What is Section 409A and why does it warrant such special attention?
Section 409A sets forth new rules regulating nonqualified deferred compensation. It warrants special attention for two reasons. First, Section 409A regulates deferred compensation through a large number of detailed rules. This is in sharp contrast to the state of the law prior to Section 409A, when there were few specific tax rules in this area. The proposed regulations interpreting Section 409A total 240 pages. Final regulations may be longer. Some of the rules are difficult to apply; others are not. Regardless of difficulty, though, these rules must be considered in designing and drafting employment and severance arrangements. Second, noncompliance with Section 409A may trigger massive tax penalties on the employee.[1] For example, in addition to a 20 percent penalty tax on the particular payment or benefit that fails to comply with Section 409A, noncompliance in most cases will taint other payments or benefits received by the employee and subject them to the 20 percent penalty tax a
