What’s New Under Section 4960 for ATEOs
The One, Big, Beautiful Bill (OBBBA) amended sec. 70416, which changed who qualifies as a “covered employee” for purposes of the excise tax imposed under § 4960:
- Expanded Definition: Now includes ANY employee of an Applicable Tax-Exempt Organization (ATEO) (or predecessor) for taxable years after December 31, 2025. Also includes former employees who served after December 31, 2016. (irs.gov)
- Prior Rule limited coverage to an entity’s five highest compensation employees—no longer sufficient.
- Some exceptions (like limited hours, nonexempt funds) may still apply; IRS intends to issue proposed regulations to clarify these exceptions. (irs.gov)
Risks & Compliance Actions
What Can Trigger Excise Tax Exposure
- Excessive compensation (over $1 million/year per covered employee).
- Parachute payments.
- Making payments to formerly excluded employees who now fall under covered definition.
- Failing to track which employees are “covered” under new definitions; paying without requisite reporting.
Steps ATEOs Should Take Now
- Audit your employee roster: See who was employed any time after December 31, 2016, or hired thereafter.
- Review compensation practices: Bonuses, perks, severance could be impacted.
- Update internal policies and control frameworks: Contract language, board oversight, executive awards.
- Prepare for proposed regulations that will clarify exceptions (limited hours, nonexempt funds). Consider providing input during public comment period (due August 4, 2026). (irs.gov)
Practical Example
- Before 2026, a mid-level director not among top five earners avoided covered employee status—even if making $500,000.
- Post-2025, that same director, since employed post-2016, becomes a covered employee under the broader definition and could trigger excise tax liability for the organization if remuneration exceeds $1 million.
Key Takeaways for ATEOs
- The definition shift renders many more employees subject to compensation limits.
- Excise tax is not only about top-tier salaries; second-tier executives and long-time employees could be affected.
- Organizations need to plan compensation, benefit, and retirement packages accordingly.
- Stay tuned for IRS proposed regulations to understand exceptions and recordkeeping requirements.
Bottom line: Nonprofits, charities, hospitals, universities—any ATEO—should immediately update compliance frameworks and compensation policies to avoid excise tax surprises in 2026+.