Nonqualified Deferred Comp and Stock Options — Watch out for IRC 409A

By Kenneth H. Bridges, CPA, PFS     July 2015

IRC section 409A was enacted in 2004 to curb perceived abuses in the area of executive nonqualified deferred compensation (NQDC).  The supposed primary target of this legislation was the situation in which corporate executives enjoyed the benefit of tax deferral on deferred compensation, but then wanted to be able to shelter the deferred compensation from the reach of creditors of the employer corporation in the event the employer’s financial health deteriorated (e.g. Enron and Delta).  However, the rules as written are quite broad and can cover many more situations; and the ramifications of compensation being subject to 409A are severe.

Section 409A provides that where an NQDC plan fails to meet certain requirements amounts deferred thereunder will be included in taxable income and, in addition to the normal income tax that would apply, will be subjected to an additional 20% tax plus interest accruing from the year that the amounts were deferred.

Stock options are excluded from the reach of 409A, provided that the exercise price can never be less than the fair market value of the underlying stock as of the date of grant.  Accordingly, it is very important to document that the strike price is at least as great as the value of the stock at the date of grant.

Kenneth H. Bridges, CPA, PFS is a partner with Bridges & Dunn-Rankin, LLP an Atlanta-based CPA firm.

This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice.  The article provides only a very general summary of complex rules.  For advice on how these rules may apply to your specific situation, contact a professional tax advisor.