The IRS finalized proposed regulations issued in 2011 regarding the performance-based compensation exception under Sec. 162(m)(4)(C) to the $1 million deduction limitation for compensation paid by publicly held corporations to covered employees.
Regs. Sec. 1.162-27(e)(2)(vi)(A) in the final regulations clarifies that the plan under which an option or stock appreciation right is granted must state "the maximum number of shares with respect to which options or rights may be granted during a specified period to any individual [emphasis added] employee" (per-employee limitation requirement). The prior regulations had specified that the requirement applied "to any employee."
The final version of Regs. Sec. 1.162-27(e)(2)(vi)(A), in response to comments to the proposed regulations, clarifies that a plan satisfies the per-employee limitation requirement if the plan specifies an aggregate maximum number of shares with respect to which stock options, stock appreciation rights, restricted stock, restricted stock units (RSUs), and other equity-based awards can be granted to any individual employee during a specified period under a plan the shareholders approved, as required by Regs. Sec. 1.162-27(e)(4). In the proposed regulations, Prop. Regs. Sec. 1.162-27(e)(2)(vi)(A) mentioned only stock options and stock appreciation rights.
Finally, the regulations clarify the application of the transition rule in Regs. Sec. 1.162-27(f)(1), which provides that when a corporation becomes publicly held, the Sec. 162(m) deduction limitation does not apply to any remuneration paid pursuant to a compensation plan or agreement that existed during the period in which the corporation was not publicly held. Under the final regulations, the transition rule applies to all compensation other than compensation specifically identified in Regs. Sec. 1.162-27(f)(3). Therefore, under the final regulations, compensation payable under an RSU is eligible for transition relief only if it is paid—not merely granted—before the earliest of the events specified in Regs. Sec. 1.162-27(f)(2). This clarification applies to remuneration otherwise deductible under an RSU that is granted on or after April 1, 2015.
Other than the transition rule for RSUs, the final rules apply to compensation attributable to stock options or stock appreciation rights granted on or after June 24, 2011, the date the proposed regulations were published (REG-137125-08).
- T.D. 9716
By Sally P. Schreiber, J.D., a JofA senior editor.