The US Department of the Treasury and the Internal Revenue Service (IRS) plan to propose regulations on how an excise tax will apply to excessive compensation and “excess parachute payments”.
In Notice 2026–36, Treasury and the IRS said the forthcoming rules would address payments made by applicable tax-exempt organisations under the One, Big, Beautiful Bill (OBBB).
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Previously, this tax was limited to the five highest‑paid employees of an applicable tax‑exempt organisation (ATEO) in each tax year.
Under the OBBB, the scope widens to any employee whose annual remuneration exceeds $1m, as well as to those receiving excess parachute payments.
Notice 2026–36 explains that the updated “covered employee” definition will apply to individuals who worked for an ATEO in any tax year beginning after 31 December 2016 and on or before 31 December 2025.
It will also apply to anyone employed by an ATEO in a tax year beginning after 31 December 2025, unless a specific exception for covered employees is available.
However, the notice preserves key exceptions for volunteers.
ATEOs and related organisations may continue to rely on the “limited hours” and “nonexempt funds” exceptions under the post‑OBBB definition of covered employee until further guidance is issued.
Treasury and the IRS expect the forthcoming regulations to formally incorporate these exceptions.
The proposed rules are not expected to apply to tax years that begin before final regulations are issued.
IRS CEO Frank J. Bisignano said: “The new law strengthens the accountability of tax-exempt organisations by expanding tax compliance requirements for certain organisations paying excessive compensation and excess parachute payments to their executives.
“It broadens the scope of tax from a limited group of executives to potentially any highly compensated employee.”
Last week, the American Institute of Certified Public Accountants asked the US Treasury and the IRS to clarify proposed regulations for Trump Accounts.
