Rethinking Executive Pay: How the OBBBA May Change Your Nonprofit’s Compensation Policy

You may need to take a second look at your executive compensation policies this year.

The One Big Beautiful Bill Act (OBBBA) made a simple yet significant change to the tax code concerning compensation for highly paid individuals at nonprofits. The excise tax that once applied only to the organization’s top five earners may now reach a much larger group of employees starting in 2026.

Let’s go over what changed and talk about what this could mean for your organization’s tax exposure.

What is the excise tax on executive compensation?

Section 4960 of the tax code imposes a 21% excise tax on excess compensation paid to a nonprofit organization’s executives. The tax applies to compensation paid to any covered employee that exceeds $1 million.

Section 4960 was created in 2017 in response to public concern over excessive executive pay. Section 4960 closely resembled the restrictions that public companies faced under Section 162(m), which prevents corporations from taking tax deductions for compensation packages that exceed $1 million. Because nonprofits don’t pay income tax, Congress couldn’t limit their deduction, so they imposed an excise tax instead.

How the excise tax worked before the OBBBA

Prior to the OBBBA, covered employees included (1) the organization’s five highest-compensated employees for that year, and (2) covered employees from any prior year dating back to 2017. If any of those individuals received more than $1 million in remuneration that year, the amounts in excess were subject to a 21% excise tax.

A few additional facts to know:

• The excise tax is a flat 21%, the same rate as the current corporate tax rate.
• The tax is paid by the nonprofit, not the employee.
• Only the portion of compensation above $1 million is taxed.
• The $1 million threshold is notindexed for inflation.

How the excise tax works now

The OBBBA changed which employees qualify as covered employees. Starting in 2026, covered employees are any employees of a nonprofit organization — not just the top five highly compensated employees — and all covered employees from prior years. This small change expands the pool of employees whose earnings could be subject to the tax.

Let’s look at an example to show how this change could impact nonprofits:

Pre-OBBBA

Nonprofit Org has 80 employees. Seven of those employees earned more than $1 million — let’s assume they each earned $1.15 million — and there were no covered employees in prior years.

Prior to the OBBBA, only the top five highest paid employees were considered covered employees. In this scenario, the nonprofit would calculate the excise tax using only these five employees’ earnings. They would owe an excise tax of $157,500.

Excess earnings of $150,000 x 5 employees = $750,000
$750,000 x 21% = $157,500 excise tax

Post-OBBBA

Let’s assume the same scenario: Nonprofit Org has 80 employees, seven of whom earn $1.15 million each. There are no covered employees in prior years.

Post-OBBBA, there is no five-employee cap, so all 80 of the nonprofit’s employees are considered covered employees. However, only seven of those employees made more than $1 million, so the tax will only be calculated based on their excess earnings. In this scenario, the nonprofit would owe an excise tax of $220,500.

Excess earnings of $150,000 x 7 employees = $1,050,000$1,050,000 x 21% = $220,500 excise tax

This simple rule change effectively costs the nonprofit $63,000 in additional tax.

How will this change executive compensation planning?

The OBBBA didn’t change the tax rate, the $1 million limit, or how remuneration is calculated. It simply changed the definition of covered employees. But this simple change could lead to a significant increase in tax exposure. Here are a few things you can do to prepare yourself for this change:

• Determine who is a covered employee.
  Per the amended statute, a covered employee is “any employee of an applicable tax-exempt organization… and any former employee of such an organization… who was such an employee during any taxable year beginning after December 31, 2016.”

TLDR: All your employees are now covered employees, not just the top five highly compensated employees.

• Calculate covered employees’ remuneration.
  Calculate the remuneration amounts for each covered employee to see if amounts exceed $1 million. Remuneration includes lots of different types of compensation — W-2 wages and fringe benefits, for example — but it also includes deferred compensation.

Deferred compensation is compensation earned today that will be paid in a future year, often in connection with retirement or termination. For excise tax purposes, the most important point to remember is that it must be vested before it is included in the current year’s remuneration calculation.

• Consider changes to compensation plans — specifically to vesting schedules.
  Based on the results you’ve collected, you can consider changing your compensation packages. For many nonprofits, it’s the deferred compensation piece that has the biggest impact on their excise tax exposure.

Deferred compensation is treated as remuneration for excise tax purposes in the year it vests, not the year it gets paid. Once the executive has a legally enforceable right to the amount, it is included in that year’s compensation. Large vesting events can therefore create unexpected tax exposure. An executive earning well below the $1 million threshold in base pay could exceed it the year they reach a significant vesting milestone. Review your executives’ vesting schedules for significant vesting cliffs, and consider restructuring them to manage excise tax risk.

• Prepare for an increase in tax liability — now and into the future.
  Project current and future years’ tax liabilities based on the expanded definition of covered employees, and set aside funds to pay those taxes.

Planning for Broader Excise Tax Exposure

There may be opportunities to revisit compensation policies, vesting schedules, or other employment arrangements in ways that help manage excise tax exposure. Even modest changes to how compensation is structured or when amounts vest could make a meaningful difference in whether and when the tax applies. Reach out to your CRI advisor to discuss potential strategies and how these considerations may fit within your organization’s broader compensation planning.