Proposed Regulatory Changes to Executive Compensation in Tax-Exempt Organizations
The U.S. Department of the Treasury and the Internal Revenue Service (IRS) have signaled plans to introduce new regulations regarding the application of excise taxes on excessive compensation and so-called “excess parachute payments” within tax-exempt organizations. According to Notice 2026–36, these forthcoming rules aim to clarify compliance requirements for payments made by applicable tax-exempt organizations (ATEOs) under the One, Big, Beautiful Bill (OBBB).
Broadening the Definition of ‘Covered Employee’
Historically, the excise tax on excessive executive compensation was constrained to the five highest-paid employees within an ATEO for any given tax year. The updated regulatory framework under the OBBB significantly expands this scope. Moving forward, the designation of a “covered employee” will encompass any individual whose annual remuneration exceeds $1 million, regardless of their specific title or rank within the organization.
The Treasury and IRS have outlined the following application timeline for the “covered employee” status:
- Historical Application: Individuals who worked for an ATEO in any tax year beginning after December 31, 2016, and on or before December 31, 2025.
- Future Application: Individuals employed by an ATEO in any tax year beginning after December 31, 2025, barring the application of specific regulatory exceptions.
Preservation of Existing Exceptions
Despite the broader reach of the new tax rules, the Treasury and the IRS intend to maintain specific protections for certain classes of workers. Notice 2026–36 confirms that “limited hours” and “nonexempt funds” exceptions, which were established following the implementation of the OBBB, will remain in effect until formal guidance is finalized. The agencies anticipate that these exceptions will be explicitly incorporated into the final regulatory language.
Furthermore, regulators have indicated that the proposed rules are not expected to be retroactively applied to tax years that begin prior to the issuance of final regulations.
Regulatory Intent and Accountability
IRS leadership has framed these changes as a move toward greater transparency and accountability within the non-profit and tax-exempt sector. By broadening the scope of the tax from a select group of top-tier executives to any highly compensated employee, the government aims to ensure that tax-exempt entities adhere to stricter compensation standards.
As the regulatory process moves forward, organizations are advised to monitor further updates from the Treasury and the IRS to ensure compliance. The guidance follows broader industry discussions, including recent inquiries from the American Institute of Certified Public Accountants regarding the implementation of tax regulations.
