This article discusses the traps for the unwary created by Section 409A of the Internal Revenue Code (“Section 409A”) with respect to current trends in change-in-control compensation for public company executives and the structure of private company acquisitions. Although Section 409A is a deferred compensation statute, it potentially applies to many types of compensatory arrangements implicated in a change in control, including severance arrangements, stock options, incentive arrangements and certain other forms of compensation. The consequences to the executive of violating Section 409A are severe — accelerated income inclusion, interest and a 20% federal penalty tax (California imposes an additional 20% penalty).

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