Background: What the Change Entails
The One, Big, Beautiful Bill Act expanded Internal Revenue Code excise tax rules for Applicable Tax-Exempt Organizations (ATEOs). Previously, only the top five highest-paid employees were subject. Under the new rules, any employee whose compensation exceeds $1 million in a tax year—or who receives an excess parachute payment—may now trigger the ex-tax liability for the organization. (irs.gov)
IRS and Treasury issued Notice 2026-36 on June 5, 2026, announcing intent to issue proposed regulations clarifying the definition of “covered employee” in light of OBBB law changes. It addresses transitional and grandfathering rules and exceptions. (irs.gov)
Who Is Impacted?
- Any tax-exempt organization (e.g., charities, nonprofits) that pays employees over 1 million USD or parachute payments that qualify as “excess.”
- Executives, managers, or high-earning staff beyond the previous circle of “top five.”
- Organizations planning remuneration packages now may face tougher scrutiny and potential excise tax exposure.
Key Dates & Transitional Relief
- The amendment applies to tax years beginning after December 31, 2025. (irs.gov)
- Notice allows ATEOs to rely on opportunity for exceptions like limited hours or non-exempt funds until the final regulations are issued. (irs.gov)
- Stakeholder comments are requested by August 4, 2026 to shape forthcoming guidance. (irs.gov)
Practical Tips for ATEOs & Executives
- Review employee compensation structures—if multiple employees exceed $1M, assess org’s readiness to tax exposure.
- Identify parachute payments—those made upon termination or change in control need review.
- Document hours and funds classification to see if exceptions apply.
- Coordinate with HR, legal, and board to understand risk and communicate new rules.
- Consult tax counsel or accounting to model excise tax impact under different scenarios.
Example Scenario
Nonprofit “ArtReach” pays CEO $1.2M, COO $950,000, and several senior directors at $1.05M. Under OBBB rules, both CEO and directors now cross the $1M threshold and may be “covered employees,” risking penalty for compensation excess. Previously, only top 5 were considered—now, a broader set could be included.
Meanwhile, a senior director with a $2M parachute payment upon departure may also become subject even if their annual salary is moderate, depending on how payments are structured.
Action Plan for the Next 3-6 Months
- Evaluate and redesign compensation to balance mission with tax compliance.
- Establish internal review of executive pay exceeding $1M or involving parachute payments.
- Explore exceptions (e.g., limit hours or fund types) that may exclude some employees.
- Monitor release of final proposed regulations—these will lock down many open questions.
- Update policies, board approvals, employment contracts accordingly.
Common Misconceptions
- It’s not just “top five” anymore—all with comp over $1M count.
- Not all high levels will be penalized immediately—some exceptions (still under guidance) may apply.
- The excise tax is on the organization, not directly on individual employees.
Bottom Line
For tax-exempt organizations, the OBBB Act’s expansion of excise tax risks for executive comp is a material change. It demands proactive review, clear documentation, and dialogue across the org before regulations solidify.
Stay current—implementation rules are coming, but the law is already effective for periods starting after Dec. 31, 2025.