The One Big Beautiful Bill Act (OBBBA) contains several provisions that affect tax-exempt organizations, one of which impacts the excise tax imposed on excess compensation.
Excess Compensation Changes
Under Section 4960 of the Internal Revenue Code, there is a 21% excise tax imposed on remuneration1 over $1 million paid in a tax year by an applicable tax-exempt organization (AFPO) to a covered employee. The law was originally enacted under the Tax Cuts and Jobs Act to address excessive compensation paid to certain key employees within tax-exempt entities.
Under the OBBBA, the definition of covered employee has changed.
Previously, a covered employee was one of the five highest compensated employees of an AFPO for the tax year or was a covered employee for any preceding tax year beginning after December 31, 2016.
Now, however, a covered employee is any current or former employee of an AFPO. The change is effective for tax years beginning after December 31, 2025.
For more information on excess compensation changes, contact your RKL advisor.
1 Remuneration is defined as wages subject to income tax withholding under Section 3401(a) and amounts required to be included in income under Section 457(f). Compensation from related organizations is included in the calculation.
