The NASPP Blog

The IRS recently proposed new regulations under Section 409A to clarify certain aspects of the current regulations. Here is a quick summary of the most significant clarifications that apply to stock compensation.

Pre-Hire Stock Options

As my readers know, NQSOs are exempt from Section 409A if they meet certain conditions. Under the existing regs, however, it is unclear that NQSOs granted in advance of when an individual starts employment (or starts performing services, in the case of outside directors, consultants, and other nonemployees) can be exempt. The proposed regulations clarify that these options can also be exempt provided they meet the same conditions that apply to other NQSOs.  (This issue doesn’t apply to ISOs because ISOs can’t be granted in advance of employment).

Delay of Payment Due to Legal Compliance

The proposed regs would permit a delay of a payment under the short-term deferral exemption, if the payment would violate the federal securities laws or other applicable laws. This could be helpful in the right set of circumstances (e.g., a restatement that causes a company to no longer be current in its public filings, causing the Form S-8 filed for the plan to no longer be effective).  But, in my experience, the situations in which issuing stock under an equity plan would violate a law are few and far between. For instance, this would not allow a company to delay issuing shares until the end of a black-out if the short-term deferral period expired before the trading window is scheduled to open. While employees wouldn’t be able to sell the shares until the trading window opens, the issuance is not a violation of securities law.  Even in a situation where the S-8 is no longer effective, there might be other exemptions the company could rely on to issue the shares.

Repurchase Rights

The amendments would clarify that stock options are exempt even if stock acquired under the option is subject to repurchase at less than FMV in the event the optionee is terminated for cause or breach of a restrictive covenant. Who knew? I had no idea there was even a concern about this.

Payments Upon Death

The proposed regulations would clarify that a payment will be treated as being made upon death, in satisfaction of Section 409A, if the payment is made no later than December 31 of the year following the calendar year of death. The proposed regs would also provide flexibility around making payments in the event of the death of a beneficiary who has become entitled to payments as a result of an employee’s death (i.e., a situation where an employee dies, the company begins making payments to the employee’s beneficiary, and then the beneficiary dies).

For more information, see the NASPP alert “IRS Proposes Regulations under Section 409A” and the Pillsbury memo, “Proposed Section 409A Regulations Facilitate Common Pay Practices.”

– Barbara