What does substantial risk of forfeiture mean?

Generally, a substantial risk of forfeiture exists if an employee’s right to deferred compensation or transferred property is contingent on the performance of substantial services in the future or on the occurrence (or nonoccurrence) of a given event.

Is an IPO a substantial risk of forfeiture?

Transfer restrictions (for example, a lock-up period following an initial public offering) generally do not create a substantial risk of forfeiture, including transfer restrictions that carry the potential for forfeiture or disgorgement of some or all of the property, or other penalties, if the restriction is violated.

What is the short-term deferral rule?

Under the short-term deferral rule, a deferred compensation arrangement will be exempt from Section 409A if payment of the compensation must under the terms of the plan be made (and actually is paid) by no later than the 15th day of the third month following the later of the end of the service provider’s taxable year …

What does an 83b election do?

The 83(b) election is a provision under the Internal Revenue Code (IRC) that gives an employee, or startup founder, the option to pay taxes on the total fair market value of restricted stock at the time of granting. The 83(b) election applies to equity that is subject to vesting.

What is Section 457A?

LAW AND ANALYSIS. Section 457A(a) provides that any compensation that is deferred under a nonqualified deferred compensation plan of a nonqualified entity shall be includible in gross income when there is no substantial risk of forfeiture of the rights to such compensation.

Can severance pay be deferred?

Deferred compensation exists only when the service provider (employee) has a legally binding right to receive compensation that is payable in a later year. Thus, severance pay provided upon an employee’s involuntary termination is subject to a substantial risk of forfeiture.

Who pays 409A penalty?

Risk Exposure: Employer Liability for Reporting and Withholding Penalties. Though the employee has the ultimate responsibility to pay excise taxes under Code Sec. 409A, employers must properly report and withhold the compensation paid to employees.

What happens if you don’t file 83b?

If the employee does not file the Section 83(b) election within 30 days of the grant date, the employee is generally forced to recognize the stock value as income as he or she satisfies the vesting conditions – which will often happen at a time when the stock has appreciated and the amount of taxable income has …

Who should make an 83 B election?

In a nutshell, timely filing an 83(b) election upon the receipt of restricted stock is strongly recommended for restricted stock grants to founders to avoid future tax complications for founders as well as startups.

What is Section 457A deferred compensation?

Section 457A generally provides that any compensation deferred by a service provider (such as an employee) under a nonqualified deferred compensation plan that is sponsored by a “nonqualified entity” (see below) is includible in the service provider’s gross income when there is no substantial risk of forfeiture …

What does substantial risk of forfeiture mean for deferred compensation?

A substantial risk of forfeiture is a standard applied by the IRS to determine whether deferred compensation and transfers of property should be taxed currently to the payee.

Is there a substantial risk of forfeiture under code 409A?

For example, an employee’s agreement to refrain from performing services (e.g., a noncompete agreement) may create a substantial risk of forfeiture (and therefore defer taxation) under Code Section 83, but it would not be considered a substantial risk of forfeiture under Section 409A.

What happens if deferred compensation is not exempt from Section 409A?

Section 409A penalties. If a deferred compensation arrangement that is not exempt from Section 409A fails to meet the rules of Section 409A, two things happen at the point that amounts deferred under the plan are no longer subject to a SRF: The employee must include the amounts deferred under the plan in income for tax purposes.

When does a lapse of SRF constitute a permissible payment event?

I.R.C. §409A (a) (1) (A) (i). Lapse of SRF also constitutes a permissible payment event under payment rules, and identifies the taxable year (or 2.5 month period following such year) in which compensation should be paid so as not to constitute deferred compensation (i.e., the short-term deferral rule) Section 457 (f).