October 2, 2026 · 7 min read
What Is the 409A Short-Term Deferral Exception? Definition, Examples
The rule that keeps most bonuses and stock awards out of 409A: the two-and-a-half-month deadline, how vesting sets it, and what happens if a payment misses it.
- Tax
- Deferred compensation
- RSUs
The 409A short-term deferral exception says a payment is not deferred compensation at all if it is paid soon after it vests. The deadline is the 15th day of the third month after the end of the year in which your right to the pay vests, or can no longer be lost. The year is yours or your employer’s, whichever ends later. For a calendar-year employee, that means March 15 of the following year.
Most bonuses and most RSUs (restricted stock units, shares delivered after they vest) rely on it. Vesting sets the deadline, and the grant date plays no part. The exception is lost by paying late. It is also lost through any plan term that could pay later, even if the money in fact arrives on time.
March 15
Deadline for a calendar-year employee and employer, in the year after the right vests
2½ months
The window after the end of the vesting year, measured from the later of the employee’s and the employer’s tax year
How Does the 409A Short-Term Deferral Exception Work?
Section 409A governs pay you have a right to in one year and receive in a later one. The short-term deferral rule takes out a large class of payments that cross a year-end only briefly. Examples are a bonus for 2026 paid in February 2027, or RSUs that vest in December and settle in January. If a payment qualifies, none of the 409A rules on elections, payment events or early payment apply to it.
When the Clock Starts: Vesting
The window opens when the right stops being subject to a substantial risk of forfeiture. That is a condition you can fail and so lose the pay. The regulation names two kinds. One is substantial future work. The other is a condition related to the purpose of the pay, and the regulation’s own example is “completion of an initial public offering.” A right that was never at risk is treated as vesting the day you get it. Conditions added or extended later are ignored. A promise not to work for a competitor is not a risk of forfeiture either.
When the Clock Stops: The Later Year-End
Take the first tax year in which the right is vested. Do this for your year, and separately for the employer’s. Go to the 15th day of the third month after each of those years ends. The later of the two dates is the deadline. For a calendar-year employer, that is always March 15. For an employer whose year ends on June 30, it can be September 15.
What Disqualifies a Payment
Paying on time is not enough. A payment counts as a deferred payment, outside the exception, if the plan says it is made on or after a date or event that will or may fall after the deadline. Such events include a separation from service, a change in control or a fixed date in a later year. This holds even if the event happens early and the money is paid in time. A stock right whose holder may exercise it after the deadline is a deferred payment for the same reason. The test is applied payment by payment.
The regulation allows three narrow excuses for a late payment that was otherwise on schedule. The first is that paying in time was administratively impracticable, and this could not be foreseen when the right arose. The second is that paying would have endangered the employer as a going concern, meaning a business able to keep operating. The third is that the employer reasonably expected the payment would not be deductible under §162(m), a limit on the tax deduction for some executive pay. In each case, the payment must be made as soon as the obstacle goes. A delay caused by the employee, such as missing paperwork, does not count.
RSUs, Double-Trigger Awards and the Short-Term Deferral
A time-vested RSU that settles in shares at or shortly after each vesting date is the textbook short-term deferral. At a private company, RSUs are often double-trigger. They need both service and a liquidity event, such as an IPO or a sale, before they vest. A liquidity condition is a risk of forfeiture in its own right. So the window opens only when the second trigger happens. Shares earned by service years earlier can still settle as a short-term deferral after the IPO. This works as long as the plan fixes settlement before the deadline.
Two features can move an award inside 409A. One is retirement vesting. Say an award vests in full when you reach a retirement age. The risk of forfeiture then ends on that birthday. Settlement on the original, later dates becomes deferred compensation that must meet the 409A rules. The other feature is a settlement clause tied to a later event, such as separation. Acceleration on an acquisition is covered in accelerated vesting. The tax on settlement itself is in RSU taxes.
Example of the 409A Short-Term Deferral, with Dates
Take five awards held by one employee with a calendar tax year. Unless the row says otherwise, the employer’s tax year is the calendar year too.
Illustrative awards, amounts and dates, made up for this page. The deadline is the later of the 15th day of the third month after the employee’s and the employer’s vesting years
Rules and the fiscal-year and fixed-date patterns per Treas. Reg. §1.409A-1(b)(4), Examples 1, 2 and 5, as of October 2026
The fourth row shows the “later of” rule. The employee’s year gives March 15, 2027. But the employer’s first year in which the bonus is vested ends on June 30, 2027. So the deadline is September 15, 2027. The last row is no violation by itself. A fixed date is a permitted 409A payment event, so the bonus is valid deferred compensation. But now every 409A rule applies to it. Paying it early, in March, would be a prohibited acceleration.
The Short-Term Deferral Rules, as of October 2026
The exception in seven lines. Each applies separately to each payment
As of October 2026 · Treas. Reg. §1.409A-1(b)(4), (d)(1); §1.409A-3(i)(5)(iv) · Cornell LII
General Information, Not Tax Advice
Whether a payment is a short-term deferral depends on the exact wording of the award or plan. That includes clauses about retirement, separation and change in control. If your award’s settlement date is not tied directly to vesting, have a qualified tax adviser review the agreement.
Key Risks and Common Mistakes
- Counting from the grant dateThe window runs from vesting. A grant made in 2024 that vests in 2026 has a deadline in 2027.
- A “may pay later” clauseA term allowing payment on separation or at a later date disqualifies the payment. This holds even if the payment is in fact made on time.
- Retirement-eligible employeesFull vesting at a retirement age ends the risk of forfeiture early. Settlement on the original schedule is then deferred compensation.
- Stretching vesting to buy timeAdding a new service condition after the right arose does not move the deadline.
- Missing the dateA payment made after the deadline without one of the three excuses is no longer exempt. It has to meet every 409A rule. See 409A penalties.
Pay within two and a half months after the year a right vests, under terms that never allow later payment. Then Section 409A does not apply at all.
The Terms This Page Uses
- Short-term deferral
- A payment received by the end of the applicable 2½-month period after the year it vests, under terms that do not provide for later payment.
- Applicable 2½-month period
- The window ending on the later of the 15th day of the third month after the employee’s and the employer’s first vested tax year.
- Substantial risk of forfeiture
- A service or purpose-related condition, such as an IPO, that you can fail and so lose the pay. Its lapse is vesting.
- Deferred payment
- A payment the plan provides for on or after a date or event that will or may fall after the deadline. It is outside the exception.
- Double-trigger RSU
- An RSU that vests only when both a service condition and a liquidity event are met.
- Lock-up
- An agreement that bars insiders from selling shares for a period after an IPO. The example assumes 180 days.
- Section 409A
- The tax code section the exception takes these payments out of.
What People Ask About the 409A Short-Term Deferral Exception
It is a rule that a payment is not deferred compensation if it is paid by the 15th day of the third month after the end of the year it vests in. The year is the employee’s or the employer’s, whichever ends later. The terms must never allow payment later.
Yes, for a calendar-year employee and employer. If the employer’s tax year ends on another date, the deadline can be later. The rule takes whichever of the two dates falls later.
Usually, when they settle at or shortly after vesting. They can fall outside the exception if the award allows settlement on a later event. They can also fall outside it if retirement vesting ends the forfeiture risk before the scheduled settlement dates.
It is no longer exempt and must meet every 409A rule. If it was not paid on a permitted event fixed in advance, that can be a failure with the 409A penalties attached. The regulation allows three narrow excuses for late payment.
Not usually. An option granted at fair market value is outside 409A on its own terms. An option priced below fair market value cannot use the exception if it can be exercised after the deadline.
Where Every Rule on This Page Comes From
Every rule was checked against the Treasury regulations on October 2, 2026. The rule and its worked examples are in Treas. Reg. §1.409A-1(b)(4). The dates in the example are illustrative and use no market data.
- 01Code of Federal Regulations (Cornell LII)Current textTreas. Reg. §1.409A-1(b)(4) — short-term deferrals, deferred payments, late-payment excuses and examples; (d)(1) substantial risk of forfeiture
- 02Code of Federal Regulations (Cornell LII)Current textTreas. Reg. §1.409A-3(i)(5)(iv) — transaction-based compensation and forfeiture conditions on a change in control
- 03US Code (Cornell LII)Current law26 U.S.C. §409A — the rules a payment outside the exception has to meet
This page explains how a market works. It is not investment advice, not a recommendation of any security, strategy or company, and not an offer to sell or a solicitation to buy anything. Private companies may never list or be acquired, positions in them can be illiquid for years, and the entire amount invested can be lost. Figures are accurate as of the dates shown and change. Requirements for investor status, and the tax treatment of a private holding, differ by jurisdiction — the jurisdiction is named wherever this page discusses either. Prepared by the AXEVIL Capital research team. Tax rules described here are United States federal rules unless another jurisdiction is named; they change every year and depend on your own facts. Nothing here is tax advice — take your documents to a qualified adviser.
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Where to go from here
TaxesWhat Is Section 409A (Deferred Compensation)? Definition, How It WorksA 409A plan promises pay in a later year. Section 409A sets when that pay may be elected and paid. Break the rules and the employee owes tax at once, plus 20%.
Equity compensationWhat Are Restricted Stock Units (RSUs)? How They Work and ExamplesAn RSU, or restricted stock unit, is a company’s promise of shares that vest over time. How RSUs work at a private company, the second trigger and an example.
TaxesWhat Are 409A Penalties? Definition, How They Work and ExamplesA Section 409A failure makes vested deferred pay taxable at once and adds a 20% extra tax plus interest. What triggers it, a worked example and how to fix it.