Entity Setup
Managing Excessive Executive Pay Risks for U.S. Nonprofits Under the One, Big, Beautiful Bill
OBBBA broadens excise tax on executive compensation, potentially changing how nonprofits handle pay, parachute deals, and exemptions—this article helps you prepare before the proposed regulations land.
By NomadicTax Research Team • 5-8 min read • June 16, 2026
## What Changed About Section 4960 and Covered Employees
The One, Big, Beautiful Bill (OBBBA) of July 2025 revised **section 4960** of the Internal Revenue Code: previously the excise tax on excess compensation applied only to the **top five highest-paid employees** of a tax-exempt organization. Now, the law potentially covers **any employee** whose compensation exceeds **$1 million** or who receives an **excess parachute payment**. ([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: What Organizations Need to Know Now
Published **June 5, 2026**, Notice 2026-36 announces proposed regulations are coming. Key features:
- Clarifies amendments to the covered employee definition.
- Provides for **exceptions**, especially the “limited hours” and “nonexempt funds” exceptions—allowing some flexibility until final guidance.
- Regulations not expected to apply prior to their effective date; tax years beginning **after** the final regulations are issued.
- Solicits public comments 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))
## Risk Points & Strategic Planning
### Who might now be covered:
- Any executive earning over **$1 million**.
- Executives receiving parachute payments (e.g., large severance or change-in-control payments).
### Exemptions to watch for:
- **Limited hours exception**: if compensation doesn’t exceed threshold or doesn’t reach required number of hours under the law.
- **Nonexempt funds exception**: parts of pay funded by sources not exempt under the Code might be exempted. These are still under debate in proposed rules.
## What Nonprofits Should Do Now
- **Review compensation structures**, including severance plans and fringe benefits, to identify potential exposures.
- Monitor which employees might now cross $1 million threshold.
- Plan for benefit redesigns or timing changes to compensation to avoid unnecessary tax exposure.
- Ensure clear documentation and consistent hours tracking if relying on limited hours exceptions.
- Consider delaying certain payouts until after final regulations are issued if that offers compliance relief.
- Submit feedback by **August 4, 2026**, particularly about how exceptions should be defined.
## Example Scenarios
- **Senior VP earning $1.2 million** including bonuses: now likely a covered employee, may need to assess compensation under section 4960.
- **Executive leaving nonprofit** with parachute payment clause: that exit package may trigger excess parachute tax unless adjusted or structured properly.
## Key Takeaways
- The shift from “top five” to “$1 million threshold” is significant—more employees could now be subject.
- Exceptions will matter greatly—track hours and sources of funds.
- Timing matters: pay or structure decisions made before final regulation effective dates could provide relief.
- Nonprofits should act proactively to minimize exposure and avoid surprises.