The Clock is Ticking for Section 409a Compliance
The deadline for compliance with IRC Section 409A is fast approaching. Section 409A
generally became effective in January 2005; however, the IRS recently extended the effective date of the final regulations until January 1, 2008 for most companies. As the new deadline approaches, the IRS is issuing continuing guidance with respect to employee tax reporting, withholding, and transition relief. But the critical point remains: bring your nonqualified deferred compensation plan into compliance with Section 409A by the deadline or be prepared for an onslaught of penalties and taxes to you and your employees.
409A Recap
Added to the tax code as part of the American Jobs Creation Act of 2004, Section 409A generally requires that amounts deferred under a nonqualified deferred compensation plan (including stock options and stock appreciation rights or "SARs") for all taxable years are currently includible in gross income to the extent they are not subject to a substantial risk of forfeiture and not previously included in gross income. With respect to stock options, the IRS concern is that stock options and SARs issued "in the money" are really just a form of deferred compensation, representing a shift of current compensation to a future taxable year. In order to avoid being subject to Section 409A, employers need to demonstrate that all stock options and SARs are issued "at the money" (strike price equal to the FMV of the underlying shares at the grant date).