WASHINGTON, D.C. — The U.S. Department of the Treasury and the Internal Revenue Service have issued guidance implementing provisions of the One, Big, Beautiful Bill that broaden the federal excise tax on excessive executive compensation paid by tax-exempt organizations.
The change significantly expands the pool of nonprofit employees who may be subject to the tax, extending it beyond a small group of top executives to potentially any employee receiving more than $1 million in annual compensation or certain excess parachute payments.
The guidance, issued through Notice 2026-36, outlines how Treasury and the IRS intend to draft proposed regulations implementing the law’s revised definition of a covered employee at an applicable tax-exempt organization, or ATEO.
“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,” IRS Chief Executive Officer Frank J. Bisignano said. “It broadens the scope of tax from a limited group of executives to potentially any highly compensated employee.”
Under prior law, the excise tax generally applied to the five highest-compensated employees of a tax-exempt organization. The new law expands coverage to include employees whose compensation exceeds $1 million in a tax year, subject to certain exceptions.
According to the notice, covered employees will include individuals who were designated as covered employees under prior law for tax years beginning after Dec. 31, 2016, through Dec. 31, 2025, as well as employees who meet the revised criteria in tax years beginning after Dec. 31, 2025.
The guidance also provides temporary relief for some nonprofit organizations by allowing them to continue relying on limited-hours and nonexempt-funds exceptions while Treasury develops formal regulations. Treasury and the IRS indicated those exceptions are expected to be included in future proposed rules.
The agencies stated that the forthcoming regulations are not expected to apply to tax years beginning before final regulations are issued.
Treasury and the IRS are seeking public comments on the notice and related implementation issues through Aug. 4, 2026.
Additional information is available through the One, Big, Beautiful Bill resources on IRS.gov.
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