On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021 (“ARPA”), the $1.9 trillion COVID-19 stimulus legislation. Among other provisions affecting employee benefit plans, the law includes a provision that expands the definition of a “covered employee” under Section 162(m) of the Internal Revenue Code.
Internal Revenue Code Section 162(m) limits the deduction that a publicly-held corporation can take with respect to compensation paid to each of its “covered employees” to $1 million per year.
The definition of “covered employee” was initially expanded under the 2017 Tax Cuts and Jobs Act to include any person who served as CEO, CFO or one of the next three highest compensated officers, plus any individual who has been a “covered employee” for any prior tax year beginning on or after January 1, 2017.
Beginning on or after January 1, 2027, the ARPA further expands the application of the $1 million deductibility cap to include the next five highest compensated employees, in addition to the CEO, CFO and the three other highest compensated officers. However, ARPA does not require these additional five employees be permanently treated as covered employees; rather, this group of five additional covered employees would be re-assessed based on compensation levels each year.