Compliance

Tax-Exempt Org Executives Face Broader Pay-Penalty Under OBBB Act: What to Know Now

New proposed IRS regulations expand the excise tax on executive compensation for tax-exempt organizations—anyone earning over $1M or with excess parachute payments now under scrutiny.

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

## 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](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)) 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](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 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](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 allows ATEOs to rely on opportunity for exceptions like **limited hours** or **non-exempt funds** until the final regulations are issued. ([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)) - Stakeholder comments are requested by **August 4, 2026** to shape forthcoming guidance. ([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)) ## 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.