Understanding the changing compliance landscape
Tax-exempt organizations have traditionally avoided many of the strictures applicable to for-profits, but recent legislation under the One, Big, Beautiful Bill (OBBB) has significantly altered the terrain, especially around excess executive compensation and parachute payments.
What OBBB changed for tax-exempt orgs
- The definition of covered employee now extends beyond the top five highest paid — it includes any person whose compensation exceeds $1 million in a tax year or receives excess parachute payments. (irs.gov)
- The IRS issued Notice 2026-36 on June 5, 2026, signaling the intent to issue proposed regulations clarifying how tax-exempt organizations should calculate excess compensation and parachute payments under OBBB. (irs.gov)
Compliance risks for nonprofits
- ATEOs failing to identify all covered employees may incur unexpected excise taxes.
- Misclassifying parachute payments (like severances or golden parachutes) can trigger penalties if they exceed certain benchmarks. Consider board decisions carefully.
- Poor documentation or lack of published policies can increase risk during audits.
What to do now: actionable checklist
- Audit all compensations: Identify every employee earning over $1M, not just CEO or top five.
- Review existing agreements for parachute payments, severance, or golden parachutes — ensure any such pay-outs follow safe harbor and non-excess rules according to upcoming guidance.
- Implement governance policies: Board oversight, compensation committees, third-party benchmarking.
- Prepare documentation: Minutes, contracts, salary surveys, and rationale for compensation. Needed evidence for tax-exempt compliance.
- Stay updated: Monitor IRS’s forthcoming proposed regulations for Notice 2026-36 and comment deadlines (comments are due Aug 4, 2026). (irs.gov)
Example application
A nonprofit hired a program director earning $1.2M/year during 2026. Under OBBB, that person is now a “covered employee” and subject to the excise tax regime. Paycheck structures, bonus arrangements, and severance deals must be reviewed to ensure nothing qualifies as an “excess parachute payment.” Board minutes must reflect market-comparable compensation and rationale.
Why ESG concerns align
Transparency around compensation ties directly to stakeholder trust. Donors, regulators, and the public expect nonprofit leadership to have compensation accountable and aligned with mission. Compliance is not just legal — it’s reputational.
Final thoughts
Tax-exempt organizations can’t fly under the radar when it comes to executive compensation post-OBBB. Ensure people earning above $1 million are correctly identified, severance/golden parachutes reviewed, governance structures reinforced, and be ready for proposed regulations in late 2026. With proper preparation, nonprofits can avoid excise tax exposure and solidify public trust.