Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...
By Mary Hughes
March 30—The IRS issued final regulations 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 (T.D. 9716; RIN 1545-BI65) adopt the proposed regulations (REG-137125-08) 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.
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 Internal Revenue Service said.
Extending the clarification to all types of equity awards “is not intended as a substantive change,” the IRS said.
The rules in general provide that the Section 162(m) deduction limit doesn't apply to compensation paid “pursuant to a plan that existed during the period in which the corporation was not publicly held.”
For companies that go public through an initial public offering, the final rules clarify the extent of the exemption from Section 162(m) for compensatory arrangements that existed during the time the company was privately held.
The proposed rules made it clear that compensation payable under a restricted stock unit would be eligible for transition relief only “if it is paid, and not merely granted, before the earliest of the events” enumerated in the regulations. The final rules adopt this clarification without change.
The final rules grant additional time for their application to RSUs paid by companies that are newly public. The final rules will apply to RSUs granted on or after the date the rules are published in the Federal Register, scheduled for March 31.
The rules will apply to compensation attributable to equity awards granted on or after June 24, 2011.
To contact the reporter on this story: Mary Hughes in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Sue Doyle at email@example.com
Text of T.D. 9716 is in TaxCore.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)