Final Rules Clarify Performance-Based Pay Exception Under Section 162(m)


The Internal Revenue Service issued final regulations (T.D. 9716; RIN 1545-BI65) confirming that stock-based compensation plans must provide a limit on the maximum number of shares for which individual employees may receive options and that only compensation specifically identified in the regulations is available for special transition relief in the case of newly public companies.

Issued March 30, the final rules adopt the proposed regulations (REG-137125-08; RIN 1545-BI65) with minor modifications

Tax code Section 162(m) limits the deduction for compensation paid to any covered employee of a public company to $1 million for the taxable year. An exception to the $1 million cap applies to performance-based compensation.

The final rules add an additional example to the regulations and clarify (1) that a plan must specify the maximum number of shares that may be granted to each individual employee during a specified period, and (2) that, under the transition rule for companies that become publicly held, compensation attributable to restricted stock units during the transition period must be paid, rather than merely granted, to be eligible for the exception.

All Equity Awards

The final rules clarify that a plan will satisfy the performance-based plan exception under Section 162(m) if it specifies the maximum number of shares with respect to which any type of equity-based compensation may be granted to any individual employee during a specified period. The proposed rules had specified stock options and stock appreciation rights, “which are the two types of equity-based awards described” in the regulations, the IRS said.

Extending the clarification to all types of equity awards “is not intended as a substantive change,” the IRS said.

Excerpted from a story that ran in Pension & Benefits Daily (03/30/2015).

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