What Changed — and Why It Matters

For years, the excise tax under Section 4960 of the Internal Revenue Code only applied to a nonprofit's five highest-compensated employees earning more than $1 million annually. A sixth executive making $1.5 million? Walked away untouched.

That loophole is now closed.

The IRS and Treasury issued a notice on June 5, 2026 announcing plans to issue proposed regulations expanding who gets hit with the excise tax. According to the IRS statement, for tax years beginning after December 31, 2025, the $1 million threshold applies to any employee at a tax-exempt organization — not just the five biggest earners.

The change flows directly from the One Big Beautiful Bill Act.

The Numbers Behind the Rule

Section 4960 already imposed a 21% excise tax on compensation over $1 million paid by nonprofits to their top earners. The structure mirrored the corporate tax rate — the logic being that tax-exempt organizations shouldn't escape accountability simply by laundering massive salaries through charitable status.

The new rule, per the IRS, also reaches former employees who were among the top five compensated workers at any point between December 31, 2016 and December 31, 2025 and whose pay exceeded $1 million. Executives cannot retire out of accountability retroactively.

Excess parachute payments — golden parachutes exceeding three times an executive's five-year average annual compensation — remain taxable under existing rules with no structural change.

IRS Commissioner Frank J. Bisignano said the rule "strengthens the accountability of tax-exempt organizations" and "broadens the scope of tax from a limited group of executives to potentially any highly compensated employee."

Who's Actually Affected Here

Major hospital systems, university endowments, and large advocacy organizations routinely pay executives well into seven figures — all while claiming tax-exempt status. The CEO of a major nonprofit health system pulling $3 million a year paid zero excise tax under the old rules if five other executives happened to earn more.

This is the sector the rule targets. Not the local food bank. Not your church. The massive, quasi-corporate organizations that use charitable status as a tax shield while compensating executives like Fortune 500 CEOs.

Volunteer service to tax-exempt organizations remains explicitly exempt under the updated rules, according to the IRS notice.

Coverage and Context

The nonprofit sector is enormous: it controls roughly $8 trillion in assets in the United States and employs about 12.5 million people, according to the National Council of Nonprofits. Yet the compensation provision of the One Big Beautiful Bill Act has received minimal coverage, overshadowed by debates over spending cuts, Medicaid changes, and tax restructuring.

The provision raises a basic question about accountability: organizations paying zero federal income tax, subsidized by American taxpayers through the tax code, should have some mechanism governing eight-figure executive compensation.

The Public Comment Window

The Treasury and IRS are accepting public comments on the notice until August 4, 2026. The nonprofit sector's advocacy groups are expected to file objections, arguing the tax stifles their ability to compete for talent or that it drives executives to the private sector.

Organizations paying zero federal income tax can still compensate executives at any level they choose. They'll simply owe the IRS 21% excise tax on compensation above $1 million.

The Rule Itself

This is a targeted expansion of an existing rule. It doesn't kill nonprofits. It doesn't regulate salaries. It applies a 21% excise tax to compensation over $1 million — the same threshold in place since 2017 — to a broader pool of executives.

If a nonprofit executive is worth $2 million in compensation, the organization can still pay it. They'll owe the IRS $210,000 in excise tax on the amount above $1 million. That's accountability.

Taxpayers subsidize the tax-exempt sector every year. An excise tax when that sector hands out Wall Street-level pay packages is a reasonable trade-off.