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Section 409A Valuation Considerations
Section 409A regulates the treatment of nonqualified deferred compensation (NQDC) paid by a “service recipient” to a “service provider” for federal income tax purposes. Sec. 409A has a measurable impact on the way NQDC plans are designed and operated.
Failure to adhere to Sec. 409A could result in immediate taxation, a 20% penalty and potential interest payments to the employee. The context in which most commonly encounter Sec. 409A regulations is related to the issuance of employee stock options and other equity instruments.