The IRS recently commenced a Section 409A audit initiative, highlighting the need for companies to conduct internal audits of their deferred compensation arrangements (see Article, Expert Q&A on Section 409A Audits). Equity awards present several potential traps for the unwary under Section 409A. For example, stock options that are otherwise excluded from Section 409A can become subject to Section 409A if they are modified in a way that directly or indirectly reduces the exercise price.

When evaluating whether your equity arrangements meet Section 409A's requirements, review Equity Pitfalls under Section 409A Checklist, which discusses potential Section 409A pitfalls that can arise when granting and administering restricted stock units (RSUs) and stock options and methods for avoiding these pitfalls.