2025 Tax Law Changes: New Executive Compensation Rules for Nonprofits and Public Companies

Executive Summary

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, introduces significant changes affecting both nonprofit organizations and publicly traded companies. For nonprofits, the 21% excise tax on executive compensation over $1 million has been dramatically expanded from applying to only the top 5 highest-paid employees to all current or former employees earning over $1 million. For public companies, the expansion of Section 162(m) deduction limitations creates new incentives to adopt nonqualified deferred compensation (NQDC) plans as tax-efficient compensation strategies.

How 2025 Executive Compensation Tax Changes Impact Nonprofits

1. Expanded Executive Compensation Excise Tax (IRC §4960)

What Changed:

  • Previous Rule: 21% excise tax applied only to compensation over $1 million for the top 5 highest-compensated employees
  • New Rule: 21% excise tax now applies to all current and former employees earning over $1 million in compensation

Critical Details:

  • The change is retroactive to any employee who was employed during any taxable year beginning after December 31, 2016
  • Organizations must now review compensation for all employees, not just the top 5
  • This significantly broadens the pool of employees subject to the tax
  • The tax applies to the amount of compensation exceeding $1 million

Impact: Organizations with multiple employees earning over $1 million will see substantial increases in their excise tax liability. This particularly affects large nonprofits, hospitals, universities, and foundations with highly compensated executives, medical professionals, or investment managers.

2. Enhanced College and University Endowment Tax (IRC §4968)

What Changed:

  • Student Threshold: Increased from 500 to 3,000 tuition-paying students
  • Tiered Tax Structure: Replaced the flat 1.4% rate with graduated rates based on “student-adjusted endowment” size:
    • 1.4% for endowments of $500,000-$750,000 per student
    • 2.8% for endowments of $750,000-$1,000,000 per student
    • 5.6% for endowments of $1,000,000-$1,250,000 per student
    • 8.4% for endowments exceeding $1,250,000 per student

Impact: While fewer institutions will be subject to the tax due to the higher student threshold, those with large endowments relative to their student body will face significantly higher tax rates.

New Executive Compensation Tax 2025 Opportunities for Public Companies

Section 162(m) Expansion Creates NQDC Opportunities

What Changed

The One Big Beautiful Bill Act expands the scope of Section 162(m), which limits the deductibility of executive compensation for publicly traded companies. Under Section 162(m), compensation over $1 million paid to certain executives is generally not deductible for tax purposes.

The NQDC Opportunity

The expansion of 162(m) limitations makes nonqualified deferred compensation (NQDC) plans increasingly attractive for public companies that don’t currently sponsor them. Here’s why:

  • Tax Deduction Timing: NQDC allows companies to deduct compensation when it’s actually paid (upon distribution), not when earned.
  • 162(m) Mitigation: Deferred amounts may not count against current-year 162(m) limitations.
  • Competitive Advantage: Companies can offer competitive total compensation packages while managing current tax deductions more effectively.

Strategic Implications:

  • Public companies without NQDC plans should evaluate adoption.
  • Existing plans may need restructuring to optimize tax benefits.
  • Enhanced importance of sophisticated plan design and administration.

Executive Compensation Tax 2025: Action Steps for Organization

Immediate Actions

1. Conduct Compensation Review

  • Identify all current and former employees who have earned over $1 million since 2017.
  • Calculate potential additional excise tax liability.
  • Review employment agreements and compensation structures.

2. Update Financial Planning

  • Budget for increased excise tax payments.
  • Consider the impact on cash flow and reserves.
  • Evaluate compensation strategies for highly paid positions.

3. Compliance Assessment

  • Ensure proper reporting and payment of excise taxes.
  • Review internal controls for compensation tracking.
  • Consider engaging tax professionals for complex situations.

Executive Compensation Tax 2025: What Changed Under the New Law

1. Compensation Structure Optimization

Organizations may want to explore alternative compensation arrangements that could help manage excise tax exposure while remaining competitive for top talent:

  • Deferred compensation arrangements
  • Enhanced retirement benefits
  • Performance-based compensation structures
  • Non-cash benefits and perquisites

2. Succession Planning Impact

The expanded excise tax may influence:

  • Executive succession planning decisions
  • Recruitment and retention strategies
  • Organizational structure considerations

Planning Opportunities

For Educational Institutions

  • Review endowment management strategies.
  • Consider the timing of major gifts and bequests.
  • Evaluate spending policies in light of higher potential tax rates.

For Large Nonprofits

  • Assess the total cost of executive compensation including excise taxes.
  • Review compensation committee policies and procedures.
  • Consider the impact on competitive positioning for executive talent.

For Healthcare Organizations

  • Evaluate physician and executive compensation models.
  • Consider the impact on recruitment in competitive markets.
  • Review partnership and employment structures.

Industry-Specific Implications

Healthcare Systems: May face substantial increases in excise tax liability due to highly compensated physicians and executives. Organizations should review both employed physician compensation and executive compensation structures.

Private Universities: Face a dual impact from both the expanded executive compensation tax and potentially higher endowment taxes. Strategic endowment management becomes even more critical.

Large Foundations: Will need to carefully track all employee compensation to ensure compliance with the expanded excise tax requirements.

Cultural Institutions: Museums, performing arts organizations, and similar nonprofits with highly compensated leadership should assess their exposure and plan accordingly.

Looking Ahead

The expanded excise tax represents the current administration’s continued focus on nonprofit executive compensation. Organizations should expect ongoing scrutiny and potential future changes. Key considerations include:

  • Enhanced documentation and reporting requirements
  • Increased importance of compensation committee governance
  • Need for sophisticated tax planning and compliance systems
  • Potential impact on nonprofit sector competitiveness for executive talent

How Executive Benefit Solutions Can Help

At Executive Benefit Solutions (EBS), we specialize in helping both nonprofits and public companies navigate complex compensation and benefits challenges. Our comprehensive services include:

For Nonprofit Organizations:

  • Compliance Assessment: Reviewing your organization’s exposure to the expanded excise tax
  • Strategic Planning: Developing compensation strategies that balance competitive needs with tax efficiency
  • Implementation Support: Helping design and implement compliant benefit programs
  • Ongoing Guidance: Providing continuous support as regulations evolve

For Public Companies:

  • NQDC Plan Design: Creating sophisticated nonqualified deferred compensation plans to address Section 162(m) challenges
  • Plan Implementation: Full-service setup and administration of new NQDC programs
  • Existing Plan Optimization: Reviewing and enhancing current plans for maximum tax efficiency
  • Regulatory Compliance: Ensuring all plans meet Section 409A and other regulatory requirements
  • Executive Education: Training executives and HR teams on plan features and compliance

Integrated Solutions:

  • Cross-Sector Expertise: Unique understanding of both nonprofit and public company compensation challenges
  • Tax-Efficient Design: Strategies that optimize compensation while maintaining compliance
  • Competitive Benchmarking: Market analysis to ensure competitive positioning

The changes introduced by the One Big Beautiful Bill Act require immediate attention and careful planning for both nonprofit and public company leaders. Organizations that act proactively to understand and address these changes will be better positioned to manage their tax exposure while continuing to attract and retain top talent.

For nonprofits, the expanded excise tax necessitates comprehensive compensation reviews and strategic planning. For public companies, the Section 162(m) expansion creates compelling opportunities to implement or enhance NQDC plans.

For more information about how these changes might affect your organization, or to discuss strategic planning opportunities for either nonprofit excise tax compliance or public company NQDC implementation, contact EBS today.

This article is for informational purposes only and does not constitute legal or tax advice. Organizations should consult with qualified tax and legal professionals to understand how these changes apply to their specific situations.

About Executive Benefit Solutions

Executive Benefit Solutions is a leading provider of executive compensation and benefits consulting services to nonprofit organizations and publicly traded companies across the United States. Headquartered in Boston, MA, we serve clients nationwide, helping organizations design, implement, and maintain compliant and competitive benefit programs, including nonqualified deferred compensation plans. Visit us at executivebenefitsolutions.com for more resources and insights.