Compliance
Exempt Organizations & Executive Compensation: Navigating New Section 4960 Rules
The IRS has opened comment on proposed regulations expanding who’s treated as a “covered employee” under excise tax rules—especially under the One, Big, Beautiful Bill.
By NomadicTax Research Team • 5-8 min read • June 27, 2026
## 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](https://www.irs.gov/irb/2026-26_irb?utm_source=openai))
## 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](https://www.irs.gov/pub/irs-irbs/irb26-26.pdf?utm_source=openai))
- Transition relief allowing certain limited-hours or non-exempt funds exceptions under old regulations to persist temporarily until final guidance. ([irs.gov](https://www.irs.gov/pub/irs-irbs/irb26-26.pdf?utm_source=openai))
- Comment period open until **August 4, 2026**, enabling public input on these proposed changes. ([irs.gov](https://www.irs.gov/pub/irs-irbs/irb26-26.pdf?utm_source=openai))
## 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.