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Section 4960 Profit-Exempt Orgs & Executive Pay: Emerging Responsibilities Post-OBBBA

Charities and other tax-exempt organizations must heed expanded rules on excessive compensation under section 4960—know who counts and prepare for new regulations.

By NomadicTax Research Team • 5-8 min read • July 14, 2026

## What Changed Under the One, Big, Beautiful Bill (OBBBA) Notice 2026-36 (IRS/Treasury, June 5, 2026) clarifies that the excise tax under **section 4960** now has a **broader reach**: any employee earning above **$1 million** or receiving excess parachute payments may be considered a “covered employee,” not just the top 5 highest-paid—effective for tax years **after December 31, 2025**. ([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)) OBBBA also kept **exceptions** in place temporarily: organizations can rely on **limited hours** and **nonexempt funds** exceptions in determining whether someone is a covered employee **until further guidance issues**. ([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)) ## What Section 4960 Means in Practice ### Who Might Be Impacted - Individuals past the **$1 million compensation** threshold, even if not among top 5 earners. - Employees with **excess parachute payments** (e.g. large severance or buyout amounts). - Tax-exempt entities like large charities, hospitals, universities, and their related organizations. Smaller nonprofits less likely unless highly compensated staff. ### Penalties and Compliance Burdens - Section 4960 imposes a **2-percent excise tax** on remuneration exceeding \$1 million paid to a covered employee, plus any excess parachute payments. - Extended definitions mean more employees must be monitored and tracked. Public disclosure obligations, reporting duties increase. ## Examples & Strategic Planning **Example:** Nonprofit hospital has 20 employees. Under prior law, only their top 5 earners were “covered employees”. Now, if multiple other employees make over \$1 million, each qualifies as a covered employee and their excess pay over \$1 million becomes subject to section 4960 tax. **Example:** Charity grants a large severance package to a senior executive. This pay might be treated as a parachute payment—reportable and taxable under section 4960. Proper documentation and structuring matters. ### What Organizations Should Do Now - **Audit compensation schedules:** Identify current employees who might exceed \$1 million or receive parachute‐type payments. - **Evaluate agreements** for severance, exits, or bonuses—structure to avoid parachute issues if possible. - **Use exceptions wisely**: Limited hours and nonexempt funds exceptions can provide safe harbor near term—but may expire or change. - **Track proposed regulations**: IRS is seeking comments (due by **August 4, 2026**) on many of these areas. Stakeholders should participate. ([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)) ## Key Insights - Definition change transforms number of potentially covered employees—pay thresholds and roles matter. - Nonprofits should maintain compensation policies with transparency and documentations. - Once final regulations issue, certain temporary exceptions may disappear—planning ahead is critical. **Bottom line:** OBBBA’s expansion of section 4960 elevates risk for organizations with any highly compensated staff. Early assessments and strategic compensation planning can avoid costly penalties and ensure compliance.