On February 27, 2013 the U.S. Court of Federal Claims (Federal Claims No. 11-724T 227-13) found that discounted stock options can be considered noncompliant nonqualified deferred compensation (NQDC) arrangements under Internal Revenue Code (IRC) Section 409A.

Effective since January 1, 2005 Section 409A detailed certain rules that must be followed in the case of NQDC and applicable to most deferred compensation arrangements. If a plan fails to comply with either Section 409A or the corresponding regulations than it may lead to a 20% surtax plus interest on the amounts received under non-compliant deferred compensation arrangements and corresponding Form 1099-MISC reporting consequences.

Now, there are safe harbors to these rules and we highly recommend that those involved in drafting or reporting payments related to 409A plans make sure to follow the rules for meeting these safe harbors. If confused about matters such as the safe harbors, what the court ruling means for your organization in terms of further clarifying 409A rules that may apply to your facts and circumstances, or the 1099-MISC reporting consequences of 409A please do not hesitate to ask us. The bottom line is that the case affirms that discounted options clearly fall under the 409A rules and you need to plan accordingly - especially in terms of meeting your reporting requirements.