What is Section 409a?
In brief, Section 409a refers to deferred compensation for work performed. It can apply to SERPs, restricted stock, stock options, long-term commission programs and severance agreements.
What does Section 409a do?
“The main function of Section 409a is to govern the timing of when deferred compensation can be paid. In part, Section 409a was created in response to executives from Enron, Worldcom, and other companies who decided to accelerate their deferred compensation payments in order to “cash out” before the company went bankrupt.
Specifically, Section 409a establishes six instances when it’s acceptable to distribute money from a nonqualified deferred compensation plan:
- When the employee separates from service.
- When the employee becomes disabled.
- Upon the death of the employee.
- At a fixed time or on a schedule specified by the plan’s documents.
- Upon a change in ownership or control of the company.
- In the event of an unforeseen emergency.“
– According to The Motley Fool
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