CLIENT ALERT | Tax & Compensation June 2026
The One Big Beautiful Bill (OBBB) significantly expanded the pool of employees whose compensation can trigger the 21% Section 4960 excise tax. Under prior law, that tax applied to compensation over $1 million paid to an organization’s top-five highest-compensated employees (plus any prior-year covered employees). The OBBB extended coverage to all current and former employees going back to 2017, effective for 2026 and beyond.
The IRS has now issued Notice 2026-36 signaling a narrower, more favorable interpretation in anticipated proposed regulations.
Two points to consider:
The 2017-2025 lookback is limited. Rather than sweeping in everyone employed since 2017, the IRS will identify covered employees for that lookback period using pre-OBBB rules, including existing regulatory exceptions. Organizations will not face a sudden, massive expansion of historical covered employee lists.
Most existing exceptions carry forward. The IRS intends to preserve the “limited hours” and “nonexempt funds” exceptions in the new regulations. The “limited services” exception, however, will not survive, as it is no longer relevant under the OBBB’s broader definition.
Organizations may rely on Notice 2026-36 until proposed regulations are issued. The IRS is accepting public comments through August 4, 2026.
What this means for you. If your organization compensates anyone at or near $1 million, this guidance warrants immediate review of your covered employee determinations for 2026. The lookback limitation is a meaningful relief provision, but the loss of the limited services exception may affect some organizations’ prior planning assumptions.
Contact us to discuss how this guidance applies to your compensation structure.
Dan Liutikas is an attorney with more than 25 years of experience representing tax-exempt organizations, including public charities, trade associations, professional societies, and credentialing bodies. He is the founder of Org Law, a boutique law firm serving mission-driven organizations.