Section 409A (Deferred Compensation)

Internal Revenue Code Section 409A (“409A”) provides comprehensive rules regulating the income tax treatment of “nonqualified deferred compensation” paid by a service recipient to a service provider. Deferred compensation is compensation that a worker earns in any given year but that is not paid out until some future year. Such deferred compensation can take the form of stock options, stock appreciation rights, or other similar financial instruments. If a company provides nonqualified deferred compensation to its employees, 409A requires the value of stock options be determined “by the reasonable application of a reasonable valuation method” with certain caveats. Under 409A, stock options issued below the fair market value of the stock can result in draconian tax consequences. While an independent appraisal of shares is not required for private company stock valuations, many companies choose to obtain an independent valuation, which provides a “safe harbor” under 409A.


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3000 Wilson Boulevard

Suite 220

Arlington, VA 22201


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