New Section 4960 Rules Are Expanding Nonprofit Excise Tax Exposure – What Your Organization Needs to Know
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The One Big Beautiful Bill Act broadens the 21% executive compensation excise tax, and many nonprofit leaders are underestimating the reach of the new rules.
For years, many nonprofit organizations treated Section 4960 of the Internal Revenue Code as a narrow compliance issue – one that applied only to the highest-paid executives at the largest institutions. That assumption no longer holds.
The expansion of Section 4960 under the One Big Beautiful Bill Act has significantly broadened the reach of the 21% excise tax on executive compensation.
Beginning with tax years after December 31, 2025, the tax applies to a wider group of employees than many nonprofits originally expected – and organizations that have not yet revisited their compensation planning may already be carrying exposure they have not accounted for.
What Has Changed Under Section 4960?
When Section 4960 was first enacted, most nonprofits viewed it as a limited rule, affecting only a small number of top earners. Final IRS guidance and the OBBBA expansion have made clear that the rules now reach much further.
Here is what nonprofit leaders need to understand about the expanded framework:
- Broader employee threshold: The excise tax now applies to any employee earning more than $1 million in a tax year – no longer limited to a narrow group of the most senior executives
- Deferred compensation counts: Vested deferred compensation, retention incentives, supplemental executive retirement plans, and certain taxable fringe benefits all count toward the threshold, even when annual base salary falls below $1 million
- Aggregation rules apply: Compensation paid by related organizations, taxable subsidiaries, or affiliated entities must be combined when calculating whether the threshold has been exceeded – a significant complication for nonprofits that operate across multiple entities
- Permanent covered-employee status: Once an employee crosses the threshold, that status generally remains permanent, extending excise tax exposure well beyond the year the limit was first reached
- Separation payments are included: Section 4960 also applies to certain excess parachute payments tied to an employee’s departure from the organization
Who Pays the Tax – and Why It Matters for Your Budget
One detail that surprises many nonprofit finance teams: the 21% excise tax is paid directly by the organization, not by the employee. For nonprofits operating with tight margins, donor restrictions, or grant-based funding, even a modest excise tax bill can create real budget pressure.
The deeper problem is unpredictability. A single vesting event, executive departure, or large deferred compensation payout can spike a covered employee’s remuneration dramatically in a single year – generating unexpected liability that was never built into the organization’s financial plan.
That unpredictability is pushing many nonprofits to move Section 4960 analysis out of year-end reporting and into annual budgeting and forecasting discussions.
What Should Nonprofit Leaders Be Doing Now?
The organizations best positioned to manage Section 4960 exposure are those treating it as an ongoing financial planning issue rather than a compliance checkbox. Key steps to take now include:
- Model all forms of compensation annually – salary alone does not reflect total remuneration; deferred comp schedules, retention programs, and separation arrangements all need to be included in forward-looking projections
- Review aggregation obligations – if your organization operates through related entities or affiliated organizations, compensation across all of them may need to be combined when assessing excise tax exposure
- Audit existing employment agreements – contracts with accelerated vesting provisions or large severance packages deserve a careful review under the expanded rules
- Build Section 4960 modeling into the budget cycle – annual budgeting discussions should now include excise tax projections, not just year-end compliance reviews
- Coordinate across departments earlier – payroll, finance, human resources, and legal now need to collaborate at the front end of the compensation planning process, not after decisions have already been made
The Broader Shift in Nonprofit Financial Planning
Section 4960 is changing the way nonprofit organizations think about executive compensation. What was once a narrow line on a Form 990 has become an ongoing operational and financial planning challenge that touches budgeting, governance, talent strategy, and long-term organizational sustainability.
Organizations that begin modeling exposure early, review compensation structures deliberately, and improve cross-departmental coordination will be in a stronger position to manage both compliance obligations and the long-term financial impact of the expanded rules.
The core lesson: executive compensation planning can no longer be treated in isolation. For many nonprofits, Section 4960 is now a fixture of financial strategy – one that will continue influencing compensation decisions well beyond the current filing cycle.
Is Your Nonprofit Ready for the Expanded Section 4960 Rules?
Navigating executive compensation excise tax exposure requires proactive planning, not year-end reactions. Virtue Advisors works with nonprofit organizations across Atlanta and Georgia to model Section 4960 exposure, review compensation structures, and build financial planning strategies that account for changing IRS rules.
Contact Virtue Advisors today at (678) 952-9001 or email info@virtuecpas.com to schedule an advisory consultation.
Disclaimer: This press release is for informational purposes only and does not constitute legal, tax, or financial advice. Organizations should consult a qualified tax professional to evaluate their specific circumstances and obligations under Section 4960.
