409A

409A refers to Section 409A of the Internal Revenue Code, enacted in 2004 and applicable to many deferred compensation arrangements beginning in 2005. It governs nonqualified deferred compensation, which is compensation promised to be received in a future year rather than in the year it is earned. The rule applies to individuals and employers in the United States and covers many cash bonuses and most types of nonqualified equity compensation that do not meet the definitions of qualified plans.

Key requirements include strict timing for deferral elections and for distributions. The election to defer typically must be made before the service period to which the compensation relates, and distributions generally may only be paid on defined events or dates, such as separation from service, death, disability, change in control, or a specified future date. The rules also limit acceleration of distributions and impose standards for valuation and plan administration.

Scope and exceptions: 409A does not apply to qualified retirement plans like 401(k)s or defined benefit plans. Some stock options and other equity awards may be exempt if they meet certain safe harbors or other specific qualifications; otherwise they may fall under 409A.

Penalties and enforcement: If 409A is breached, the deferred amount becomes includible in gross income in the year of vesting or payment, and the recipient is subject to a 20 percent additional tax plus interest on the underpayment. Employers may face penalties, and corrective actions may be required.

Compliance: Organizations often seek guidance from tax professionals to design 409A-compliant plans with clear deferral elections, distribution rules, and procedures for corrections when needed.