What is 409A and why is it important?

• A. Section 409A governs nonqualified deferred compensation; improper timing or valuation can trigger penalties
• B. Section 409A governs payroll tax deposits
• C. Section 409A governs health coverage
• D. Section 409A governs wage garnishments

Answer: (A)

Section 409A governs nonqualified deferred compensation. It matters because the timing of deferral elections and the timing and form of distributions must follow specific rules; if they don’t, the deferred amounts are treated as having been paid earlier than intended, triggering immediate income taxation and penalties. Specifically, the deferral amount is included as ordinary income in the year it should have been paid, plus a 20% additional tax and interest on underpayments. This is especially important for equity compensation in startups and private companies, where stock options and RSUs rely on valuation timing; improper timing or valuation can push compensation into 409A, incurring penalties. The other options don’t apply: 409A does not govern payroll tax deposits, health coverage, or wage garnishments.