Contributing Author: Kristine Custodio Suero, Advanced Certified Paralegal

The technology sector is booming—fueled by rapid expansion in generative AI, cloud platforms, SaaS solutions, and venture-backed innovation. In San Diego, this growth intersects with the region's globally recognized biotech ecosystem, home to hundreds of research-driven companies that rely on advanced data tools, AI discovery platforms, and a highly specialized workforce.

From early-stage biotech startups to publicly traded life sciences firms, companies in the region use equity-based compensation (e.g., stock options, restricted stock units (RSUs)) and nonqualified deferred compensation (NQDC) to attract and retain top scientific and executive talent.

However, without careful legal structuring and administration, these arrangements can easily run afoul of Section 409A of the Internal Revenue Code (IRC), triggering steep tax penalties and administrative exposure.

ERISA Legal Priorities for Tech & Biotech Employers:

1. Ensure full Section 409A compliance in equity compensation plans, including incentive stock options (ISOs), nonqualified stock options (NSOs), RSUs, and performance share units (PSUs).

• ISOs: Generally exempt from 409A if granted at fair market value (FMV) and exercised within limits. But if they're modified or improperly repriced, they may become subject to 409A.
• NSOs: Must be granted at or above fair market value on the grant date to avoid 409A.
• RSUs and PSUs: Typically subject to 409A because payment is deferred. You must structure vesting and payout terms carefully to comply with permissible payment events and timing rules.

If these instruments are not 409A-compliant, recipients may owe immediate income tax, a 20% additional tax, and interest (per IRC §409A(a)(1)(B)).

2. Draft and review customized NQDC plan documents aligned with clinical milestone incentives, liquidity events, and executive retention agreements.

• Plans must be in writing and include clear provisions about:
  • When compensation is earned and vested
  • When and how payments will be made
  • What happens on change-in-control, IPO, death, or disability
• Plans tied to clinical milestones, M&A events, or liquidity triggers require especially careful drafting to avoid prohibited acceleration or ambiguity.

The Internal Revenue Service (IRS) scrutinizes any attempt to disguise current compensation as deferred compensation without proper controls and timing.

3. Conduct risk assessments for equity valuation timing, including 409A safe harbor valuations, early-stage company FMV appraisals, and strike price fairness.

• 409A Safe Harbor Valuations: Companies can rely on a third-party valuation (aka “409A valuation”) to establish FMV for stock options. These must be updated every 12 months or upon material events.
• Strike Price Fairness: If an option's exercise price is below FMV, it's treated as deferred comp and becomes subject to 409A.

Underpricing stock options, even unintentionally, can make the option taxable immediately and penalize the recipient.

4. Train HR, Legal, and Finance Teams

Compliance is not just about documentation—it's also about consistent administration. Your internal teams must understand:

• Permissible Deferral Election Timing: Participants must elect to defer compensation before the year in which it is earned (Treas. Reg. §1.409A-2(a)(1)).
• Distribution Event Rules: Payments must be tied to allowable events (separation from service, disability, death, fixed time, change in control, or unforeseeable emergency).
• Anti-Acceleration and Re-Deferral Restrictions: Once set, payout schedules generally can't be accelerated (with narrow exceptions). Re-deferrals must follow strict timing and extension rules.

Even a well-drafted plan can fail if administered inconsistently—resulting in IRS penalties, employee dissatisfaction, and litigation. Section 409A noncompliance results in immediate income recognition of all deferred amounts, a 20% federal excise tax, and additional interest penalties. Litigation exposure is significant, particularly in equity-heavy biotech ventures and acquisition scenarios where improper acceleration, documentation gaps, or employee misclassifications lead to executive disputes or IRS scrutiny.

As trusted ERISA counsel to high-growth companies in life sciences, biotech, and technology corridors, Schechter Benefits Law Group LLP offers:

• Legal design and implementation of compliant NQDC and equity-based compensation plans tailored to biotech and research organizations
• 409A reviews of existing plans, option grant practices, and deferred compensation agreements for emerging and pre-IPO entities
• Advisory support during M&A transactions, spinouts, and IPO preparation, including 409A due diligence, severance and change-in-control analysis, and plan assumption planning
• Ongoing compliance monitoring, board and committee training, and guidance with IRS correction programs (e.g., EPCRS, SCP)

We work to ensure your executive benefit programs support both compliance and strategic workforce goals. Whether you're an early-stage therapeutics startup navigating equity design or a mature life sciences firm integrating benefits post-acquisition, our ERISA attorneys deliver the clarity and expertise you need.

For tailored assistance—whether you're drafting a new NQDC plan, reviewing existing arrangements, or addressing a potential §409A violation—our firm is here to support you with thoughtful, expert counsel. Contact Schechter Benefits Law Group today.

*Nothing stated herein is to be construed as legal or tax advice and shall not form any attorney-client relationship. Each individual situation is unique. Please contact us and speak with one of our attorneys regarding your individual situation.