Section 409A of the Internal Revenue Code is a set of rules that govern the taxation of non-qualified deferred compensation plans. It was introduced as part of the American Jobs Creation Act of 2004 and was created, in part, due to Enron executives accelerating access to large sums of deferred payouts before the company went bankrupt. The primary purpose of 409A is to ensure appropriate taxation of deferred compensation.
409A is complicated because of how broad non-qualified deferred compensation plans are. These plans range from severance pay to bonus plans, and include phantom equity plans.
409A and the MARE Stock Plan
The MARE Stock plan, Reins’ proprietary phantom equity plan, is structured to be 409A compliant or exempt, meaning it specifies the following:
- The amount of deferred compensation (for example, the percentage of phantom stock allocation)
- The payment schedule (when that deferred amount will be paid)
- The payment event (the trigger that has to occur in order for the plan participant to receive the payment)
Payment events and the acceleration of vesting in the MARE Stock Plan fall into variations of the following categories:
- A fixed date or dates
- The sale of the company
- Termination or retirement
- Death or disability
When it comes to the MARE and 409A, specificity is everything. The more precise and detailed you are about the award you’re granting to employees, the better. For example, in order to comply with 409A, you must tell your employee, the plan participant, exactly when they can expect to receive a payout. They must know the circumstances involved with that payout (the amount and the payment event). And, of course, employees must pay taxes upon receiving the payout.
409A Compliant vs. Exempt
Depending on the options you choose within the MARE, your plan will be 409A compliant, exempt, or both.
Exempt plans don’t fall under the rules of Section 409A because they meet certain criteria that exclude them from the requirements. Compliant plans might be subject to 409A, but they are structured to meet all of the requirements.
For example, a cash payout of MARE Stock that happens within 30 days is exempt because that 30-day deferral is short enough that it doesn’t fall under 409A. On the other hand, scheduling a longer deferral of payment might be 409A compliant, as long as it adheres to all rules and is planned for in written form at the outset.
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