Code Section 409A

Section 409A of the Internal Revenue Code sets forth strict rules that should be consulted anytime compensation could be taxed in a year after it first becomes vested.  409A involves particularly complex and counter-intuitive rules with respect to severance and stock options. 

Although employers typically draft benefit plans and employment agreements, the consequences for 409A violations fall on executives (and other service providers).  A 20% tax, in addition to ordinary income, applies to amounts paid in violation of 409A. Employers have a statutory duty to report 409A violations on Forms W-2 and 1099.