ArticleOn June 5, the Department of the Treasury and the Internal Revenue Service announced via Notice 2026-36 their intent to issue proposed regulations pertaining to the changes to the excise tax on excess compensation and excess parachute payments to employees of tax-exempt organizations included in the One, Big, Beautiful Bill Act (the “OBBBA”).
Section 4960 of the Internal Revenue Code (“IRC”), which was enacted as part of the Tax Cuts and Jobs Act (“TCJA”) in December 2017, imposes an excise tax on any applicable tax-exempt organization (“ATEO”) or related person or governmental entity that pays a “covered employee” 1) remuneration in excess of $1 million in a taxable year or 2) an excess parachute payment. For the purposes of Section 4960, remuneration does not include compensation paid to a licensed medical professional (including a veterinarian) for the performance of medical or veterinary services. Under the TCJA, the term “covered employee” was limited to an ATEO’s five highest compensated employees for the current taxable year or any prior taxable year beginning after December 31, 2016. There were certain exceptions to the definition of covered employee (“limited hours,” “nonexempt funds,” and “limited services”) provided in the final regulations issued in January 2021. But generally, under the TCJA rules, the tax was imposed, at a 21% rate, on the sum of the remuneration in excess of $1 million paid to the ATEO’s five highest-compensated covered employees and any excess parachute payments to covered employees.
Now, the OBBBA has greatly expanded the definition of covered employee to include any employee or former employee of an ATEO, not just the five highest compensated employees, significantly broadening the applicability of the excise tax. Under the new OBBBA rule, ATEOs will need to consider the tax implications of compensation above $1 million paid to any of their employees (aggregated across the ATEO and any related organizations), not just their five highest-paid employees. This expanded definition has the potential to have a significant impact on large tax-exempt organizations with many highly compensated employees.
Notice 2026-36 clarifies that the amended definition of covered employee applies to individuals who were employees of an ATEO in any tax year beginning after December 31, 2016 and on or before December 31, 2025, if the individual was a covered employee for the tax year under the prior law, and any individual who is an employee of an ATEO in any tax year beginning after December 31, 2025 (unless an exception applies). The Notice also indicates that the forthcoming proposed regulations will include exceptions to the definition of covered employee, including limited hours and nonexempt funds, similar to the exceptions under the TCJA regulations.
Notice 2026-36 solicits public comments on the notice and any other issues that should be addressed in the forthcoming proposed regulations by August 4, 2026.