Section 409A–What Is It?

 “Section 409A”–Section 409A of the Internal Revenue Code requires the inclusion in income of deferred compensation paid pursuant to a deferred compensation plan that fails to meet certain requirements, or that is not operated in accordance with certain requirements.  

If a deferred compensation plan fails to meet the Code’s requirements, or is not operated in accordance with the Code’s requirements, then all compensation deferred under the plan for the taxable year and all preceding years must be included in gross income for the tax year to the extent not subject to a substantial risk of forfeiture or not previously included in gross income.

If compensation is required to be included in gross income under Section 409A, the tax imposed by 409A for the tax year is increased by interest and an amount equal to 20% of the compensation which is required to be included in gross income.

Compensatory stock options and compensatory warrants are subject to Section 409A, and under Section 409A all such options must be granted at fair market value on the date of grant.  If a compensatory option is granted at below fair market value, the amount that must be included in income is the spread between the fair market value and the exercise price upon vesting, plus 20% of that amount, plus interest.  

Non-compensatory warrants, such as those received in connection with making a loan, are not subject to Section 409A, although they raise other tax issues.

Send to Kindle