Section 162(m) Covered Employee Worksheet

Summary

Use this worksheet to track current and former employees of a publicly held corporation and certain affiliated corporations who are considered covered employees under I.R.C. § 162(m). Section 162(m) limits the deductibility of taxable compensation paid to covered employees to the extent such compensation exceeds $1 million for the taxable year. This template contains practical guidance, drafting notes, and an optional clause. Public companies must identify and keep track of Section 162(m) covered employees to determine whether their compensation exceeds the $1 million threshold since amounts over that limit may not be treated as a deductible expense. In general, under current law, covered employees include the CEO and CFO of the organization and the next three highest-paid officers. Beginning in 2027, up to five additional of the corporation's highest-paid employees must also be included. The Tax Cuts and Jobs Act (Pub. L. No. 115-97) (TCJA) made significant changes to Section 162(m) for tax years beginning in 2018, including by (1) eliminating the rule that performance-based compensation is disregarded for purposes of Section 162(m) (unless the arrangement has grandfathered status) (2) adding the CFO as a role-based covered employee (and providing that any individual acting as CEO or CFO during the year is included), (3) reducing the top-paid officer category from four to three; and (4) establishing a once-in-always-in rule whereby any individual gaining covered employee status for a tax year beginning after December 31, 2017, retains that status for all future tax years. See implementing final regulations at 85 Fed. Reg. 86481 (Dec. 30, 2020). The American Rescue Plan Act of 2021 (Pub. L. No. 117-2) (ARPA) expands the list of covered employees to include up to five more individuals for tax years beginning after December 31, 2026. This new group is determined as the five highest paid employees (not limited to officers) of the corporation other than any individual designated as a covered employee based on their status as a CEO, CFO, or top-three officer for the year. This group of covered employees is not subject to the once-in-always-in rule. See proposed regulations at 90 Fed. Reg. 4,691 (Jan. 16, 2025). Once the ARPA amendments become effective (i.e., in 2027 and later tax years), covered executives will include the following: • The CEO (including any individual in that role for the tax year) • The CFO (including any individual in that role for the tax year) • The three most highly compensated executive officers for the tax year (other than anyone covered as a CEO and CFO), determined consistent with the SEC proxy disclosure rules for named executive officers under Regulation S-K (17 C.F.R. § 229.402(a)(3), (m)(2)) • Under the once-in-always-in rule, any individual designated as a covered employee of the corporation under one of the above categories for a prior tax year that began after December 31, 2016 –and– • The five highest compensated employees for the tax year other than any individual who is a covered employee based on their status as CEO, CFO, or a top-three officer for the relevant tax year (the exclusion does not apply to an individual who is a covered employee solely due to the once-in-always-in rule) I.R.C. § 162(m)(3); see also Treas. Reg. § 1.162-33(c)(2)(i) and Prop. Treas. Reg. § 1.162-33(c)(2)(i)(D). For corporations that are part of an affiliated group, special rules apply for determining covered employee status. For more information, see Section 162(m) Tax Deduction Limit for Public Company Executive Compensation and Deductibility of Executive Compensation for C Corporations.