n-26-36.pdf

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing.

This collection currently includes the publisher’s available advance-release directory. Historical bulletin renditions are discovered separately; an advance-release record alone does not certify the collection archive complete.

Notice of Intent to Issue Regulations Under Section 4960

Notice 2026-36

SECTION 1. PURPOSE
This notice announces that the Department of the Treasury (Treasury
Department) and the Internal Revenue Service (IRS) intend to issue proposed
regulations under section 4960 of the Internal Revenue Code (Code)
1
pertaining to the
tax on excess tax-exempt organization executive compensation. It is anticipated that the
proposed regulations will address the effective date of the amendment to the definition
of covered employee made by section 70416 of Public Law 119-21, 139 Stat. 72 (July 4,
2025), commonly known as the One, Big, Beautiful Bill Act (OBBBA) and will also
propose exceptions to the definition of covered employee that are similar to the limited
hours and nonexempt funds exceptions in the existing section 4960 regulations. This
notice also solicits public comments on the matters addressed in this notice.
SECTION 2. BACKGROUND
.01 Overview of section 4960. Section 4960 generally imposes an excise tax on any
applicable tax-exempt organization (ATEO) or related person or governmental entity
that pays a covered employee remuneration in excess of $1 million in a taxable year or
an excess parachute payment.
.02 Pre-OBBBA definition of covered employee. As originally enacted in 2017 under

1
Unless otherwise provided, all “section” references are to sections of the Code or the Regulations on
Foundation and Similar Excise Taxes (26 CFR Part 53).

2

Section 13602 of the Tax Cuts and Jobs Act, Pub. L. No. 115-97, 131 Stat. 2054, 2157
(Dec. 22, 2017), section 4960(c)(2) of the Code defined a covered employee as any
employee (including any former employee) of an ATEO if the employee (1) is one of the
five highest-compensated employees of the ATEO for the taxable year, or (2) was a
covered employee of the ATEO (or any predecessor) for any preceding taxable year
beginning after December 31, 2016. On January 19, 2021, the Treasury Department
and IRS published final regulations under section 4960 in the Federal Register ( T.D.
9938, 86 FR 6196) (section 4960 regulations).
.03 Exceptions to five highest-compensated employees under the section 4960
regulations. Section 53.4960-1(d)(2) defines the term “five highest-compensated
employees” of an ATEO. Section 53.4960-1(d)(2)(ii), (iii), and (iv) provide “limited
hours,” “nonexempt funds,” and “limited services” exceptions to this definition,
respectively. Under the section 4960 regulations, an individual meeting any of these
exceptions is disregarded for purposes of determining an ATEO’s five highest-
compensated employees for a taxable year. An individual who was a covered employee
of an ATEO (not qualifying for an exception to being one of the five highest-
compensated employees) for any taxable year beginning after December 31, 2016,
remains a covered employee for all future years because covered employee status is
permanent.
.04 Reason for the exceptions in the section 4960 regulations. The limited hours
exception and nonexempt funds exception were adopted in response to commenters
requesting exceptions for situations in which employees of non-ATEO related
organizations perform limited or temporary services for the related ATEO (in particular,

3

while receiving no compensation from the ATEO). The limited services exception was
adopted to prevent an employee to whom the ATEO paid minimal remuneration from
displacing an employee who would otherwise have been one of the five highest-
compensated employees (and thus a covered employee) of the ATEO.
.05 OBBBA changes to the definition of covered employee. Section 70416 of the
OBBBA revised the definition of “covered employee.” For taxable years beginning after
December 31, 2025, the term “covered employee” means any employee of an ATEO (or
any predecessor of an ATEO) and any former employee of an ATEO (or its
predecessor) who was such an employee during any taxable year beginning after
December 31, 2016. Thus, after the OBBBA, the definition of covered employee in
section 4960 is no longer limited to an ATEO’s five highest-compensated employees,
and the section 4960 regulations’ exceptions to the “five highest-compensated
employees” of an ATEO no longer apply by their terms.
SECTION 3. APPLICABILITY OF POST-OBBBA DEFINITION OF COVERED
EMPLOYEE
Section 70416(b) of the OBBBA provides that the amendment to the definition of
covered employee applies to taxable years beginning after December 31, 2025. The
Treasury Department and the IRS interpret this effective-date provision to broaden the
definition of covered employee only for taxable years of an ATEO beginning after
December 31, 2025, and to retain the prior definition of covered employee for taxable
years beginning on or before December 31, 2025, including for purposes of determining
for a taxable year beginning after December 31, 2025, whether a former employee was
a covered employee in a taxable year beginning on or before December 31, 2025.

4

Accordingly, the definition of covered employee under section 4960(c)(2), as amended
by the OBBBA, includes only—
• Any individual who was an employee of an ATEO in any taxable year beginning
after December 31, 2016, and on or before December 31, 2025, if the individual
was a covered employee for the taxable year under prior law, and
• Any individual who is an employee of an ATEO in any taxable year beginning
after December 31, 2025 (subject to any exceptions provided in future
guidance, such as those described in section 4.01 of this notice).
SECTION 4. FORTHCOMING PROPOSED REGULATIONS
.01 Intent to issue regulations. The Treasury Department and the IRS intend to issue
proposed regulations (forthcoming proposed regulations) revising the section 4960
regulations by removing references to an ATEO’s five highest-compensated employees
and making conforming changes. It is anticipated that the forthcoming proposed
regulations would provide the interpretation of the post-OBBBA definition of covered
employee described in section 3 of this notice. It is also anticipated that the proposed
regulations would provide covered employee exceptions for limited hours and
nonexempt funds similar to those in section 53.4960-1(d)(2)(ii) and (iii), but would not
provide a limited services exception to the amended definition of covered employee
because the concern that motivated that exception—displacement of an employee who
would otherwise have been one of the five highest-compensated employees of the
ATEO—is no longer relevant. The forthcoming proposed regulations may also address
other issues, such as issues reserved in the existing section 4960 regulations.
.02 Prospective changes. It is anticipated that the forthcoming proposed regulations

5

would be prospective and would not apply to taxable years beginning before the
issuance of final regulations.
SECTION 5. RELIANCE
.01 Interpretation of the post-OBBBA definition of covered employee and limited
hours and nonexempt funds exceptions. Until the forthcoming proposed regulations are
issued, ATEOs may rely on the rules described in section 4.01 of this notice that are
anticipated to be included in the proposed regulations.
.02 Example.
Facts. ATEO 1 (an ATEO) and CORP 2 (a taxable-related organization) use a
calendar taxable year. Employees A and B have been employees of CORP 2 and
ATEO 1 since 2017. Employee A was a covered employee for ATEO 1’s taxable year
beginning on January 1, 2025, because Employee A was one of ATEO 1’s five highest-
compensated employees and did not qualify for an exception to such status for 2025.
Employee B has never been one of the five highest-compensated employees of ATEO
1 and meets the requirements of the limited hours exception for ATEO 1’s taxable year
beginning on January 1, 2026. Employee C has been an employee of CORP 2 since
2017 and was an employee of ATEO 1 only in 2020, but not one of its five highest-
compensated employees because there were more than 5 individuals with higher
remuneration than Employee C for the 2020 taxable year.
Conclusion. Employee A is a covered employee of ATEO 1 for taxable year 2026
because Employee A was a covered employee for 2025 and covered employee status,
once obtained, is permanent.
In accordance with section 5.01 of this notice, ATEO 1 may rely on the
interpretation of the post-OBBBA definition of covered employee described in section 3

6

of this notice and the limited hours exception to determine that Employee B is not a
covered employee of ATEO 1 for taxable year 2026.
In accordance with section 5.01 of this notice, ATEO 1 may rely on the
interpretation of the post-OBBBA definition of covered employee described in section 3
of this notice to determine that Employee C is not a covered employee of ATEO 1 for
taxable year 2026 by reason of being a former employee of ATEO 1. Although
Employee C was an employee of ATEO 1 in 2020, Employee C was not a covered
employee for that taxable year under the interpretation of the post-OBBBA definition of
covered employee described in section 3 of this notice and thus was not a covered
employee for any taxable year through 2025 under prior law. If Employee C becomes
an employee of ATEO 1 in a post-2025 taxable year and does not meet any applicable
exception to covered employee status, Employee C will be a covered employee of
ATEO 1 for that taxable year and all future taxable years.
SECTION 6. REQUEST FOR COMMENTS
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.
SECTION 7. SUBMISSION OF COMMENTS
.01 Written comments should be submitted on or before August 4, 2026.
Consideration will be given, however, to any written comment submitted after such date,
if such consideration will not delay the issuance of guidance. The subject line for the

7

comments should include a reference to Notice 2026-36. Comments may be submitted
in one of two ways:
(1) Electronically via the Federal eRulemaking Portal at www.regulations.gov (type
IRS-2026-0233 in the search field on the regulations.gov homepage to find this notice
and submit comments).
(2) Alternatively, by mail to: Internal Revenue Service, CC:PA:01:PR (Notice 2026-
36), Room 5503, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.
.02 All commenters are strongly encouraged to submit comments electronically. The
Treasury Department and the IRS will publish for public availability any comment
submitted electronically, or on paper, to the IRS’s public docket on
www.regulations.gov.
SECTION 8. DRAFTING INFORMATION
The principal authors of this notice are Robert C. Weedman and Ward L. Thomas
of the Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations,
and Employment Taxes). For further information regarding this notice, contact
Mr. Weedman at (202) 317-3517 or Mr. Thomas at (202) 317-6173 (not a toll-free call).