The IRS recently issued final regulations under Section 162(m), which limits a public company’s deduction of executive compensation in excess of $1M.  The Section 162(m) limits do not apply to performance-based compensation that meets certain qualifications.  These final regulations released on March 30 solve two important riddles for practitioners:

• Per-Employee Limitations – To avoid the Section 162(m) limitations, plans that provide performance-based compensation must include a specific per-employee limit on the number of stock options or rights that may be granted during a specified period.  Many practitioners were confused about whether this per-employee share limit applied to all types of equity-based awards offered under the plan, or only to certain kinds of awards named in the regulations (stock options and stock appreciation rights).  The final regulations answer this question by giving plans wide berth, by allowing plans to name an aggregate maximum number of shares for most types of awards (stock options, stock appreciation rights, restricted stock, restricted stock units and other equity-based awards).  The IRS noted that this was not intended to as a substantive change, which should give comfort to sponsors of plans that were already drafted broadly.

• Newly-Public Companies – The proposed regulations provided a transition relief period for companies that become publicly-traded.  During the transition period, the limits of Section 162(m) do not apply to awards granted under plans or agreements that existed before the company became publicly-traded.  With respect to restricted stock units (RSUs), the proposed regulations provided transition period protection only to RSUs that were paid during the transition period.  In the final regulations, the IRS declined to extend transition relief to RSUs granted during the transition period.  However, the IRS agreed to make the final regulations applicable to RSUs granted on or after the final regulations are published in the Federal Register.