Tax Law

Compensation: Deduction Limits on Certain Employers

by Mary Howley, Esq. *

Deduction limits apply with respect to compensation in excess of $1,000,000 per year for covered employees of any publicly held corporation. A limit also applies for remuneration in excess of $500,000 paid by certain health insurance providers. Financial institutions that participated in the troubled assets relief program (TARP) are limited to a $500,000 per year deduction for covered executives.

In General

In the case of any publicly held corporation, no compensation deduction is allowed for salary for covered employees that exceeds $1,000,000. [IRC § 162(m); Treas. Reg. § 1.162-27.]

A limit of $500,000 per year deduction is imposed on financial institutions that participated in the troubled asset relief program (TARP). [IRC § 162(m)(5).]

No compensation deduction is allowed for certain remuneration in excess of $500,000 per year for certain health insurance providers. [IRC § 162(m)(6).]

Publicly Held Corporations

In the case of any publicly held corporation,... [the $1,000,000 limit for covered employees] is reduced by excess golden parachute payments that are not deductible by the corporation. [IRC § 162(m)(4)(F).]

A publicly held corporation is any corporation issuing any class of common equity securities required to be registered under section 12 of the Securities Exchange Act of 1934 (Exchange Act). [IRC § 162(m)(2); Treas. Reg. § 1.162-27(c)(1).] A covered employee means any individual who, on the last day of the tax year, is:

  1. The chief executive officer of the corporation or is acting in such capacity; or
  2. Among the four highest compensated officers (other than the chief executive officer). [IRC § 162(m)(3).]

Under final regulations, whether an employee is the chief executive officer or among the four most highly compensated officers should be determined pursuant to the executive compensation disclosure rules promulgated under the Exchange Act. [Treas. Reg. § 1.162-27(c)(2)(B)(ii).] In 2006, the Securities and Exchange Commission amended certain rules relating to executive compensation, including which executive officers' compensation must be disclosed under the Exchange Act...


Employers Participating in the Troubled Assets Relief Program (TARP) and Certain Financial Institutions

The deduction limit for otherwise deductible compensation is reduced to $500,000 in the case of a covered executive for any applicable tax year of an applicable employer. [IRC § 162(m)(5).]

An applicable employer means any employer from which one or more troubled assets are acquired under the "troubled assets relief program" ("TARP") established by the Emergency Stabilization Act of 2008 [Pub L No 110-343, 111th Cong, 2d Sess (Oct 3, 2008)] if the aggregate amount of the assets acquired for all tax years exceeds $300,000,000. [IRC § 162(m)(5)(B)(i).] An applicable employer does not include any employer from which troubled assets are acquired by the Treasury Department solely through direct purchases. [IRC § 162(m)(5)(B)(ii).]...

Aggregation rules [IRC § 414(b), (c)] apply in determining whether an employer is an applicable employer. However, the rules are applied disregarding the rules for brother-sister controlled groups and combined groups. [IRC § 1563(a)(2), (3).] Thus, this aggregation rule only applies to parent-subsidiary controlled groups. [IRC § 162(m)(5)(B)(ii).]


The $500,000 deductible compensation limit is reduced by excess golden parachute payments that are not deductible by the corporation. [IRC § 162(m)(5)(G).] For this purpose, a parachute payment means any payment in the nature of compensation to (or for the benefit of) a covered executive made during an applicable tax year on account of an applicable severance from employment during the authorities period if the aggregate present value of such payments equals or exceeds an amount equal to three times the covered executive's base amount.

Health Insurance Providers

For tax years beginning after 2012, no deduction is allowed for compensation attributable to services performed by an applicable individual for a covered health insurance provider during an applicable tax year to the extent that such compensation exceeds $500,000. [IRC § 162(m)(6).]

As under the rules for TARP participant compensation [IRC § 162(m)(5)], the exceptions for performance based compensation and commissions do not apply. [IRC § 162(m)(6)(D).]The $500,000 deduction limitation applies without regard to whether the compensation is paid during the tax year or a later tax year. [IRC § 162(m)(6)(A)(ii).]


Information referenced herein is provided for educational purposes only. For legal advice applicable to the facts of your particular situation, you should obtain the services of a qualified attorney licensed to practice law in your state.

LEXIS users can view the complete commentary HERE. Additional fees may apply. (Approx. 13 pages)

* Mary Howley, Esq. is a federal tax author who works on such publications as Matthew Bender's Federal Tax Guidebook, Federal Income, Gift and Estate Taxation, and Professional Corporations and Associations. Ms. Howley received a B.A. from Albany State University, a J.D. from St. John's Law School, and was admitted to the New York State bar in 1983. She holds an LL.M. in taxation from New York University.

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