In Notice 2007-49, the IRS indicated how it will define "covered employee" for purposes of Internal Revenue Code §162(m)’s annual limit of $1,000,000 on deducting compensation of public company officers in light of the September 8, 2006 amendments to Item 402 of Regulation S-K.
The September 8, 2006 amendment to the SEC executive compensation disclosure rules (i) added the "principal financial officer" as a "named executive officer" by reason of position, and (ii) reduced from four to three the number of other executives treated as "named executive officers" by reason of compensation. Companies must comply with the amended disclosure rules for fiscal years ending on or after December 15, 2006. However, §162(m) applies only to the chief executive officer, and does not apply to the chief financial officer, by reason of the executive’s position. Also, §162(m) applies to officers other than the CEO only to the extent the SEC requires disclosure of their compensation.
Notice 2007-49 states the term "covered employee," for purposes of §162(m), will apply to the principal executive officer and the three highest compensated officers (other than the principal executive officer and principal financial officer). Accordingly, the term "covered employee" does not include those individuals for whom disclosure is required under the SEC executive compensation disclosure rules on account of the individual being the principal financial officer.
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