Recently proposed regulations provide that, for taxable years beginning after December 31, 2026, the definition of “covered employees” will be expanded to include a company’s next five highest compensated employees for each taxable year in addition to those employees that already fall into such definition, regardless of whether they are officers of the company.~~Last amended in 2017, Section 162(m) of the Internal Revenue Code generally prohibits publicly held corporations from taking income tax deductions for annual compensation in excess of $1 million paid to the company’s “covered employees.”  Currently, “covered employees” include a company’s principal executive officer, principal financial officer, and three other most highly compensated executive officers determined based on total compensation required to be disclosed pursuant to Item 402 of Regulation S-K (thus, typically, the company’s “named executive officers” as disclosed in the company’s Form 10-K or annual proxy statement for the year). If a person is designated as a “covered employee” after December 31, 2016, the person remains a “covered employee” in perpetuity.~~On January 14, 2025, the Internal Revenue Service and Treasury Department issued proposed regulations to implement statutory changes to Section 162(m) enacted by the American Rescue Plan Act of 2021. In implementing these changes, the proposed regulations provide that, for taxable years beginning after December 31, 2026, the definition of “covered employees” will be expanded to include the next five highest compensated employees for each taxable year, regardless of whether they are officers of the company. These additional highly compensated employees may change from year to year and will not remain “covered employees” in perpetuity.~~The proposed regulations include several examples that provide guidance with respect to application of these changes.~~In anticipation of the changes to Section 162(m), companies may wish to review their employee population (including employees of their affiliated group) and begin to track compensation to determine how these changes may affect the company’s group of “covered employees” for purposes of Section 162(m).  Special attention should be given to particularly large cash or equity awards that may vest or become payable in or after 2027.~~The following Gibson Dunn lawyers assisted in preparing this update: Sean Feller, Krista Hanvey, Kate Napalkova, and Alli Balick.~~Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues. To learn more about these developments, please contact the Gibson Dunn lawyer with whom you usually work, any leader or member of the firm’s Executive Compensation and Employee Benefits practice group, or the authors:~~Sean C. Feller – Los Angeles (+1 310.551.8746, sfeller@gibsondunn.com) Krista Hanvey – Dallas (+1 214.698.3425, khanvey@gibsondunn.com) Kate Napalkova – New York (+1 212.351.4048, enapalkova@gibsondunn.com) Alli Balick – Los Angeles (+1 213.229.7685, abalick@gibsondunn.com)~~© 2025 Gibson, Dunn & Crutcher LLP.  All rights reserved.  For contact and other information, please visit us at www.gibsondunn.com.~~Attorney Advertising: These materials were prepared for general informational purposes only based on information available at the time of publication and are not intended as, do not constitute, and should not be relied upon as, legal advice or a legal opinion on any specific facts or circumstances. Gibson Dunn (and its affiliates, attorneys, and employees) shall not have any liability in connection with any use of these materials.  The sharing of these materials does not establish an attorney-client relationship with the recipient and should not be relied upon as an alternative for advice from qualified counsel.  Please note that facts and circumstances may vary, and prior results do not guarantee a similar outcome.~~Download PDF~~