The Department of the Treasury and the Internal Revenue Service (IRS) today announced their intent to issue proposed regulations addressing the excise tax on excessive compensation and excess parachute payments for employees of tax-exempt organizations under the One, Big, Beautiful Bill (OBBB).
This new legislation significantly expands the application of the excise tax by broadening the definition of a "covered employee" for applicable tax-exempt organizations (ATEOs). Previously, the tax applied only to the five highest-compensated employees; now, it may include any employee receiving over $1 million in compensation or an excess parachute payment in a tax year. IRS Chief Executive Officer Frank J. Bisignano said, "The new law strengthens the accountability of tax-exempt organizations by expanding tax compliance requirements for certain organizations paying excessive compensation and excess parachute payments to their executives." He added, "It broadens the scope of tax from a limited group of executives to potentially any highly compensated employee."
Notice 2026-36 clarifies that the amended definition of a covered employee will encompass individuals who were employees of an ATEO in any tax year beginning after December 31, 2016, and on or before December 31, 2025, if they were covered under prior law. It also includes any individual employed by an ATEO in tax years beginning after December 31, 2025, with certain exceptions. Important exceptions for volunteers, specifically those providing limited hours or funded by nonexempt sources, will be allowed until further guidance is issued.
The forthcoming proposed regulations are not expected to apply to tax years beginning before the issuance of final regulations. Treasury and the IRS are requesting public comments on all aspects of Notice 2026-36 and other relevant issues by August 4, 2026.