A closely-held business will often use deferred compensation arrangements to induce or reward certain behavior by its key non-shareholder executives; for example, to incentivize the executive to attain certain business performance goals or operational benchmarks.

Such an incentive arrangement will defer the payment of compensation such as a bonus until the compensation is earned, usually

Yesterday we reviewed the IRS’s determination that a nonstatutory stock option (NSO) violated Section 409A. Today we will review the income tax consequences of such failure.


Income Inclusion under Section 409A

Section 409A provides that, if at any time during a taxable year a nonqualified deferred compensation plan fails to meet certain distribution-timing requirements, or

Incentive Compensation

It is not uncommon for a closely-held business to provide an economic incentive to its key employee. Often, the incentive takes the form of an annual cash bonus. Alternatively, the business may provide the key employee with a longer-term incentive, in the form of a deferred compensation arrangement that may be payable on

Closely-held businesses often rely heavily on a small group of key employees to help their businesses succeed.   Given the value of these key employees to the business, it is not uncommon for the business to offer them certain types of additional executive compensation, in addition to standard base salary and participation in typical employee welfare