409A Deferred Compensation

Appraisal Economics has experience performing valuations to assist companies’ compliance with Section 409A of the Internal Revenue Code.  Section 409A applies to companies granting deferred compensation, such as stock options, where awards are earned over time, often several years, after the grant.  As shares in privately held companies do not enjoy the price transparency of publicly traded companies, a qualified appraisal prepared by an independent valuation expert allows the issuing company to know the fair value of the underlying shares before granting derivatives.  The company can use Appraisal Economics’ appraisal report for the underlying instrument to issue awards with exercise or “strike” prices at or above that level so that the deferred compensation is “qualified” under Section 409A.  Deferred compensation awards that are granted “in-the-money” may be “disqualified” and subject to penalties including an additional 20 percent tax.

Compensation has evolved from simple annual salaries, to cash bonuses, to “plain vanilla” stock options, to complex stock-based compensation awards that include a range of derivative securities, such as long-term incentive plans (LTIPs), outperformance plans (OPPs), restricted stock units (RSUs), and performance shares.  To avoid being treated as disqualified deferred compensation under Section 409A, a valuation of the underlying equity generally must be completed within the 12 months preceding the award grant.

To learn more, please Contact Us.