Compliance
Compliance Alert: New Proposed Regulations on Excess Compensation for Tax-Exempt Executives
Tax-exempt organizations now face broader coverage for excise tax under section 4960—any employee earning over $1 million could qualify as a ‘covered employee’. Are you ready?
By NomadicTax Research Team • 5-8 min read • June 26, 2026
## What’s Changing Under Section 4960
The **One, Big, Beautiful Bill (OBBB)** significantly expanded the scope of **excise tax on excess compensation** for tax-exempt organizations. Previously, only the **five highest-paid employees** of an applicable tax-exempt organization (ATEO) were potentially subject; now, *any employee* with compensation exceeding **$1 million** (or any excess parachute payment) might qualify as a **covered employee**. ([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))
### Proposed regulations (Notice 2026-36)
- Expand covered employee definition to include employees with compensation over $1 million in a taxable year or who receive excess parachute payments. ([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))
- Retain **exceptions** such as limited-hours and nonexempt funds, though a **limited-services exception** is *not expected* under the new rules. ([irs.gov](https://www.irs.gov/irb/2026-26_irb?utm_source=openai))
- The changes are anticipated to be **prospective**, meaning they won’t apply to taxable years before the final regulations are issued. ([irs.gov](https://www.irs.gov/irb/2026-26_irb?utm_source=openai))
- IRS is requesting **public comments** by **August 4, 2026**. ([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))
## Why This Matters for Organizations
- Increased **tax liability risk**: More employees could now fall under the excise tax, leading to unexpected obligations.
- Expanded compliance burden: Need for pay structures review, compensation disclosure and defining who qualifies as “covered employee”.
- Recordkeeping importance: Must establish who is eligible, track exceptions, parachute payments, etc.
## Examples
- **Org A** has 10 executives; three earn more than \$1 million; under the new rule, all three could be covered employees—even if not in top five previously.
- **Org B**, small nonprofit with one high-earning program director (\$1.2 million), must analyze whether that position should be treated as covered; apply exceptions carefully (limited hours or funds) if applicable.
## Actionable Compliance Tips
1. **Identify all employees** potentially earning \$1 million+ or subject to parachute payments.
2. Review existing exceptions: **limited-hours** status, **nonexempt funds**—do employees meet these?
3. Update compensation disclosure, budgeting and contracts to anticipate potential excise taxes.
4. Keep an eye out for final regulations and adjust practices accordingly.
5. Participate in comment process: Prepare input if your organization has unusual compensation structures.
Tax-exempt entities ignoring this expansion could face penalties or unexpected taxes. Proactive compliance is key.