On June 5, 2026, the Department of the Treasury and the Internal Revenue Service (IRS) issued Notice 2026-36, outlining their intent to propose new regulations under Internal Revenue Code Section 4960 addressing excise taxes on excessive compensation and excess parachute payments paid by tax-exempt organizations.
The guidance reflects the significant changes introduced under the One, Big, Beautiful Bill Act (OBBBA), marking a notable expansion in the scope of executive compensation oversight within the nonprofit sector.
Section 4960 generally imposes an excise tax on any applicable tax-exempt organization (ATEO) that pays remuneration in excess of $1 million to a covered employee in a taxable year. Since its inception as part of the Tax Cuts and Jobs Act of 2017, the tax applied only to a limited group of employees. Under the original law, covered employees were the five highest-compensated employees of an ATEO for the taxable year. Once an employee was considered a covered employee in a tax year, they remained a covered employee for all subsequent tax years. However, the OBBBA significantly broadens this framework by expanding the definition of “covered employee,” thereby extending the potential reach of the excise tax.
Under the revised statutory framework, the definition of covered employee is no longer limited to the top five earners each tax year. Notice 2026-36 clarifies that the amended definition of covered employee, which will be addressed in the forthcoming proposed regulations, includes two primary categories:
- Individuals who were employees of an ATEO in any tax year beginning after December 31, 2016, through December 31, 2025, if they were considered covered employees under prior law, and
- Any individual who is an employee of an ATEO in tax years beginning after December 31, 2025, unless an exception applies.
The notice signals the Treasury and IRS’s intent to include exceptions for employees who meet the “limited hours” or “nonexempt funds” criteria, which were originally designed to address situations in which employees of non-ATEO-related organizations perform limited or temporary services for the related ATEO. Notably, the prior “limited services” exception is not expected to carry forward.
Until proposed regulations are issued, organizations may rely on the guidance provided in the notice.
Treasury and the IRS are actively seeking public input on Notice 2026-36, with comments requested by August 4, 2026. Specifically, they are requesting feedback on any changes that are needed or appropriate to adapt the current limited hours and nonexempt funds exceptions to the new definition of covered employee under the OBBBA and the appropriateness of applying these exceptions to officers of the ATEO.
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