Section 162(m): And Then There Were … Ten?

The Senate added a provision to the American Rescue Plan Act of 2021 that will increase the number of employees subject to Section 162(m) from the current 5+ to 10+. Wait, what?

A Bit of History

Did you know that when Section 162(m) was originally introduced into Congress, it was drafted to apply to all employees? That turned out to be too controversial and the bill was rejected. It was subsequently redrafted to apply to only the CEO, CFO, and the next top three highest paid officers (a max of five officers) and it is this version that was enacted into law in 1993.

Here’s another fun fact: the number of employees covered under Section 162(m) dropped to a max of four in 2007. At that time, a change in the SEC rules governing who is considered to be a named executive officer for proxy disclosure purposes inadvertently caused the CFO to no longer be covered under Section 162(m) (which references the proxy disclosure regulations for purposes of determining who is covered). 

The 2017 Tax Cuts and Jobs Act rectified this gap by amending Section 162(m) to expressly stipulate that the CFO is a covered employee. But it did more than that. It also stipulated that anyone serving as CEO or CFO during the year is covered under 162(m) even if no longer serving at the end of the year and that former officers who would have been among the top three highest paid officers except for the fact that they terminated prior to the end of the year are also covered.

Lastly, the TCJA implemented the “once covered, always covered” rule: beginning with 2017, any employees covered under Section 162(m) remain covered for the duration of the time they receive compensation from the company, regardless of role or amount of compensation received.

Although we tend to think of Section 162(m) as covering the top five highest paid officers, as a result of the TCJA amendments, the number of officers covered under Section 162(m) can now be considerably more than five.

Section 162(m) and the American Rescue Plan Act of 2021

Under Section 9708 of the American Rescue Plan Act of 2021, the number of employees covered under Section 162(m) will increase by another five employees. Here are three important things to know about the five additional covered employees:

• They don’t have to be officers. Up until the ARPA, anyone covered under Section 162(m) had to be an officer (or former officer). But this new group of five can be any employee.
• The additional five covered employees won’t be subject to the “once covered, always covered” rule. If their compensation in future years is not sufficient to place them among the highest paid employees, they will no longer be covered.
• This requirement doesn’t go into effect until 2027, so you have several years to prepare (and I have several years to blog about it).

The Scoreboard

If you are keeping score, we’re at almost a quarter century with no legislative changes to Section 162(m) followed by two expansions to the scope of Section 162(m) in the space of five years. You have to wonder if this is a trend: maybe Congress will continue to add covered employees in increments of five until all employees are covered as was originally intended.

Thanks to Carl Toppin of Kilpatrick Townsend & Stockton for bringing this development to my attention.