IRS plans new rules on excess compensation for tax-exempt groups

The IRS has put hospitals, universities and other tax-exempt employers back on the clock: new section 4960 rules could reshape how they pay executives, structure severance and document retention deals, creating fresh work for KPMG's executive-compensation, employment tax, nonprofit advisory and controversy teams.

Treasury and the IRS issued Notice 2026-36 on June 5 and asked for comments by August 4, 2026. The notice said proposed regulations were coming under section 4960, the excise-tax provision that generally imposes a 21% levy on remuneration above $1 million and on excess parachute payments paid by applicable tax-exempt organizations and related entities. The provision was originally effective for taxable years beginning after December 31, 2017.

The practical issue for clients was not just the tax rate. The One, Big, Beautiful Bill expanded the covered-employee rules, and the IRS said the forthcoming regulations would address the amended definition while also proposing exceptions similar to the existing limited-hours and nonexempt-funds rules. Until further guidance is issued, Notice 2026-36 lets certain pre-existing exceptions continue to apply, giving organizations a short runway to reassess who is covered and how compensation packages are measured.

That is where KPMG's tax practice gets pulled in from multiple angles. Nonprofits, health systems and universities often use shared services, related organizations, deferred compensation and board-approved severance arrangements, so the questions quickly move from a narrow technical reading to compensation modeling, governance documentation and exposure analysis. Boards and compensation committees will need advice on who counts, how pay is measured and whether severance or bonus packages could trigger excise tax liability before the proposed rules arrive. KPMG's own U.S. TaxNewsFlash page listed Notice 2026-36 the same day and repeated the August 4 deadline, underscoring how fast this issue moved from a Treasury notice to a live client advisory item.