The IRS recently released final regulations excluding restricted stock units (RSUs) from the IRC § 162(m) transition rules. The final regulations exclude compensation paid under an RSU arrangement or a phantom stock arrangement from the transition relief provided by Treas. Reg. § 1.162-27(f). Under § 162(m), a publicly traded corporation may only deduct $1 million in compensation to its CEO and next three highest paid officers. However, the transition rules of Treas. Reg. § 1.162-27(f) allow former non-publicly held companies to grandfather in some stock and other compensation under pre-existing plans.

A non-publicly held company that becomes a publicly held company will not be subject to the $1 million deduction limit until 1) the plan expires, 2) the plan is materially modified, or 3) all stock or compensation has been allocated under the plan. Relief shall not be granted more than three years after an IPO, or in the case of a corporation that does not have an IPO, one year after the corporation becomes publicly held. Further, a privately held company must disclose the compensation plan in its IPO prospectus.

The final regulations largely adopt the proposed regulations (REG 137125-08) from 2011. However, the final regulations clarify that compensation paid under an RSU is “eligible for transition relief only if it is paid, and not merely granted, before the earliest of the events specified in Treas. Reg. 1.162-27(f)(2).” Comments to the proposed regulations urged the Service to allow RSUs to qualify for transition relief. However, the Final Regulations did the opposite, holding RSUs, which are subject to § 409A, to be different than restricted stock subject to § 83.

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