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Count Them Up! Tracking “Covered Employees” for Section 162(m)’s $1 Million Deduction Limit

April 30, 2024 (3 min read)

Section 162(m) limits the deductibility of taxable compensation paid in any tax year to covered employees of publicly held corporations and certain affiliates to the extent such compensation exceeds $1 million (per covered employee). The Tax Cuts and Jobs Act changed Section 162(m) by (1) eliminating the prior performance-based compensation exemption, and (2) increasing the number of covered executives, consistent with SEC disclosure requirements. Importantly, the TCJA added a “once-covered-always-covered” rule providing that any individual who serves as the employer's CEO or CFO or who is classified as one of the next three highest-paid executive officers remains designated as a Section 162(m) covered employee after employment, and even after death. This worksheet can help you track your covered employees.

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Related Content

  • Section 162(m) Tax Deduction Limit for Public Company Executive Compensation
    Plan your public and reporting company client compensation package structures for senior executives to mitigate adverse tax treatment under I.R.C. Section 162(m). For tax years beginning after December 31, 2026, the American Rescue Plan Act of 2021, signed into law on March 11, 2021, expanded the Section 162(m) list of covered employees to include five more of the corporation’s highest-paid executives.

Practical Guidance Updates 
Featuring the latest updates from your Practical Guidance account.      

  • Employee Benefits & Executive Compensation Key Legal Developments Tracker (Current)
    Stay informed on new developments.
    • Retirement Plans. DOL’s Employee Benefits Security Administration division finalized amendments to Class Prohibited Transaction Exemption 84-14 (Qualified Professional Asset Manager Exemption or QPAM), which permits various parties related to employee benefit plans and IRAs to engage in transactions involving plan and IRA assets, provided they satisfy specified financial standards. 89 Fed. Reg. 23090 (Apr. 3, 2024); DOL News Release.
    • Health and Welfare Plans. IRS issues FAQs related to the tax treatment of work-life referral services provided to employees under an employer’s work-life referral program providing generally that these programs qualify as de minimis fringe benefits that are excluded from an employee’s income and are not subject to tax withholding. Fact Sheet 2024-13.
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