409A
Business & Finance abbreviation · Tax
| Stands for | Section 409A (nonqualified deferred compensation rules) |
|---|---|
| Categories | Business & Finance |
409A stands for Section 409A (nonqualified deferred compensation rules), a tax abbreviation.
Section of the Internal Revenue Code governing nonqualified deferred compensation, best known for requiring startup stock options to be granted at or above fair market value. Companies obtain an independent "409A valuation" of their common stock, usually yearly, to set option strike prices.
Example: We need a fresh 409A before the board approves the next round of option grants.
Usage notes
Enacted in 2004 after the Enron scandal, in which executives accelerated deferred pay before the company collapsed. A violation makes the deferred amount taxable immediately plus a 20% additional tax and interest. A valuation by a qualified independent appraiser generally gives the company a presumption of reasonableness, known as a safe harbor.
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