Compliance
Compliance Spotlight: IRS Changes for Non-Profit Executive Compensation under OBBB Bill
A major change under U.S. tax law expands the definition of ‘covered employees’ in non-profit exec compensation—nonprofits must adapt policies now to avoid excise taxes.
By NomadicTax Research Team • 5-8 min read • July 24, 2026
## 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](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)) 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](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))
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## 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.
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## Actions Organizations Should Take Now
1. **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.
2. **Revise Compensation Policies**
- Cap bonus and parachute payment practices.
- Defer or distribute compensation in ways that may reduce exposure.
3. **Track Detailed Records**
- Maintain documentation of all compensation arrangements, contracts, deferred compensation, parachute payments, board‐approvals, etc.
4. **Submit Comments to IRS / Monitor Regulations**
- IRS is soliciting comments until **August 4, 2026**. Nonprofits should engage via comment process. ([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))
- Incorporate upcoming regulations into governance once finalized.
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## 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.
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## 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.
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### 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.