The American Rescue Plan Act of 2021 (“ARPA”)[1] makes a small but significant change for publicly held corporations subject to the compensation deduction limitations under Internal Revenue Code Section 162(m).

In general, Code Section 162(m) limits deductions for compensation in excess of $1 million for “covered employees”. Under current law, covered employees consist of (i) the principal executive officer, principal financial officer (or any individual acting in either such capacity) plus the next three highest compensated officers for a taxable year, and (ii) individuals who were covered employees during any tax year beginning on or after January 1, 2017.  For tax years beginning after December 31, 2016, ARPA Section 9708 expands the number of covered employees to include the next five highest compensated employees (in addition to the principal executive officer, principal financial officer, the next three highest compensated officers, and any post-December 31, 2016 covered employee) for a taxable year. The ARPA 162(m) changes will require companies to track at least their top 10 employees to determine if their compensation exceeds the $1M deduction limit.

The ARPA changes comes on the heels of a significant 162(m) enhancement made by the 2017 Tax Cuts and Jobs Act (the “TCJA”)[2]. Of particular note, the TCJA eliminated the ability to deduct performance-based compensation in excess of $1 million, and expanded Code Section 162(m) to require that covered executives be included in the $1 million deduction limitation for all subsequent tax years (retroactive to tax years beginning on and after January 1, 2017). Fortunately, it does not appear that the additional five covered employees under ARPA Section 9708 includes the TCJA requirement that they must be included in the covered employee group for ever subsequent tax year, meaning that if the additional five covered employees fall at any time outside of the top 10 compensated employees they may be disregarded in subsequent tax years.


[1] P.L. 117-2, effective March 11, 2021.

[2] P.L. 115-97, effective December 22, 2017.