Compliance
Compliance Alert: Expanded Excise Tax for Tax-Exempt Org Execs Under OBBB
Nonprofits and charities must adjust rapidly: new rules under OBBB broaden who’s taxed on excess compensation and parachute payments among tax-exempt organization employees.
By NomadicTax Research Team • 5-8 min read • June 14, 2026
## Overview of the Change
Notice **2026-36**, issued **June 5, 2026**, signals forthcoming regulations that broaden the definition of “covered employee” under tax-exempt organizations (Applicable Tax-Exempt Organizations, or ATEOs). Under the One, Big, Beautiful Bill (OBBB), this tax now applies to **any employee earning over $1 million** or receiving an excess parachute payment—not just the previous top five highest-paid employees. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-announce-intent-to-issue-proposed-regulations-for-excise-tax-on-excess-tax-exempt-organization-executive-compensation-under-the-one-big-beautiful-bill?utm_source=openai))
## Key Definitions & Exceptions
- **Covered Employee**: Was restricted to the **top five highest-paid** but now includes employees exceeding **$1 million** in compensation for tax years after Dec. 31, 2025. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-announce-intent-to-issue-proposed-regulations-for-excise-tax-on-excess-tax-exempt-organization-executive-compensation-under-the-one-big-beautiful-bill?utm_source=openai))
- **Exceptions include**:
* Limited hours exception;
* Nonexempt funds exception (e.g., salaries funded by grants, etc.). These still apply temporarily until final regulations come out. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-announce-intent-to-issue-proposed-regulations-for-excise-tax-on-excess-tax-exempt-organization-executive-compensation-under-the-one-big-beautiful-bill?utm_source=openai))
## What ATEOs Need to Do Now
1. **Audit compensation scales**: Identify all employees earning over $1 million and track parachute payments.
2. **Review funding sources**: Distinguish between exempt vs. nonexempt funds as exceptions are temporary but depend on these categorizations.
3. **Document compensation agreements carefully**: Which years apply, when payments were made—these matter for both compensation and parachute pay.
4. **Monitor rulemaking process**: Comments requested by **August 4, 2026**; stay tuned for proposed regulations. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-announce-intent-to-issue-proposed-regulations-for-excise-tax-on-excess-tax-exempt-organization-executive-compensation-under-the-one-big-beautiful-bill?utm_source=openai))
## Potential Impacts & Risks
- **Tax liability**: More employees may now trigger excise taxes, increasing costs or redistributing compensation strategies.
- **Governance and pay transparency**: ATEOs should rethink their executive pay policies.
- **Contractual obligations**: Parachute payment contracts may face new scrutiny or require modifications.
## Example Scenario
A tax-exempt hospital pays its chief surgeon $1.2 million/year and uses grants (nonexempt funds) to pay for some portion of her compensation. Under the new rules, unless a valid exception is met, that compensation could be subject to the excess compensation excise tax—even if she wasn’t in the top 5 by pay. Same for severance packages considered parachute payments.
## Actionable Best Practices
- **Benchmark** executive compensation now, anticipating changes;
- **Revise compensation agreements** or severance terms to minimize excess parachutes;
- **Ensure robust documentation** of employee classification, hours worked, and funding sources;
- **Consult with tax advisors**—new or revised policies needed immediately so compliant with upcoming regulations.
## Timeline to Watch
- **June 5, 2026**: Issuance of Notice 2026-36 (alert to rulemaking) ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-announce-intent-to-issue-proposed-regulations-for-excise-tax-on-excess-tax-exempt-organization-executive-compensation-under-the-one-big-beautiful-bill?utm_source=openai));
- **August 4, 2026**: Deadline for public comments; regulation language likely released afterward.
For tax-exempt entities, this signals a shift toward **greater accountability** and **expanded tax liability**. Compliance requires prompt review of pay structures, documentation, and policies under OBBB’s revised definitions.