What Changed Under the One, Big, Beautiful Bill (OBBB)
The Notice 2026-36, jointly issued by the U.S. Department of the Treasury and IRS on June 5, 2026, announces proposed regulations under IRC Section 4960 expanding the definition of covered employee for excise taxes on excess compensation paid by tax-exempt organizations. (irs.gov) Previously, only the top five highest-paid employees were subject; now, any employee making over US$1 million or receiving excess parachute payments could be covered. (irs.gov)
Who Needs to Comply
- Applicable Tax-Exempt Organizations (ATEOs), including charities, foundations, universities, and associations.
- Executives or employees receiving compensation exceeding US$1 million/year, or receiving parachute payments above set thresholds.
- Related organizations or government entities interacting with ATEOs under IRC 4960.
Actions Organizations Should Take Now
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Identify All Covered Employees
- Review all employee compensation above US$1M or including parachute payments.
- Consider whether exceptions (e.g. limited hours, nonexempt funds) may apply.
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Revise Compensation Policies
- Cap bonus and parachute payment practices.
- Defer or distribute compensation in ways that may reduce exposure.
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Track Detailed Records
- Maintain documentation of all compensation arrangements, contracts, deferred compensation, parachute payments, board‐approvals, etc.
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Submit Comments to IRS / Monitor Regulations
- IRS is soliciting comments until August 4, 2026. Nonprofits should engage via comment process. (irs.gov)
- Incorporate upcoming regulations into governance once finalized.
Example Scenario
An educational nonprofit has:
- President making US$900,000 salary plus US$200,000 deferred compensation (parachute).
- Chief Research Officer making US$1.2 million in salary.
Under new rules:
- The President may be considered a covered employee because of parachute payment.
- The CRO is also covered due to compensation over US$1M.
- Both could be liable for section 4960 excise tax unless exceptions apply.
Risk Management & Best Practices
- Governance Policies: Board or compensation committee must approve large compensation or parachute deals.
- Benchmarking: Use comparables data to defend compensation levels.
- Advance Planning: Consider staggered payments or different employment contracts to reduce lump sums.
Bottom Line
For U.S. nonprofits, the OBBB changes to IRC 4960 create broader tax exposure on executive compensation. Organizations must audit their payroll and compensation frameworks immediately, ensure proper documentation, and adjust practices to avoid unexpected excise taxes.