January 31, 2024
162(m): Planning for Coming Expansion of “Covered Employees”
This Wachtell post on the HLS Blog regarding the 2024 compensation season reminds us that the American Rescue Plan Act of 2021, which feels like a lifetime ago, included a new change to IRC §162(m). And, given the effective date of the change, compensation committees and their advisors may want to consider this when structuring 2024 long-term incentive awards. Here’s an excerpt:
Section 162(m) of the Internal Revenue Code disallows a federal income tax deduction to public companies for certain compensation in excess of $1 million during a company’s taxable year to “covered employees” which is generally defined to include the company’s named executive officers. The American Rescue Plan Act amended the definition of “covered employees” for tax years beginning after December 31, 2026 to include an additional five highest compensated employees.
While the expanded definition does not become effective for several years, companies might consider structuring long-term incentive awards to individuals who might be covered by the expanded definition to vest and be paid in 2026 in order to avoid a lost tax deduction.
– Meredith Ervine