Skip to main content

Definition of Section 409A

Rule 409A is a provision of the United States Internal Revenue Code that governs nonqualified deferred compensation. It was implemented to ensure that compensation is not deferred to avoid taxes. Under this rule, nonqualified deferred compensation must meet strict timing and form requirements to avoid being subject to income taxes, penalties, and interest. Failure to comply with Rule 409A can result in significant financial consequences for both employers and employees.

For example, under Rule 409A, companies must grant stock options equal to the fair market value of such options at the date of grant. Failure to do so could result in an immediate recognition of income on the difference between the fair market value and the exercise price of such options for the recipient (irrespective of vesting), plus a 20% penalty tax on such amounts to the recipient.

Related Posts

  • 1 (1)

    Post Categories

    • Startups
    • Tax

    What Startups Need to Know About 409A Valuations

    A concise guide for startup founders to understand the basics of 409A valuations, when you'll need them, and the risks of not relying on them.

  • image-asset (6)

    Post Categories

    • Startups

    Equity Grants to Startup Advisors

    Guiding the way for early-stage startup founders, advisors bring value and wisdom to the table. Understand the norms of advisor equity issuance and how to do it right.

  • 30

    Post Categories

    • Startups
    • Employment

    Startups and Stock Options: ISOs vs. NSOs

    Explore the world of stock options with our informative guide. Compare Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs), and learn why startups choose one over the other.