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About 409A

Section 409A regulates the treatment of “nonqualified deferred compensation” plans such as employee stock options (ESO), stock appreciation rights (SARs), or similar instruments. Section 409A was enacted as part of the American Jobs Creation Act of 2004 to curb abuses in executive compensation.

 

Severe penalties may be imposed for non-compliance upon granting ESOs with a strike price less than the fair market value of the stock price on the grant date. Non-compliance will result in significant tax consequences to the company and option holder. These severe tax consequences include:

 

  • Immediate taxation upon vesting of ESO
  • Potential interest charge at the underpayment rate plus 1%
  • 20% penalty tax in addition to the income tax 

 

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