On June 5, 2026, the Treasury Department and IRS issued IRS Notice 2026-36 (the “Notice”), announcing that proposed regulations under IRC Section 4960 are imminent.
As background, Section 4960 imposes a 21% excise tax on applicable tax-exempt organizations (“ATEOs”) that pay covered employees remuneration in excess of $1 million in a taxable year or make excess parachute payments. Prior to the enactment of the One Big Beautiful Bill Act (“OBBBA”) last July, Section 4960’s definition of covered employee included only an ATEO’s five highest-compensated employees for the current tax year, as well as any employee who was a covered employee for any previous tax year beginning after December 31, 2016. The OBBBA significantly expanded Section 4960’s definition of “covered employee” to potentially cover all of an ATEO’s employees – not just the top five highest-compensated.
Until the proposed regulations are issued, the Notice provides interim guidance on the expansion of Section 4960’s definition of “covered employee” under the OBBBA.
The Notice clarifies that, following the enactment of the OBBBA, Section 4960’s definition of covered employee now includes:
- Any employee of an ATEO who was one of the five highest-compensated employees for a tax year beginning after December 31, 2016, and before January 1, 2026, and
- All current and former employees of an ATEO for each tax year beginning after December 31, 2025.
According to the Notice, the proposed regulations are expected to provide interpretive guidance on the post-OBBBA definition of “covered employee” and to propose exceptions from the expanded definition for employees with limited hours and employees compensated primarily from certain nonexempt funds, but not for employees providing limited services. The proposed regulations may also address other issues, such as those reserved in the existing Section 4960 regulations. Written comments to the Notice should be submitted on or before August 4, 2026.
For now, ATEOs may rely on the rules summarized above.
For more information on compliance with Section 4960, see this article.
