
Impact of House passed legislation on health industries organizations
Summary of the impact of House passed legislation on the pharmaceutical, life sciences, medtech and health services sectors including PwC key observations.
January 2025
Treasury and the IRS on January 16 published proposed regulations under Section 162(m), which limits the compensation deduction of a "publicly held corporation" to $1 million per "covered employee" in the tax year when the deduction otherwise would apply. The proposed regulations provide guidance on the five covered employees added by the American Rescue Plan Act (ARPA). The proposed regulations apply to compensation that otherwise is deductible for tax years beginning after the later of December 31, 2026, or the date of publication of the Treasury decision adopting the proposed rules as final regulations in the Federal Register.
The proposed regulations provide definitions for determining the compensation and the type of employee in relation to the five covered employees under the ARPA (the ARPA 5) that are different from the definitions of compensation and the type of employee that apply to current law covered employees. Additionally, the proposed rules incorporate and expand on the current law and regulations’ affiliated group definitions for Section 162(m) purposes, including in relation to foreign corporations, since these rules also generally apply for ARPA 5 purposes. Various anti-avoidance guidance is provided in the proposed regulations that also has implications under current law.
While the ARPA 5 change is not effective until 2027, taxpayers should consider the impact of the proposed regulations on current Section 162(m) determinations as well as in preparation for the effective date of the ARPA 5 additions.
Section 162(m) was enacted as part of the Omnibus Budget Reconciliation Act of 1993. The 2017 tax reform act (2017 Act) significantly expanded the application of Section 162(m) by amending the definitions of covered employee, publicly held corporation, and applicable employee remuneration subject to the limitation. Under the 2017 Act and applicable regulations, a covered employee is defined as an employee of the taxpayer if:
Effective for tax years beginning after December 31, 2026, ARPA further amends the definition of covered employee to include any employee who is among the five highest compensated employees for the tax year other than the individuals described in (1) and (2) above.
Consistent with the statute, the proposed regulations indicate that the ARPA 5 are based on the definition of “employee” under Section 3401(c), which includes common law employees and officers. The ARPA 5 are not limited to executive officers as the covered employee group is under current law. Additionally, the proposed rules clarify that an ARPA 5 covered employee may overlap with a covered employee who is one based on being a covered employee for a preceding tax year.
The proposed rules also provide that the definition of compensation for purposes of determining the ARPA 5 is based on current Section 162(m) regulations that relate to compensation that would (but for Section 162(m)) be allowable as a deduction. This is in contrast to compensation for the purpose of determining current law Section 162(m) covered employees, which is based on compensation disclosure rules under the Exchange Act.
The proposed rules apply the Section 162(m) affiliated group rules to ARPA 5 determinations. Current Section 162(m) regulations define a publicly held corporation to include an affiliated group of corporations as defined in Section 1504 but without regard to Section 1504(b). The proposed regulations provide that any employee of a corporation in the affiliated group may be in the ARPA 5 group regardless of whether the employee is an employee of or performs services for the publicly held corporation. The proposed rules provide several examples on the application of these affiliated group rules for ARPA 5 determinations – including when the affiliated group includes more than one publicly held corporation, as well as when affiliated groups include foreign corporations. An explicit rule addressing compensation from a controlled foreign corporation (CFC) is included, and comments are requested on the application of the rules to CFCs.
The proposed regulations add rules to prevent avoidance of the application of Section 162(m), for example, due to failure to treat an individual as an employee of a publicly held corporation (which includes its affiliated group as defined under Section 162(m)) or failure to treat amounts as compensation if an individual functions as an employee of a publicly held corporation. To that end, even if an individual is an employee of a person outside the publicly held corporation affiliated group (including a professional employer organization and other third parties) and amounts are paid by or to such an outside person or party in relation to the individual’s services for the publicly held corporation, the individual may nevertheless be an employee and receive compensation for purposes of ARPA 5 determinations and impacts.
Observation: The proposed regulations take the opportunity to further clarify the application of current law and regulations under Section 162(m). The preamble and examples in the proposed regulations shed light on Treasury and IRSs’ focus on anti-avoidance of the application of Section 162(m) in relation to affiliated groups, including those with foreign corporations, in connection with partnership arrangements, and in connection with third-party arrangements. Companies may want to consider the application of these clarifications within the proposed regulations to current arrangements and fact patterns.
Summary of the impact of House passed legislation on the pharmaceutical, life sciences, medtech and health services sectors including PwC key observations.
The House-passed HR 1 proposes major changes for financial services, including limits on PTE tax, a higher SALT cap, and increasing US tax for certain inbound investors.
House-passed “One Big Beautiful Bill” includes significant information reporting provisions
Washington legislation includes significant tax changes including for B&O tax, sales and use tax, and capital gains tax.