Stock-based compensation plans; $1 million limit on employee remuneration

Stock-based compensation plans; $1 million limit

The Treasury Department and IRS today released for publication in the Federal Register final regulations (T.D. 9716) relating to the deduction limit for certain employee remuneration in excess of $1 million.

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Today’s regulations [PDF 227 KB] finalize regulations that were proposed in June 2011, to clarify the effects of stock-based compensation plans of publicly held corporations on the $1 million limitation for employee remuneration under section 162(m).

The final regulations reflect changes made in response to comments—changes that are intended to clarify provisions and not intended to be substantive changes.


A notice of proposed rulemaking (REG-137125-08) was issued in June 2011 concerning the deduction limitation for employee remuneration in excess of $1 million. The preamble to the proposed regulations stated that these regulations were not intended to make substantive changes to the existing regulations under section 162(m) but were intended to:

  • Clarify that qualified performance-based compensation attributable to stock options and stock appreciation rights must specify the maximum number of shares with respect to which options or rights may be granted to each individual employee
  • Clarify the application of a transition rule for taxpayers that are not publicly held corporations but then become publicly held corporations

Final regulations

The preamble to today’s final regulations notes that comments were received concerning the 2011 proposed regulations.

In response to some of the comments, changes have been accepted and made to the final regulations, including:

  • A clarification that a plan satisfies the requirement in the regulations to state the maximum number of shares that may be granted to any employee if the maximum number of shares of all equity-based awards, including stock options, stock appreciation rights, restricted stock, and restricted stock units (RSUs) that may be granted to an employee is stated.
  • A statement that the final regulations apply to compensation attributable to stock options and stock appreciation rights granted on or after June 24, 2011 (the date of publication of the proposed regulations).
  • A transition rule is available for a non-public corporation that becomes publicly held, with respect to compensation payable under a restricted stock unit (RSU) arrangement granted after the date of publication of the final regulations—scheduled for Tuesday, March 31, 2015. For RSUs granted after that date, compensation must be paid, not merely granted, before the corporation becomes publicly held in order for the 162(m) limitation not to apply.

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