The 409 is an executive benefit plan is a type of nonqualified deferred compensation plan that lets select, highly compensated employees enjoy tax advantages by deferring a greater percentage of their compensation (and current income taxes) than is allowed by the IRS in a qualified retirement plan1.
A 409A executive benefit can be used to provide additional retirement income, reward performance, attract and retain talent, and align the interests of the executive and the company¹². A 409A executive benefit can also be customized to suit the needs and preferences of the executive and the company, such as the amount, timing, and form of payment¹².
However, a 409A executive benefit must comply with strict rules and regulations under Section 409A of the Internal Revenue Code, which governs the taxation of nonqualified deferred compensation plans¹².
Section 409A imposes various requirements on the initial deferral election, the distribution events, the payment schedule, and the plan documentation¹². If a 409A executive benefit fails to comply with Section 409A, the deferred income will be subject to immediate taxation, plus a 20% penalty tax and interest charges¹².
(1) (2) https://www.esopmarketplace.com/article/daniel-zugell-business-transition-advisors/executive-benefits-for-esop-owned-s-corporations-post-irc-secs-409a-and-409-p-