Merry 162(m)-as - An Early Christmas Present From The IRS?

So for years some practitioners have bemoaned the need for a per-person limit under the option rules in the Section 162(m) regulations. After all, if there is a plan-wide limitation, than isn't it the case that no particular participant can be granted more than the gross limit? Treasury and the IRS expressly rejected that approach after specific consideration of the point, however, thereby forcing issuers to identify expressly, and seek shareholder approval of, a specific per-person limitation. See Treas. Reg. § 1.162-27(e)(2)(vi)(A).

Now comes PLR 200949005 (Aug. 18, 2009, rel. Dec. 4, 2009). If you were worried that a per-plan limitation was not sufficiently protective of the government's interests, then, as Jack said in Tim Burton's first Batman movie, "Wait'l they get a load of me." In the new ruling, awards were made in the form of performance units. The ruling states: "The Plan provides a maximum limitation on the dollar amount of an award that may be paid to a covered employee for any performance period. Under the terms of the Plan, the dollar amount payable to a covered employee may not . . . exceed Y percent of Corporation’s earnings before income taxes, as publicly disclosed . . . for the fiscal year ended immediately prior to the applicable payment date."

The plan required the establishment within the first 90 days of a performance period of a number of standards, including the performance period, the applicable goals, the applicable unit value and the maximum number of units that may be granted to any one participant. If a participant received less than the maximum number of units, the number of units issued to other participants would not be increased as a result.

On this record, the issuer asked for approval of a provision under which the Committee could delay the grant of a specific number of units until after the first 90 days of the performance period. In other words, the actual award could be deferred indefinitely, subject to the established maximums.

The logic of the request is understandable, particularly in light of the odd way in which Section 162(m) works. So many requirements of Section 162(m) can be worked around, if one is willing to endure the klunkiness of doing so. Harkening back to the option rule noted above, for example, you could satisfy the requirement for a per-person limit by saying that no participant may get more than the amount available under the plan,* if you were willing to go out to shareholders with such a provision and endure the resulting slings and arrows. But there was always a facade of required process. Thus, notwithstanding the foregoing, you indeed did need a per-person maximum.

Let's now come back to the kind of bonus plan at issue in the new ruling. If you wanted flexibility as to the ultimate amount of an award, you could have awarded everyone a pie-in-the-sky maximum, and then shaved everyone down in a surgical or otherwise contoured fashion using the ubiquitous negative-discretion authority bestowed by the regulations. See Treas. Reg. § 1.162-27(e)(2)(iii)(A) (second sentence). But, again, you would have to go through the cosmetic of large presumptive awards. One might have thought that Section 162(m) would at least require that cosmetic, even if substantively there was a potential work-around.

Surely, you couldn't just leave the actual award to each participant altogether unstated, right? I mean, that would be worse than retaining the prohibited discretion to increase the amount of the award in an untimely fashion in violation of the fundamental requirement relating thereto, see § 1.162-27(e)(2)(iii)(A) (first sentence), . . . right?

Well - wrong. The new ruling seems to say that all of that's just fine and dandy. Those spunky Democrats! Merry Christmas to all, and to all a good night.


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* Put aside for the moment some of the nuances surrounding the inability to add back canceled grants under the rules governing the per-person limits. See Treas. Reg. § 1.162-27(e)(2)(vi)(B).