Compliance
Compliance Update: Expanded Executive Compensation Excise Tax for Nonprofits under OBBBA
Nonprofits must take note: the definition of "covered employee" under the excise tax for excessive compensation has been significantly broadened—effective for tax years after December 31, 2025.
By NomadicTax Research Team • 5-8 min read • August 6, 2026
## What’s Changing under Section 4960
The One, Big, Beautiful Bill (OBBBA) made sweeping changes to § 4960 of the Internal Revenue Code, which imposes an **excise tax** on tax-exempt organizations (ATEOs) paying excessive compensation or parachute payments. Previously, only the top five highest-compensated employees were “covered,” but now:
- **Any employee with compensation over** **$1 million** in a tax year may be subject, not just top-five. ◆ Includes those receiving **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))
- For tax years **after December 31, 2025**, the expanded definition applies, unless transitional exceptions (limited hours, nonexempt funds) are in effect until final guidance. ([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))
## Compliance Risks & Practical Steps
- **Review all employees’ compensation packages** to identify anyone over $1 million or with parachute‐type contracts. Nonprofits that never had a “top five” executive exceeding that threshold might now be subject.
- **Evaluate volunteer roles**, or roles funded from non-exempt funds, for possible exceptions. OBBBBA allows **limited hours / nonexempt funds** exceptions until more guidance is issued. ([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))
- **Document compensation and agreements**—especially severance, golden parachutes, performance bonuses—anything that could be classified as an “excess parachute payment.”
- **Model cash flow for excise tax liabilities**: determine how much excess compensation could be taxed, what percentage excise tax applies, and how to budget accordingly.
## Definitions & Clarifications
| Term | New Definition | Notes |
|------|------------------|-------|
| Covered Employee | Any ATEO employee with compensation > $1M or excess parachute payment, for tax years after Dec 31, 2025 | Expands beyond top-5 rule. ◆ Transitional rules may delay full application. |
| Excess Parachute Payment | Severance or payments tied to involuntary separation or similar triggers exceeding threshold under § 280G / § 4960 | Now triggers the excise tax under broader definition. |
## Example Scenario
A nonprofit hires a Chief Technology Officer (CTO) paid $1.2 million salary in fiscal 2026, plus severance clause triggered by change-in-control. Under the new rules:
- CTO is a “covered employee” because salary exceeds $1M.
- The excise tax will apply to that compensation exceeding $1M, **and any parachute payments** if triggered.
- Limited hours exception likely doesn’t apply; if volunteer/part-time role, check guidance.
- Must assess whether nonexempt funds are used; if so, transition relief may apply.
## Action Plan for ATEOs
1. **Audit existing employee agreements** to identify potential triggers and compensation levels.
2. **Estimate tax exposure** under excise tax changes; consult legal/tax counsel.
3. **Ensure reporting systems are ready**—track employee compensation across all related entities.
4. **Stay tuned for proposed regulations and comment periods**—there will be opportunities to influence drafting of definitions and exceptions.
## Bottom Line
If you run or work with a nonprofit organization, or serve its leadership, the OBBBA’s expanded excise tax rules on high compensation impose new risks, reporting obligations, and costs—especially for high earners and parachute contracts. Begin preparation now to avoid surprises once these rules are in full effect.