On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021 (the “ARPA”), the much-debated $1.9 trillion COVID-19 stimulus legislation. The ARPA includes a provision, added by Senate amendment on March 6, 2021, which will further limit the deductibility of amounts deemed to be “excessive employee remuneration” under Section 162(m) of the Internal Revenue Code of 1986, as amended (“Section 162(m)”) for tax years starting after December 31, 2026. This change comes on the heels of other recent expansions of Section 162(m).
Section 162(m) generally limits the amount of compensation expense that a public company may deduct each tax year, disallowing deductions for compensation over $1 million with respect to each of the company’s “covered employees.” Under current law, the covered employees are generally the company’s CEO, CFO and its three other most highly compensated officers, along with individuals who have been previously deemed to be covered employees of the company. Under the ARPA, covered employees will expand to include the next five highest compensated employees of the company; however this new group of employees will not retain the perpetual covered employee status and will be determined annually. This provision is projected to generate $7.8 billion in revenue by 2031.
This memorandum discusses the implications of this ARPA provision, particularly in light of other recent changes to Section 162(m).