The Internal Revenue Service (IRS) released Notice 2026-36 on June 5, 2026, announcing it intends to issue proposed regulations under Section 4960 of the Internal Revenue Code (IRC) addressing the expansion under the One Big Beautiful Bill Act (OBBBA) of the excise tax on tax-exempt organization executive compensation (for prior coverage, see the tax alert dated July 23, 2025 (New Tax Law Will Have Significant Impact on Tax-Exempt Organizations) and for an overview of the excise tax, see the article published on August 29, 2022). In particular, the notice provides interim relief and clarity regarding the excise tax on annual executive compensation over $1 million and excess parachute payments for applicable tax-exempt organizations (ATEOs). Most importantly, it protects ATEOs from unexpected tax liabilities by confirming that the existing exceptions for “limited hours” “limited services,” and “non-exempt funds” will continue to apply, which essentially prevents volunteers from inadvertently being classified as “covered employees” who subject the ATEO to the excise tax.

Section 4960, enacted in 2017 as part of the Tax Cuts and Jobs Act, imposes an excise tax equal to the corporate tax rate on remuneration in excess of $1 million or any excess parachute payment made to a “covered employee” of an ATEO. A covered employee was originally the five highest compensated employees of an ATEO, subject to certain exceptions in the 2021 final regulations. However, the definition of a covered employee was expanded in OBBBA to include any employee or former employee of an ATEO, not just the highest compensated.