Expansion of Excise Tax on Excess Compensation

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Christopher Jones

The One Big Beautiful Bill (OBBB), signed into law on July 4, 2025, expands the application of the 21% excise tax on excess compensation paid by tax-exempt organizations on:

  • Remuneration paid to a covered employee greater than $1 million (including amounts that vest under a 457(f) plan); and
  • Any excess parachute payment to a covered employee (even if less than $1 million).

The Original Language

As originally enacted, “covered employees” who were considered for purposes of the excise tax included:
  • The 5 highest-compensated executives of the tax-exempt organization for the taxable year; and
  • Any employee who was a covered employee for any taxable year beginning after December 31, 2016. Under this provision, if an employee became a covered employee at any time after December 31, 2016, the employee will always be a covered employee, and the $1 million threshold applies to remuneration paid after separation from service.

The Expansion

Effective for tax years after December 31, 2025, the OBBB expands the definition of “covered employee” to include any employee or former employee of the tax-exempt organization or of a predecessor organization.  In other words, an employee will be a covered employee even if he/she is not within the top 5 highest-paid group.
 
As in the case of the original enactment, the expanded excise tax does not provide for any grandfathering of benefits under agreements that were in effect before January 1, 2026. Thus, a tax-exempt organization will have to pay an excise tax on benefits greater than $1 million paid to a covered employee who is not within the top-5 highest-paid group under a 457(f) plan that vests after December 31, 2025, even if that plan was in effect before January 1, 2026.

Federal Credit Unions

Based on IRS regulations, it does not appear that the excise tax currently applies to a federal credit union that is exempt from tax as a “federal instrumentality,” but the IRS has requested comments on this issue and that position is subject to change.

Suggestions

For credit unions seeking to provide competitive executive benefits while taking the possible excise tax impact of the OBBB into account, Collateral Assignment Split Dollar Supplemental Executive Retirement Plans (CASD SERPs) offer a compelling alternative to traditional 457(f) plans. Unlike a 457(f) plan, which is an expense to the credit union and triggers a lump-sum taxable event to the executive at the time of vesting, a CASD SERP is a loan, and retirement benefits function similarly to a home equity line of credit. A CASD SERP plan allows executives to access tax-favorable retirement benefits through life insurance policy distributions. From the credit union’s perspective, the arrangement is treated as a recoverable, interest-bearing loan rather than compensation, preserving long-term balance sheet strength and avoiding the excise tax exposure now extended to a broader group of covered employees under the OBBB. In this new environment, the strategic and tax-efficient design of CASD SERPs becomes a practical substitute to be considered by credit union boards and leadership.

If you are interested in learning more about split-dollar SERPs, please contact us. We are ready to dive in further and share more information about this topic.

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About the Author

Chris J. Jones, CLU®, ChFC®

Partner & Senior Benefits Consultant

cjones@parcstreetpartners.com

Known for his analytical mindset and mathematical precision, Chris works closely with credit unions to design Supplemental Executive Retirement Plans (SERPs) that are not only durable and compliant but also grounded in data that supports long-term performance. With more than three decades in financial services, he has built a reputation for ensuring that every plan rests on solid numbers and delivers on its promise to executives and boards.

Since 2014, Chris and his team have implemented more than 200 split-dollar SERPs for credit unions and nonprofits, each one on track or exceeding its original performance projections.

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