The IRS has revised the definition of “covered employee” under Section 162(m) of the Internal Revenue Code. The old definition used to mirror the SEC’s definition of Named Executive Officer (officers for whom compensation must be disclosed), but the SEC’s recent changes to executive compensation disclosure rules caused the two definitions to be out-of-sync.

Under new guidance from the IRS, the text of which is not yet available on the IRS website, “covered employee” means any employee who is either the principal executive officer or whose total compensation is required to be reported by the SEC for being one of the three highest paid officers. This definition aligns 162(m) with the SEC’s new executive compensation disclosure rules. Interestingly, a corporation’s principal financial officer is excluded as a “covered employee” if his or her compensation disclosure required by the SEC is simply on account of he or she being the principal financial officer.  

Internal Revenue Code Section 162(m) restricts the amount of deductions a publicly held corporation may claim for compensation paid to a “covered employee” in excess of $1 million per year, unless such excess compensation is performance based and other requirements are met. As a result, many corporations ensure that an executive officer’s base salary (plus perks) does not exceed the $1 million threshold.