What’s changing under section 4960
The One, Big, Beautiful Bill Act expanded who counts as a “covered employee” subject to excise tax on excess compensation under IRC § 4960. The IRS issued Notice 2026-36 on June 22, 2026, announcing proposed regulations and related transition relief for Applicable Tax-Exempt Organizations (ATEOs). (irs.gov)
Key provisions from the proposed regulations
- Updated definition of “covered employee” that removes references to being among the five highest-compensated employees; the focus shifts to the broader post-OBBBA definition. (irs.gov)
- Transition relief allowing certain limited-hours or non-exempt funds exceptions under old regulations to persist temporarily until final guidance. (irs.gov)
- Comment period open until August 4, 2026, enabling public input on these proposed changes. (irs.gov)
How this impacts exempt organizations and their leadership
- More employees may be caught under excise tax rules based on updated “covered employee” criteria. Compensation now under closer IRS scrutiny.
- Organizations should review compensation practices for senior staff, contractors, or individuals who might be newly classified as covered employees under the broader definition.
- Exception categories (limited hours, non-exempt funds) may afford some breathing room during transition—but should not be relied on indefinitely.
Practical example
A 501(c)(3) charity has a part-time board member who receives high compensation but was never in the top-five paid employees. Under old law, that board member escaped § 4960 treatment. Under the revised definition, she may now be considered a covered employee—and excess compensation paid could trigger excise tax exposure unless an exception applies.
What exempt organizations should do now
- Conduct a compensation audit: map out those who would qualify under both old and new definitions.
- Assess whether limited hours or non-exempt fund exceptions apply—and document accordingly.
- Engage counsel to comment before August 4, 2026 to influence final drafting of regulations.
- Adjust executive compensation policies going forward to minimize risk of excise tax liabilities under the post-OBBBA framework.