The IRS has issued Notice 2026-36, providing guidance on significant changes to IRC Section 4960 enacted by the One Big Beautiful Bill Act. 

Section 4960 imposes an excise tax on applicable tax-exempt organizations (ATEOs) that pay a "covered employee" more than $1 million in remuneration in a taxable year, or an excess parachute payment.

The OBBBA, enacted July 4, 2025, significantly expanded the definition of "covered employee." Previously, only an ATEO's five highest-compensated employees were covered. For taxable years beginning after December 31, 2025, anycurrent or former employee of an ATEO (going back to 2017) is now a covered employee — dramatically broadening the scope of the excise tax.

The Treasury Department and IRS interpret the effective date to mean the expanded definition applies only to taxable years beginning after December 31, 2025. The old "top five" definition still governs whether someone was a covered employee in prior years (2017–2025).

Treasury and IRS intend to issue proposed regulations that will remove references to the "five highest-compensated employees" and make conforming changes. The proposed rules are expected to retain limited hours and nonexempt fundsexceptions (which allow certain employees of related non-ATEO organizations to be excluded), but will drop the old limited services exception, since it was only relevant under the prior "top five" framework.

Until the forthcoming proposed regulations are issued, ATEOs may rely on the IRS's interpretation described in this notice, including the limited hours and nonexempt funds exceptions. A worked example in the notice walks through how these rules apply to three hypothetical employees.

The Treasury Department and the IRS request comments regarding all issues raised by this notice, in particular: (1) any changes that are needed or appropriate to adapt the current limited hours and nonexempt funds exceptions to the new definition of covered employee under the OBBBA and the appropriateness of applying these exceptions to officers of the ATEO, and (2) any other issues that should be addressed in the forthcoming proposed regulations.

Written comments are due by August 4, 2026, and can be submitted via regulations.gov (docket IRS-2026-0233) or by mail to the IRS in Washington, DC.