IRS code section 409A is regulating the taxation of “non-qualified” deferred compensation for “service providers” (employees. independent contractors and directors). In essence this section imposes a 20% federal tax penalty on deferred compensation that is not exempt from or comply with the provisions of Section 409A.
Non-qualified stock options issued below the Fair Market Value of such options at the time of issuance, will be non-compliant and subject to the above penalties of Section 409A.
Non-qualified deferred compensation plans include: deferred salary, severance arrangements, bonuses, options, RSUs, earnouts and other compensation that is not payable in the tax year in which it was awarded.
Exempt plans include: incentive stock options, restricted stock, short term deferral, Separation Pay Plan, and Qualified Plans (such as 401k, profit sharing plans, 403(b), and Keogh (HR-10) plans).