Business and Finance Alert: Important Q&A on the Effect of New Section 409A of the Internal Revenue Code on Stock Options and Other Types of Equity Grants
12/14/2005
As you may be aware, Congress enacted Section 409A of the Internal Revenue Code in October 2004 as part of the American Jobs Creation Act. Among other things, the Act broadly regulates "deferred compensation," which is defined to include stock options. But the Act's legislative history contemplates an exemption for certain non-discounted options. Congress directed the Internal Revenue Service (IRS) and the Treasury Department to draft regulations providing much of the detail. In December 2004, the IRS released Notice 2005-1 to provide initial guidance and on September 29, 2005, the IRS issued proposed regulations under Section 409A. Companies may rely on this guidance until final rules are enacted. Comments on these proposed rules may be submitted to the IRS and a public hearing is scheduled for January 25, 2006. The purpose of this alert is to provide you with the basic answers to common questions on Section 409A as it relates to stock options based on the statute and current guidance.
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