409A

 

WHAT IS  SECTION 409A OF THE IRC?

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 ESOP with a strike price less than the fair market value of the stock price on the grant date.
 
 

WHO SHOULD BE CONCERNED ABOUT 409A?

Section 409A applies to compensation plans such as employee stock option plans (ESOP) and affects ESOs granted and vested after 31.12.2004.
 
  • Straight stock options
  • Restricted stock
  • Stock options with accreting exercise prices
  • Performance stock options
  • Contingent purchase price elements
  • Employee stock purchase plans
 

HOW IS  THE VALUE OF A PRIVATE COMPANY DETERMINED?

Section 409A requires that the fair market value is determined by the “reasonable application of a reasonable valuation method”. What is considered unreasonable? For example, to use a previously calculated value that fails to reflect all material information or a calculation that is more than 12 months old. Our team of accredited valuation analysts has extensive experience in valuing private companies, and has performed hundreds of valuations in all fields, from life sciences to internet companies.
 
 

PENALTIES FOR NON-COMPLIANCE

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
  • Interest charge at the underpayment rate plus 1%
  • 20% penalty tax in addition to the income tax