Compliance
New IRS Relief and Compliance Rules for Nonprofits Under the ‘One, Big, Beautiful Bill’
IRS Notice 2026-36 broadens the definition of covered employee in tax-exempt organizations and strengthens accountability under excise tax rules. Nonprofits must adapt or risk incurring penalties.
By NomadicTax Research Team • 5-8 min read • June 13, 2026
## What the Notice Changes
Issued on **June 5, 2026**, IRS **Notice 2026-36** outlines proposed regulations that significantly affect how **tax-exempt organizations** define “covered employees” under **Section 4960** (Excise tax on excess compensation and parachute payments) of the Internal Revenue Code. ([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))
Previously, only the **top five highest compensated employees** were potentially subject to the excise tax. Notice 2026-36 now extends applicability to **any employee earning over \$1,000,000 annually** or receiving 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))
## Effective Period & Exceptions
- The new definition applies for tax years beginning **after December 31, 2025**, with certain exceptions.
- Organizations may rely on existing “limited hours” and “nonexempt funds” exceptions until further guidance is issued. These serve as relief while final rules are developed. ([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))
## Compliance Implications for Nonprofit Entities
### What You Should Do Now:
- **Identify potential covered employees**: Pull compensation data for anyone earning over \$1 million or receiving parachute payments.
- **Review parachute payment arrangements** for key staff; assess whether they could trigger excise tax liability.
- **Document exceptions**: If relying on limited hours or nonexempt funds exceptions, maintain robust records.
### Risks to Be Aware Of:
- Applying previous definition incorrectly might lead to under-reporting and penalties.
- Final regulations could narrow exceptions or change the effective dates.
- Employees who weren’t in covered groups before may now become subject to taxation or withholding responsibilities.
## Real-World Examples
- A nonprofit CEO earning \$1.2 million in 2026 would now be a “covered employee,” whereas under the old rule, that status depended purely on whether they were among the top five.
- An employee receiving a substantial “golden parachute” in the event of severance may now generate liability for excess parachute payments under Section 4960.
## Next Steps & Best Practices
- **Monitor regulation progress**: Note that the notice calls for public comment 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))
- **Plan ahead**: Consider compensation packages with both tax-exempt requirements and Section 4960 consequences in mind.
- **Consult counsel**: Nonprofits should review their policies with experienced tax advisors as guidance evolves.
With enforcement likely to intensify in light of these broader definitions, tax-exempt organizations—and their executives—should evaluate their practices now and build stronger compliance mechanisms moving forward.