The section 409A of the Internal Revenue Code controls the nonqualified deferred compensation paid by the service recipient to the service provider.
Section 409A is a part of the Internal Revenue Code (IRC), called IRC 409A. This section was first added in October 2004 by the American Jobs Creation Act. It was on the 10th of April 2007 when the IRS issued the final regulations that fell under the IRC section 409A.
The section 409A of the Internal Revenue Code controls the nonqualified deferred compensation paid by the service recipient to the service provider. In most cases this is in the form of stock options and shares in the company to employees.
The service providers can be the board members, independent contractors, general employees, executives, or a company that offers the services. On the other hand, the service recipients are normally the employees or even independent contractors who have given services to the company. In short, all the non-qualified deferred compensation have to comply with section 409A. The rules mainly focus on the timing of the distributions and deferrals.
Section 409A is applied only when there is any “deferral of compensation” that takes place. This is when an employee has the legal right to compensation in a taxable year that can be paid or is payable in the next or close to the future taxable year. There are many exceptions including qualified plans like 401k plans, pension, welfare benefits like disability pay, sick leave, vacation leave,or death benefit plan.
Also as per the section, if any rule is violated, then a 20% exercise tax is imposed. Not following the operational or design rules of the compensation plan are a violation in this case.
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