Kansas Employment Law Blog Photo
Dividends and Dividend-Equivalents as Performance-Based Compensation
By: Jason Lacey

A new ruling from the IRS (Rev. Rul. 2012-19) addresses when dividends and dividend-equivalents paid to an employee in connection with restricted stock or restricted-stock units (RSUs) will qualify as performance-based compensation for purposes of the deduction limitation under Code Section 162(m).

Note. This ruling is of particular relevance to publicly traded companies. They are limited by Code Section 162(m) in their ability to deduct compensation paid to a "covered employee," unless the compensation is qualifying performance-based compensation.

The ruling concludes that rights to dividends and dividend-equivalents must be analyzed separately from the underlying restricted stock or RSUs to determine whether they qualify as performance-based compensation.

For example, if an employee is granted restricted stock that qualifies as performance-based compensation but is also given the right to receive dividends with respect to the restricted stock without regard to whether the performance conditions are satisfied with respect to the restricted stock, the dividends will not qualify as performance-based compensation and will be subject to the deduction limitation under Section 162(m). But if the arrangement provides that the dividends will be accumulated and paid to the employee only if and when the performance-based conditions on the restricted stock are satisfied, the dividends also will qualify as performance-based compensation.

Facing the Music at Facebook: When the Tax Bill Comes for Equity Compensation
By: Donald Berner

Facebook's pre-IPO regulatory filings (click here) with the Securities and Exchange Commission (SEC) highlight a common issue with equity compensation programs -- the tax bill can be very large and trigger a burdensome withholding obligation.  Facebook reports that its employees and contractors hold about 378.5 million restricted stock units (RSUs).  Each RSU represents a right to receive one share of Facebook stock when the RSU vests.  The RSUs will vest approximately six months after the IPO.  Facebook is estimating a median IPO price of $36 per share.  If that valuation holds up, the RSU holders will vest in equity compensation worth approximately $13.6 billion.  Assuming a combined state and federal tax rate of 40%, that will produce a tax bill of about $5.5 billion.

A big tax bill can be a nice problem to have; however, employers are required to withhold taxes with respect to equity compensation as it vests, and the IRS wants to be paid in cash, not shares.  So where does the money come from?  In Facebook's case, it looks like they are planning to use a good chunk of the money they will receive from selling shares to the public in the IPO for business purposes; however, Facebook will likely hold back a percentage of the shares each employee would receive upon vesting of the RSUs and then use some of the cash from the IPO to make the required tax payments.  This is sometimes referred to as "netting down" the shares the employees receive.  It is convenient for employees, but requires the      Continue Reading...


Don Berner Image
Don Berner, the Labor Law, OSHA, & Immigration Law Guy
Boyd Byers Image
Boyd Byers, the General Employment Law Guy
Jason Lacey Image
Jason Lacey, the Employee Benefits Guy
Additional Sources
Subscribe to Kansas Employment Law Letter Image
Subscribe to Kansas Legislative Insights Image