IRC 4960 Excise Tax on Excess Executive Compensation at Tax-Exempt Organizations: OBBBA Expansion, Notice 2026-36, and Form 4720

IRC 4960 was a targeted excise on a narrow class of executives when it was enacted in 2017. The OBBBA's expansion of the covered employee definition transforms it into a broadly applicable levy on tax-exempt employers -- hospital systems, universities, large foundations, and any organization with a substantial cohort of highly paid employees. This guide is written for enrolled agents, CPAs, and tax attorneys who need a citation-anchored reference for the core rule, the OBBBA expansion, Notice 2026-36, the remuneration definitions, the parachute payment calculation, and Form 4720 compliance obligations.

All statutory citations, regulatory guidance references, and descriptions of OBBBA provisions must be verified against the current text of the Internal Revenue Code, Notice 2026-36, and any IRS guidance issued at IRS.gov before being relied on in any specific client matter. The OBBBA is recently enacted; proposed regulations under IRC 4960 are expected; and no description of OBBBA-modified provisions here should be treated as settled without that verification. This guide is for informational purposes only and does not constitute legal or tax advice.

Section 1: Background -- What IRC 4960 Is and Why It Exists

IRC 4960 was enacted as part of the Tax Cuts and Jobs Act of 2017 (TCJA), effective for taxable years beginning after December 31, 2017. Congress enacted IRC 4960 in direct response to public and legislative concern about rapidly rising executive compensation at tax-exempt organizations -- particularly at hospital systems, major universities, and large foundations -- where compensation was unconstrained by the competitive pressure on share price or the deduction limit that applies to publicly held corporations under IRC 162(m).

Tax-exempt organizations are generally not subject to federal income tax, and they generally have no taxable income against which a deduction limit would operate. The mechanism Congress chose to parallel IRC 162(m) for tax-exempt organizations was an excise tax on the organization rather than a deduction disallowance. Under IRC 4960(a), the excise tax falls on the applicable tax-exempt organization, not on the covered employee -- the organization pays it as an additional cost on top of the covered employee's compensation. Confirm the current excise tax rate and mechanism at IRC 4960(a) and IRS.gov.

For the publicly held corporation analog, see our guide on IRC 162(m): Executive Compensation Deduction Limit and OBBBA Expansion. The two provisions are parallel in purpose but operate through different mechanisms and cover different types of organizations.

The TCJA-Era Scope: A Narrow Set of Top-Five Executives

Under the TCJA-era rule, IRC 4960 applied only to the five highest-compensated employees of the tax-exempt organization in any given year. Once an employee was designated a covered employee in any year, the employee remained a covered employee for all future years, even after departure from the organization. In practice, this meant that TCJA-era IRC 4960 affected a relatively limited population -- the top five executives at any organization, plus former executives who had crossed the covered employee threshold in a prior year and continued to receive deferred compensation.

Organizations that were otherwise affected (because their top executives crossed the $1 million remuneration threshold) had some ability to manage their exposure through executive compensation structuring: identifying the covered employees, monitoring remuneration levels, and coordinating the timing of IRC 457(f) vesting events with overall compensation planning. The population of covered employees was predictable and bounded.

The OBBBA Expansion: A Structural Shift

The OBBBA (signed July 4, 2025) fundamentally changed this structure. Effective for taxable years beginning after December 31, 2025, the OBBBA expanded the definition of covered employee to include any employee whose remuneration from the organization and related organizations exceeds $1 million. Hedge this effective date and the $1 million threshold to IRC 4960(c)(2) as amended by the OBBBA, Notice 2026-36, and IRS.gov.

For large hospital systems with hundreds of employed physicians, large research universities with highly compensated athletics coaches, endowment investment professionals, and senior academic administrators, and large foundations with high-earning portfolio managers and executives, the OBBBA expansion means that the pool of covered employees subject to IRC 4960 may be substantially larger than under the TCJA-era top-five rule. Hedge the specific impact for any sector or organization to IRC 4960 as amended by the OBBBA, Notice 2026-36, and IRS.gov; do not rely on any projected number of covered employees for a specific organization without applying the current statutory rules to that organization's specific facts.

Section 2: Who Is Subject -- Applicable Tax-Exempt Organizations

IRC 4960(c)(1) defines "applicable tax-exempt organization" as the class of entities subject to the excise tax. Confirm the full scope of the definition at IRC 4960(c)(1) and IRS.gov; the OBBBA may have modified the scope of covered organizations and any modification must be verified against the enacted statute and Notice 2026-36.

Organizations Covered Under IRC 4960(c)(1)

Under IRC 4960(c)(1), applicable tax-exempt organizations include:

• Organizations exempt from tax under IRC 501(a). This includes the full range of tax-exempt organizations that have received recognition under Subchapter F: IRC 501(c)(3) public charities, hospitals, universities and other educational institutions, community foundations and private foundations, and the many other categories exempt under IRC 501(c).
• Farmers' cooperatives under IRC 521. Agricultural cooperatives exempt from tax under IRC 521 are included in the applicable tax-exempt organization definition even though they are organized as cooperatives rather than as charities or associations.
• Political organizations under IRC 527. Political committees and other organizations exempt from tax under IRC 527 are subject to IRC 4960 if they pay excess remuneration or excess parachute payments to covered employees.
• Certain governmental entities. Certain governmental entities are included in the IRC 4960(c)(1) definition. Confirm the specific scope of governmental entity coverage at IRC 4960(c)(1) and IRS.gov.

Common examples of applicable tax-exempt organizations immediately affected by the OBBBA expansion include large hospital systems and academic medical centers, private and public universities, large national and community foundations, credit unions, professional associations, and large charitable organizations with substantial operating budgets and high executive and professional compensation. Hedge the full scope of covered organizations and whether any specific organization is an applicable tax-exempt organization to IRC 4960(c)(1) as amended and IRS.gov.

Section 3: Who Is a "Covered Employee" After the OBBBA

The definition of "covered employee" under IRC 4960(c)(2) is the provision most dramatically changed by the OBBBA. Understanding both the pre-OBBBA rule and the post-OBBBA expansion is essential for any practitioner advising an applicable tax-exempt organization, because (a) the pre-OBBBA rule still applies to taxable years beginning on or before December 31, 2025, and (b) the "once a covered employee, always a covered employee" carry-forward rule means that employees designated as covered employees under the old rule will carry that status forward under the new regime. Hedge the specific mechanics of the transition and the carry-forward rule to IRC 4960(c)(2) as amended, Notice 2026-36, and IRS.gov.

Pre-OBBBA Rule: Top-Five Covered Employees

Under the TCJA-era IRC 4960(c)(2), a covered employee was any employee who was one of the five highest-compensated employees of the applicable tax-exempt organization for the taxable year, or who had been a covered employee of the organization (or any predecessor) for any prior taxable year beginning after December 31, 2016. The "once a covered employee, always a covered employee" rule meant that an executive who was in the top five in 2019 and retired in 2021 remained a covered employee through all subsequent years, including years in which deferred compensation continued to be paid after departure.

Under the pre-OBBBA rule, only the top-five employees mattered for new covered employee designations each year. Once an organization identified its five highest-compensated employees, its compliance analysis for covered employee purposes was largely complete for that year, subject to monitoring any employees approaching the threshold who might move into the top-five group. Hedge the specific mechanics of the pre-OBBBA top-five rule to IRC 4960(c)(2) as in effect before the OBBBA and IRS.gov.

Post-OBBBA Rule: The $1 Million Threshold Expansion

Under the OBBBA expansion (effective for taxable years beginning after December 31, 2025, as provided in the OBBBA as enacted), any employee whose remuneration from the organization and its related organizations for the calendar year ending in the organization's taxable year exceeds $1 million is a covered employee. The expansion removes the cap on the number of covered employees: there is no longer a "top-five" ceiling. Every employee who crosses the $1 million remuneration threshold from all related-entity sources is a covered employee for that year.

Hedge the $1 million threshold, the effective date, and all specific mechanics of the expanded definition to IRC 4960(c)(2) as amended by the OBBBA, Notice 2026-36, and IRS.gov. Do not apply the expanded definition to any specific client situation without verifying against the current statutory text, Notice 2026-36, and any subsequent IRS guidance.

Practical Impact: Who Gets Captured

The practical effect of the OBBBA expansion on applicable tax-exempt organizations with large, highly compensated professional workforces is significant. Categories of employees who may become covered employees under the expanded rule (subject to IRC 4960(c)(2) as amended and Notice 2026-36) include:

• Physicians and physician executives at hospital systems. Large academic medical centers and hospital systems may employ physician specialists, department chairs, and physician executives whose total compensation from base salary, productivity bonuses, call pay, administrative stipends, and other sources regularly exceeds $1 million.
• Head coaches and athletics staff at universities. Major university athletic programs employ head football and basketball coaches and other senior athletics staff at compensation levels that frequently exceed $1 million when total remuneration is aggregated across base salary, media, shoe and apparel contracts (if paid through or guaranteed by the university), and performance bonuses.
• Investment professionals at endowment and foundation offices. Large university endowments and private foundations employ investment officers, portfolio managers, and chief investment officers at compensation levels that may exceed $1 million, particularly where performance-based compensation supplements base salary.
• Senior executives at large associations and nonprofits. Presidents, CEOs, COOs, and other senior executives of large national associations and nonprofits may now all be covered employees rather than only those in the top five.

Hedge all of the above categories and specific compensation figures to IRC 4960(c)(2) as amended by the OBBBA, Notice 2026-36, and IRS.gov. The specific analysis for any organization requires applying the current statutory rules, including the related organization aggregation rules in IRC 4960(c)(4), to that organization's specific facts.

Section 4: What Counts as "Remuneration"

The definition of "remuneration" under IRC 4960(c)(3) determines both whether an employee crosses the covered employee threshold and how much excess remuneration triggers the excise tax. The definition is not identical to total compensation for employment purposes; it includes specific categories and excludes others. Hedge all inclusions and exclusions to IRC 4960(c)(3), existing IRS guidance including Notice 2019-9, Notice 2026-36, and IRS.gov.

What Is Included as Remuneration

Under IRC 4960(c)(3), "remuneration" generally means:

• Wages as defined in IRC 3401(a). This is the same definition of wages used for income tax withholding purposes: it includes salary, bonus, commissions, and most other forms of current compensation paid to an employee. Confirm the current scope of IRC 3401(a) wages at IRS.gov.
• Amounts required to be included in gross income under IRC 457(f). When deferred compensation held under an ineligible IRC 457(f) plan vests (i.e., when the substantial risk of forfeiture lapses), the vested amount becomes includible in gross income under IRC 457(f)(a) and is included in remuneration for IRC 4960 purposes in the year of vesting. Hedge this inclusion to IRC 4960(c)(3) and IRS.gov.

What Is NOT Remuneration

Under IRC 4960(c)(3) and existing IRS guidance, amounts that are generally not included in remuneration include the following. Hedge each exclusion to IRC 4960(c)(3), Notice 2019-9, Notice 2026-36, and IRS.gov:

• Qualified plan distributions. Distributions from qualified retirement plans (IRC 401(a) plans, including 403(b) plans at tax-exempt organizations) are not remuneration for IRC 4960 purposes. Deferrals into a qualified plan also do not count as current remuneration in the deferral year.
• IRC 457(b) eligible plan deferrals. Amounts deferred into an eligible IRC 457(b) plan (the governmental and tax-exempt organization counterpart to the 401(k) for qualified-plan-eligible employees) are not remuneration in the year of deferral. Distributions from a 457(b) plan are subject to tax when paid, but whether they count as remuneration for IRC 4960 purposes requires verification against IRC 4960(c)(3) and IRS.gov. Do not assume 457(b) distributions are excluded without that verification.
• Bona fide expense reimbursements. Amounts reimbursed to employees for legitimate business expenses are generally not wages under IRC 3401(a) and are generally not remuneration. Hedge this exclusion to IRC 3401(a), IRC 4960(c)(3), and IRS.gov.
• Certain medical and fringe benefits. Employer-provided medical benefits and other qualified fringe benefits excluded from wages under IRC 3401(a) are generally not remuneration. Confirm the specific fringe benefit exclusions with reference to IRC 4960(c)(3) and IRS.gov.

The IRC 457(f) Vesting Trap

The most significant planning complexity in the remuneration definition is the treatment of IRC 457(f) ineligible deferred compensation. Tax-exempt organizations commonly use IRC 457(f) plans to provide supplemental deferred compensation to highly paid executives, because ERISA-covered qualified plans cap benefit accruals. Under IRC 457(f), the deferred amount is subject to a substantial risk of forfeiture (commonly a continued-service requirement). When the risk of forfeiture lapses (the vesting date), the entire vested amount becomes includible in the executive's gross income -- and, under IRC 4960(c)(3), becomes remuneration for IRC 4960 purposes in that year.

For executives who are already receiving more than $1 million in W-2 wages, a 457(f) vesting event in the same year pushes total remuneration further above the threshold, increasing the excess remuneration subject to the 21% excise tax. For executives who are below $1 million in W-2 wages, a large 457(f) vesting event can push them over the $1 million threshold, both creating a new covered employee designation and triggering excise tax on the excess in the vesting year.

Practitioners advising tax-exempt organizations on executive compensation should coordinate 457(f) vesting schedules with IRC 4960 remuneration monitoring. If a 457(f) vesting event is scheduled in a year in which the executive's W-2 wages are already near $1 million, restructuring the vesting timeline (to the extent consistent with the substantial risk of forfeiture rules) may reduce or eliminate the IRC 4960 excise tax exposure for that year. Hedge all 457(f) vesting mechanics and their IRC 4960 consequences to IRC 4960(c)(3), IRC 457(f), Notice 2019-9, Notice 2026-36, and IRS.gov.

For the comparison between IRC 457(f) for tax-exempt organizations and IRC 409A for for-profit entities, see our guide on Section 409A: Nonqualified Deferred Compensation Deferral Elections and Distribution Events. IRC 409A governs nonqualified deferred compensation at for-profit (and certain other) employers; IRC 457(f) governs ineligible deferred compensation at tax-exempt organizations. They are parallel but distinct regimes, and the interaction between the two can be a trap for executives who work at both for-profit and tax-exempt entities during a career.

Section 5: Excess Remuneration -- Calculation and Related Organization Aggregation

Once covered employees are identified and remuneration is determined, the excess remuneration calculation under IRC 4960(a)(1) is mechanically straightforward: total remuneration from all related organizations minus $1 million equals excess remuneration, and excess remuneration multiplied by the IRC 4960 excise tax rate equals the excise tax due. But the related organization aggregation rules in IRC 4960(c)(4) add operational complexity for any organization operating as part of a larger system. Hedge all computation mechanics to IRC 4960(a)(1), IRC 4960(c)(4), Notice 2026-36, and IRS.gov.

The Basic Excess Remuneration Formula

Under IRC 4960(a)(1), the excise tax applies to "excess remuneration," which is the remuneration paid to a covered employee for the taxable year (from the organization and all related organizations) that exceeds $1 million. Confirm the current $1 million threshold and whether the OBBBA modified it at IRC 4960(a)(1) as amended and IRS.gov.

The resulting excise tax is: total remuneration from all related organizations, minus $1 million, multiplied by the excise tax rate specified in IRC 4960(a) (which is 21% as of the enactment of the TCJA; confirm the current rate at IRC 4960(a) and IRS.gov, including whether the OBBBA modified the rate).

Related Organization Aggregation: IRC 4960(c)(4)

Under IRC 4960(c)(4), remuneration paid to an employee by two or more related organizations is aggregated for both the covered employee determination and the excess remuneration calculation. The definition of "related organization" is set out in IRC 4960(c)(4); it generally includes entities that share common control, ownership, or affiliation relationships such as controlled groups, affiliated service groups, and entities treated as related under the applicable tax rules. Confirm the full definition of related organization and its application to your client's specific organizational structure at IRC 4960(c)(4) and IRS.gov.

Once total remuneration is aggregated across all related organizations, each related organization that paid the employee bears its proportionate share of the excise tax. The apportionment is based on each organization's proportionate share of total remuneration paid to the covered employee. The related organizations are jointly and severally liable for the excise tax. Hedge the joint and several liability rule and the apportionment mechanism to IRC 4960(c)(4) and IRS.gov; Notice 2026-36 may address the aggregation rules in the context of the OBBBA expansion.

Operational Complexity for Large Systems

Large hospital systems and university systems often include dozens of related entities -- each a separate legal employer -- that employ the same pool of physicians, executives, and administrators across multiple entities. Under the related organization aggregation rules, the IRC 4960 analysis requires combining remuneration data across all entities in the related organization group, not just from the parent organization. This requires data coordination across payroll systems, compensation databases, and entity structures that were not necessarily designed with IRC 4960 aggregation in mind.

For organizations with related payroll and employment arrangements, confirm the FICA and employment tax treatment of multi-employer arrangements with reference to our guide on Employment Tax and Worker Classification: IRC 3121, Section 530 Relief, and IRC 3509. Proper worker classification and employment tax reporting are necessary inputs to the IRC 4960 remuneration calculation; errors in W-2 reporting at one entity in the related group can produce errors in the aggregated remuneration figure.

Section 6: Excess Parachute Payments -- The Separation-Pay Trigger

IRC 4960 imposes the excise tax on two separate triggers: excess remuneration (Section 5 above) and excess parachute payments. Under IRC 4960(a)(2), the excise tax applies separately to any excess parachute payment paid to a covered employee. This is a separate calculation from the excess remuneration calculation; both can apply in the same year. Hedge all parachute payment mechanics to IRC 4960(a)(2), Notice 2019-9, Notice 2026-36, and IRS.gov.

How the Excess Parachute Payment Calculation Works

Under IRC 4960(a)(2), an "excess parachute payment" is the amount by which the aggregate present value of "parachute payments" to a covered employee exceeds three times the covered employee's "base amount." The base amount is generally the covered employee's average annualized includible compensation from the applicable tax-exempt organization (and related organizations) for the five calendar years ending before the taxable year in which the separation occurs. The excess parachute payment is the amount over the three-times-base-amount threshold. Confirm the specific definitions of parachute payment, base amount, and the computation mechanics at IRC 4960(a)(2) and IRS.gov; the IRS issued Notice 2019-9 with prior guidance on these computations.

In summary form, the calculation structure is: (1) compute the aggregate present value of all parachute payments to the covered employee; (2) compute the base amount (five-year average annualized compensation); (3) compare the aggregate present value of parachute payments to three times the base amount; (4) if the aggregate present value exceeds the three-times threshold, the excess is an excess parachute payment subject to the 21% excise tax. The excise tax applies to the excess parachute payment itself, not to the full parachute amount. Hedge all aspects of this computation to IRC 4960(a)(2), Notice 2019-9, Notice 2026-36, and IRS.gov.

IRC 4960 vs. IRC 280G: The Parallel Structures

The excess parachute payment rules under IRC 4960 borrow conceptual structure from the "golden parachute" rules in IRC 280G, which apply to payments made in connection with a change in control to "disqualified individuals" of public companies and certain other organizations. Under IRC 280G, payments exceeding the applicable multiple of base amount are not deductible by the corporation, and the recipient is subject to a 20% excise tax under IRC 4999.

IRC 4960 adapts these concepts for tax-exempt organizations: tax-exempt organizations are not subject to the IRC 280G deduction disallowance (they generally have no taxable income and therefore no deduction to lose), and IRC 4999 does not impose an excise tax on the covered employee receiving an excess parachute payment from a tax-exempt organization in the same manner as it does from a corporation subject to IRC 280G. Instead, IRC 4960(a)(2) imposes the excise tax on the applicable tax-exempt organization itself. Hedge all IRC 280G vs. IRC 4960 distinctions and the specific application to any transaction to IRC 4960(a)(2), IRC 280G, Notice 2019-9, Notice 2026-36, and IRS.gov.

Common Trigger Scenarios

The most common scenarios that trigger the excess parachute payment calculation at tax-exempt organizations include:

• Hospital system mergers and acquisitions. When a large hospital system acquires or merges with another nonprofit hospital or health system, departing senior executives may receive severance, accelerated vesting of deferred compensation, and other separation payments that in the aggregate trigger the parachute payment calculation. Hedge all transaction-specific analysis to IRC 4960(a)(2) and IRS.gov.
• University president departures. University president terminations and departures, particularly in connection with restructuring or governance changes, often involve separation pay packages that practitioners must analyze under IRC 4960(a)(2). Hedge to IRC 4960(a)(2) and IRS.gov.
• Change-in-control provisions in executive agreements. Employment agreements for tax-exempt organization executives frequently include change-in-control protections that provide for enhanced severance if the executive departs following a significant restructuring or loss of board control. These provisions must be analyzed under IRC 4960(a)(2) before any triggering transaction closes. Hedge to IRC 4960(a)(2), Notice 2019-9, and IRS.gov.

Section 7: Notice 2026-36 -- Key Developments and Immediate Compliance Steps

IRS Notice 2026-36, issued June 5, 2026, provides the first and only IRS guidance on the IRC 4960 OBBBA expansion. All specifics of Notice 2026-36 are hedged to the full text of the Notice and IRS.gov. This section describes the guidance's general role and the immediate compliance steps practitioners should take; it does not restate, summarize, or rely on specific provisions of Notice 2026-36 without the hedge, because the Notice is interim guidance and subject to change when proposed regulations are issued.

What Notice 2026-36 Addresses

Notice 2026-36 provides preliminary IRS guidance on the implementation of the OBBBA's IRC 4960 expansion. Practitioners must read Notice 2026-36 in full before advising any client on any OBBBA-modified provision of IRC 4960. Hedge all Notice 2026-36 specifics, including any transition relief, safe harbors, computation guidance, or interpretation of the expanded covered employee definition, to the full text of Notice 2026-36 and IRS.gov. The Notice is interim guidance only; proposed regulations under the OBBBA expansion are expected, and positions taken in reliance on the Notice may need to be revisited when final regulations are issued.

What Is Still Uncertain

As of the date of this guide, proposed regulations under the OBBBA's IRC 4960 expansion have not been issued. Practitioners should be aware that:

• Specific computation rules for the expanded covered employee definition, including how the calendar-year remuneration figure is determined for organizations with non-calendar fiscal years, may not yet be definitively resolved by Notice 2026-36 alone.
• The interaction of the OBBBA expanded definition with the pre-OBBBA "once a covered employee, always a covered employee" carry-forward rule may require further regulatory guidance to apply clearly.
• The aggregation mechanics for the expanded covered employee definition, including how related organization remuneration is attributed for organizations with complex multi-entity structures, may be addressed in proposed regulations beyond what is covered in Notice 2026-36.
• Whether any OBBBA modification affects the definition of "applicable tax-exempt organization" in IRC 4960(c)(1) or the excess parachute payment rules in IRC 4960(a)(2) should be confirmed at IRC 4960 as amended, Notice 2026-36, and IRS.gov.

Immediate Compliance Steps for Practitioners

For applicable tax-exempt organizations with taxable years beginning after December 31, 2025, the OBBBA expansion is already in effect. Practitioners should work with their clients to take the following steps, subject to verification against Notice 2026-36 and IRS.gov:

1. Read Notice 2026-36 in full. Notice 2026-36 is the only current IRS guidance on the OBBBA expansion. No advisory work on the OBBBA-modified IRC 4960 should proceed without a thorough reading of the Notice and verification at IRS.gov for any subsequent developments.
2. Identify all employees with potential remuneration above $1 million. Pull compensation data from all related organizations in the related organization group for all employees. Identify every employee whose W-2 wages and other IRC 3401(a) amounts from all related organizations are approaching or exceeding $1 million for the current year. Do not limit this exercise to the prior year's top-five covered employees; the OBBBA expansion applies to any employee above the $1 million threshold.
3. Identify IRC 457(f) vesting events for the current year. Any 457(f) plan vesting events scheduled for the current taxable year will add to remuneration in the vesting year. Practitioners should coordinate with plan administrators to identify all 457(f) vestings and model their impact on covered employee status and excess remuneration for the year.
4. Review employment agreements for covered employee analysis. Employment agreements for senior executives and highly compensated employees should be reviewed to identify all compensation elements that may constitute IRC 3401(a) wages or IRC 457(f) includible amounts for the current year. Related-organization compensation paid to employees under joint employment or loan-out arrangements requires particular attention.
5. Model the excise tax exposure and Form 4720 obligation. For each covered employee, compute the excess remuneration (total remuneration minus $1 million), apply the excise tax rate (confirm at IRC 4960(a) and IRS.gov), and apportion the resulting tax among related organizations. This modeling exercise is necessary both for current-year compliance planning and for assessing whether the organization has sufficient funds to pay the Form 4720 excise tax by the due date.
6. Coordinate with executive compensation counsel on 457(f) vesting management. If a 457(f) vesting event in the current year will cause excess remuneration (or increase it), coordinate with executive compensation counsel on whether the vesting schedule can be restructured consistent with the substantial risk of forfeiture requirements of IRC 457(f) and the applicable plan terms. Changes to 457(f) plans require careful analysis under both IRC 457(f) and IRC 409A (which may have limited applicability to tax-exempt organization plans; confirm at IRS.gov). Do not modify 457(f) vesting schedules without reviewing the interaction with both the IRC 457(f) vesting rules and any IRC 409A-applicable provisions.

Section 8: Form 4720 -- Reporting and Payment

Applicable tax-exempt organizations that owe the IRC 4960 excise tax must report and pay it on Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42. The organization files Form 4720, not the covered employee. The covered employee does not have a separate IRC 4960 filing or payment obligation (the excise tax is on the organization). Hedge all Form 4720 filing requirements, due dates, and any available extensions to the current Form 4720 instructions and IRS.gov.

What to Report on Form 4720

Form 4720 requires the organization to separately compute and report:

• Excess remuneration excise tax (IRC 4960(a)(1)). Report the excess remuneration for each covered employee and the corresponding 21% excise tax (confirm the current rate at IRC 4960(a) and IRS.gov). If remuneration is aggregated from related organizations, report the organization's apportioned share.
• Excess parachute payment excise tax (IRC 4960(a)(2)). If the organization made payments that qualify as excess parachute payments to covered employees, report those amounts and the corresponding 21% excise tax separately from the excess remuneration calculation. Confirm the specific Form 4720 reporting requirements at the current Form 4720 instructions and IRS.gov.

Due Date and Extensions

Form 4720 is generally due by the 15th day of the fifth month after the close of the organization's taxable year. For a calendar-year organization, this is typically May 15 of the following year. Confirm the current due date and any available automatic extension at the Form 4720 instructions and IRS.gov; the deadline and any extension rules may have changed. Organizations that file Form 990 on extension should separately track the Form 4720 due date, because the IRC 4960 excise tax payment obligation arises independently of the Form 990 annual information return filing.

Related Organization Filing

If a covered employee is paid by multiple related organizations and remuneration is aggregated under IRC 4960(c)(4), each related organization that is an applicable tax-exempt organization must file Form 4720 and report its proportionate share of the excise tax on that employee's excess remuneration. The joint and several liability rule means that the IRS can collect the full excise tax from any one of the related organizations; the filing and apportionment obligations apply to each. Hedge the specific related-organization filing obligations to the Form 4720 instructions, IRC 4960(c)(4), Notice 2026-36, and IRS.gov.

Frequently Asked Questions: IRC 4960 Excise Tax

Related Guides

• IRC 162(m): Executive Compensation Deduction Limit and OBBBA Expansion -- IRC 162(m) is the publicly-held corporation analog to IRC 4960: it disallows the deduction for compensation over $1 million paid to covered employees of publicly held C corporations. IRC 4960 is the tax-exempt organization parallel: it does not limit deductibility (tax-exempt organizations generally have no taxable income and no deduction to lose) but instead imposes a 21% excise tax on the organization. Practitioners advising clients that include both publicly held entities and tax-exempt affiliates within a common enterprise may need to analyze both provisions.
• Section 409A: Nonqualified Deferred Compensation Deferral Elections and Distribution Events -- IRC 409A governs nonqualified deferred compensation plans at for-profit and certain other employers. IRC 457(f) governs ineligible deferred compensation at tax-exempt organizations. The two regimes are parallel but distinct, and understanding both is necessary for advising executives who move between for-profit and tax-exempt employment. IRC 457(f) vesting events directly affect the IRC 4960 remuneration calculation.
• Employment Tax and Worker Classification: IRC 3121, Section 530 Relief, and IRC 3509 -- FICA and employment tax reporting accuracy is a prerequisite for IRC 4960 compliance. The remuneration calculation under IRC 4960(c)(3) depends on correct W-2 reporting of IRC 3401(a) wages across all related organizations. Worker classification errors at any entity in a related organization group can produce errors in the aggregated remuneration figure used for covered employee determination and excess remuneration computation.
• IRC 511/512 UBIT -- UBIT and executive compensation excise tax under IRC 4960 -- dual compliance obligations for exempt organizations with highly compensated employees and business income.
• IRC 4940 Private Foundation Excise Tax -- IRC 4940 excise tax on net investment income runs concurrently with the IRC 4960 executive compensation excise tax for private foundations with highly compensated employees.
• IRC 4945 Taxable Expenditures -- Foundation grant programs and compensation arrangements that could simultaneously trigger IRC 4945 taxable-expenditure taxes and IRC 4960 executive compensation excise taxes.