Blog · 14 October 2026

Section 162(m) in 2027: The “Next Five” Covered Employees, the Athlete Exclusion Bill and What US CPA Firms Should Tell Clients

By Keshav Bansal, CA

Section 162(m) is about to reach further into public-company payrolls. Starting with taxable years that begin after December 31, 2026, the $1 million deduction cap on executive pay also covers a company’s next five highest-paid employees, and those five don’t have to be officers. The first group to push back is pro sports: on September 30, 2026, Sens. Raphael Warnock and Katie Britt introduced S. 5661, and on October 1, Reps. Nicole Malliotakis, Tom Suozzi, Brian Jack and Lucy McBath introduced the House companion, H.R. 10682. Both bills would keep athletes out of the new “next five” group. For US CPA firms, the bill is the news hook. The bigger point is that the 2027 expansion applies to every publicly held corporation, and it lands on returns and tax provisions next year.

How the Section 162(m) cap works today

Under §162(m)(1), a publicly held corporation can’t deduct “applicable employee remuneration” paid to any covered employee to the extent it exceeds $1,000,000 for the taxable year. Two details matter for scoping:

• Publicly held corporation (§162(m)(2)) means an issuer whose securities must be registered under section 12 of the Securities Exchange Act of 1934, or one that must file reports under section 15(d). A client with no listed stock can still be covered.
• Remuneration counts cash and non-cash pay (§162(m)(4)). Plante Moran notes it covers salaries, bonuses, equity awards and deferred compensation, and the Tax Cuts and Jobs Act of 2017 removed the old exception for performance-based pay.

The cap only limits the company’s deduction. The employee’s wages are still fully taxable, and the W-2 doesn’t change.

Today’s covered employees are listed in §162(m)(3): the principal executive officer and principal financial officer (subparagraph (A)), the three highest-compensated officers other than those two (subparagraph (B)), and anyone who was an (A) or (B) covered employee in any taxable year beginning after December 31, 2016 (subparagraph (D)). That last rule is the TCJA’s “once covered, always covered” rule.

What changes in 2027: the “next five”

Section 9708 of the American Rescue Plan Act of 2021 added §162(m)(3)(C). For taxable years beginning after December 31, 2026, it covers any employee who “is among the 5 highest compensated employees for the taxable year” other than the (A) and (B) individuals. Three practical consequences:

• Not limited to officers. White & Case (October 2, 2026) stresses that the additional five need not be executive officers. A star trader, surgeon, salesperson or engineer can make the list.
• Retested every year. Subparagraph (D) now reaches only (A) and (B) employees. White & Case and Plante Moran both explain that a next-five employee doesn’t stay covered permanently and is identified again each year.
• Ordering. Plante Moran suggests identifying the CEO, CFO and next three officers first, then the five highest-paid employees, and then any “once covered, always covered” officers not already on the list.

A simple illustration: if a next-five employee earns $3 million of otherwise deductible pay in 2027, $2 million is nondeductible. At the 21% corporate rate, that’s $420,000 of extra federal tax. (These figures are hypothetical and don’t come from any source.)

The proposed regulations and the OBBBA aggregation rule

Treasury and the IRS proposed rules for the next five on January 16, 2025 (REG-118988-22, 90 FR 4691). According to the Federal Register notice, White & Case and EY, the proposal would:

• define “employee” under §3401(c), so common-law employees and officers both count;
• measure compensation as amounts otherwise deductible, not proxy-disclosed pay;
• count employees anywhere in the affiliated group, including foreign corporations; and
• treat a worker paid through a PEO or other unrelated payor as an employee if they perform substantially all of their services for the public company.

The proposed rules would apply to taxable years beginning after the later of December 31, 2026 or publication of final regulations. As of White & Case’s October 2, 2026 alert, the regulations had not been finalized.

Separately, P.L. 119-21 (the One Big Beautiful Bill Act), §70603, added §162(m)(7) for taxable years beginning after December 31, 2025. For a publicly held corporation in a controlled group, the next five are identified across all members of the group. When several members pay a specified covered employee, the $1,000,000 is split among them pro rata as an “allocable limitation amount.” Plante Moran warns that some groups may hit the cap for the first time as a result.

The athlete exclusion bill: what H.R. 10682 / S. 5661 would do

The two bills have the same text. They would rewrite §162(m)(3)(C) so the next five exclude “any individual who performs services in the field of athletics,” as defined in Treas. Reg. §1.199A-5(b)(2)(viii). That is the §199A definition of athletes, coaches and team managers who take part in athletic competition, and it excludes equipment and facility staff and broadcasters. The change would apply to taxable years beginning after December 31, 2026. The existing CEO/CFO/top-three cap would stay as it is.

Eide Bailly’s October 9, 2026 roundup, quoting Tax Notes, says only a handful of US franchises are publicly held (the Atlanta Braves, New York Knicks and New York Rangers), and players are typically their highest-paid employees. Privately owned teams aren’t affected, because §162(m) only applies to publicly held corporations. Senator Britt’s October 6 release says the bill “makes a targeted correction by excluding athletic personnel from that additional five-employee category.” Both bills are still in committee (Finance and Ways and Means), and neither has been marked up.

What US CPA firms should do before year-end

1. Scope the client list. Flag every client that is a §12 registrant or §15(d) filer, a subsidiary of one, or planning an IPO. The 2027 state millionaire taxes are another reason to map high-earner exposure now.
2. Build the 2027 compensation census. Pull deductible pay group-wide, including subsidiaries, foreign affiliates and PEO-paid workers, not just proxy officers.
3. Update the tax provision. Plante Moran notes that pay over $1 million to covered employees creates a permanent difference that affects the effective tax rate. Equity awards can also force deferred tax assets to be reduced when someone may land in the next five.
4. Consider timing. White & Case suggests companies look at whether future-year payments to likely next-five employees could be made before year-end 2026.
5. Don’t over-deduct. Claiming deductions above the cap creates exposure, including the §6662 accuracy-related penalties.
6. Keep payroll unchanged. Withholding and W-2 reporting don’t change. Pair this review with your draft 2027 Form W-4 client updates.

Where this fits for Tax Brew readers

Compensation censuses, provision workpapers and payroll reconciliations take time in a busy season. If you need extra capacity for tax prep and bookkeeping, see how we support US CPA firms or email info@taxbrewglobal.com.

Check current guidance: this article summarizes IRC §162(m) (Cornell LII), H.R. 10682 and S. 5661 (GovInfo, Congress.gov), proposed regulations REG-118988-22 (90 FR 4691), Treas. Reg. §1.199A-5, Senator Britt’s October 6, 2026 release, Eide Bailly (October 9, 2026), White & Case (October 2, 2026), Plante Moran (April 1, 2026) and EY. Pending bills may change or never pass. This is general information, not tax or legal advice. Sources as of 14 October 2026.