Attention CEPI students: Starting in 2020, the CEPI curriculum is all-digital, and the CEPI will give you the digital books as part of the exam fee. You will still be able to buy the printed books from us as a supplement to the free digital editions you will receive from the CEPI, but the 2020 editions are not available yet. See our CEPI information page.
The Certified Equity Professional Institute (CEPI) is part of the Leavey School of Business at Santa Clara University in California's Silicon Valley. The CEPI was founded in 1989 by a group of equity compensation professionals. Their mission was to establish, promote, and provide certification and continuing education for the equity compensation industry. Since its founding, the CEPI's self-study curriculum has served as the industry's educational standard. Organizations and individuals use CEPI exams as a measurement of basic (Level 1), intermediate (Level 2), and advanced (Level 3) knowledge, skills, and abilities related to equity compensation.
The CEPI's ongoing GPS (guidance, procedures, systems) project has produced a series of books designed to provide impartial guidance for everyone working in the field. This volume combines the four GPS books currently assigned to CEP candidates (Employee Stock Purchase Plans, Restricted Stock and Restricted Stock Units, Performance Awards, and Global Equity Plans), all updated for 2019.
Like the other books used in the CEPI program, the new 2019 edition features spiral coil binding so you can lay the pages flat while studying or at the exam, a feature first added in the second printing of the 2018 book last year due to popular demand.
Table of Contents
CEPI Advisory Board
Employee Stock Purchase Plans, 2018 ed.
Restricted Stock and Restricted Stock Units, 2018 ed.
Performance Awards, 2018 ed.
Global Equity Plans, 2017 ed.
From Restricted Stock and Restricted Stock Units, 2019 ed
Q35: Has the IRC Section 162(m) Limit Been Observed?
A corporate tax deduction may be claimed for the ordinary income recognized by the employee upon vest of restricted stock. The corporate tax deduction is limited (IRC §162(m)) for "covered" employees whose compensation exceeds the $1 million cap for the year. Specifically, IRC §162(m) limits a publicly held corporation's deduction for compensation paid to each of its principal executive officer (PEO), principal financial officer (PFO), and its next three highest compensated officers, excluding the PEO and PFO, to $1 million per year. In addition, if an individual is considered to be a covered employee at any time during a tax year commencing after 2016, he or she will retain the covered employee status permanently. All future payments to such individuals (as well as their beneficiaries) will be subject to the $1 million deduction limit, even if the individual is no longer an officer or employee of the corporation at the time of payment unless the payment is covered by grandfathering rules discussed below. For many companies, this limitation may be a material item for financial statement purposes.
Under prior law, performance-based compensation was not subject to the $1 million cap. The definition of performance-based required that the compensation was contingent on the "attainment of one or more performance goals" and met numerous other requirements.
The Tax Cuts and Jobs Act of 2017 (TCJA) eliminated this exception. As a result, generally all incentive compensation (e.g., performance shares) paid to covered employees after the 2017 tax year are subject to the $1 million deduction limit, unless it meets the IRC §162(m) grandfather rule.
The grandfather rule applies to compensation provided under a written binding contract that was in effect on November 2, 2017, and that has not been materially modified after such date. Under the grandfather rule, such compensation would be subject to the IRC §162(m) rules in effect prior to enactment of the TCJA, including being eligible for a deduction for performance-based compensation.
The Treasury Department and the IRS have provided detailed guidance on the application of the grandfather rule, explaining that a written binding contract is a payment obligation under applicable state law in which the employer does not have any discretion to unilaterally reduce or eliminate the covered employee's right to such award.
Many employers have existing plans and arrangements that were in effect on November 2, 2017, and were designed to meet the performance-based compensation exception. Such employers may still be able to take advantage of this exception and fully deduct the pay. Similarly, many individuals who were not covered employees under prior law, but became covered employees following the enactment of the TCJA have existing incentive pay arrangements that were not designed to satisfy the performance-based compensation exception - namely, PFOs of listed corporations or all executive officers of unlisted corporations now treated as publicly held by virtue of having debt registered with the SEC. Employers may rely on the grandfather rule to fully deduct certain pay to such employees. A complete analysis of the issues associated with IRC §162(m) and a discussion of its grandfather rule are beyond the scope of this publication.
SEC proxy rules require that the Compensation Committee's report state its policy with respect to IRC § 162(m) (i.e., whether compensation paid to the corporation's officers is or is not intended to be fully deductible). This policy should be reviewed annually to determine that it accurately reflects the Committee's policy and the corporation's actual pay practices.