Health care groups pay tax on CEO pay

Nonprofit groups didn't feel a lot of love from the big tax bill passed by Congress at the end of 2017.

The measure signed into law by President Donald Trump reduced incentives for many gifts to charities and imposed new taxes for certain tax-exempt organizations — including an excise tax on the subset of nonprofits that pay executives more than $1 million per year.

A Star Tribune review of recently released IRS filings shows that four of the state's most prominent health care providers were newly subject to the excise tax in 2018, with Allina Health System, Fairview Health Services and Mayo Clinic collectively paying more than $1.6 million.

The excise tax has been criticized by nonprofit groups as unnecessary, since they already faced penalties if they didn't pay reasonable compensation to executives. What's more, some feel the new tax puts nonprofits at a competitive disadvantage with for-profit competitors that are private companies.

"A for-profit hospital that is not publicly traded would have an advantage over a tax-exempt hospital, in that it could pay its executives a million dollars or more and not be subject to any kind of a tax penalty on that," said Heidi Christianson, an attorney who represents health care nonprofits and is president of the Nilan Johnson Lewis firm in Minneapolis. "This tax is, in my view, a heavy-handed and unnecessary way to penalize the nonprofit sector."

The Tax Cut and Jobs Act was a $1.5 trillion tax overhaul that featured tax cuts for individuals, dropped the corporate rate to 21% and halted enforcement of a requirement for people to buy health insurance. Down in the details of the law were changes for nonprofit groups including the new excise tax on executive compensation.

A report on the legislation from the House Ways and Means Committee said that taxable employers generally may deduct reasonable compensation expenses, but the deduction for a publicly held corporation is capped at $1 million of compensation for an employee per year. The committee believed the new excise tax would align the tax treatment of excessive executive compensation between for-profit and tax-exempt employers.

The law imposes an excise tax of 21% on remuneration in excess of $1 million paid to a covered employee by an applicable tax-exempt organization, beginning with calendar year 2018. It applies to any of the five highest-paid employees of the nonprofit group.

The Star Tribune's annual survey of executive compensation at Minnesota's largest nonprofit groups listed 10 CEOs with more than $1 million in compensation for 2018. Only a subset of those nonprofits had to pay the excise tax, according to the newspaper's review of tax filings that largely became public in November.

At Minneapolis-based Fairview Health Services, Chief Executive James Hereford saw 2018 total compensation of about $1.9 million. The Star Tribune review suggests the portion of his pay that would be deemed excess remuneration under the tax law came to $780,267. Apply the 21% tax rate, and the bill comes to $163,856, according to the Star Tribune review. Fairview confirmed the calculations.

Minneapolis-based Allina Health System paid $267,640 in excise tax on compensation paid to Chief Executive Dr. Penny Wheeler and two other health system leaders. Wheeler's total compensation was $2.5 million in 2018, of which about $1.2 million was deemed excess remuneration, according to a tax filing provided by Allina.

The biggest tax tab was $1.2 million at the Rochester-based Mayo Clinic, where Chief Executive John Noseworthy in 2018 saw pay of $3.5 million. The Star Tribune review suggests the clinic paid excise tax not just on Noseworthy's compensation, but also pay for four other highly paid executives, as well.

Minnetonka-based Medica paid Chief Executive John Naylor about $1.8 million in 2018, but didn't pay the excise tax because the pay "is allocated among all Medica entities," the insurance company said in a statement. "The piece related to the nonprofit is under the excise tax limits."

Duluth-based Essentia Health shows up on the Star Tribune list as paying its CEO more than $1 million in 2018, but the excise tax hadn't kicked in because Essentia's fiscal year runs from July to June. That's also true at St. Cloud-based CentraCare.

Eagan-based Blue Cross and Blue Shield of Minnesota pays its chief executive more than $1 million, but Blue Cross said in a statement that it didn't pay the tax because it "excludes amounts that are subject to a lower-deduction limit under another section of IRS law that applies to our executive compensation."

Dr. J. Kevin Croston of Robbinsdale-based North Memorial Health saw compensation of about $1.1 million in 2018, but some of the pay was shielded by an exemption for medical work, the nonprofit group says. "Dr. Croston performs surgery in addition to his CEO responsibilities," North Memorial said in a statement. It was a similar explanation at Hennepin Healthcare, where some of Dr. Jon Pryor's compensation of about $1.1 million was excluded from the calculation, according to the nonprofit group that runs HCMC in Minneapolis. So, the tax wasn't triggered.

Congress was within its rights to impose the excise tax, but it puts tax-exempt organizations at a competitive disadvantage, argued Christie Lohkamp, the director of corporate tax at Mayo Clinic.