Bad news. The proposed American Rescue Plan legislation would further expand the definition of covered employee under Code Section 162(m) to include even more highly compensated employees. Sec. 9708, “Expansion of Limitation on Excessive Employee Remuneration,” would amend Section 162(m)(3) to include the 5 highest compensated employees for the taxable year other than any individual who was the CEO or CFO at any time during the year or among the 3 highest compensated officers reported in the proxy for the year. The only good news is that this change would not apply until taxable years beginning after December 31, 2026,
Consequently, beginning in 2027, a company could easily have more than 10 current employees subject to the deductibility limit of Section 162(m) in any year. 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 he/she receives compensation from that company (until and even beyond death).
It could have been worse. The Senate Bill dropped a provision in the House proposal that would have frozen the growth in annual limits on contributions to 401(k) and other retirement accounts after 2030. However, pernicious proposals like this one tend to reappear in future legislation.
-Mike Melbinger, CompensationStandards.com March 8, 2021
