IRC 162(m) | Executive Pay Limits Included in Covid Stimulus Package

The American Rescue Plan Act of 2021 (commonly referred to as the $1.9 trillion coronavirus aid package) includes a provision that will double the number of the highest-paid executives whose compensation in excess of $1 million cannot be deducted by their employers.

Public companies are currently prohibited from deducting more than $1 million per year in compensation for five employees – the chief executive officer, the chief financial officer and the three highest-paid executives at the company.  The new legislation, signed into law yesterday, Thursday, March 11, adds five more highly paid officials to the list, starting in 2027.

Prior legislative changes to Code Section 162(m) included in the 2017 Tax Cuts and Jobs Act were:

• Increasing the number of covered executives whose compensation could not be written off from four to five (adding the CFO back to the list of five),
• removing performance-based bonus exemptions, and
• Establishing that once an executive is covered under the law, they are always a covered employee, forcing retirement distributions to also be subject to the deductibility cap.

The new 2021 law treats employees from six to 10 differently, in that they are only covered for the applicable year when earnings exceed $1 million, rather than cumulatively.