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Watch Out for IRC Section 409A
If you have an equity-based compensation plan, the stakes are higher than ever to make sure that you are valuing the compensation properly. Failure to do so can lead to excise taxes and penalties that can only be described as confiscatory. Executives in charge of maintaining equity-based compensation plans should seek advice from a qualified tax professional regarding the plan's compliance with IRC Section 409A. Furthermore, any issuer of deferred equity-based compensation should employ the services of an independent valuation expert in order to assure that the plan is not granting deferred compensation at a discount.
The 2004 passage of the American Jobs Creation Act brought with it the addition of Section 409A to the Internal Revenue Code. Section 409A carries potentially burdensome tax implications for individuals rewarded under non-qualified deferred compensation plans. Individuals charged with the responsibility of maintaining a plan of this type must take care to structure company plans in such a way as to abide by the stringent regulations of Section 409A. Otherwise, employees could face unexpected taxes, penalties, and interest on deferred compensation.
The IRS issued Notice 2005-1 in December 2004 in an attempt to provide guidance in the application of Section 409A. In September 2005, further guidance was issued in the form of proposed regulations on deferred compensation. While the latter material should be viewed as guideline in nature, it is widely assumed that the reliance upon these regulations by plan administrators and tax professionals will evidence good-faith compliance with Section 409A.