IRS Notice 2026-36 Eases the Burden of the OBBBA’s Excise Tax Expansion for Tax-Exempt Organizations

The One Big Beautiful Bill Act (OBBBA or the Act) created many significant changes to the tax code when it was signed into law last summer. The Act’s deceptively simple modification to IRC 4960, which imposes an excise tax on certain excess compensation, impacts tax-exempt organizations. The OBBBA expands the pool of qualifying employees that might trigger the tax. The AICPA requested interim relief in May 2026 for navigating the changes. In response, the IRS issued Notice 2026-36: Notice of Intent to Issue Regulations Under Section 4960 (the Notice), which provides both insight into what the formalized regulations might look like, and welcome interim relief.

What is the IRC 4960 Excise Tax?

IRC 4960 imposes an excise tax of 21% on total compensation, referred to as remuneration, exceeding $1,000,000, and certain golden parachute payments paid to “covered employees” of Applicable Tax Exempt Organizations (ATEO). First introduced by the Tax Cuts and Jobs Act of 2017 (TCJA), this provision seeks to bring parity with for-profit organizations who are unable to deduct compensation over $1,000,000 per employee each year. Crucially, the combined remuneration paid by the ATEO and its related organizations may trigger the thresholds, and related for-profit organizations can find themselves with an IRC 4960 tax liability.

Who is Considered a Covered Employee?

Before the OBBBA, only the top five highest compensated employees in a given year, and employees who had been such in the past, were considered covered employees. The OBBBA removed this scope limitation, classifying virtually any employee of an ATEO as a covered person. Importantly, the IRS previously carved out specific exceptions for when an employee may be excluded from the top five highest compensated employees, based on “limited hours,” “limited services,” or by being compensated with “nonexempt funds.” Because of the expansion under OBBBA, these exceptions are no longer applicable as written.

Additionally, status as a covered employee does not sunset. A covered employee of an ATEO who goes on to accept employment at a related organization, whether or not tax exempt, even years later, can trigger the excise tax for their new employer.

IRS Provides Interim Support for 4960 Application

While we wait for the final regulation, the Notice issued by the IRS provides some immediate relief:

• 10-year Look-back Period – The AICPA expressed concern that the OBBBA change creates a burdensome 10 year look-back period where certain employees of an ATEO retroactively become covered employees under the new rules. The Notice clarifies that the IRS views the change as prospective, and that the prior definition of a covered employee may remain in place for all tax years beginning prior to January 1, 2026. 
• Covered Employee Exceptions – The IRS also intends to provide exceptions in the final regulation akin to the existing “limited hours” and “nonexempt funds” exceptions, but clarifies that the “limited services” exception is unnecessary, because an employee providing limited services is not at risk of displacing another potential covered employee, as the number of covered employees is no longer capped. In the interim, the Notice allows organizations to rely on the limited hours and nonexempt funds exceptions for years beginning after December 31, 2025.

The Notice provides meaningful insight into the IRS’ approach to this implementation. The provisions above alleviate two of the most significant concerns related to the 4960 change.The IRS is accepting public comments on the Notice until August 4, 2026.

Contact Johnson Lambert Today

If you are determining how these changes affect your organization, you do not have to do it alone. Connect with us for advice on successfully navigating IRC 4960 and planning for the future impacts.