Commencing with the 2027 tax year and beyond, the American Rescue Plan Act (ARPA) doubles, for publicly traded companies, the number of employees that are subject to the annual $1 million deduction limit on compensation per tax code section 162(m). Found in Section 9708 of the ARPA, the new guidelines define that a “covered employee” subject to the 162(m) deduction limits includes:
- The CEO
- The CFO
- The three highest compensated officers of the company
- Plus, the next five highest compensated employees of the company
Included in addition to these ten employees, are any individuals who were covered employees in a previous year. One important distinction is that employees on the list as part of the “next five” do not get carried forward as employees covered in a previous year.
Tracking Covered Employees and the $1 Million Deduction Limitation
Given that publicly traded companies must track each year’s current list of covered employees, they will likely find it necessary to also maintain an additional list of employees who were on the list in previous years and will be carried over onto future lists. In other words, companies must consider both a fixed list of covered employees and additions to the list that may be made each year as roles or compensation changes.
Tracing the Steps that Got Us Here
Historically, IRS Code Section 162(m) defined $1 million as the deduction limit a publicly held organization can take on the compensation paid to its covered employees. When the Tax Cuts and Jobs Act was enacted in 2017, the limitation was expanded from four employees to five as a means to increase tax revenues and offset some of the allowances of the Tax Cuts and Jobs Act.
Most people did not see it coming that the American Rescue Plan Act would include, in what seems to have been a late addition, the add-on of deduction limits for the five-highest paid employees. While the speculation has been tossed around that this add-on will be reviewed in the future and evaluated to see if the burden it places on companies is outweighed by the tax revenue benefits, there is nothing specific to suggest that future reconsideration is in the plans or will even be considered.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any tax advice contained herein is of a general nature. You should seek specific advice from your tax professional before pursuing any idea contemplated herein.
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