Dividends and Dividend Equivalents May be Performance-Based Compensation under Code ?º 162(m) Even if Received Prior to Vesting of Restricted Stock or Restricted Stock Units

July 04, 2012
The IRS has confirmed that dividends and dividend equivalents relating to restricted stock and restricted stock units (RSUs) are separate grants from the restricted stock and RSUs, and must separately satisfy performance-based compensation requirements in order to avoid being counted toward the $1 million deduction limit on compensation under Internal Revenue Code ?º 162(m). For example, if an employee?ÇÖs right to dividends and dividend equivalents vests and becomes payable only upon satisfaction of the same performance goals that apply to the related grants of restricted stock and RSUs, then the dividends and dividend equivalents are excluded from compensation for purposes of applying the $1 million deduction limitation. However, if an employee receives dividends and dividend equivalents at the same time that dividends are paid on the company?ÇÖs common stock prior to vesting of the restricted stock and RSUs and achievement of related performance goals, then these amounts are not qualified performance-based compensation, regardless of whether the performance goals are later met with respect to the related restricted stock and RSUs. Revenue Ruling 2012-19 can be found here.
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