Compliance
Navigating Nonprofit Executive Compensation Rules: Compliance After OBBB
If you oversee or work for a tax-exempt organization, recent shifts in how “covered employee” is defined under OBBB mean **anyone earning over $1 million** might face new excise taxes for excess pay or parachute deals.
By NomadicTax Research Team • 5-8 min read • July 5, 2026
## Background & Key Change
In the One, Big, Beautiful Bill (OBBB), passed July 2025, Congress expanded the excise tax on **excessive compensation** and **excess parachute payments** in tax-exempt organizations. That includes altering who qualifies as a “covered employee.” Previously limited to the top five compensated; the new rule covers any employee whose pay exceeds **$1 million** in a tax year or who is subject to a 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, issued in early June, marks the IRS’s “intent to issue proposed regulations” that define how the new rules will work in practice. The notice also includes **transition relief** for organizations that may need it. ([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’s Affected & What to Do Now
### Tax‐Exempt Organizations (Nonprofits, Charities, Foundations)
- **Identify any employee(s) exceeding $1 million** in compensation (including salary, bonuses, benefits) in the tax year beginning **after December 31, 2025**. These individuals may now be treated as “covered employees” for excise purposes.
- Review any “parachute” or severance payment arrangements—they’re likely to be scrutinized and potentially taxed if exceeding defined limits.
- Ensure documentation is strong for any exceptions—Notice 2026-36 allows for limited-hours and nonexempt funds exceptions until further guidance is released. Use them if eligible. ([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))
### Individuals Employed by Nonprofits
- If you are compensated over $1 million, you’ll want to confirm whether your employer is an “applicable tax-exempt organization” (ATEO) under OBBB.
- Review benefit packages and any arrangements that might include steep severance, change of control or similar “parachute” triggers. Understand your tax exposure.
## Compliance Checklist & Deadlines
| Task | Suggested Timeline |
|---|---|
| Audit all high-compensated employees (>$1 million) for 2026 | **Immediately** |
| Map out any severance or parachute clauses | **Mid-2026** before fiscal-year closing |
| Track hours / fund classification to qualify for exceptions | As you go through 2026 reporting period |
| Monitor draft regulations | Proposed regs expected after Notice 2026-36; public comments open until **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 Scenarios & How to Mitigate
- **Risk**: Paying someone over $1 million but failing to treat them as a covered employee—may lead to missed tax liabilities and penalties.
- **Mitigate**: Maintain accurate compensation records; implement policy reviews of severance/parachute payments.
- **Risk**: Losing transition relief if you don’t meet exceptions (limited hours / nonexempt funds).
- **Mitigate**: Document hours worked; document sources of compensation; avoid ambiguous classifications.
## Practical Example
- **Example Nonprofit A**: CEO earns $1.2 million in 2026. Under pre-OBBB law, only the top 5 highest paid would be covered—CEO already included. Under new law, in future years, there might be more covered employees if others cross $1 million even if not in top-5. Nonprofit must ensure that compensation committee evaluates every high earner—not just top ranks.
- **Example B**: A nonprofit has a senior manager earning $800,000 plus a potential severance package of $400,000 if certain conditions met. Combine causes this to cross $1,000,000—parachute rules might apply, pushing them into “covered employee” classification for that year.
## Strategic Advice
- Forecast compensation for all senior staff to see who might cross the threshold if bonus or benefits increase.
- Revise deferred compensation / severance arrangements to limit excess parachute exposure.
- Engage in comment process once proposed regulations are released—they may offer clarifications or exceptions favorable to certain situations.
## Final Takeaway
OBBB has tightened the leash on high pay in nonprofits. Anyone earning $1 million+ per year, or with parachute arrangements, needs awareness now—well before final regulations arrive. Solid record-keeping, policy clarity, and proactive review are your best tools to stay compliant and avoid unexpected tax bills.