In June 2011, the IRS/Treasury Department issued proposed amendments to the regulations on the performance-based compensation exception for certain stock awards under Code Sec. 162(m). The proposed regulations would not have made any dramatic changes. However, they would have emphasized a few subtle drafting and disclosure points (see “IRS Proposes New Regulations on Sec. 162(m) Performance-Based Compensation Exception”).

Two weeks ago, the IRS finalized these amendments to the 162(m) regulations. The final regulations are mostly consistent with proposed regulations that (presumably) everyone has been following, with only a couple of small but helpful changes in the areas of:

  • The maximum individual share award limit, and
  • The post-IPO transition rule. 


Section 162(m) requires that a stock plan provide a maximum number of shares with respect to which stock options and stock appreciation rights (SARs) may be granted to any employee during a specified period. The revised final regulations clarify that a plan will satisfy this 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 may be granted to an employee during a specified period. Most plans provide such a limit or a specific annual limit on options and SARs, but now would be a good time to double-check your plan document.


Section 162(m) provides a special transition rule for companies following an IPO under which the 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.” This transition rule generally applies until the first meeting of shareholders that occurs after the close of the third calendar year following the calendar year in which the IPO occurred. Prior to the fix provided by these amendments of the regulations, a drafting quirk suggested that most RSUs would not be protected by the transition rule. This amendment of the final regulations clarifies that the post-IPO transition period applies to compensation otherwise deductible under an RSU granted on or after April 1, 2015.