Section 409A

This article summarizes the characteristics and tax treatment of deferred stock units (DSUs).

Where participants recognize compensation income in connection with stock compensation, the company has a reporting obligation with respect to this income and is also sometimes required to withhold taxes on the income. This article summarizes the U.S. tax withholding and reporting requirements for stock compensation.

Changes to tax withholding rates and compensation thresholds for various tax-related purposes for 2019.

A summary of the provisions of the Tax Cuts & Jobs Act of 2017 that impact stock compensation.

On June 22, 2016, the IRS proposed new regulations under Section 409A. The proposals are intended to clarify certain aspects of the final regulations under Section 409A and the proposed regulations on inclusion of income for violations of Section 409A. Although the regulations are not final, they can generally be relied on immediately. This development is a discussion about some of the most significant clarifications that relate to stock compensation.

Section 409A of the Internal Revenue Code was enacted in 2004 and has been in effect since 2005, but the comprehensive and complex final regulations interpreting the provision formally took effect only January 1, 2009. As a result, “good-faith compliance” with the statutory provisions and transitional guidance is now no longer enough. Plan documentation and operations now need to conform to the final regulations, with limited exemptions for grandfathered deferrals earned and vested before 2005. Failure to abide by the final regulations comes with a hefty price. Specifically, affected participants will be subject to accelerated taxation, a 20% tax penalty and possibly additional interest.

On December 5, 2008, the Internal Revenue Service issued proposed regulations describing how to calculate amounts includible in income when a nonqualified deferred compensation plan or agreement fails to comply with the requirements of Section 409A(a) of the Internal Revenue Code.

Updates to the definition of "highly compensated" for Section 423 purposes and "key employees" for Section 409A purposes. Also, the penalties for late tax form filings (and failures to file) increase.

409A Audits

Tax Reform

Get answers to all your questions on the treatment of stock awards upon retirement!

Are complex rules and regulations on a collision course with your stock plans?

Proposed rules on section 409A addressing grants to newly hired employees, payments upon death, accelerations or delays in payments due to foreign ethics or conflicts of interest laws, separation pay, distribution of restricted stock in lieu of compensation, and vesting under the income inclusion rules.