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IRS Deadline For Section 409A Compliance is Tomorrow

I have written about the exciting topic of 409A compliance before on the Seattle 2.0 site.  Our company has just gone thru a series of additional work to ensure that all of our compensation-based agreements (like stock agreements, executive compensation agreements, etc) within the company are section 409A compliant.  Here is an interesting brief from Wilson Sonsini.  The deadline is tomorrow and I am calling this out to other startups.  Per the Wilson post there are some hefty penalties, including:

    * Violations are extremely costly for employees, particularly in California, which imposes an additional 20 percent state penalty tax atop the 20 percent federal penalty tax (thus, the effective tax rate on amounts includible into income as a result of a Section 409A violation can range up from 80-90 percent or more).

    * Employers usually make representations and warranties regarding Section 409A compliance in acquisition and financing documents.

    * Section 409A disproportionately affects key management and sales employees, who are more likely to participate in arrangements subject to Section 409A.

    * Noncompliance with Section 409A can permeate through broad-based employee benefit plans (e.g., stock plans and severance policies) and, as a result, employers can encounter pressure to "make whole" many employees from the costly tax ramifications of Section 409A.

    * If an employer's plans/agreements are subject to Section 409A, internal business administration (e.g., human resources, payroll, and legal departments) will need to monitor various aspects of compliance with Section 409A.

You might want to take a pass with your attorney to make sure that you are in compliance.


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