Source: https://www.schiffhardin.com/insights/publications/2015/irs-further-clarifies-162-m-rules
Timestamp: 2020-02-24 14:36:50
Document Index: 799458545

Matched Legal Cases: ['§162', '§162', '§162', '§162', '§162', '§162', '§162', '§162', '§162']

IRS Further Clarifies §162(m) Rules
On March 31, 2015 the IRS published regulations under §162(m) of the Internal Revenue Code that finalized proposed regulations issued in 2011. The final regulations clarify existing regulations in two respects:
1. Per-Employee Limit. The regulations clarify that for stock options and stock appreciation rights (SARs) to come within the §162(m) exemption for performance-based compensation, a plan must, among other things, set forth a per-employee limit on the number of shares that can be granted pursuant to stock options or SARs during a specified period. This clarification was made because apparently some practitioners believed that the overall plan limit on the aggregate number of shares that can be granted to all employees generally over the life of the plan was a sufficient limit for §162(m) purposes. The limit, however, must state the number of shares that can be granted to any individual employee during the specified period. The regulations further clarify that an individual employee limit on the number of shares that can be granted to any employee during a specified period with respect to all equity-based awards satisfies the per-employee limit on options and SARs. This clarification applies to compensation attributable to stock options and SARs granted on or after June 24, 2011 (the publication date of the proposed regulations).
Practice Point: Although in our experience the vast majority of clients’ equity plans are compliant, public companies should review their plans to ensure that an individual employee limit applies to the number of shares that can be granted in any specified period pursuant to options or SARs.
2. Transition Role for Newly Public Companies. The initial §162(m) regulations provide a transition period for newly public companies during which §162(m) does not apply to compensation paid pursuant to a plan or arrangement that existed while the company was not public. In the case of certain stock-based compensation, the transition rule applies to compensation received pursuant to the exercise of options or SARs or upon the vesting of restricted stock, as long as the grant occurred during the transition period. The initial regulations, however, did not specifically address restricted stock units (RSUs) or phantom shares.
The new final regulations clarify that RSUs and phantom shares are not treated in the same way as options and restricted stock — compensation relating to RSUs and phantom shares must be paid rather than merely granted during the transition period in order to qualify for the transition period exception from §162(m).[1]
The final regulations provide some relief in that the clarification applies to RSUs and phantom stock granted on or after April 1, 2015.
Practice Point: For newly public companies still in the transition period, RSUs and phantom shares granted prior to April 1, 2015 will still be eligible for full tax deduction under §162(m) as long as the other requirements of the statute are satisfied. Going forward, such companies may want to consider granting restricted stock rather than RSUs or phantom shares to ensure that awards that vest after the transition period expires can be fully deductible for §162(m) purposes.
[1] The transition period ends on the earliest of (i) the expiration or material modification of the plan, (ii) the issuance of all stock or compensation that has been allocated under the plan or (iii) the first annual shareholders meeting at which directors are elected that occurs after the close of the third calendar year following the calendar year in which the IPO occurs, or, if the company becomes public without an IPO, the end of the first calendar year following the calendar year in which the company becomes publicly held.