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Author: cynthiamoore

Section 409A Implications of Discounted Stock Options

Employers are generally aware that Section 409A of the Internal Revenue Code of 1986 (“Section 409A”) applies to deferred compensation but may not be aware that it can also apply to certain stock option programs, which could result in compliance problems. A non-qualified stock option[1] is not treated as deferred compensation under Section 409A if three conditions are met: The exercise price can never be less than the fair market value of the underlying stock on the date of grant and the number of shares subject to the option is fixed on the grant date; The exercise of the option is taxable under Code Section 83; and The option does not include any feature allowing the grantee to defer compensation, other than the deferral of income until the later of (a) the exercise of the option; or (b) the date the stock acquired through exercise of the option becomes vested. A “discounted” stock option is an option with an exercise price that is less than fair market value.  A discounted option can be created: At the grant date; or At a later date, if the option term is extended when the exercise price is less than the fair market value of the underlying stock. In either of these events, the option would be treated as deferred compensation under Section 409A.  To comply with Section 409A, the option could only...

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Tax Act Significantly Impacts the Deduction of Executive Compensation

P.L. 115-97, popularly known as the Tax Cuts and Jobs Act (“TCJA”), significantly changes an employer’s ability to deduct compensation paid to its top executive employees. Background Section 162(m), added to the Internal Revenue Code (“Code”) in 1993, provides that a publicly traded corporation may not deduct more than $1 million in compensation paid to its CEO and next three most highly compensated employees.  Section 162(m) included an important exception to the $1 million limitation for commissions and performance-based compensation.  The exception for performance-based compensation covered not only many cash bonus plans but also most stock options and stock appreciation rights plans. Changes TCJA makes the following changes to Section 162(m): Eliminates the exception for commissions and performance-based compensation. Changes the definition of “covered employee” to include (a) an employee who is the principal executive officer (PEO) or principal financial officer (PFO) at any time during the taxable year; (b) the next three most highly compensated employees (other than the PEO and PFO); and (c) any employee who was a covered employee for any taxable year beginning after December 31, 2016. Expands the definition of an employer who is subject to Section 162(m) to include not only corporations whose stock is publicly traded and registered pursuant to Section 12 of the Securities Exchange Act of 1934 (the “1934 Act”) but also any entity required to file reports under Section...

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Tax Blog is published by Dickinson Wright PLLC to inform the public of important developments within the firm and practice areas. The content is informational only and does not constitute legal or professional advice. We encourage you to consult a Dickinson Wright attorney if you have specific questions or concerns relating to any of the topics covered in this blog.