Tax Planning
Executive Compensation Rules Tighten for Tax-Exempt Organizations under OBBB
New proposed regulations extend excise tax on excess compensation beyond the top five employees, potentially impacting any employee earning above $1 million.
By NomadicTax Research Team • 5-8 min read • August 10, 2026
## What’s Changing and Why
The **One, Big, Beautiful Bill Act (OBBBA)** expanded excise tax rules under IRC Section 4960—traditionally targeting the five highest compensated employees of an Applicable Tax-Exempt Organization (ATEO). Under changes taking effect for tax years beginning **after December 31, 2025**, **any employee earning over $1,000,000 or making an excess parachute payment** could become a “covered employee.” This change drastically widens the scope of Section 4960. ([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 & Proposed Regulations
Published on June 5, 2026, **Notice 2026-36** signals the Treasury and IRS intent to issue formal proposed regulations that:
- Clarify the **expanded definition of “covered employee”** post-OBBBA.
- Include exceptions such as **limited hours** and **nonexempt funds**—similar to those in prior regulations—for certain employees.
- Are intended to be **prospective** only; they will *not* apply to taxable years before final regulations are 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))
Comments on the notice were requested by **August 4, 2026**. ([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))
## Who Needs To Worry?
Any tax-exempt organization paying executive compensation over $1 million or making parachute payments should be closely reviewing its payroll, governance, and compensation structures. For example:
- If you’re currently paying multiple executives just under the top five benchmark but over $1M, those individuals may now be in scope.
- Even employees who were previously excluded (non-officers) may now be considered covered employees if their compensation exceeds $1M.
- Pay close attention to parachute payments (golden parachutes, etc.), which often trigger additional excise tax liabilities.
## Practical Steps to Take
- **Run internal audits** of current and planned executive pay: Include salaries, bonuses, deferred compensation, severance or parachute payments—all count toward determining who is subject.
- **Consult with HR and legal** to assess whether you can classify employees under exceptions such as limited hours or nonexempt funds once proposed regulations finalize.
- **Document roles and hours** clearly for employees who may fall under “limited hours” thresholds.
- **Forecast excise tax exposure** under worst case, to understand financial impact and perhaps consider altering compensation design.
## Example Scenario
XYZ Charitable Org has seven employees. Under prior law, only the **top five compensated** were subject to Section 4960. Under the new rule, the **sixth-highest** now earns $1.2 million, above the $1 million threshold—even though they weren’t in the top five. Without an exception under proposed regs, that employee is now a covered employee for tax years starting **after December 31, 2025**. XYZ must prepare for excise tax on that compensation.
## Key Dates & Deadlines
- **Effective** for taxable years beginning **after December 31, 2025**. So starts with many organizations using calendar‐year fiscal years in 2026.
- Proposed regulations expected after the comment period closing **August 4, 2026**.
- Transition relief offered under certain exceptions while guidance is ahead.
## Bottom Line
These changes represent one of the most significant expansions in nonprofit executive compensation tax rules in recent years. If you're a tax-exempt organization, now’s not the time to assume you’re unaffected—run your numbers, consult advisors, and be ready for stricter rules.