Tax Planning
Executive Compensation & OBBB: What Non-Profits Need to Know About the New Excise Tax Proposal
Recent changes under the One, Big, Beautiful Bill are expanding excise tax exposure for executive pay — non-profits must act now to assess who qualifies under the new rules.
By NomadicTax Research Team • 5-8 min read • July 14, 2026
## Context: OBBB and Section 4960
In July 2025, Congress passed the **One, Big, Beautiful Bill Act (OBBBA)**, which among many things revised **Section 4960** of the Internal Revenue Code. It vastly **expanded** the definition of a *covered employee* in applicable tax-exempt organizations (ATEOs). The IRS and Treasury have now issued **Notice 2026-36** to begin drafting proposed regulations to implement this change. ([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))
## What’s Changing: Definition of Covered Employee
Previously, only the **top five compensated** employees in a tax-exempt organization in a tax year were covered under Section 4960. Now, **any employee** earning over **$1 million** in a tax year or receiving excess parachute payments may be a “covered employee”. OBBBBA widened the net significantly. ([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))
Notice 2026-36 clarifies transition relief and exceptions:
- Employees who were covered under prior law for years beginning after Dec 31, 2016 through Dec 31, 2025 remain covered.
- Employees earning over $1M in **years after Dec 31, 2025**, now qualify — unless an exception applies.
- Two key exceptions are under consideration: **limited hours** and **non-exempt funds** exceptions — these existed under old rules, and interim relief allows for them to continue while new regulations are drafted. ([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))
## Key Implications for Tax-Exempt Organizations
Non-profits, charities, universities, hospitals should evaluate carefully:
- **Review compensation practices.** Any employee compensated above $1M could now trigger Section 4960 excise tax exposure.
- **Parachute payments** (severance or similar payments reflecting separation) also remain relevant and possibly taxable under the new scope.
- **Track hours and fund source.** If the limited hours or non-exempt funds exceptions apply (once regulations are finalized), organizations should maintain documentation that qualifies individuals under those exceptions.
## Action Items Before the Proposed Regulations Are Finalized
1. **Inventory executive compensation.** Identify employees paid over $1M in FY 2025 and expected to exceed it in FY 2026.
2. **Assess separation arrangements.** Any agreements or payments made upon separation (parachutes) should be reviewed and possibly renegotiated.
3. **Maintain documentation.** For any employee who may rely on the limited hours exception, maintain records of hours worked. For non-exempt funds, track how compensation is funded.
4. **Watch for public comment period.** Notice 2026-36 solicits comments through **August 4, 2026**. Organizations should participate and raise any clarifications needed or unintended consequences. ([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))
## Example Scenarios
- **Example A:** University President with base salary $1.2M, plus housing allowance. Under the expanded definition, this person is now a covered employee, and compensation above $1M (excluding certain costs) may be subject to excise tax.
- **Example B:** Hospital executive earning $900K from ATEO funds and an additional $200K from non-exempt sources. If finalized guidance allows, the non-exempt funds exception might exclude the $200K — lowering exposure. But until final regulations are issued, documentation is essential.
## Why This Matters (Tax Planning Category)
Non-profits need to evaluate strategy now — not when final regulations drop. Understanding the full scope of covered employees is critical for budgeting for excise taxes, structuring compensation packages, and ensuring compliance. Survivability will depend not only on compensation levels, but on valid exceptions and evidence supporting them.