Executive Compensation Tax Planning for Nonprofit C-Suite Leaders

April 6, 2026

By: Diana Miller

Partner, Assurance

Running a nonprofit organization does not insulate your compensation from tax complexity. If anything, it adds a layer. Unlike for-profit executives, who primarily navigate income tax optimization through wages and equity, nonprofit executives operate under a separate, specifically targeted federal tax framework — one that scrutinizes the size, structure, and documentation of their pay with sometimes more intensity than the IRS applies to a privately held corporation.

Three provisions of the Internal Revenue Code define the tax landscape for nonprofit executive compensation: IRC Section 4958, which imposes excise taxes on excess benefit transactions; IRC Section 4960, which imposes an excise tax on compensation above $1 million at certain tax-exempt organizations; and IRC Sections 457(b) and 457(f), which govern the deferred compensation structures available to nonprofit executives. Understanding how each applies — and how they interact — is the foundation of sound personal tax planning for any nonprofit C-suite leader.

Key Takeaways

IRC Section 4958 imposes a 25% excise tax on “disqualified persons” — including executives, officers, and directors with substantial influence over an organization’s affairs — who receive compensation that exceeds the fair market value of the services they provide. A correction tax of 200% of the excess benefit applies if the transaction is not corrected in a timely manner.
Organizations that follow the rebuttable presumption of reasonableness procedures under the Treasury regulations — independent board approval, use of comparable compensation data, and contemporaneous documentation — shift the burden of proof to the IRS to demonstrate that compensation is excessive.
IRC Section 4960 imposes a 21% excise tax on the portion of a “covered employee’s” remuneration that exceeds $1,000,000 in a taxable year, as well as on excess parachute payments. This tax is paid by the exempt organization, not the executive, but it directly affects the organization’s compensation decisions.
Section 457(b) plans permit elective deferrals of up to $23,500 in 2025 (the same limit as 401(k) plans, indexed for inflation) and provide tax-deferred growth until distribution. Amounts deferred under a 457(b) plan are not subject to income tax until distributed.
Section 457(f) plans allow deferrals beyond the 457(b) limit but require that deferred amounts be subject to a “substantial risk of forfeiture.” Amounts deferred under a 457(f) plan are includable in income when the substantial risk of forfeiture lapses — not when distributed.
Bottom Line: Nonprofit executives who are not actively managing the tax structure of their compensation — including the documentation supporting its reasonableness and the design of any deferred compensation arrangements — are exposed to risks that good planning can substantially reduce.

IRC Section 4958: The Excess Benefit Transaction Rules

Section 4958 applies to public charities and social welfare organizations exempt under IRC Section 501(c)(3) and 501(c)(4). It does not apply to private foundations, which are governed by the self-dealing rules under IRC Section 4941.

A “disqualified person” for purposes of Section 4958 includes any person who was in a position to exercise substantial influence over the affairs of the organization at any time during the five-year period ending on the date of the transaction. This typically includes the CEO, CFO, COO, chief medical officer, and other senior executives with meaningful authority over organizational finances or operations. It also includes family members of disqualified persons and entities more than 35%-controlled by such persons.

An “excess benefit transaction” is any transaction in which an economic benefit is provided by the organization to a disqualified person and the value of the benefit exceeds the value of the consideration received by the organization. For compensation, this means the total compensation paid — including salary, bonuses, deferred compensation, fringe benefits, and any other economic benefits — exceeds the fair market value of the services the executive provides.

The excise tax consequences are significant. The disqualified person pays a 25% excise tax on the excess benefit. If the excess benefit is not corrected — meaning the disqualified person returns the excess amount to the organization, with interest — within the taxable period, an additional 200% excise tax applies. Organization managers who knowingly participate in an excess benefit transaction may also be subject to a separate $20,000 excise tax per transaction.

The practical defense is the rebuttable presumption of reasonableness. An organization that, before paying compensation, obtains approval from an authorized body of independent members of the board or compensation committee, relies on appropriate comparability data — such as compensation surveys from organizations of comparable size, purpose, and geography — and adequately documents the basis for its determination in contemporaneous written records, shifts the burden of proof to the IRS. The IRS must then demonstrate that the compensation was not reasonable. Executives who do not know whether this process was followed at their organization should find out.

IRC Section 4960: The Million-Dollar Excise Tax

IRC Section 4960, enacted as part of the Tax Cuts and Jobs Act of 2017, imposes a 21% excise tax on “applicable tax-exempt organizations” — which includes organizations exempt under IRC Section 501(a), including 501(c)(3) organizations — that pay a “covered employee” remuneration in excess of $1,000,000 in a taxable year, or that pay an “excess parachute payment.”

A “covered employee” is any current or former employee of the organization who is one of the five highest-compensated employees for the current taxable year, or who was a covered employee for any taxable year beginning after December 31, 2016. Once an employee is a covered employee, they remain a covered employee for all future years, even after leaving the organization. This is a permanent designation with no termination mechanism.

“Remuneration” for Section 4960 purposes includes wages subject to federal income tax withholding, as well as amounts deferred under a Section 457(f) plan in the year the substantial risk of forfeiture lapses — not the year of actual deferral. This interaction between Section 4960 and Section 457(f) is one of the most common sources of unexpected excise tax exposure at large nonprofits, because a significant 457(f) vesting event can push an executive over the $1,000,000 threshold even if base salary alone would not.

The 21% excise tax is owed by the organization, not the executive. But the compensation committee sets pay for real human beings who are also trying to attract and retain talent in a competitive market. Organizations near the $1,000,000 threshold for covered employees should model 457(f) vesting schedules and other deferred compensation events prospectively, not reactively, to avoid excise tax liability that reduces the mission impact of every dollar spent on compensation.

Section 457(b) and 457(f): Deferred Compensation in the Nonprofit Context

Nonprofit executives do not have access to the nonqualified deferred compensation arrangements commonly used in for-profit settings — such as rabbi trusts funded with corporate assets — without triggering immediate income inclusion under IRC Section 457(f). The rules for nonprofits are more restrictive, and the available structures are fewer.

Section 457(b) plans are the most straightforward option. An eligible deferred compensation plan under Section 457(b) permits an executive to elect to defer up to $23,500 of compensation in 2025, with a catch-up contribution of up to $7,500 for participants age 50 or older, and a special three-year catch-up provision available in the three years before normal retirement age that permits deferrals of up to twice the annual limit. Amounts deferred are not included in the executive’s income until the year of distribution. For tax-exempt organizations, the plan must be unfunded — meaning the assets remain part of the organization’s general assets and are subject to the claims of general creditors — for the tax deferral to apply.

Section 457(f) plans allow deferrals beyond the 457(b) limits, but the mechanics are categorically different and the tax consequences are more complex. Under Section 457(f), deferred amounts are includable in the executive’s gross income when they are no longer subject to a substantial risk of forfeiture — regardless of whether the executive has actually received the funds. A substantial risk of forfeiture requires that the executive’s right to the deferred amount be conditioned upon the future performance of substantial services or upon the occurrence of a condition related to a purpose of the compensation.

Critically, a covenant not to compete generally does not constitute a substantial risk of forfeiture for Section 457(f) purposes under Treasury Regulation Section 1.457-4(c)(3), unless the IRS is satisfied that the possibility of forfeiture is genuine and not illusory. This is an area where the regulatory framework is precise and the consequences of getting it wrong — immediate income inclusion on the full deferred amount, plus potential Section 4960 exposure if the vesting event pushes remuneration above $1,000,000 — are material.

What Nonprofit Executives Should Be Doing Now

The executives most exposed to these rules are typically those who have been with an organization long enough to accumulate deferred compensation balances, those approaching an organizational transition that might trigger parachute payment analysis under Section 4960, and those at organizations that have not revisited their compensation documentation since the compensation committee last set pay several years ago.

Three concrete steps apply broadly. First, confirm that your organization has followed the rebuttable presumption procedures under Section 4958 for your most recent compensation review — specifically, that independent approval was obtained, comparable data was consulted, and contemporaneous documentation exists. Second, if you participate in a Section 457(f) plan, obtain a clear accounting of when substantial risks of forfeiture are scheduled to lapse and model whether any vesting events will intersect with the Section 4960 threshold for covered employees. Third, if your base compensation is approaching or exceeds $1,000,000, discuss with your organization’s tax advisor whether the structure of total compensation — timing of bonus payments, 457(b) vs. 457(f) allocation, and benefit characterization — can be optimized without creating excess benefit exposure under Section 4958.

These are not abstract planning exercises. They have direct, quantifiable consequences for the executives involved and for the organizations that employ them.

Wiss’s nonprofit tax advisory team advises tax-exempt organizations and their executive leadership on compensation structures, deferred compensation plan design, excess benefit transaction compliance, and the interaction between Section 4960 and 457(f) vesting schedules. If your compensation arrangement has not been reviewed in the context of current law, contact our team to schedule a planning consultation.

This article is general in nature and reflects the law as currently in effect. It does not constitute legal or tax advice for any specific individual or organization. Consult your Wiss advisor regarding your particular circumstances.