New 409A Deferred Compensation Regulations Issued

The new regulations for deferred compensation taxation have been issued-all 400 pages of them. For equity compensation plans, the rules are basically the same, but they allow companies to give departed employees more time to exercise options without triggering the tax. Prior rules required the options to be exercised within 90 days of termination; the new rules allow up to 10 years after the original grant date as well. The definition of service recipient stock has also been liberalized so that service recipients of companies where the parent owns less than 50% of the stock can be issued options exempt from the deferred compensation rules. The definition of allowable stock is broadened as well by allowing any kind of common stock, not just the class that is either publicly traded or has the highest combination of voting and dividend rights. Finally, the valuation requirements remain substantially the same for private companies, with the significant addition that recent equity sales provide a safe harbor.

The NCEO will provide a detailed issue brief on this topic in the near future.