United States: Tax Bill: New Opportunity To Defer Tax On Certain Equity Awards And Repeal Of Performance-Based Exception To 162(M)

The Tax Cuts and Job Act of 2017 was recently signed into law creating two important changes in executive compensation, which we outline below.

The Tax Bill Permits Certain Employees to Elect to Defer Taxation of Qualified Equity Grants by Private Companies

The Tax Bill creates a new Section 83(i) of the tax code, which allows certain employees of private companies to defer taxation on the exercise of certain stock options or the settlement of restricted stock units for up to 5 years. Under current law, non-qualified stock options and restricted stock units are generally taxed on exercise (for options) or settlement (for restricted stock units).

The key benefit of Section 83(i) is the opportunity to defer taxation of income attributable to "qualified stock" (defined below) until the earlier of:

  • the date the qualified stock becomes transferrable (including transferable to the employer);
  • the date the stock becomes readily tradeable on an established securities market, such as upon an IPO;
  • the date that is 5 years after the employee's right in the stock is vested;
  • the date the employee becomes an "excluded employee" (defined below); or
  • the date the employee revokes his or her election.

However, not all employees and employers will be able to benefit from the new Section 83(i); specifically:

  • Section 83(i) can only be utilized by "eligible corporations." "Eligible corporations" are private companies that have a written plan under which at least 80% of all US employees (excluding part-time employees) are granted options or restricted stock units, with the same rights and privileges. The number of shares available to all employees need not be equal in amount so long as more than a de-minimis amount is available to each employee. Because Section 83(i) requires that 80% of all US employees to be participants, it is likely that only early stage corporations will be able to utilize this deferral opportunity.
  • Section 83(i) is available for employees who are not "excluded employees" and who make an election to defer (as further described below). An "excluded employee" is a person who:

    • is or has been at any time the corporation's chief executive officer or chief financial officer;
    • is or was one of the 4 highest compensated officers during the preceding 10 taxable years; or
    • is or was a 1% owner during the preceding 10 calendar years.

Employees who are family members of the CEO or CFO are also excluded.

Only the taxation of "qualified stock" is eligible for deferral under Section 83(i). "Qualified stock" means: (a) stock received in connection with the exercise of an option or settlement of a restricted stock unit; and (b) the option or restricted stock unit was granted by an employer in connection with the performance of services during a calendar year in which the employer was an "eligible corporation." However, qualified stock does not include any stock if, at the time of vesting, the employee may sell the stock to, or otherwise receive cash in lieu of stock from, the corporation. Further, no election is permissible if the employer purchased any of its outstanding stock in the preceding calendar year, unless (a) at least 25% of the total dollar amount of stock purchased is stock under which there is an active deferral election (i.e., "deferral stock"), and (b) the determination of which individuals from whom deferral stock is purchased is made on a reasonable basis.

In order to take advantage of the deferral opportunity, the employee must make a Section 83(i) election no later than 30 days after the employee's rights in the qualified stock are transferrable or vested. If the election is made, the amount of income required to be included at the end of the deferral period will be based on the value of the stock at the time the stock becomes transferrable or vested, regardless of whether the stock value decreases during the deferral period. No election may be made under Section 83(i) if the employee has already made an election under Section 83(b) with respect to the qualified stock. In addition, if an election is made under new Section 83(i), an option granted as an incentive stock option, will no longer be eligible for the favorable tax treatment available to incentive stock options.

Section 83(i) also imposes notice and reporting requirements, which are as follows:

  • The employer is required to provide notice to the qualified employee at the time the right to the qualified stock becomes transferable or vested. The notice must: (a) certify that the stock is qualified stock; (b) notify the employee that the employee may be eligible to make an election to defer under Section 83(i); and (c) inform the employee of the tax consequences of the election. A failure to satisfy the notice requirements may result in the imposition of a penalty ($100 per failure, maximum of $50,000 per year).
  • The employer must report on Form W-2: (a) the amount of income covered by the deferral election for both the year of deferral and the year income is recognized by the employee; and (b) the aggregate amount of income which is deferred pursuant to Section 83(i) elections, determined as of the close of the calendar year.
  • Any employer with outstanding deferral stock as of the beginning of a calendar year which purchases any stock during such year is required to include on its tax return the total dollar amount of its outstanding stock purchased during the year.

Generally, the new Section 83(i) will apply to stock attributable to options exercised or restricted stock units settled after December 31, 2017.

The Tax Bill Repeals the Performance-Based Compensation Exception Under Section 162(m) and Expands Who is Covered by Section 162(m)

Under current law, Section 162(m) places a $1 million limit on the ability of "publicly held corporations" to deduct, for federal income tax purposes, compensation paid to "covered employees." Prior to the Tax Bill, compensation that was "performance-based" did not count against the $1 million limit.

The Tax Bill eliminates this performance-based exception, meaning that all compensation paid to a "covered employee" that is above $1 million will not be deductible by employer corporation. There will no longer be an exemption available for stock options and performance-based stock awards.

The Tax Bill also broadens the applicability of Section 162(m) in two key ways. First, the definition of "covered employee" has been expanded. Under current law, "covered employees" only includes the chief executive officer and the next 3 highest compensated officers (excluding the chief financial officer) who served in those roles at the end of the year. The definition of "covered employee" will be expanded to include the chief financial officer of the employer, and now applies to anyone who met the criteria at any time during the taxable year. In addition, beginning for covered employees in 2017, once an employee is a covered employee, they will remain subject to Section 162(m) for as long as they are employed by the corporation and beyond. This means corporations will no longer be able to defer compensation to an employee into a year when the employee is no longer a "covered employee."

Second, the definition of "publicly held corporation" is expanded beyond all publicly traded corporations (currently subject to Section 162(m)) to include corporations required to file under Section 15(d) of the Securities Exchange Act of 1934 (i.e., corporations with publicly traded debt).

The amendments to Section 162(m) will apply to taxable years beginning after December 31, 2017, except that the amendments will not apply to compensation provided pursuant to a binding contract that was in effect on November 2, 2017, and which was not modified in any material respect on or after that date. The impact of the grandfathering provision is still unclear. However, deductions in 2018 for performance-based awards granted in previous years may still be allowed. Compensation pursuant to an employment agreement with the chief financial officer entered into prior to November 2, 2017 may also still qualify for the deduction.


The creation of Section 83(i) potentially makes the equity component of executive compensation packages much more valuable. However, due to the limited scope and applicability of Section 83(i), it remains to be seen how many companies will elect to utilize this new opportunity.

Companies subject to Section 162(m) will likely modify their compensation philosophies to be more cash-based and more definitive in light of the repeal of the performance-based exception. In fact, some large public companies have recently announced a move to higher salaries in light of the changes to Section 162(m).

For more coverage of the new tax bill's impact on the workplace click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Stroock & Stroock & Lavan LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Stroock & Stroock & Lavan LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions