The tax increases and spending legislation proposed by Democrats in September 2021 would apply the deductibility limits of Code Section 162(m) to more employees and sooner. Readers may think this is an accidental repeat of the article in our March 2021 Newsletter “Proposed “Stimulus” Legislation Would Extend the Limits of 162(m) Even Further.” However, they would be wrong. Indeed, the American Rescue Plan Act of 2021 (“ARPA”), a $1.9 trillion conglomerate of spending and tax increases, signed by President Biden in March 2021, applied the deductibility limits of Code Section 162(m) to more employees. But the Democrats’ newest tax increase proposal would make it even worse.
ARPA inserted a new subparagraph (3)(C) to Section 162(m), which would apply the $1 million deductibility cap to an additional five highest compensated employees beyond the CEO, CFO and the three highest-paid executive officers already covered. Under ARPA, this deduction limitation would apply to taxable years beginning after December 31, 2026. Consequently, beginning in 2027, Section 162(m) covered employees would include the CEO, CFO and the eight highest-paid employees of a public company, regardless of whether or not those additional employees are officers reported in the company’s proxy statement.
And don’t forget, once an individual is designated as a covered employee for any year, he or she will remain a covered employee subject to the deductibility limit of Section 162(m) for as long as they receive compensation from that company (until and even beyond death). However, under ARPA, the additional five highest compensated employees would not necessarily remain covered employees indefinitely.
The September 2021 Proposal
The September 2021 Proposal would accelerate the extension of the Section 162(m) limits to taxable years beginning after December 31, 2021. The Proposal also provides that a partnership or any other non-corporate entity would be treated as a member of the same controlled or affiliated group with the public company if that entity is controlled by the public company or other members of its controlled group. Finally, the September 2021 Proposal would clarify that performance-based compensation, commissions, post-termination compensation, and beneficiary payments, whether or not paid during the taxable year, are all covered by the deduction limitation.
The September 2021 Proposal is just that, a proposal that may or may not ever become signed into law. However, this second amendment of Section 162(m) in the same suggests that Democrats view Section 162(m) as a honey pot to fund future spending increases.
-Mike Melbinger, CompensationStandards.com September 21, 2021