.414(q)-1T,
Q/A–1, any person who is a highly com-
pensated employee within the meaning
of section 414(q) and, with regard to an
ATEO that does not maintain such a plan,
any person who would be a highly com-
pensated employee within the meaning of
section 414(q) if the ATEO did maintain
such a plan. For purposes of determining
the group of highly compensated employ-
ees for a determination year, consistent
with §1.414(q)-1T, Q/A–14(a)(1), the de-
termination year calculation is made on
the basis of the applicable plan year under
§1.414(q)-1T, Q/A–14(a)(2) of the plan or
other entity for which a determination is
made, and the look-back year calculation
is made on the basis of the 12-month pe-
riod immediately preceding that year. For
an ATEO that does not maintain a plan
described in §1.414(q)-1T, Q/A–1, the
rules are applied by analogy, substituting
the calendar year for the plan year. Thus,
for example, in 2022, an ATEO that does
not maintain such a plan must use its em-
ployees’ 2021 annual compensation (as
defined in §1.414(q)-1T, Q/A–13, includ-
ing any of the safe harbor definitions if
applied consistently to all employees) to
determine which employees are HCEs for
2022, if any, for purposes of section 4960.
If an employee is an HCE at the time of
separation from employment, then for
purposes of section 4960 any parachute
payment that is contingent on the separa-
tion from employment (as defined in para-
graph (d) of this section) is treated as paid
to an HCE so that the exception from the
term parachute payment under paragraph
(a)(2)(iv) of this section does not apply,
even if the payment occurs during one or
more later taxable years (that is, taxable
years after the taxable year during which
the employee separated from employ-
ment).
(b) Payment in the nature of compen-
sation—(1) In general. Any payment—
in whatever form—is a payment in the
nature of compensation if the payment
arises out of an employment relationship,
including holding oneself out as available
to perform services and refraining from
performing services. Thus, for example,
a payment made under a covenant not
to compete or a similar arrangement is a
payment in the nature of compensation.
A payment in the nature of compensation
includes (but is not limited to) wages and
salary, bonuses, severance pay, fringe ben-
efits, life insurance, pension benefits, and
other deferred compensation (including
any amount characterized by the parties
as interest or earnings thereon). A pay-
ment in the nature of compensation also
includes cash when paid, the value of the
right to receive cash, the value of accel-
erated vesting, or a transfer of property.
The vesting of an option, stock appreci-
ation right, or similar form of compensa-
tion as a result of a covered employee’s
separation from employment is a payment
in the nature of compensation. However,
a payment in the nature of compensation
does not include attorney’s fees or court
costs paid or incurred in connection with
the payment of any parachute payment or
a reasonable rate of interest accrued on
any amount during the period the parties
contest whether a parachute payment will
be made.
(2) Consideration paid by covered
employee. Any payment in the nature of
compensation is reduced by the amount
of any money or the fair market value of
any property (owned by the covered em-
ployee without restriction) that is (or will

Bulletin No. 2021–7 879 February 16, 2021
be) transferred by the covered employee
in exchange for the payment.
(c) When payment is considered to be
made—(1) In general. A payment in the
nature of compensation is considered
made in the taxable year in which it is in-
cludible in the covered employee’s gross
income or, in the case of fringe benefits
and other benefits that are excludable
from income, in the taxable year the ben-
efits are received. In the case of taxable
non-cash fringe benefits provided in a cal-
endar year, payment is considered made
on the date or dates the employer chooses,
but no later than December 31 of the cal-
endar year in which the benefits are pro-
vided, except that when the fringe benefit
is the transfer of personal property (either
tangible or intangible) of a kind normally
held for investment or the transfer of real
property, payment is considered made on
the actual date of transfer. If the fringe
benefit is neither a transfer of personal
property nor a transfer of real property,
the employer may, in its discretion, treat
the value of the benefit actually provided
during the last two months of the calen-
dar year as paid during the subsequent
calendar year. However, an employer that
treats the value of a benefit paid during the
last two months of a calendar year as paid
during the subsequent calendar year under
this rule must treat the value of that fringe
benefit as paid during the subsequent cal-
endar year with respect to all employees
who receive it.
(2) Transfers of section 83 property.
A transfer of property in connection with
the performance of services that is sub-
ject to section 83 is considered a payment
made in the taxable year in which the
property is transferred or would be inclu-
dible in the gross income of the covered
employee under section 83, disregarding
any election made by the employee under
section 83(b) or (i). Thus, in general, such
a payment is considered made at the lat-
er of the date the property is transferred
(as defined in §1.83-3(a)) to the covered
employee or the date the property be-
comes substantially vested (as defined
in §1.83-3(b) and (j)). The amount of the
payment is the compensation as deter-
mined under section 83, disregarding any
amount includible in income pursuant to
an election made by an employee under
section 83(b).
(3) Stock options. An option (including
an option to which section 421 applies)
is treated as property that is transferred
when the option becomes vested (regard-
less of whether the option has a readily
ascertainable fair market value as defined
in §1.83-7(b)). For purposes of determin-
ing the timing and amount of any payment
related to the option, the principles of
§1.280G-1, Q/A–13 and any method pre-
scribed by the Commissioner in published
guidance of general applicability under
§601.601(d)(2) apply.
(d) Payment contingent on an employ-
ee’s separation from employment—(1) In
general. A payment is contingent on an
employee’s separation from employment
if the facts and circumstances indicate
that the employer would not make the
payment in the absence of the employee’s
involuntary separation from employment.
A payment generally would be made in
the absence of the employee’s involuntary
separation from employment if it is sub-
stantially certain at the time of the invol-
untary separation from employment that
the payment would be made whether or
not the involuntary separation occurred.
A payment the right to which is not sub-
ject to a substantial risk of forfeiture with-
in the meaning of section 457(f)(3)(B) at
the time of an involuntary separation from
employment generally is a payment that
would have been made in the absence of
an involuntary separation from employ-
ment (and is therefore not contingent on
a separation from employment), except
that the increased value of an accelerated
payment of a vested amount described in
paragraph (f)(3) of this section resulting
from an involuntary separation from em-
ployment is not treated as a payment that
would have been made in the absence of
an involuntary separation from employ-
ment. A payment the right to which is
no longer subject to a substantial risk of
forfeiture within the meaning of section
457(f)(3)(B) as a result of an involuntary
separation from employment, including a
payment the vesting of which is acceler-
ated due to the separation from employ-
ment as described in paragraph (f)(3) of
this section, is not treated as a payment
that would have been made in the ab-
sence of an involuntary separation from
employment (and thus is contingent on a
separation from employment). A payment
does not fail to be contingent on a sepa-
ration from employment merely because
the payment is conditioned upon the ex-
ecution of a release of claims, noncom-
petition or nondisclosure provisions, or
other similar requirements. See paragraph
(d)(3) of this section for the treatment of
a payment made pursuant to a covenant
not to compete. If, after an involuntary
separation from employment, the former
employee continues to provide certain
services as a nonemployee, payments for
services rendered as a nonemployee are
not payments that are contingent on a
separation from employment to the extent
those payments are reasonable and are
not made on account of the involuntary
separation from employment. Whether
services are performed as an employee or
nonemployee depends upon all the facts
and circumstances. See §53.4960-1(e).
For rules on determining whether pay-
ments are reasonable compensation for
services, the rules of §1.280G-1, Q/A–40
through Q/A–42 (excluding Q/A–40(b)
and Q/A–42(b)), and Q/A–44 are applied
by analogy (substituting involuntary sep-
aration from employment for change in
ownership or control).
(2) Employment agreements—(i) In
general. If a covered employee involun-
tarily separates from employment before
the end of a contract term and is paid
damages for breach of contract pursuant
to an employment agreement, the pay-
ment of damages is treated as a payment
that is contingent on a separation from
employment. An employment agreement
is an agreement between an employee
and employer that describes, among oth-
er things, the amount of compensation or
remuneration payable to the employee for
services performed during the term of the
agreement.
(ii) Example. The following example
illustrates the rules of this paragraph (d)
(2). For purposes of this example, assume
any entity referred to as “ATEO” is an
ATEO.
(A) Example—(1) Facts. Employee A, a cov-
ered employee, has a 3-year employment agreement
with ATEO 1. Under the agreement, Employee A
will receive a salary of $200,000 for the first year
and, for each succeeding year, an annual salary that
is $100,000 more than the previous year. The agree-
ment provides that, in the event of A’s involuntary
separation from employment without cause, Em-
ployee A will receive the remaining salary due under
the agreement. At the beginning of the second year of

February 16, 2021 880 Bulletin No. 2021–7
the agreement, ATEO 1 involuntarily terminates Em-
ployee A’s employment without cause and pays Em-
ployee A $700,000 representing the remaining salary
due under the employment agreement ($300,000 for
the second year of the agreement plus $400,000 for
the third year of the agreement).
(2) Conclusion. The $700,000 payment is treated
as a payment that is contingent on a separation from
employment.
(3) Noncompetition agreements. A payment un-
der an agreement requiring a covered employee to
refrain from performing services (for example, a
covenant not to compete) is a payment that is con-
tingent on a separation from employment if the pay-
ment would not have been made in the absence of an
involuntary separation from employment. For exam-
ple, a payment contingent on compliance in whole or
in part with a covenant not to compete negotiated as
part of a severance arrangement arising from an in-
voluntary separation from employment is contingent
on a separation from employment. Similarly, one or
more payments contingent on compliance in whole
or in part with a covenant not to compete not negoti-
ated as part of a severance arrangement arising from
an involuntary separation from employment but that
provides for a payment specific to an involuntary
separation from employment (and not voluntary sep-
aration from employment) is contingent on a sepa-
ration from employment. Payments made under an
agreement requiring a covered employee to refrain
from performing services that are contingent on sep-
aration from employment are not treated as paid in
exchange for the performance of services and are not
excluded from parachute payments.
(4) Payment of amounts previously included
in income or excess remuneration. Actual or con-
structive payment of an amount that was previously
included in gross income of the employee is not a
payment contingent on a separation from employ-
ment. For example, payment of an amount includ-
ed in income under section 457(f)(1)(A) due to the
lapsing of a substantial risk of forfeiture on a date
before the separation from employment generally is
not a payment that is contingent on a separation from
employment, even if the amount is paid in cash or
otherwise to the employee because of the separation
from employment. In addition, actual or constructive
receipt of an amount treated as excess remuneration
under §53.4960-4(b)(1) is not a payment that is con-
tingent on a separation from employment (and thus
is not a parachute payment), even if the amount is
paid to the employee because of the separation from
employment.
(5) Window programs. A payment under a win-
dow program is contingent on a separation from
employment. A window program is a program es-
tablished by an employer in connection with an
impending separation from employment to provide
separation pay if the program is made available by
the employer for a limited period of time (no longer
than 12 months) to employees who separate from
employment during that period or to employees who
separate from service during that period under speci-
fied circumstances. A payment made under a window
program is treated as a payment that is contingent
on an employee’s separation from employment not-
withstanding that the employee may not have had an
involuntary separation from employment.
(6) Anti-abuse provision. Notwithstanding para-
graphs (d)(1) through (5) of this section, if the facts
and circumstances demonstrate that either the vest-
ing or the payment of an amount (whether before
or after an employee’s involuntary separation from
employment) would not have occurred but for the
involuntary nature of the separation from employ-
ment, the payment of the amount is contingent on a
separation from employment. For example, an em-
ployer’s exercise of discretion to accelerate vesting
of an amount shortly before an involuntary separa-
tion from employment may indicate that the acceler-
ation of vesting was due to the involuntary nature of
the separation from employment and was therefore
contingent on the employee’s separation from em-
ployment. Similarly, payment of an amount in ex-
cess of an amount otherwise payable (for example,
increased salary), shortly before or after an invol-
untary separation from employment, may indicate
that the amount was paid because the separation was
involuntary and was therefore contingent on the em-
ployee’s separation from employment. If an ATEO
becomes a predecessor as a result of a reorganization
or other transaction described in §53.4960-1(h), any
payment to an employee by a successor organization
that is contingent on the employee’s separation from
employment with the predecessor ATEO is treated as
paid by the predecessor ATEO.
(e) Involuntary separation from em-
ployment—(1) In general. Involuntary
separation from employment means a
separation from employment due to the
independent exercise of the employer’s
unilateral authority to terminate the em-
ployee’s services, other than due to the
employee’s implicit or explicit request, if
the employee was willing and able to con-
tinue performing services as an employee.
An involuntary separation from employ-
ment may include an employer’s failure to
renew a contract at the time the contract
expires, provided that the employee was
willing and able to execute a new contract
providing terms and conditions substan-
tially similar to those in the expiring con-
tract and to continue providing services.
The determination of whether a separation
from employment is involuntary is based
on all the facts and circumstances.
(2) Separation from employment for
good reason—(i) In general. Notwith-
standing paragraph (e)(1) of this section,
an employee’s voluntary separation from
employment is treated as an involuntary
separation from employment if the sepa-
ration occurs under certain bona fide con-
ditions (referred to herein as a separation
from employment for good reason).
(ii) Material negative change required.
A separation from employment for good
reason is treated as an involuntary separa-
tion from employment if the relevant facts
and circumstances demonstrate that it was
the result of unilateral employer action
that caused a material negative change to
the employee’s relationship with the em-
ployer. Factors that may provide evidence
of such a material negative change include
a material reduction in the duties to be
performed, a material negative change in
the conditions under which the duties are
to be performed, or a material reduction in
the compensation to be received for per-
forming such services.
(iii) Deemed material negative change.
An involuntary separation from employ-
ment due to a material negative change
is deemed to occur if the separation from
employment occurs within 2 years follow-
ing the initial existence of one or more of
the following conditions arising without
the consent of the employee:
(A) Material diminution of compensa-
tion. A material diminution in the employ-
ee’s base compensation;
(B) Material diminution of responsibil-
ity. A material diminution in the employ-
ee’s authority, duties, or responsibilities;
(C) Material diminution of authority
of supervisor. A material diminution in
the authority, duties, or responsibilities of
the supervisor to whom the employee is
required to report, including a requirement
that an employee report to a corporate of-
ficer or employee instead of reporting di-
rectly to the board of directors (or similar
governing body) of an organization;
(D) Material diminution of budget. A
material diminution in the budget over
which the employee retains authority;
(E) Material change of location. A ma-
terial change in the geographic location
at which the employee must perform ser-
vices; or
(F) Other material breach. Any other
action or inaction that constitutes a mate-
rial breach by the employer of the agree-
ment under which the employee provides
services.
(3) Separation from employment. Ex-
cept as otherwise provided in this para-
graph, separation from employment has
the same meaning as separation from ser-
vice as defined in §1.409A-1(h). Pursuant
to §1.409A-1(h), an employee generally
separates from employment with the em-
ployer if the employee dies, retires, or
otherwise has a termination of employ-
ment with the employer or experiences a

Bulletin No. 2021–7 881 February 16, 2021
sufficient reduction in the level of services
provided to the employer. For purposes of
applying the rules regarding reductions in
the level of services set forth in the defi-
nition of termination of employment in
§1.409A-1(h)(1)(ii), the rules are mod-
ified for purposes of this paragraph such
that an employer may not set the level of
the anticipated reduction in future services
that will give rise to a separation from em-
ployment, meaning that the default per-
centages set forth in §1.409A-1(h)(1)(ii)
apply in all circumstances. Thus, an antic-
ipated reduction of the level of service of
less than 50 percent is not treated as a sep-
aration from employment, an anticipated
reduction of more than 80 percent is treat-
ed as a separation from employment, and
the treatment of an anticipated reduction
between those two levels is determined
based on the facts and circumstances. The
measurement of the anticipated reduc-
tion of the level of service is based on the
average level of service for the prior 36
months (or shorter period for an employee
employed for less than 36 months). In ad-
dition, an employee’s separation from em-
ployment is determined without regard to
§1.409A-1(h)(2) and (5) (application to in-
dependent contractors), since, for purpos-
es of this section, only an employee may
have a separation from employment, and
a change from bona fide employee status
to bona fide independent contractor status
is also a separation from employment. See
§53.4960-2(a)(1) regarding the treatment
of an employee who also serves as a direc-
tor of a corporation (or in a substantially
similar position). The definition of sepa-
ration from employment also incorporates
the rules under §1.409A-1(h)(1)(i) (ad-
dressing leaves of absence, including mil-
itary leaves of absence), §1.409A-1(h)(4)
(addressing asset purchase transactions),
and §1.409A-1(h)(6) (addressing employ-
ees participating in collectively bargained
plans covering multiple employers). The
definition further incorporates the rules of
§1.409A-1(h)(3), under which an employ-
ee separates from employment only if the
employee has a separation from employ-
ment with the employer and all employers
that would be considered a single employ-
er under section 414(b) and (c), except that
the “at least 80 percent” rule under section
414(b) and (c) is used, rather than replac-
ing it with “at least 50 percent.” Howev-
er, for purposes of determining whether
there has been a separation from employ-
ment, a purported ongoing employment
relationship between a covered employee
and an ATEO or a related organization is
disregarded if the facts and circumstances
demonstrate that the purported employ-
ment relationship is not bona fide, or the
primary purpose of the establishment or
continuation of the relationship is avoid-
ance of the application of section 4960.
(f) Accelerated payment or accelerated
vesting resulting from an involuntary sep-
aration from employment—(1) In general.
If a payment or the lapse of a substantial
risk of forfeiture is accelerated as a result
of an involuntary separation from em-
ployment, generally only the value due to
the acceleration of payment or vesting is
treated as contingent on a separation from
employment, as described in paragraphs
(f)(3) and (4) of this section, except as
otherwise provided in this paragraph (f).
For purposes of this paragraph (f), the
terms vested and substantial risk of forfei-
ture have the same meaning as provided in
§53.4960-2(c)(2).
(2) Nonvested payments subject to a
non-service vesting condition. If (without
regard to a separation from employment)
vesting of a payment would depend on an
event other than the performance of ser-
vices, such as the attainment of a perfor-
mance goal, and that vesting event does
not occur prior to the employee’s separa-
tion from employment and the payment
vests due to the employee’s involuntary
separation from employment, the full
amount of the payment is treated as con-
tingent on the separation from employ-
ment.
(3) Vested payments. If an involun-
tary separation from employment accel-
erates actual or constructive payment of
an amount that previously vested with-
out regard to the separation, the portion
of the payment, if any, that is contingent
on the separation from employment is the
amount by which the present value of the
accelerated payment exceeds the present
value of the payment absent the accelera-
tion. The payment of an amount otherwise
due upon a separation from employment
(whether voluntary or involuntary) is not
treated as an acceleration of the payment
unless the payment timing was accelerated
due to the involuntary nature of the sepa-
ration from employment. If the value of
the payment absent the acceleration is not
reasonably ascertainable, and the acceler-
ation of the payment does not significantly
increase the present value of the payment
absent the acceleration, the present value
of the payment absent the acceleration is
the amount of the accelerated payment (so
the amount contingent on the separation
from employment is zero). If the present
value of the payment absent the acceler-
ation is not reasonably ascertainable but
the acceleration significantly increases
the present value of the payment, the fu-
ture value of the payment contingent on
the separation from employment is treated
as equal to the amount of the accelerated
payment. For purposes of this paragraph
(f)(3), the acceleration of a payment by 90
days or less is not treated as significantly
increasing the present value of the pay-
ment. For rules on determining present
value, see paragraph (f)(6) and paragraphs
(h), (i) and (j) of this section.
(4) Nonvested payments subject to a
service vesting condition—(i) In general.
If an involuntary separation from employ-
ment accelerates vesting of a payment,
the portion of the payment that is contin-
gent on separation from employment is
the amount described in paragraph (f)(3)
of this section (if any) plus the value of
the lapse of the obligation to continue to
perform services described in paragraph
(f)(4)(ii) of this section (but the amount
cannot exceed the amount of the accel-
erated payment, or, if the payment is not
accelerated, the present value of the pay-
ment), to the extent that all of the follow-
ing conditions are satisfied with respect to
the payment:
(A) Vesting trigger. The payment vests
as a result of an involuntary separation
from employment;
(B) Vesting condition. Disregarding the
involuntary separation from employment,
the vesting of the payment was contingent
only on the continued performance of ser-
vices for the employer for a specified peri-
od of time; and
(C) Services condition. The payment
is attributable, at least in part, to the per-
formance of services before the date the
payment is made or becomes certain to be
made.
(ii) Value of the lapse of the obligation
to continue to perform services. The value

February 16, 2021 882 Bulletin No. 2021–7
of the lapse of the obligation to continue
to perform services is one percent of the
amount of the accelerated payment mul-
tiplied by the number of full months be-
tween the date that the employee’s right to
receive the payment is vested and the date
that, absent the acceleration, the payment
would have been vested. This paragraph
(f)(4)(ii) applies to the accelerated vesting
of a payment in the nature of compensa-
tion even if the time when the payment is
made is not accelerated. In that case, the
value of the lapse of the obligation to con-
tinue to perform services is one percent of
the present value of the future payment
multiplied by the number of full months
between the date that the individual’s right
to receive the payment is vested and the
date that, absent the acceleration, the pay-
ment would have been vested.
(iii) Accelerated vesting of equity com-
pensation. For purposes of this paragraph
(f)(4), the acceleration of the vesting of a
stock option or stock appreciation right
(or similar arrangement) or the lapse of a
restriction on restricted stock or a restrict-
ed stock unit (or a similar arrangement)
is considered to significantly increase the
value of the payment.
(5) Application to benefits under a non-
qualified deferred compensation plan. In
the case of a payment of benefits under a
nonqualified deferred compensation plan,
paragraph (f)(3) of this section applies to
the extent benefits under the plan are vest-
ed without regard to the involuntary sepa-
ration from employment, but the payment
of benefits is accelerated due to the invol-
untary separation from employment. Para-
graph (f)(4) of this section applies to the
extent benefits under the plan are subject
to the conditions described in paragraph
(f)(4)(i) of this section. For any other
payment of benefits under a nonqualified
deferred compensation plan (such as a
contribution made due to the employee’s
involuntary separation from employ-
ment), the full amount of the payment is
contingent on the employee’s separation
from employment.
(6) Present value. For purposes of
this paragraph (f), the present value of a
payment is determined based on the pay-
ment date absent the acceleration and the
date on which the accelerated payment is
scheduled to be made. The amount that
is treated as contingent on the separation
from employment is the amount by which
the present value of the accelerated pay-
ment exceeds the present value of the pay-
ment absent the acceleration.
(7) Examples. See §1.280G Q/A–24(f)
for examples that may be applied by anal-
ogy to illustrate the rules of this paragraph
(f).
(g) Three-times-base-amount test for
parachute payments—(1) In general. To
determine whether payments in the nature
of compensation made to a covered em-
ployee that are contingent on the covered
employee separating from employment
with the ATEO are parachute payments,
the aggregate present value of the pay-
ments must be compared to the individ-
ual’s base amount. To do this, the aggre-
gate present value of all payments in the
nature of compensation that are made or
to be made to (or for the benefit of) the
same covered employee by an ATEO (or
any predecessor of the ATEO) or related
organization and that are contingent on
the separation from employment must be
determined. If this aggregate present val-
ue equals or exceeds the amount equal to
3-times the individual’s base amount, the
payments are parachute payments. If this
aggregate present value is less than the
amount equal to 3-times the individual’s
base amount, the payments are not para-
chute payments. See paragraphs (f)(6),
(h), (i), and (j) of this section for rules on
determining present value.
(2) Examples. The following examples
illustrate the rules of this paragraph (g).
For purposes of these examples, assume
any entity referred to as “ATEO” is an
ATEO.
(i) Example 1 (Parachute payment)—(A) Facts.
Employee A is a covered employee and an HCE of
ATEO 1. Employee A’s base amount is $200,000.
Payments in the nature of compensation that are con-
tingent on a separation from employment with ATEO
1 totaling $800,000 are made to Employee A on the
date of Employee A’s separation from employment.
(B) Conclusion. The payments are parachute
payments because they have an aggregate present
value at the time of the separation from employment
of $800,000, which is at least equal to 3-times Em-
ployee A’s base amount of $200,000 (3 x $200,000
= $600,000).
(ii) Example 2 (No parachute payment)—(A)
Facts. Assume the same facts as in paragraph (g)(2)
(i) of this section (Example 1), except that the pay-
ments contingent on Employee A’s separation from
employment total $580,000.
(B) Conclusion. Because the aggregate present
value of the payments ($580,000) is not at least equal
to 3-times Employee A’s base amount ($600,000),
the payments are not parachute payments.
(h) Calculating present value—(1)
In general. Except as otherwise provid-
ed in this paragraph (h), for purposes of
determining if a payment contingent on
a separation from employment exceeds
3-times the base amount, the present value
of a payment is determined as of the date
of the separation from employment or, if
the payment is made prior to that date, the
date on which the payment is made.
(2) Deferred payments. For purposes of
determining whether a payment is a para-
chute payment, if a payment in the nature
of compensation is the right to receive
payments in a year (or years) subsequent
to the year of the separation from employ-
ment, the value of the payment is the pres-
ent value of the payment (or payments)
calculated on the basis of reasonable actu-
arial assumptions and using the applicable
discount rate for the present value calcula-
tion that is determined in accordance with
paragraph (i) of this section.
(3) Health care. If the payment in the
nature of compensation is an obligation to
provide health care (including an obliga-
tion to purchase or provide health insur-
ance), then, for purposes of this paragraph
(h) and for applying the 3-times-base-
amount test under paragraph (g) of this
section, the present value of the obligation
is calculated in accordance with generally
accepted accounting principles. For pur-
poses of paragraph (g) of this section and
this paragraph (h), the obligation to pro-
vide health care is permitted to be mea-
sured by projecting the cost of premiums
for health care insurance, even if no health
care insurance is actually purchased. If the
obligation to provide health care is made
in coordination with a health care plan that
the employer makes available to a group,
then the premiums used for purposes of
this paragraph (h)(3) may be the allocable
portion of group premiums.
(i) Discount rate. Present value gen-
erally is determined by using a discount
rate equal to 120 percent of the applica-
ble Federal rate (determined under section
1274(d) and the regulations in part 1 under
section 1274(d)), compounded semiannu-
ally. The applicable Federal rate to be used
is the Federal rate that is in effect on the
date as of which the present value is deter-
mined, using the period until the payment

Bulletin No. 2021–7 883 February 16, 2021
is expected to be made as the term of the
debt instrument under section 1274(d).
See paragraph (h) of this section for rules
with respect to the date as of which the
present value is determined. However, for
any payment, the employer and the cov-
ered employee may elect to use the appli-
cable Federal rate that is in effect on the
date on which the parties entered into the
contract that provides for the payment if
that election is set forth in writing in the
contract.
(j) Present value of a payment to be
made in the future that is contingent on an
uncertain future event or condition—(1)
Treatment based on the estimated proba-
bility of payment. In certain cases, it may
be necessary to apply the 3-times-base-
amount test to a payment that is contin-
gent on separation from employment at
a time when the aggregate present value
of all the payments is uncertain because
the time, amount, or right to receive one
or more of the payments is also contingent
on the occurrence of an uncertain future
event or condition. In that case, the em-
ployer must reasonably estimate whether
it will make the payment. If the employer
reasonably estimates there is a 50-percent
or greater probability that it will make the
payment, the full amount of the payment
is considered for purposes of the 3-times-
base-amount test and the allocation of the
base amount. If the employer reasonably
estimates there is a less than 50-percent
probability that the payment will be made,
the payment is not considered for either
purpose.
(2) Correction of incorrect estimates.
If an ATEO later determines that an es-
timate it made under paragraph (j)(1) of
this section was incorrect, it must reapply
the 3-times-base-amount test to reflect the
actual time and amount of the payment.
In reapplying the 3-times-base-amount
test (and, if necessary, reallocating the
base amount), the ATEO must determine
the aggregate present value of payments
paid or to be paid as of the date described
in paragraph (h) of this section using the
discount rate described in paragraph (i)
of this section. This redetermination may
affect the amount of any excess parachute
payment for a prior taxable year. How-
ever, if, based on the application of the
3-times-base-amount test without regard
to the payment described in this paragraph
(j), an ATEO has determined it will pay an
employee an excess parachute payment or
payments, then the 3-times-base-amount
test does not have to be reapplied when a
payment described in this paragraph (j) is
made (or becomes certain to be made) if
no base amount is allocated to that pay-
ment under §53.4960-4(d)(5).
(3) Initial option value estimate. To the
extent provided in published guidance of
general applicability under §601.601(d)
(2), an initial estimate of the value of an
option subject to paragraph (c) of this
section is permitted to be made, with the
valuation subsequently redetermined and
the 3-times-base-amount test reapplied.
Until guidance is published under sec-
tion 4960, published guidance of general
applicability described in §601.601(d)(2)
that is issued under section 280G applies
by analogy.
(4) Examples. See §1.280G-1, Q/A–
33(d) for examples that may be applied by
analogy to illustrate the rules of this para-
graph (j).
(k) Base amount—(1) In general. A
covered employee’s base amount is the
average annual compensation for services
performed as an employee of the ATEO
(including compensation for services per-
formed for a predecessor of the ATEO),
and/or, if applicable, a related organiza-
tion, with respect to which there has been
a separation from employment, if the
compensation was includible in the gross
income of the individual for taxable years
in the base period (including amounts that
were excluded under section 911) or that
would have been includible in the individ-
ual’s gross income if the individual had
been a United States citizen or resident.
See paragraph (l) of this section for the
definition of base period and for examples
of base amount computations.
(2) Short or incomplete taxable years.
If the base period of a covered employee
includes a short taxable year or less than
all of a taxable year of the employee,
compensation for the short or incomplete
taxable year must be annualized before
determining the average annual compen-
sation for the base period. In annualizing
compensation, the frequency with which
payments are expected to be made over an
annual period must be taken into account.
Thus, any amount of compensation for a
short or incomplete taxable year that rep-
resents a payment that will not be made
more often than once per year is not an-
nualized.
(3) Excludable fringe benefits. Because
the base amount includes only compen-
sation that is includible in gross income,
the base amount does not include certain
items that may constitute parachute pay-
ments. For example, payments in the form
of excludable fringe benefits or exclud-
able health care benefits are not included
in the base amount but may be treated as
parachute payments.
(4) Section 83(b) income. The base
amount includes the amount of compen-
sation included in income under section
83(b) during the base period.
(l) Base period—(1) In general. The
base period of a covered employee is the
covered employee’s 5 most-recent taxable
years ending before the date on which
the separation from employment occurs.
However, if the covered employee was not
an employee of the ATEO for this entire
5-year period, the individual’s base period
is the portion of the 5-year period during
which the covered employee performed
services for the ATEO, a predecessor, or a
related organization.
(2) Determination of base amount if
employee separates from employment
in the year hired. If a covered employee
commences services as an employee and
experiences a separation from employ-
ment in the same taxable year, the covered
employee’s base amount is the annualized
compensation for services performed for
the ATEO (or a predecessor or related or-
ganization) that was not contingent on the
separation from employment and either
was includible in the employee’s gross
income for that portion of the employ-
ee’s taxable year prior to the employee’s
separation from employment (including
amounts that were excluded under section
911) or would have been includible in the
employee’s gross income if the employee
had been a United States citizen or resi-
dent.
(3) Examples. The following exam-
ples illustrate the rules of paragraph (k)
of this section and this paragraph (l). For
purposes of these examples, assume any
entity referred to as “ATEO” is an ATEO,
any entity referred to as “CORP” is not
an ATEO, and all employees are HCEs of
their respective employers.

February 16, 2021 884 Bulletin No. 2021–7
(i) Example 1 (Calculation with salary defer-
rals)—(A) Facts. Employee A, a covered employee
of ATEO 1, receives an annual salary of $500,000
per year during the 5-year base period. Employee A
defers $100,000 of salary each year under a nonqual-
ified deferred compensation plan (none of which is
includible in Employee A’s income until paid in cash
to Employee A).
(B) Conclusion. Employee A’s base amount is
$400,000 (($400,000 x 5) / 5).
(ii) Example 2 (Calculation for less-than-5-year
base period)—(A) Facts. Employee B, a covered
employee of ATEO 1, was employed by ATEO 1 for
2 years and 4 months preceding the year in which
Employee B separates from employment. Employ-
ee B’s compensation includible in gross income was
$100,000 for the 4-month period, $420,000 for the
first full year, and $450,000 for the second full year.
(B) Conclusion. Employee B’s base amount is
$390,000 (((3 x $100,000) + $420,000 + $450,000)
/ 3). Any compensation Employee B receives in the
year of separation from employment is not included
in the base amount calculation.
(iii) Example 3 (Calculation for less-than-5-
year base period with signing bonus)—(A) Facts.
Assume the same facts as in paragraph (l)(3)(ii)(A)
of this section (Example 2), except that Employee
B also received a $60,000 signing bonus when Em-
ployee B’s employment with ATEO 1 commenced at
the beginning of the 4-month period.
(B) Conclusion. Employee B’s base amount is
$410,000 ((($60,000 + (3 x $100,000)) + $420,000
+ $450,000) / 3). Pursuant to paragraph (k)(2) of this
section, because the bonus is a payment that will not
be paid more often than once per year, the bonus is
not taken into account in annualizing Employee B’s
compensation for the 4-month period.
(iv) Example 4 (Effect of non-employee com-
pensation)—(A) Facts. Employee C, a covered em-
ployee of ATEO 1, was not an employee of ATEO
1 for the full 5-year base period. In 2024 and 2025,
Employee C is only a director of ATEO 1 and re-
ceives $30,000 per year for services as a director.
On January 1, 2026, Employee C becomes an officer
and covered employee of ATEO 1. Employee C’s in-
cludible compensation for services as an officer of
ATEO 1 is $250,000 for each of 2026 and 2027, and
$300,000 for 2028. In 2028, Employee C separates
from employment with ATEO 1.
(B) Conclusion. Employee C’s base amount is
$250,000 ((2 x $250,000) / 2). The $30,000 of di-
rector’s fees paid to Employee C in each of 2024 and
2025 is not included in Employee C’s base amount
calculation because it was not for services performed
as an employee of ATEO 1.
§53.4960-4 Liability for tax on excess
remuneration and excess parachute
payments.
(a) Liability, reporting, and payment of
excise taxes—(1) Liability. For each tax-
able year, with respect to each covered
employee, the taxpayer is liable for tax at
the rate imposed under section 11 on the
sum of the excess remuneration allocated
to the taxpayer under paragraph (c) of this
section and, if the taxpayer is an ATEO,
any excess parachute payment paid by the
taxpayer or a predecessor during the tax-
able year.
(2) Reporting and payment. The ex-
cise tax imposed by section 4960 is re-
ported as provided in §§53.6011-1(b) and
53.6071-1(i) and paid in the form and
manner prescribed by the Commissioner.
(3) Arrangements between an ATEO
and a related organization. Calculation of,
and liability for, the excise tax imposed by
section 4960 is separate from, and unaf-
fected by, any arrangement that an ATEO
and any related organization may have for
bearing the cost of any liability for the ex-
cise tax imposed by section 4960.
(4) Certain foreign related organi-
zations. A related organization that is a
foreign organization described in section
4948(b) that either is exempt from tax un-
der section 501(a) or is a taxable private
foundation (section 4948(b) related orga-
nization) is not liable for the excise tax
imposed by section 4960. A foreign orga-
nization is an organization not created or
organized in the United States or in any
possession thereof, or under the law of the
United States, any State, the District of
Columbia, or any possession of the United
States. See section 4948(b) and §53.4948-
1. For purposes of this paragraph (a)(4)
and the application of section 4960 to a
taxable year, an organization’s status as
a section 4948(b) related organization is
determined at the end of its taxable year.
However, remuneration that the section
4948(b) related organization pays to a cov-
ered employee of an ATEO must be taken
into account by the ATEO and other relat-
ed organizations for purposes of section
4960 generally, including for purposes of
determining the five highest-compensated
employees and the total remuneration paid
to a covered employee. For example, if an
ATEO and its related organization that is a
section 4948(b) related organization each
paid $600,000 remuneration to a covered
employee during the applicable year, then
the related organization would not be li-
able for the tax that would otherwise be
allocable to it, and the ATEO would be
liable for tax on $100,000 (50 percent of
the $200,000 excess remuneration paid to
the employee).
(5) [Reserved].
(b) Amounts subject to tax—(1) Excess
remuneration—(i) In general. Excess re-
muneration means the amount of remu-
neration paid by an ATEO to any covered
employee during an applicable year in
excess of $1 million, as determined under
§53.4960-2.
(ii) Exclusion for excess parachute
payments. Excess remuneration does not
include any amount that is an excess para-
chute payment as defined in paragraph (b)
(2) of this section.
(2) Excess parachute payment. Excess
parachute payment means an amount
equal to the excess (if any) of the amount
of any parachute payment paid by an
ATEO, a predecessor of the ATEO, or a
related organization, or on behalf of any
such person, during the taxable year over
the portion of the base amount allocated to
such payment.
(c) Calculation of liability for tax on
excess remuneration—(1) In general. For
each taxable year, an employer is liable for
the tax on excess remuneration paid in the
applicable year ending with or within the
employer’s taxable year. If, for the taxable
year, remuneration paid during an appli-
cable year by an ATEO or one or more re-
lated organizations to a covered employee
is taken into account in determining the
tax imposed on excess remuneration for
that taxable year, then each employer is
liable for the tax in an amount that bears
the same ratio to the total tax determined
under section 4960(a) as the amount of
remuneration paid by the employer to the
covered employee (including remuner-
ation paid by the employer as described
in §53.4960-2(b)(1), but disregarding
remuneration treated as paid by the em-
ployer under §53.4960-2(b)(2)), bears to
the total amount of remuneration paid by
the ATEO under §53.4960-2 (including
remuneration treated as paid by the ATEO
under §53.4960-2(b)(2)).
(2) Calculation if liability is allocated
from more than one ATEO with regard to
an individual. If liability for the tax on
excess remuneration is allocated to an
employer from more than one ATEO in a
taxable year with regard to an individual
that is a covered employee of each ATEO,
then the employer is liable for the tax only
in the capacity in which it is liable for the
greatest amount of the tax with respect to
that individual for the taxable year. For

Bulletin No. 2021–7 885 February 16, 2021
example, assume ATEO 1 is a related or-
ganization to both ATEO 2 and ATEO 3
and pays excess remuneration to Employ-
ee D, and Employee D is a covered em-
ployee of ATEO 1, ATEO 2, and ATEO 3.
In this case, ATEO 1’s liability for the tax
on excess remuneration to Employee D is
the highest of its liability as an ATEO, as
a related organization to ATEO 2, or as a
related organization to ATEO 3.
(3) Calculation if liability is allocat-
ed from an ATEO with a short applicable
year. If liability for the tax on excess re-
muneration paid to an individual is allo-
cated to an employer from an ATEO with
a short applicable year under §53.4960-
1(c)(3), then the liability with respect to
the excess remuneration paid to that indi-
vidual is allocated in accordance with the
principles of this paragraph (c) adjusted as
necessary to avoid, to the extent possible,
duplication of application of the excise
tax. The Commissioner may provide ad-
ditional guidance of general applicability,
published in the Internal Revenue Bulle-
tin (see §601.601(d)(2) of this chapter),
on the application of this paragraph (c)
(3) to particular circumstances, including
circumstances involving an ATEO with a
short applicable year that has one or more
related organizations and the ATEO’s
short applicable year and the preceding
applicable year both end with or within
the related organization’s taxable year,
such that the ATEO and related organi-
zations are liable for the tax for multiple
applicable years ending with or within the
employer’s taxable year.
(4) Examples. The following examples
illustrate the rules of this paragraph (c).
For purposes of these examples, assume
that the rate of excise tax under section
4960 is 21 percent, that any entity that is
referred to as “ATEO” is an ATEO, that
any entity referred to as “CORP” is not an
ATEO and is not a publicly held corpora-
tion within the meaning of section 162(m)
(2) or a covered health insurance provider
within the meaning of section 162(m)(6)
(C), that no related organization is a sec-
tion 4948(b) related organization, all tax-
payers use the calendar year as their tax-
able year unless otherwise stated, and that
no parachute payments are made in any of
the years at issue.
(i) Example 1 (Remuneration from multiple em-
ployers)—(A) Facts. ATEO 1 and CORP 1 are relat-
ed organizations. Employee A is a covered employee
of ATEO 1 and an employee of CORP 1. In the 2022
applicable year, ATEO 1 pays Employee A $1.2 mil-
lion of remuneration, and CORP 1 pays A $800,000
of remuneration. Remuneration paid by each em-
ployer is for services performed by Employee A
solely as an employee of that employer.
(B) Conclusion. For the 2022 taxable year, ATEO
1 is treated as paying Employee A $2 million of re-
muneration, $1 million of which is excess remuner-
ation. The total excise tax is $210,000 (21 percent
x $1 million). ATEO 1 paid 3/5 of Employee A’s
total remuneration ($1.2 million / $2 million); thus,
ATEO 1 is liable for 3/5 of the excise tax, which is
$126,000. CORP 1 paid 2/5 of Employee A’s total
remuneration ($800,000 / $2 million); thus, CORP 1
is liable for 2/5 of the excise tax, which is $84,000.
(ii) Example 2 (Application when taxpayers have
different taxable years)—(A) Facts. Assume the
same facts as in paragraph (c)(4)(i) of this section
(Example 1), except that CORP 2 uses a taxable year
beginning July 1 and ending June 30.
(B) Conclusion. The conclusion is the same as
the conclusion in paragraph (c)(4)(i) of this section
(Example 1), except that ATEO 1 is liable for the tax
for its taxable year starting January 1, 2022, and end-
ing December 31, 2022, and CORP 1 is liable for the
tax for its taxable year beginning July 1, 2022, and
ending June 30, 2023 (the taxable year with or within
which ATEO 1’s 2022 applicable year ends).
(iii) Example 3 (Multiple liabilities for same ap-
plicable year due to multiple ATEOs)—(A) Facts.
The following facts are all with respect to the 2023
applicable year: ATEO 5 owns 60 percent of the
stock of CORP 2. Sixty percent of ATEO 4’s direc-
tors are representatives of ATEO 3. In addition, 60
percent of ATEO 5’s directors are representatives
of ATEO 4, but none are representatives of ATEO
3. Employee B is a covered employee of ATEO 3,
ATEO 4, and ATEO 5 and is an employee of CORP
2. ATEO 3, ATEO 4, ATEO 5, and CORP 2 each pay
Employee B $1.2 million of remuneration in the
applicable year. ATEO 4’s related organizations are
ATEO 3 and ATEO 5. ATEO 3’s only related organi-
zation is ATEO 4. ATEO 5’s related organizations are
ATEO 4 and CORP 2.
(B) Calculation (ATEO 3). Under ATEO 3’s cal-
culation as an ATEO for the 2023 applicable year,
ATEO 3 is treated as paying Employee B a total
of $2.4 million in remuneration ($1.2 million from
ATEO 3 + $1.2 million from ATEO 4). The total
excise tax is $294,000 (21 percent X $1.4 million).
ATEO 3 and ATEO 4 each paid 1/2 of Employee B’s
total remuneration ($1.2 million / $2.4 million); thus,
under ATEO 3’s calculation, ATEO 3 and ATEO 4
each would be liable for 1/2 of the excise tax, which
is $147,000.
(C) Calculation (ATEO 4). Under ATEO 4’s cal-
culation as an ATEO for the 2023 applicable year,
ATEO 4 is treated as paying Employee B a total of
$3.6 million in remuneration for the 2022 applicable
year ($1.2 million from ATEO 3 + $1.2 million from
ATEO 4 + $1.2 million from ATEO 5). The total
excise tax is $546,000 (21 percent X $2.6 million).
ATEO 3, ATEO 4, and ATEO 5 each paid 1/3 of the
total remuneration to Employee B ($1.2 million /
$3.6 million); thus, under ATEO 4’s calculation,
ATEO 3, ATEO 4, and ATEO 5 each would be liable
for 1/3 of the excise tax, which is $182,000.
(D) Calculation (ATEO 5). Under ATEO 5’s cal-
culation as an ATEO for the 2023 applicable year,
ATEO 5 is treated as paying Employee B a total
of $3.6 million in remuneration ($1.2 million from
ATEO 4 + $1.2 million from ATEO 5 + $1.2 mil-
lion from CORP 2). The total excise tax is $546,000
(21 percent X $2.6 million). ATEO 4, ATEO 5, and
CORP 2 each paid 1/3 of the total remuneration to
Employee B ($1.2 million / $3.6 million); thus, un-
der ATEO 5’s calculation, ATEO 4, ATEO 5, and
CORP 2 each would be liable for 1/3 of the excise
tax, which is $182,000.
(E) Conclusion (Liability of ATEO 3). For the
2023 applicable year, ATEO 3 is liable for $182,000
of excise tax as a related organization under ATEO
4’s calculation, which is greater than the $147,000
of excise tax under ATEO 3’s own calculation. Thus,
ATEO 3’s excise tax liability with respect to Em-
ployee B is $182,000 for its 2023 taxable year.
(F) Conclusion (Liability of ATEO 4). For the
2023 applicable year, ATEO 4 is liable as a related
organization for $147,000 of excise tax according
to ATEO 3’s calculation, for $182,000 according to
ATEO 4’s own calculation, and for $182,000 accord-
ing to ATEO 5’s calculation. Thus, ATEO 4’s excise
tax liability with respect to Employee B is $182,000
for its 2023 taxable year.
(G) Conclusion (Liability of ATEO 5). For the
2023 applicable year, ATEO 5 is liable as a related
organization for $182,000 of excise tax under ATEO
4’s calculation, and is liable for $182,000 of excise
tax under ATEO 5’s own calculation. Thus, ATEO
5’s excise tax liability with respect to Employee B is
$182,000 for its 2023 taxable year.
(H) Conclusion (Liability of CORP 2). For the
2023 applicable year, CORP 2 is liable as a related
organization for $182,000 of excise tax according to
ATEO 5’s calculation only. Thus, CORP 2’s excise
tax liability with respect to Employee B is $182,000
for its 2023 taxable year.
(d) Calculation of liability for excess
parachute payments—(1) In general. Ex-
cept as provided in paragraph (d)(3) of
this section, only excess parachute pay-
ments made by or on behalf of an ATEO
are subject to tax under this section. How-
ever, parachute payments made by related
organizations that are not made by or on
behalf of an ATEO are taken into account
for purposes of determining the total
amount of excess parachute payments.
(2) Computation of excess parachute
payments—(i) Calculation. The amount
of an excess parachute payment is the ex-
cess of the amount of any parachute pay-
ment made by an ATEO, a predecessor of
the ATEO, or a related organization, or on
behalf of any such person, over the portion
of the covered employee’s base amount
that is allocated to the payment. The por-
tion of the base amount allocated to any
parachute payment is the amount that
bears the same ratio to the base amount
as the present value of the parachute pay-

February 16, 2021 886 Bulletin No. 2021–7
ment bears to the aggregate present value
of all parachute payments made or to be
made to (or for the benefit of) the same
covered employee. Thus, the portion of
the base amount allocated to any para-
chute payment is determined by multi-
plying the base amount by a fraction, the
numerator of which is the present value of
the parachute payment and the denomina-
tor of which is the aggregate present value
of all parachute payments.
(ii) Examples. The following examples
illustrate the rules of this paragraph (d)
(2). For purposes of these examples, as-
sume any entity referred to as “ATEO” is
an ATEO and all employees are HCEs of
their respective employers.
(A) Example 1 (Compensation from related or-
ganizations)—(1) Facts. ATEO 1 and ATEO 2 are
related organizations. Employee A is a covered em-
ployee of ATEO 1 and an employee of ATEO 2 who
has an involuntary separation from employment with
ATEO 1 and ATEO 2. Employee A’s base amount is
$200,000 with respect to ATEO 1 and $400,000 with
respect to ATEO 2. A receives $1 million from ATEO
1 contingent upon Employee A’s involuntary separa-
tion from employment from ATEO 1 and $1 million
from ATEO 2 contingent upon Employee A’s invol-
untary separation from employment from ATEO 2.
(2) Conclusion. Employee A has a base amount
of $600,000 ($200,000 + $400,000). The two $1 mil-
lion payments are parachute payments because their
aggregate present value is at least 3-times Employee
A’s base amount (3 x $600,000 = $1.8 million). The
portion of the base amount allocated to each para-
chute payment is $300,000 (($1 million / $2 million)
x $600,000). Thus, the amount of each excess para-
chute payment is $700,000 ($1 million – $300,000).
(B) Example 2 (Multiple parachute payments)—
(1) Facts. Employee B is a covered employee of
ATEO 3 with a base amount of $200,000 who is
entitled to receive two parachute payments: one of
$200,000 and the other of $900,000. The $200,000
payment is made upon separation from employment,
and the $900,000 payment is to be made on a date
in a future taxable year. The present value of the
$900,000 payment is $800,000 as of the date of the
separation from employment.
(2) Conclusion. The portion of the base amount
allocated to the first payment is $40,000 (($200,000
present value of the parachute payment / $1 mil-
lion present value of all parachute payments) x
$200,000 total base amount) and the portion of the
base amount allocated to the second payment is
$160,000 (($800,000 present value of the parachute
payment / $1 million present value of all parachute
payments) x $200,000 total base amount). Thus,
the amount of the first excess parachute payment is
$160,000 ($200,000 − $40,000) and that the amount
of the second excess parachute payment is $740,000
($900,000 − $160,000).
(3) Reallocation when the payment is
disproportionate to base amount. In ac-
cordance with section 4960(d), the Com-
missioner may treat a parachute payment
as paid by an ATEO if the facts and cir-
cumstances indicate that the ATEO and
other payors of parachute payments struc-
tured the payments in a manner primarily
to avoid liability under section 4960. For
example, if an ATEO would otherwise be
treated as paying a portion of an excess
parachute payment in an amount that is
materially lower in proportion to the total
excess parachute payment than the pro-
portion that the amount of average annual
compensation paid by the ATEO (or any
predecessor) during the base period bears
to the total average annual compensation
paid by the ATEO (or any predecessor)
and any related organization (or organiza-
tions), and the lower amount is offset by
payments from a non-ATEO or an unre-
lated ATEO, this may indicate that that the
parachute payments were structured in a
manner primarily to avoid liability under
section 4960.
(4) Election to prepay tax. An ATEO
may prepay the excise tax under para-
graph (a)(1) of this section on any excess
parachute payment for the taxable year of
the separation from employment or any
later taxable year before the taxable year
in which the parachute payment is actu-
ally or constructively paid. However, an
employer may not prepay the excise tax
on a payment to be made in cash if the
present value of the payment is not rea-
sonably ascertainable under §31.3121(v)
(2)-1(e)(4) or on a payment related to
health coverage. Any prepayment must be
based on the present value of the excise
tax that would be due for the taxable year
in which the employer will pay the excess
parachute payment, and be calculated us-
ing the discount rate equal to 120 percent
of the applicable Federal rate (determined
under section 1274(d) and the regulations
in part 1 under section 1274) and the tax
rate in effect under section 11 for the year
in which the excise tax is paid. For pur-
poses of projecting the future value of a
payment that provides for interest to be
credited at a variable interest rate, the em-
ployer may make a reasonable assumption
regarding the variable rate. An employer
is not required to adjust the excise tax paid
merely because the actual future interest
rates are not the same as the rate used for
purposes of projecting the future value of
the payment.
(5) Liability after a redetermination
of total parachute payments. If an ATEO
determines that an estimate made under
§53.4960-3(j)(1) was incorrect, it must
reapply the 3-times-base-amount test to
reflect the actual time and amount of the
payment. In reapplying the 3-times-base-
amount test (and, if necessary, reallocat-
ing the base amount), the ATEO must de-
termine the correct base amount allocable
to any parachute payment paid in the tax-
able year. See §1.280G-1, Q/A–33(d) for
examples that may be applied by analogy
to illustrate the rules of this paragraph (d)
(5).
(6) Examples. The following examples
illustrate the rules of this paragraph (d).
For purposes of these examples, assume
any entity referred to as “ATEO” is an
ATEO, any entity referred to as “CORP”
is not an ATEO, and all employees are
HCEs of their respective employers.
(i) Example 1 (Excess parachute payment paid
by a non-ATEO)—(A) Facts. ATEO 1 and CORP 1
are related organizations that are treated as the same
employer for purposes of §53.4960-3(e)(3) (defining
separation from employment) and are both calendar
year taxpayers. For 2022 through 2026, ATEO 1 and
CORP 1 each pay Employee A $250,000 of compen-
sation per year for services performed as an employ-
ee of each organization ($500,000 total per year). In
2027, ATEO 1 and CORP 1 each pay Employee A $1
million payment ($2 million total) that is contingent
on Employee A’s separation from employment with
both ATEO 1 and CORP 1, all of which is remuner-
ation, and no other compensation. Employee A is a
covered employee of ATEO 1 in 2027.
(B) Conclusion. Employee A’s base amount in
2027 is $500,000 (Employee A’s average annual
compensation from both ATEO 1 and CORP 1 for
the previous 5 years). ATEO 1 makes a parachute
payment of $2 million in 2027, the amount paid by
both ATEO 1 and CORP 1 that is contingent on Em-
ployee A’s separation from employment with ATEO
1 and all organizations that are treated as the same
employer under §53.4960-3(e)(3). Employee A’s $2
million payment exceeds 3-times the base amount
($1.5 million). ATEO 1 makes a $1.5 million excess
parachute payment (the amount by which $2 mil-
lion exceeds the $500,000 base amount). However,
ATEO 1 is liable for tax only on the excess parachute
payment paid by ATEO 1 ($1 million parachute pay-
ment – $250,000 base amount = $750,000) that is
subject to tax under §53.4960-4(a). CORP 1 is not
liable for tax under §53.4960-4(a) in 2027.
(ii) Example 2 (Election to prepay tax on excess
parachute payments and effect on excess remunera-
tion)—(A) Facts. Employee B is a covered employ-
ee of ATEO 2 with a base amount of $200,000 who
is entitled to receive two parachute payments from
ATEO 2, one of $200,000 and the other of $900,000.
The $200,000 payment is made upon separation
from employment, and the $900,000 payment is to
be made on a date in a future taxable year. The pres-

Bulletin No. 2021–7 887 February 16, 2021
ent value of the $900,000 payment is $800,000 as of
the date of the separation from employment. ATEO 2
elects to prepay the excise tax on the $900,000 future
parachute payment (of which $740,000 is an excess
parachute payment). The tax rate under section 11
is 21 percent for the taxable year the excise tax is
paid and, using a discount rate determined under
§53.4960-3(i), the present value of the $155,400
($740,000 x 21 percent) excise tax on the $740,000
future excess parachute payment is $140,000.
(B) Conclusion. The excess parachute payment
is thus $800,000 ($200,000 plus $800,000 present
value of the $900,000 future payment, less $200,000
base amount), with $40,000 of the base amount allo-
cable to the $200,000 payment and $160,000 of the
base amount allocable to the $900,000 payment. To
prepay the excise tax on the $740,000 future excess
parachute payment, the employer must satisfy its
$140,000 obligation under section 4960 with respect
to the future payment, in addition to the $33,600
excise tax ($160,000 x 21 percent) on the $160,000
excess parachute payment made upon separation
from employment. For purposes of determining the
amount of excess remuneration (if any) under sec-
tion 4960(a)(1), the amount of remuneration paid by
the employer to the covered employee for the taxable
year of the separation from employment is reduced
by the $900,000 of total excess parachute payments
($160,000 + $740,000).
§53.4960-5 [Reserved].
§53.4960-6 Applicability date.
(a) General applicability date. Sec-
tions 53.4960-0 through 53.4960-4 apply
to taxable years beginning after December
31, 2021. Taxpayers may choose to apply
§§53.4960-0 through 53.4960-4 to taxable
years beginning after December 31, 2017,
and on or before December 31, 2021, pro-
vided the taxpayer applies §§53.4960-0
through 53.4960-4 in their entirety and in
a consistent manner.
(b) [Reserved].
Sunita Lough,
Deputy Commissioner for Services
and Enforcement.
Approved: January 9, 2021.
David J. Kautter,
Assistant Secretary of the Treasury
(Tax Policy).
(Filed by the Office of the Federal Register on Jan-
uary 15, 2021; 4:15pm and published in the issue of
the Federal Register for January 19, 2021 86 F.R.
6196)

February 16, 2021 888 Bulletin No. 2021–7
Part III
Extension of Relief for
Qualified Opportunity
Funds and Investors
Affected by Ongoing
Coronavirus Disease 2019
Pandemic
Notice 2021-10
I. PURPOSE
This notice provides additional relief
under section 7508A of the Internal Rev-
enue Code (Code) for qualified opportu-
nity funds (QOFs) and their investors in
response to the ongoing Coronavirus Dis-
ease 2019 (COVID-19) pandemic. This
notice also provides additional relief pur-
suant to section 1400Z-2(f)(3) and Income
Tax Regulations under section 1400Z-2 of
the Code (section 1400Z-2 regulations).
Specifically, this notice extends the relief
for QOFs and their investors provided by
Notice 2020-39, 2020-26 I.R.B. 984.
II. BACKGROUND
A. 180-Day Investment Requirement
for QOF Investors
Section 1400Z-2(a)(1)(A) provides
that if a taxpayer has “gain from the sale
to, or exchange with, an unrelated person
of any property held by the taxpayer” the
taxpayer may elect to exclude from gross
income for the taxable year “so much of
such gain as does not exceed the aggre-
gate amount invested by the taxpayer in a
[QOF] during the 180-day period begin-
ning on the date of such sale or exchange”
(180-day investment requirement). Sec-
tion 1.1400Z2(a)-1 provides definitions
and rules to implement the 180-day in-
vestment requirement.
B. 30-Month Substantial Improvement
Period for QOFs
Section 1400Z-2(d)(2)(D)(i) provides
that tangible property is treated as qualified
opportunity zone business property if the
tangible property is used in a trade or busi-
ness of the QOF and satisfies three general
requirements. One of these requirements is
that the original use of post-2017 acquired
tangible property in the qualified oppor-
tunity zone must begin with the QOF (re-
ferred to as the “original use requirement”),
or the QOF must substantially improve that
property (substantial improvement require-
ment). See section 1400Z-2(d)(2)(D)(i)(II).
The substantial improvement requirement
is met only if, during any 30-month period
beginning after the date of acquisition of
the post-2017 acquired tangible property,
there are “additions to basis with respect to
such property” held by the QOF that, in the
aggregate, exceed the QOF’s adjusted basis
of that property as of the beginning of that
30-month period (30-month substantial im-
provement period). See section 1400Z-2(d)
(2)(D)(ii). Section 1.1400Z2(d)-2(b)(4)
provides rules to implement the substantial
improvement requirement.
C. 90-Percent Investment Standard for
QOFs
Section 1400Z-2(d)(1) defines a QOF
as any investment vehicle organized as a
corporation or a partnership for the pur-
pose of investing in qualified opportunity
zone property (other than another QOF).
This definition also requires a QOF to
hold at least 90 percent of its assets in
qualified opportunity zone property, de-
termined by the average of the percentage
of qualified opportunity zone property
held by that QOF as measured (i) on the
last day of the first 6-month period of the
taxable year of the QOF, and (ii) on the
last day of the taxable year of the QOF.
See section 1400Z-2(d)(1). The require-
ment that the average percentages of the
QOF’s qualified opportunity zone proper-
ty on these two dates (semi-annual testing
dates) must equal at least 90 percent of the
QOF’s assets is referred to as the 90-per-
cent investment standard. See section
1400Z-2(f). Section 1.1400Z2(d)-1 pro-
vides definitions and rules to implement
the 90-percent investment standard.
If the average of the percentages of
the qualified opportunity zone proper-
ty held by a QOF on these semi-annual
testing dates fails to meet the 90-percent
investment standard, section 1400Z-2(f)
(1) provides a general rule that the QOF
must pay a penalty for each month that the
QOF fails to meet that standard. Howev-
er, section 1400Z-2(f)(3) provides that no
such penalty is imposed “with respect to
any failure if it is shown that such failure
is due to reasonable cause.”
D. Working Capital Safe Harbor for
Qualified Opportunity Zone Businesses
An entity must meet certain require-
ments to be a qualified opportunity zone
business, including the requirement of
section 1397C(b)(8) of the Code that less
than 5 percent of the average of the ag-
gregate unadjusted bases of the entity’s
property be attributable to nonqualified
financial property, as defined in sec-
tion 1397C(e). See section 1400Z-2(d)(3)
(A)(ii). Section 1397C(e) excludes from
nonqualified financial property reasonable
amounts of working capital that are held
in cash, cash equivalents, or debt instru-
ments with a term of 18 months or less.
See § 1.1400Z2(d)-1(d)(3)(iv).
The section 1400Z-2 regulations pro-
vide qualified opportunity zone busi-
nesses with a safe harbor for treating an
amount of working capital as reasonable
for purposes of section 1397C(e) if certain
requirements are satisfied (working capi-
tal safe harbor). See § 1.1400Z2(d)-1(d)
(3)(v) (providing the scope of the work-
ing capital safe harbor and conditions for
eligibility). One of those requirements is
that there is a written schedule consistent
with the ordinary start-up of a trade or
business for the expenditure of the work-
ing capital assets within 31 months of the
receipt by the business of the assets. See
§ 1.1400Z2(d)-1(d)(3)(v)(B). A qualified
opportunity zone business may extend
the working capital safe harbor period
to a maximum 62-month period under
§ 1.1400Z2(d)-1(d)(3)(vi) if certain addi-
tional requirements are met.
If such qualified opportunity zone busi-
ness is located in a qualified opportunity
zone within a Federally declared disas-

Bulletin No. 2021–7 889 February 16, 2021
ter (as defined in section 165(i)(5)(A) of
the Code), the qualified opportunity zone
business may receive not more than an ad-
ditional 24 months to expend its working
capital assets, as long as the qualified op-
portunity zone business otherwise meets
the requirements of the working capital
safe harbor. See § 1.1400Z2(d)-1(d)(3)
(v)(D). Therefore, a qualified opportu-
nity zone business may, if each applica-
ble requirement of § 1.1400Z2(d)-1(d)
(3)(v) and (vi) is satisfied, have up to a
maximum 86-months to expend working
capital assets if the qualified opportunity
zone business is located in a qualified op-
portunity zone within a Federally declared
disaster.
E. 12-Month Reinvestment Period for
QOFs
The section 1400Z-2 regulations pro-
vide generally that, if (i) a QOF sells or
disposes of some or all of its qualified op-
portunity zone property or if a distribution
with respect to the QOF’s qualified oppor-
tunity zone stock is treated as a return of
capital in the QOF’s hands, and if (ii) the
QOF reinvests some or all of the proceeds
in qualified opportunity zone property by
the last day of the 12-month period be-
ginning on the date of the distribution,
sale, or disposition, then the proceeds, to
the extent that they are so reinvested, are
treated as qualified opportunity zone prop-
erty for purposes of the 90-percent invest-
ment standard. See § 1.1400Z2(f)-1(b)(1).
This treatment is available to a QOF only
to the extent that, prior to the reinvestment
in qualified opportunity zone property, the
reinvested proceeds are continuously held
in cash, cash equivalents, or debt instru-
ments with a term of 18 months or less.
See id.
If the QOF’s plan to reinvest some or
all of the above-described proceeds in
qualified opportunity zone property is de-
layed due to a Federally declared disas-
ter (as defined in section 165(i)(5)(A)),
the QOF may receive not more than an
additional 12 months to reinvest the pro-
ceeds, provided that the QOF invests the
proceeds in the manner originally intend-
ed before the disaster. See § 1.1400Z2(f)-
1(b)(2).
F. Prior Grants of Relief
On April 9, 2020, the Department of
the Treasury (Treasury Department) and
the Internal Revenue Service (IRS) issued
Notice 2020-23 to provide relief under
section 7508A(a) to taxpayers affected by
the COVID-19 emergency by postponing
due dates with respect to certain taxpayer
and government acts. See generally Part
III of Notice 2020-23 (providing relief for
certain time-sensitive actions due to be
performed on or after April 1, 2020, and
before July 15, 2020), amplifying Notice
2020-20, 2020-16 I.R.B. 660 (April 13,
2020) and Notice 2020-18, 2020-15 I.R.B.
590 (April 6, 2020), and modifying Rev.
Proc. 2014-42, 2014-29 I.R.B. 192 (July
1, 2014).
On June 4, 2020, the Treasury Depart-
ment and the IRS issued Notice 2020-39
to provide relief under section 7508A(a)
for QOFs and their investors in response
to the COVID-19 pandemic, and to ad-
dress the application of certain relief pro-
visions in the section 1400Z-2 regulations.
Specifically, Notice 2020-39 provided the
following:
(1) 180-day investment requirement. If
the last day of the 180-day investment pe-
riod within which a taxpayer must make
an investment in a QOF in order to sat-
isfy the 180-day investment requirement
falls on or after April 1, 2020, and before
December 31, 2020, the last day of that
180-day investment period is postponed
to December 31, 2020.
(2) 30-month substantial improve-
ment period. For purposes of the sub-
stantial improvement requirement with
respect to property held by a QOF or
qualified opportunity zone business, the
period beginning on April 1, 2020, and
ending on December 31, 2020, is dis-
regarded in determining any 30-month
substantial improvement period (that is,
the 30-month substantial improvement
period is tolled during the period be-
ginning on April 1, 2020, and ending on
March 31, 2021).
In addition, Notice 2020-39 provided
the following:
(1) 90-percent investment standard. In
the case of a QOF whose (i) last day of the
first 6-month period of the taxable year or
(ii) last day of the taxable year falls within
the period beginning on April 1, 2020, and
ending on December 31, 2020, any fail-
ure by that QOF to satisfy the 90-percent
investment standard for that taxable year
of the QOF is (i) due to reasonable cause
under section 1400Z-2(f)(3); and (ii) dis-
regarded for purposes of determining
whether the QOF or any otherwise qual-
ifying investments in that QOF satisfy the
requirements of section 1400Z-2 and the
section 1400Z-2 regulations for any tax-
able year of the QOF.
(2) Working capital safe harbor for
qualified opportunity zone businesses. As
a result of the Emergency Declaration
1

(that is, the declaration of a Federally
declared disaster for purposes of section
165(i)(5)(A)), all qualified opportunity
zone businesses holding working cap-
ital assets intended to be covered by
the working capital safe harbor before
December 31, 2020, receive not more
than an additional 24 months to expend
the working capital assets of the quali-
fied opportunity zone business, as long
as the qualified opportunity zone busi-
ness otherwise meets the requirements
of § 1.1400Z2(d)-1(d)(3)(v) (that is, the
requirements to qualify for the working
capital safe harbor).
(3) 12-Month Reinvestment Period for
QOFs. If any QOF’s 12-month reinvest-
ment period includes January 20, 2020
(that is, the date of the disaster identi-
fied in the Major Disaster Declarations
2
),
that QOF receives up to an additional 12
months to reinvest in qualified opportunity
zone property some or all of the proceeds
1
The term “Emergency Declaration” means the March 13, 2020, issuance by the President of the United States of an emergency declaration under the Robert T. Stafford Disaster Relief and
Emergency Assistance Act (Stafford Act) (42 U.S.C. 5121 et seq.) in response to the ongoing COVID-19 pandemic. For a description of the Emergency Declaration and section 7508A, see
generally Part II.A of Notice 2020-39.
2
The term “Major Disaster Declarations” means the major disaster declarations issued by the President, subsequent to the Emergency Declaration, under the authority of the Stafford Act with
respect to all 50 states, the District of Columbia, and 5 territories. See https://www.fema.gov/coronavirus/disaster-declarations.

February 16, 2021 890 Bulletin No. 2021–7
received by the QOF from the return of
capital or the sale or disposition of some
or all of the QOF’s qualified opportunity
zone property, provided that the QOF sat-
isfies the requirements of § 1.1400Z2(f)-
1(b)(1) and invests the proceeds in the
manner originally intended before January
20, 2020.
III. EXTENSION OF RELIEF FOR QOF
INVESTORS AND QOFS PROVIDED
PURSUANT TO SECTION 7508A OF
THE CODE
A. 180-Day Investment Requirement
for QOF Investors
If the last day of the 180-day invest-
ment period within which a taxpayer must
make an investment in a QOF in order to
satisfy the 180-day investment require-
ment falls on or after April 1, 2020, and
before March 31, 2021, the last day of
that 180-day investment period is post-
poned to March 31, 2021. This relief is
automatic; taxpayers do not have to call
the IRS or send letters or other documents
to the IRS to receive this relief. However,
a taxpayer will still need to make a valid
deferral election in accordance with the
instructions to Form 8949, complete Form
8997, and file the completed Form 8949
and Form 8997 with a timely filed Federal
income tax return (including extensions)
or amended Federal income tax return for
the taxable year in which the gain would
be recognized if section 1400Z-2(a)(1) did
not apply to defer recognition of the gain.
For additional information, see https://
www.irs.gov/form8949https://www.irs.
gov/form8997.
B. 30-Month Substantial Improvement
Period for QOFs and Qualified
Opportunity Zone Businesses
For purposes of the substantial im-
provement requirement with respect to
property held by a QOF or qualified op-
portunity zone business, the period be-
ginning on April 1, 2020, and ending on
March 31, 2021, is disregarded in de-
termining any 30-month substantial im-
provement period (that is, the 30-month
substantial improvement period is tolled
during the period beginning on April 1,
2020, and ending on March 31, 2021).
IV. EXTENSION OF RELIEF
FOR QOFS AND QUALIFIED
OPPORTUNITY ZONE BUSINESSES
PURSUANT TO SECTION 1400Z-2(f)
(3) OF THE CODE AND SECTION
1400Z-2 REGULATIONS
A. 90-Percent Investment Standard for
QOFs
In the case of a QOF whose (i) last
day of the first 6-month period of a tax-
able year or (ii) last day of a taxable year
falls within the period beginning on April
1, 2020, and ending on June 30, 2021,
any failure by that QOF to satisfy the
90-percent investment standard for that
taxable year of the QOF is due to reason-
able cause under section 1400Z-2(f)(3).
Thus, any failure by that QOF to satisfy
the 90-percent investment standard for
that taxable year is not taken into account
for purposes of determining whether the
QOF or any otherwise qualifying invest-
ments in that QOF satisfy the require-
ments of section 1400Z-2 and the section
1400Z-2 regulations for any taxable year
of the QOF.
This relief is granted under section
1400Z-2(f)(3) and is automatic; QOFs do
not have to call the IRS or send letters or
other documents to the IRS to receive this
relief. However, a QOF must accurately
complete all lines on Form 8996 filed with
respect to each affected taxable year EX-
CEPT that the QOF should place a “0” in
Part IV, Line 8 (Penalty). The accurately
completed Form 8996 must be filed with
the QOF’s timely filed Federal income
tax return (including extensions) for the
affected taxable year(s). For addition-
al information, see https://www.irs.gov/
form8996.
B. Working Capital Safe Harbor for
Qualified Opportunity Zone
Businesses
As a result of the Emergency Declara-
tion (that is, the declaration of a Federally
declared disaster for purposes of section
165(i)(5)(A)), all qualified opportunity
zone businesses holding working capital
assets intended to be covered by the work-
ing capital safe harbor before June 30,
2021, receive not more than an additional
24 months, including any relief provided
under Notice 2020-39, for a maximum
safe harbor period of not more than 55
months total (not more than 86 months
total for start-up businesses), to expend
the working capital assets of the quali-
fied opportunity zone business, as long
as the qualified opportunity zone busi-
ness otherwise meets the requirements
of § 1.1400Z2(d)-1(d)(3)(v) (that is, the
requirements to qualify for the working
capital safe harbor). See § 1.1400Z2(d)-
1(d)(3)(v)(D) (providing such 24-month
extension due to a Federally declared di-
saster).
C. 12-Month Reinvestment Period for
QOFs
If any QOF’s 12-month reinvestment
period includes June 30, 2020, that QOF
receives not more than an additional 12
months, including any relief provided
under Notice 2020-39, for a maximum
reinvestment period of not more than
24 months total, to reinvest in qualified
opportunity zone property some or all
of the proceeds received by the QOF
from the return of capital or the sale or
disposition of some or all of the QOF’s
qualified opportunity zone property,
provided that the QOF satisfies the re-
quirements of § 1.1400Z2(f)-1(b)(1) and
invests the proceeds in the manner origi-
nally intended before June 30, 2020. See
§ 1.1400Z2(f)-1(b)(2) (providing such
12-month extension due to a Federally
declared disaster).
V. EFFECT ON OTHER DOCUMENTS
Notice 2020-23 is modified. Notice
2020-39 is amplified.
VI. DRAFTING INFORMATION
The principal author of this notice is
Kyle C. Griffin of the Office of Associate
Chief Counsel (Income Tax and Account-
ing). For further information regarding
this notice, you may call the COVID-19
Disaster Relief Hotline at (202) 317-5436
(not a toll-free number). For further infor-
mation regarding the application of this
notice to section 1400Z-2 and the section
1400Z-2 regulations, please contact Mr.
Griffin at (202) 317-4718 (not a toll-free
number).

Bulletin No. 2021–7 i February 16, 2021
Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that
the same principle also applies to B, the
earlier ruling is amplified. (Compare with
modified, below).
Clarified is used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion. It
is not used where a position in a prior rul-
ing is being changed.
Distinguished describes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modified is used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
with amplified and clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transactions.
This term is most commonly used in a ruling
that lists previously published rulings that
are obsoleted because of changes in laws or
regulations. A ruling may also be obsoleted
because the substance has been included in
regulations subsequently adopted.
Revoked describes situations where the
position in the previously published ruling
is not correct and the correct position is
being stated in a new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a
period of time in separate rulings. If the
new ruling does more than restate the sub-
stance of a prior ruling, a combination of
terms is used. For example, modified and
superseded describes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previous-
ly published ruling in a new ruling that is
self contained. In this case, the previously
published ruling is first modified and then,
as modified, is superseded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of cas-
es in litigation, or the outcome of a Ser-
vice study.
Abbreviations
The following abbreviations in current use
and formerly used will appear in material
published in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.

February 16, 2021 ii Bulletin No. 2021–7
Numerical Finding List
1
Bulletin 2021–7
Announcements:
2021-01, 2021-04 I.R.B. 506
Notices:
2021-01, 2021-02 I.R.B. 315
2021-03, 2021-02 I.R.B. 316
2021-04, 2021-02 I.R.B. 319
2021-02, 2021-03 I.R.B. 478
2021-05, 2021-03 I.R.B. 479
2021-07, 2021-03 I.R.B. 482
2021-09, 2021-05 I.R.B. 678
2021-06, 2021-06 I.R.B. 822
2021-08, 2021-06 I.R.B. 823
2021-11, 2021-06 I.R.B. 827
2021-12, 2021-06 I.R.B. 828
2021-13, 2021-06 I.R.B. 832
2021-10, 2021-07 I.R.B. 888
Proposed Regulations:
REG-130081-19, 2021-02 I.R.B. 321
REG-114615-16, 2021-03 I.R.B. 489
REG-111950-20, 2021-05 I.R.B. 683
REG-115057-20, 2021-05 I.R.B. 714
Revenue Procedures:
2021-01, 2020-01 I.R.B. 1
2021-02, 2020-01 I.R.B. 116
2021-03, 2020-01 I.R.B. 140
2021-04, 2020-01 I.R.B. 157
2021-05, 2020-01 I.R.B. 250
2021-07, 2020-01 I.R.B. 290
2021-09, 2020-03 I.R.B. 485
2021-08, 2020-04 I.R.B. 502
2021-10, 2020-04 I.R.B. 503
2021-12, 2020-05 I.R.B. 681
2021-11, 2020-06 I.R.B. 833
Revenue Rulings:
2021-01, 2021-02 I.R.B. 294
2021-02, 2021-04 I.R.B. 495
2021-03, 2021-05 I.R.B. 674
2021-04, 2021-06 I.R.B. 724
Treasury Decisions:
9925, 2021-02 I.R.B. 296
9940, 2021-02 I.R.B. 311
9932, 2021-03 I.R.B. 345
9939, 2021-03 I.R.B. 376
9941, 2021-03 I.R.B. 396
9942, 2021-03 I.R.B. 450
9937, 2021-04 I.R.B. 495
Treasury Decisions:—Continued
9936, 2021-05 I.R.B. 508
9943, 2021-05 I.R.B. 577
9945, 2021-05 I.R.B. 627
9946, 2021-06 I.R.B. 726
9947, 2021-06 I.R.B. 748
9948, 2021-06 I.R.B. 801
9938, 2021-07 I.R.B. 838
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2020–27 through 2020–52 is in Internal Revenue Bulletin
2020–52, dated December 27, 2020.

Bulletin No. 2021–7 iii February 16, 2021
Finding List of Current Actions on
Previously Published Items
1
Bulletin 2021–7
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2020–27 through 2020–52 is in Internal Revenue Bulletin
2020–52, dated December 27, 2020.

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