Fair Market Value Determination for Section 409A Stock Rights Exception

Summary

This practice note describes the methods permitted under I.R.C. § 409A to determine the fair market value (FMV) of stock to qualify for the stock rights exception to Section 409A. That exception exempts eligible grants of nonqualified stock options (NQSOs) and stock appreciation rights (SARs) from Section 409A's strict rules for nonqualified deferred compensation arrangements. Most NQSOs and SARs granted to U.S. taxpayers are designed to qualify for the exception to preserve features generally prohibited under Section 409A, such as the grantee's ability to exercise the option or SAR at any time within a multi-year period. One of the conditions for the stock rights exception is that the exercise price of the award may never be lower than the FMV of the underlying stock as of the grant date. The Section 409A final regulations establish guidelines and safe harbors for determining the grant date FMV. It is important for practitioners to understand these rules and the risks of using an ...