The New Section 409A Guidance — Implications for Equity Compensation Arrangements

The most recent round of guidance furnished by the Treasury Department and the Internal Revenue Service with respect to deferred compensation arrangements under section 409A of the Internal Revenue Code provides a number of important clarifications with respect to equity compensation vehicles, such as stock options, stock appreciation rights, restricted stock, restricted stock units and phantom stock.

The proposed regulations do not permit the service recipient to compensate the optionee for any such increase to the exercise price by paying that individual a cash sum (or delivering vested property) equal to the amount of that increase, unless that cash payment is made on or before December 31, 2005. However, if the exercise price of the option is increased in 2006, it would be possible to compensate the optionee for the lost discount with cash or restricted stock, provided the optionee’s right to such cash or property does not vest during the 2006 calendar year.

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