As the US Treasury and IRS target tax-exempt executive pay under Section 4960, complex aggregation rules mean related for-profit corporate entities face sudden, pro-rata tax bills. Discover how Notice 2026-36 shifts the risk landscape for corporate liquidity, deferred compensation trusts, and cross-border banking partners.
The regulatory framework governing executive compensation is facing its most dramatic overhaul in nearly a decade.
The US Department of the Treasury and the Internal Revenue Service (IRS) have published Notice 2026-36, indicating their intent to propose extensive new regulations under Internal Revenue Code Section 4960. Driven by provisions within the recently enacted One, Big, Beautiful Bill Act (OBBBA), the upcoming rules will reshape how a 21% excise tax applies to excessive remuneration and excess parachute payments.
For corporate treasury departments, finance directors and their international banking partners, this regulatory shift introduces unexpected financial exposure. While Section 4960 is natively directed at Applicable Tax-Exempt Organisations (ATEOs), such as healthcare networks, universities and large corporate foundations, strict aggregation rules mean that associated for-profit corporate entities are directly in the line of fire.
Under the original parameters established by the 2017 Tax Cuts and Jobs Act, the 21% excise tax was highly targeted. It was limited exclusively to an organisation’s five highest-compensated employees for the tax year, alongside anyone who held covered employee status in any preceding tax year after 2016.
The OBBBA effectively removes this threshold. The definition of a covered employee has been expanded to encompass potentially any current or former employee whose aggregated annual compensation exceeds $1 million, or who triggers an excess parachute payment.
According to Notice 2026-36, the updated framework establishes a two-tiered system for taxable years beginning after 31 December 2025:
The Historical Tier: Individuals employed by an ATEO between 1 January 2017 and 31 December 2025 retain their covered employee status only if they met the top-five criteria under prior law.
The Post-2025 Tier: For any tax year beginning after 31 December 2025, every single employee of an ATEO becomes a covered employee the moment their compensation crosses the $1 million threshold or triggers separation provisions.
“The new law strengthens the accountability of tax-exempt organisations by expanding tax compliance requirements,” stated IRS Chief Executive Officer Frank J. Bisignano. “It broadens the scope of tax from a limited group of executives to potentially any highly compensated employee.”
The core risk for corporate treasury teams operating within diversified conglomerates or multinational structures lies in Section 4960’s Related Organisation and aggregation rules.
If a for-profit corporation controls, is controlled by, or is under common control with an ATEO, the remuneration paid by both entities must be aggregated. If the total compensation across the entire organizational structure exceeds $1 million, the 21% excise tax applies. Liability for the tax is then allocated among the employers pro rata, based on how the remuneration is paid.
A corporate treasury department could find its cash flows unexpectedly disrupted by an excise tax bill stemming from an executive who splits time between a commercial operation and an interconnected non-profit foundation.
This regulatory expansion introduces several critical challenges for corporate banking partners and financial institutions:
Liquidity and Credit Risk Modelling: Treasurers must factor potential pro-rata excise tax liabilities into their cash flow forecasting. Banks evaluating credit facilities or corporate liquidity structures will need to assess whether a corporate borrower has undisclosed exposure through an associated non-profit foundation or pension trust.
Non-Qualified Deferred Compensation (NQDC) and Trust Structuring: Remuneration is treated as paid when it is no longer subject to a substantial risk of forfeiture, which generally means at vesting. Banks managing Rabbi Trusts or administering deferred compensation programs for corporate clients must collaborate with treasury teams to monitor vesting schedules closely, as sudden multi-million dollar payouts could trigger severe tax events and unpredicted cash draws.
Triggering Parachute Payments: The tax also applies to excess parachute payments, defined as separation payments with an aggregate present value equal to or exceeding three times an executive’s base historical compensation. Corporate banks providing specialized advisory services during mergers, acquisitions or corporate restructuring must carefully evaluate executive severance packages to avoid triggering the 21% penalty on the combined entity.
Notice 2026-36 provides some interim stability, allowing organisations to rely on the existing limited hours and nonexempt funds exceptions until formal proposed regulations are issued. Treasury and the IRS anticipate that the forthcoming rules will formally preserve these safe harbors, which protect certain dual-hatted employees and volunteers from triggering the tax unnecessarily.
However, the IRS explicitly intends to eliminate the limited services exception. The regulatory body noted that the original purpose of that exception was to prevent the accidental displacement of a core executive within the top five ranking, a concept that is completely obsolete now that the top-five cap has been removed.
The proposed regulations are not expected to apply to tax years that begin before final regulations are formally issued, giving corporate treasuries a narrow window to adjust their compliance strategies.
Stakeholders and tax professionals have until 4 August 2026 to submit formal comments regarding Notice 2026-36. In the interim, treasury leaders should work alongside tax counsel to audit all entity relationships, map out compensation flows approaching the $1 million mark, and evaluate how these potential tax liabilities interact with existing corporate liquidity facilities.