Section 409A was enacted, in part, in response to the practice of Enron executives accelerating the payments under their deferred compensation plans in order to access the money before the company went bankrupt, and also in part in response to a history of perceived tax-timing abuse due to limited enforcement of the constructive receipt tax doctrine.
[1] Section 409A generally provides that "non-qualified deferred compensation" must comply with various rules regarding the timing of deferrals and distributions.
The qualified deferred compensation categories are: Section 409A's timing restrictions fall into three main categories:[3] Distributions under a nonqualified deferred compensation plan can only be payable upon one of six circumstances:[4] In addition, Section 409A provides that with respect to certain "key employees" of publicly traded corporations, distributions upon separation from service must be delayed by an additional six months following separation (or death, if earlier).
[5] The rules restricting the timing of elections as to the time or form of payment under a nonqualified deferred compensation plan fall into two categories:[6] As a general rule, initial deferral elections must be made no later than the close of the employee's taxable year immediately preceding the service year.
The term "initial deferral elections" includes all decisions, whether made by the employee or employer, as to the time or form of payment under the plan.
The final regulations did not provide specific examples of the qualifications necessary to perform a 409A valuation for an illiquid startup, highlighting that the requisite experience "could be obtained in many ways".
From its announcement and finalization, the IRS itself has recognized that many industry commentators have expressed concerns about the complexity and reasonableness of several aspects of the law.