On March 11, 2021, President Biden signed into law the "American Rescue Plan Act of 2021" (the "Act"). Tucked within the approximately $1.9 trillion piece of legislation is an unanticipated change to Section 162(m) of the tax code.

For taxable years beginning after December 31, 2026, a publicly held corporation's list of "covered employees" will expand by five and no longer be limited to executive officers. As a result, publicly held corporations will have ten covered employees: the company's CEO, CFO, three most highly compensated executive officers and five other employees who are the most highly compensated and not already covered.

By way of background, Section 162(m) disallows a deduction by any "publicly held corporation" for "applicable employee remuneration" paid to any "covered employee" in excess of $1 million. Currently, the list of "covered employees" includes the CEO, CFO and three most highly compensated executive officers. In addition, Section 162(m) was amended in late 2017 to provide that once an individual is a "covered employee" he or she remains a covered employee for all future years (even after the employment relationship terminates).

Although the list of covered employees will double, the five highly compensated employees added by the Act will not remain covered employees indefinitely, and will only be covered for the years in which they are in the most highly compensated group, unlike the CEO, CFO and three most highly-compensated executive officers.

The Act's amendment of Section 162(m) will not be effective until 2027, and it remains to be seen whether Treasury regulations will provide for the grandfathering of any deferred compensation or other compensatory arrangements currently in place. Notwithstanding the future effective date, publicly held corporations may consider it prudent to audit their compensation arrangements (including employment agreements with severance obligations) to determine the potential impact of the statutory change.

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