Section 409A Compliance Policy
This policy establishes compliance standards and procedures for Internal Revenue Code Section 409A, which governs deferred compensation arrangements. The policy ensures the Company's compensation plans comply with Section 409A requirements to avoid significant tax penalties for the company and employees.
1Purpose & Objectives
This policy establishes compliance standards and procedures for Internal Revenue Code Section 409A, which governs deferred compensation arrangements. The policy ensures the Company's compensation plans comply with Section 409A requirements to avoid significant tax penalties for the company and employees.
- •Establish compliance standards and procedures for IRC Section 409A
- •Ensure compensation plans comply with Section 409A requirements
- •Avoid significant tax penalties for the company and employees
- •Provide clear identification criteria for covered arrangements
- •Define annual compliance review procedures
2Scope
Applies To
- •All deferred compensation arrangements as defined by Section 409A
- •Sales compensation plans with payment timing features
- •Equity-based compensation with deferral provisions
- •Severance agreements and retention programs
- •All U.S.-based employees and independent contractors
3Definitions
Deferred Compensation
Any arrangement under which an employee has a legally binding right to compensation in one year that is payable in a subsequent year. This is broader than traditional 'voluntary deferral' plans.
Short-Term Deferral Exception
Payments made by the 15th day of the third month following the end of the year in which the compensation vests are exempt from Section 409A.
Specified Employee
A key employee as defined by Section 409A (generally officers, 5% owners, or highly compensated employees). Special payment delay rules apply.
Separation from Service
Termination of employment as defined by Section 409A regulations (not necessarily same as company's termination definition).
Permissible Payment Events
The six events under Section 409A that can trigger deferred compensation payments: separation from service, disability, death, specified time/fixed schedule, change in control, or unforeseeable emergency.
4Key Provisions
Section 409A of the Internal Revenue Code imposes strict requirements on non-qualified deferred compensation plans. It regulates when compensation can be deferred, when it must be paid, and what elections participants can make regarding payment timing.
Why Compliance Matters
Non-compliance with Section 409A results in severe consequences for employees:
- •Immediate income inclusion (even if payment not received)
- •Additional 20% penalty tax on deferred amounts
- •Interest penalties from original deferral date
- •No corresponding deduction for employer
- •These penalties can result in employees paying taxes exceeding 60% of deferred amounts
5Compliance References
Federal Laws
- •Internal Revenue Code Section 409A
- •IRS Section 409A Regulations (26 CFR 1.409A)
- •Federal income tax withholding requirements