Compliance

Strategic Planning with the New Executive Compensation Rules for Nonprofits

With the One, Big, Beautiful Bill expanding the excise tax on excess compensation, nonprofits need to rethink their pay structures now.

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

## Overview The **One, Big, Beautiful Bill Act (OBBBA)** significantly broadened the scope of the excise tax imposed under **section 4960** of the Internal Revenue Code. Previously only the top five highest-paid employees of an Applicable Tax-Exempt Organization (ATEO) were affected. Now, **any employee with remuneration above $1 million or who receives an excess parachute payment** may be classified as a “covered employee” and trigger the excise tax obligations. ([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)) This change demands careful planning for nonprofits and their executives. Failing to comply can lead to unexpected excise tax liability, penalties, and public relations risks. --- ## Key Changes Under the New Rules - The definition of **covered employee** now includes those earning over **$1 million in a taxable year** or receiving excess parachute payments, expanding far beyond just the 5 highest-compensated employees. ([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)) - Transition relief is available via exceptions (e.g., **limited hours** and **nonexempt funds**) to soften the impact until final guidance is issued. ([irs.gov](https://www.irs.gov/irb/2026-26_irb?utm_source=openai)) - The Treasury and IRS are soliciting **public comments** by **August 4, 2026** on proposed regulations, signaling that additional definitions and exceptions may evolve. ([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)) --- ## Actionable Strategies for Nonprofits ### 1. Audit Executive Compensation Now - Review all current employees earning over $1 million and those with parachute arrangements. Determine whether they already meet the definition of “covered employee” under the new law. - Consider whether current compensation structures (bonuses, deferred compensation, severance) might inadvertently create excess parachute payments. ### 2. Use Exceptions Wisely - The **limited hours exception** may apply to individuals who do not meet certain hourly thresholds or whose work is small in scope. - The **nonexempt funds exception** may allow an organization to exclude certain payments if they’re funded through nonexempt land or assets rather than unrestricted funds. - Document robustly: track actual hours and sources of funding, maintain clear accounting records. ### 3. Set Compensation Policies with Future Liability in Mind - Cap salaries and bonuses to avoid crossing the $1 million threshold when possible. - For executives at risk, consider compensation indeces or salary bands that reduce exposure rather than offer large lump sums. - Include clawback or review mechanisms for parachute-related payments to manage severance or change-driven compensation. ### 4. Plan Disclosures, Reporting & Governance - Ensure board or compensation committee oversight over changes, with documented decisions and written policies. - Start accounting for the excise tax in budgeting so it isn’t a surprise expense later. - Engage legal and tax advisors to follow final regulations once issued. --- ## Example Scenario **Nonprofit “CareWell”** has three executives: - CEO earns $1.2M salary + $300K bonus. - COO earns $950K. - CFO earns $1.05M including stock/equity payouts. Under OBBBA, both the **CEO and CFO** may now be considered covered employees even if they were not in the prior “top 5.” They must evaluate whether bonuses or severance qualify as excess parachute payments. They should determine eligibility for exceptions. CareWell’s board decides to limit bonuses so executive total compensation stays at or under $1 million for new base salaries, and any severance must comply carefully with nonexempt funds exception to avoid triggering the tax. --- ## What To Watch For - Final IRS regulations which will define more precisely how to calculate covered employee status and exceptions. - How excess compensation is calculated, especially what counts as “remuneration” or “parachute payments.” - Whether any retrospective liability could arise for periods before the issuance of final regulations (though for tax years before regulations are final, some relief may apply). --- **Bottom Line:** Nonprofits and their boards must immediately assess their compensation landscapes, document exceptions, and prepare policies to minimize risk under the expanded excise tax rules. The transition period offers a window for planning before final regulations take effect.