409a Valuation

If you are a private company that offers any non-qualified deferred compensation to employees, you must comply with IRC Section 409a where a formal 409a valuation must be completed at least annually. In the pronouncement, deferred compensation is defined more broadly than the typical definition and it may include equity plans (i.e. stock options or stock appreciation rights), severance plans, bonus plans and employment agreements as well as traditional nonqualified deferred compensation plans.

In general, stock options are taxed when exercised rather than when granted or vested. To maintain this tax protection, the IRS requires that a 409a valuation demonstrates the stock was granted at an exercise price at or above fair market value as of the date it was granted. If the exercise price is below fair market value, Section 409a treats it as current compensation that is both taxed as income and is additionally imposed a 20% penalty.

AccuVal’s knowledgeable appraisers can assist you with ensuring compliance. While an independent appraisal is not required, it provides substantial benefit to private companies. Most notably, 409a valuations less than 12 months old and completed by independent appraisal firms using traditional valuation methodologies are assumed to be stated at fair market value, and the burden of proving the valuation is “grossly unreasonable” shifts to the IRS. In addition to their independence, AccuVal’s 409a valuations always apply a consistent framework of approved valuation methods and are backed by the experience and expertise of professional certified appraisers.

AccuVal’s 409a valuations first seek to identify the business enterprise value of the company. Appraisers then analyze the firm’s capital structure and allocate the value of equity among different classes of shareholders with the goal of honing in on the fully-diluted per share fair market value of the common stock. After the 409a valuation is complete, AccuVal assists clients in recognizing trigger events during the year that warrant an interim statement of fair market value. 409a valuations may also be leveraged to meet fair value financial reporting requirements under ASC 718, Compensation – Stock Compensation, (Formerly SFAS 123R).

Violations of IRC Section 409A may cause imposition of a 20% additional income tax to the employee, in addition to income tax at ordinary rates on the income in question, retroactive tax assessments and incremental interest. These consequences could be significant, penalizing the employee financially and exposing the company to litigation.

Partnering with AccuVal to conduct your 409a valuation means that you can rest assured that appraisals will pass audit review and be recognized by the IRS as sound and reasonable, mitigating your firm’s and your employees’ federal income tax exposure related to Section 409a.