Entity Setup
Entity Setup: Integrating As Applicable Tax-Exempt Organization Under Section 4960 After OBBBA
Sector leaders must re-evaluate their executive compensation policies for tax-exempt organizations in light of expanded definitions and forthcoming regulations under the One, Big, Beautiful Bill.
By NomadicTax Research Team • 5-8 min read • July 7, 2026
## What’s Changed with Employee Comp- and Section 4960
The **One, Big, Beautiful Bill Act (OBBBA)** amended Section 4960, broadening **who qualifies as a “covered employee”** for purposes of excise tax on remuneration for tax-exempt orgs (ATEOs). ([irs.gov](https://www.irs.gov/irb/2026-26_irb?utm_source=openai))
### Key changes:
- Prior definition limited to **five highest-paid persons**; new definition includes **any current or former employee** if they were employed at any time after December 31, 2016. ([irs.gov](https://www.irs.gov/irb/2026-26_irb?utm_source=openai))
- New regulations are expected but not yet final; current transitional relief exists. ([irs.gov](https://www.irs.gov/irb/2026-26_irb?utm_source=openai))
## What That Means Operationally
| Function | Old Approach | New Obligations Under OBBBA |
|---|---|---|
| Executive compensation caps | Only top 5 paid staff monitored | All relevant employees from 2016 onward must be considered for Section 4960 tax exposure |
| Reporting & payroll planning | Limited group sized estimates | Expanded payroll review and documentation across broader staff base |
| Budgeting for excise tax | Rarely invoked or low risk | Risk of excise tax liability for many, need to anticipate potential tax on compensation exceeding $1 million per employee |
## Action Steps for Tax-Exempt Entities:
- Conduct a **compensation audit** for all employees/former employees to identify who is now “covered.”
- Review internal policies for **limiting compensation** that may trigger excise liability.
- Set up tracking and reporting systems to reflect the expanded definition as you approach 2026 taxable years.
- Monitor IRS notices for final regulations per the guidance in Notice 2026-36. ([irs.gov](https://www.irs.gov/irb/2026-26_irb?utm_source=openai))
## Example Scenario:
A nonprofit has 50 mid-level employees each earning $90,000/year, historically only focusing on its three top compensated execs. After OBBBA, each of those 50-plus employees might be individually considered “covered” when formulating excise exposure **if they ever exceeded $1M in compensation** in a given year, or fall under another criteria. Even if they didn’t, the organization needs the systems to know.
👇 **Takeaway:** Don’t wait for final regs—update your compensation policy, compliance infrastructure, and budgeting to reflect the expanded scope and avoid surprises and penalties.