3 Hidden Risks of 409A Non-Compliance

These days, it seems like everyone is offering some kind of valuation service.  From well-known fintech brands, to local merchant banks, firms have been quick to capitalize on this growing opportunity to supplement sales with complementary 409A valuation esrvices as firms continue to stay private longer.  However, as we have discussed in previous series, not all 409A valuation providers are created equal. 

It is important to work with a partner that truly understands your unique business needs, in order to develop a valuation that is accurate.  In addition, there are serious financial and legal risks to consider if your valuation does not pass an audit.  Here are three  potential penalties that can be triggered as a result of 409A non-compliance:

  • Employee tax penalties.  In the event of 409A non-compliance, employees of your organization will be subject to an income tax and a 20% penalty on all deferred vested amounts under the non-qualified deferred compensation plan as of the last day of the vesting year, even when payment occurs in subsequent years.
  • Employer withholding.  As an employer, you would find yourself subject to paying income tax and a 20% penalty on all deferred vested amounts under non-qualified deferred compensation plans as of the last day of the vesting year.  Such a penalty will be applicable even when payment occurs in subsequent years.
  • Potential additional state level penalties.  In certain states, such as California, 409A violations may trigger additional penalties.

As you can see, the penalties for 409A non-compliance hurt not only the future of your business, but also the livelihood of your employees.  By partnering with a trusted and experienced partner like Venture First, you will be assured that you will receive a valuation that will withstand the incense scrutiny of auditors.  Spending diligence time upfront to find the best provider for your needs will save you the potential headache of fees and penalties, and allow you to focus on what you do best: running a best-in-class organization.

Contact a Venture First professional to see if your company could benefit from a 409a valuation.

Get in touch with us today, we’d love to hear from you.


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