This is part 2 of Weintraub’s series covering the major changes from the OBBBA. This follows our initial article where we discussed the no tax on tips and overtime provisions, the SALT deduction, and the PTET Credit. These provisions, as well as the topic of our article, were discussed in our OBBBA webinar held on July 24, 2025 shortly after the bill went into effect. In this article we will discuss the OBBBA’s impact on the excise tax on excess remuneration for employees of nonprofit entities.
What is the Excise Tax and How did the OBBBA Impact It?
The excise tax, which was enacted as part of the TCJA in 2017, is a 21% excise tax on an “applicable tax exempt entity” (ATEO) for “covered employees” that have “remuneration” in excess of $1 million.[1] The statutory definition of an ATEO is broad and encompasses a majority of tax exempt entities.[2] Under the TCJA, a covered employee was defined to be the five highest compensated employees (including former employees) for each tax year, and the covered employees from the preceding tax year. The OBBBA expanded the covered employee definition to essentially all current and past employees, regardless of what their compensation is.[3]
The statutory term remuneration is defined as compensation (primarily wages and vested deferred compensation) paid to the covered employee. The excise tax is applied to the remuneration and any “excess parachute payment” paid by the ATEO.[4] The latter is a statutory term borrowed from the Section 280G and the underlying regulations.[5] An excess parachute payment is defined as a payment that is equal to at least 3x the employees base annual compensation (averaged over five years) where the payment is contingent on an employee separation from their employment.[6]
Compensation received by a related organization or governmental entity of the ATEO is also taken into account under the statute, and aggregated with the remuneration from the ATEO.[7] A related organization is defined as any person or governmental entity that meets one or more of these tests: (i) the person or governmental entity controls, or is controlled by the ATEO, (ii) is controlled by one or more person that control the ATEO, (iii) is a supported organization or supporting organization with respect to the ATEO or (iv) if the ATEO is a voluntary employee beneficiary association (VEBA), establishes, maintains, or makes contributions to the VEBA. Under the statute, control consists of more than 50 % of the stock, by vote and value, in the corporation.[8] The constructive ownership rules will apply in making this determination.[9]
When remuneration exceeds $1 million for a taxable year, each ATEO and related organization is liable for the 21% excise tax on excess remuneration, in proportion to the amount of remuneration it paid to the employee.
Here is an example of the changes made to the excise tax from the OBBBA:
Example: An ATEO has an executive with a base salary $800,000 in the current tax year, and is the 6th highest paid executive. The ATEO underwent a change of control, and the executive received a parachute payment of $2 million. The executive’s excess golden parachute payment is $1,200,000.[10] The executive also has deferred compensation of $400,000 that becomes automatically vested due to the change of control.
Under the TCJA version of the statute, this executive would not be counted since a covered employee was limited to the top 5 highest paid executives. With the changes from the OBBBA to the statute, the ATEO would now be liable for an excise tax of $294,000 ($1,400,000 *21%) for this executive alone.[11] There may likely be several executives that received similar parachute payments, deferred compensation, or payments from related organizations over $1 million. Thus, the excise tax for ATEOs can quickly add up to a significant sum.
Exclusions from Remuneration
The statute lists several exclusions from the remuneration base, such as medical services and service as a board member or trustee.[12]
Under Section 4960, remuneration does not include the portion of any compensation paid to a licensed medical professional (including veterinarians) for the performance of medical services, and for which the employer makes a reasonable, good faith allocation between compensation for medical services and other administrative services.[13]
A licensed medical professional means an individual who is licensed under state or local law to perform medical services.[14] Compensation for teaching or research services does not qualify for the exclusion.[15]
This essentially exempts most executives of tax-exempt hospitals from the excise tax, but these ATEOs may be liable for staff that aren’t performing medical services. There are also many large institutional ATEOs that do not fall within this exclusion, thus they need to be wary of the changes to the excise tax.
There are also other limited exceptions for board members, trustees, and volunteer services. These are fact specific and are not as significant as the medical services exclusions described above. They also need to be wary of any remuneration received from a related organization, since this will be aggregated to the remuneration base under the statute.
Steps to Take
ATEOs should be cautious in change of control transactions or when negotiating severance arrangements for departing executives, due to the expanded definition of covered employees under the OBBBA. Board of Directors for ATEOs and their compensation committees should review existing employment agreements and deferred compensation arrangements to assess their exposure and consider revising them, if applicable. They should also review the prior tax year for former employees since the excise tax can apply to them. The IRS has stated they will publish more guidance on this topic to explain these changes, but ATEOs need to be aware of this legislative change and act now.
[1] IRC §4960(a).
[2] An applicable tax-exempt entity for the excise tax is any §501(a) organization, §521 farmers’ cooperative, governmental entities that have their income excluded, and a §527 political organization.
[3] Effective for tax years beginning after 12/31/2025.
[4] IRC §4960(a)(2).
[5] IRC §4960(a)(2)(c)(5) and IRC §280G(b).
[6] IRC §4960(c)(5).
[7] IRC §4960(c)(4)(A).
[8] IRC §4960(c)(4)(B).
[9] Treas. Reg. §53-4960-1(i)(2).
[10] Assuming the $800,000 base salary is the average base salary for the past five years; $2,000,000 less $800,000 average base salary.
[11] $1,200,000 remuneration less $1,000,000 threshold and the excess parachute payment of $1,200,000. IRC §4960(a)(1)-(2).
[12] Treas. Reg. §53.4960-1(e)(2) and (e)(3).
[13] IRC §4960(c)(3).
[14] Treas. Reg. §53.4960-1(g)(2); Doctor, nurse, nurse practitioner, dentist, veterinarian, or other licensed medical professional.
[15] Id.
