The Advisors' Blog

For a few years now, we’ve periodically noted that the 2021 American Rescue Plan Act amended the definition of “covered employee” to add a public company’s five highest compensated employees (even if they are not executive officers) for tax years beginning January 1, 2027 and thereafter. January 1, 2027 is now right around the corner!

This Davis Polk alert addresses some frequently asked questions about the expanded definition. For example:

Q: Will the five highest compensated employees for 2027 be identified based on 2026 or 2027 compensation?  This question has not been expressly addressed. Using 2026 compensation would allow companies to identify their five highest compensated employees at the start of 2027. However, because ARPA states, “in the case of taxable years beginning after December 31, 2026, such employee is among the 5 highest compensated employees for the taxable year” (emphasis added), the determination will likely be based on 2027 compensation. If so, companies may not be able to identify these employees until after the end of their 2027 taxable year.

It also suggests some steps that companies may want to take to prepare:

– Review their employee populations to make a preliminary assessment as to who may be their covered employees beginning in 2027,

– Confirm that their systems for tracking compensation are sufficient for this purpose, and

– Consider whether to accelerate any compensation that would otherwise be paid in 2027 into 2026, if it is likely to be disallowed as a tax deduction for 2027.

Check out our “Section 162(m) Compliance” Practice Area.

– Meredith Ervine