Published on: March 19, 2021
Companies will not be able to deduct compensation exceeding $1 million paid to the 10 highest compensated employees. That is double the number subject to the current exclusion—the CEO, CFO, and three other most highly paid executive officers. This change will go into effect in 2027 and is expected to generate $7.8 billion in tax revenue over the first five years.
The new bill does not apply that same “once covered, always covered” status to the new 6–10 spots. This may serve to protect some employees who see themselves in the top 10 due to a sign-on bonus, for example. However, if a one-time spike in pay pushes an executive into the top 5, they would then remain covered by the deductibility elimination.
Congress may eventually eliminate the deductibility of any compensation over $1 million. Rep. Lloyd Doggett (D-TX 35), who serves on the House Ways and Means Committee, has proposed a bill to eliminate these deductions at any public company immediately.
Outlook: It is not clear that such changes would face much opposition from Republicans (though no Republicans supported the COVID-19 relief bill). When Congress approved the tax reform package in 2017, it set a straight $1 million threshold for deductions, eliminating the deductibility for incentive pay over that amount. Further, the 2017 tax reform law increased the number of executives covered by the deduction limit from four to five and provided that once an employee was covered by the deduction exemption, they were always covered. However, if President Biden includes these or similar deduction eliminations in the anticipated overall package, Republicans would likely oppose the full package.