American Rescue Plan Act Expands Employees Covered by 162(m) Deduction Limit

May 17, 2021
Hall Benefits Law, LLC

Section 162(m) of the Internal Revenue Code focuses on publicly held corporations and deductions for compensation paid to covered employees. This section does not allow these corporations to deduct compensation that exceeds $1 million per year. 

Under current law, covered employees include:

  • Anyone who served as the principal executive officer at any point during the taxable year.
  • Anyone who served as the principal financial officer during the taxable year.
  • The three highest compensated employees whose compensation must be reported to shareholders under the Exchange Act. 
  • Anyone who was a covered employee of the corporation or any predecessor publicly held corporation for a preceding tax year beginning after December 31, 2016.

Once an officer is designated a covered employee, that officer is considered a covered employee indefinitely, regardless of whether he or she still meets the criteria or has left the company. 

The American Rescue Plan Act (ARPA), which was signed into law on March 11, 2021, expands the group of “covered employees” under Section 162(m) for taxable years beginning after December 31, 2026 to an additional “five highest compensated employees.” In other words, Section 162(m) covered employees will eventually include the chief executive officer, chief financial officer, and the eight highest paid employees of a public corporation, in addition to employees meeting the “once a covered employee, always a covered employee” designation.

Although ARPA expands the number of covered employees, the “once covered/always covered” provision does not apply to these five new additions, which will be re-determined each year.

HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment legal compliance needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 678-439-6236.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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