Section 409A of the Internal Revenue Code applies to stock options. Meaning, stock options must be priced at fair market value.
Section 409A was added to the Code by § 885 of the American Jobs Creation Act of 2004, Public Law 108-357 (118 Stat. 1418). Section 409A generally provides that, unless certain requirements are met, amounts deferred under a nonqualified deferred compensation plan for all taxable years are currently includible in gross income to the extent not subject to a substantial risk of forfeiture and not previously included in gross income. Section 409A further provides that amounts includible in income under § 409A are subject to two additional taxes, a 20% additional tax and an additional tax calculated as the underpayment interest determined at a premium interest rate that would have been due had the amounts deferred been includible in income when first deferred or first no longer subject to a substantial risk of forfeiture, whichever is later. Thus, a failure to comply with the requirements of § 409A may have severely adverse tax consequences. Final regulations under § 409A were issued by the IRS and the Treasury Department on April 17, 2007 (T.D. 9321, 2007-1 C.B. 1123 [72 Fed. Reg. 19234]), effective for taxable years beginning on or after January 1, 2009 (see Notice 2007-86, 2007-2 C.B. 990).