What is the 409A short-term deferral exception? Definition, how it works and examples
The exception that keeps most bonuses and RSUs out of 409A — the two-and-a-half-month deadline, how vesting sets it, and what happens when a payment misses it.
The short answer
The 409A short-term deferral exception says a payment is not deferred compensation at all if it is paid by the 15th day of the third month after the end of the year — yours or your employer’s, whichever ends later — in which your right to it vests. For a calendar-year employee, that means by 15 March of the following year. Most bonuses and most RSUs rely on it. The deadline is set by vesting, not by the grant, and it is lost not only by paying late but by any plan term that could pay later — even if the money in fact arrives on time.
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 the large class of payments that cross a year-end only briefly: a bonus for 2026 paid in February 2027, RSUs that vest in December and settle in January. If a payment qualifies, none of the 409A election, payment-event or acceleration rules apply to it. When the clock starts: vesting The window opens when the right stops being subject to a substantial risk of forfeiture — a condition you can fail and lose the pay.
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 — an IPO or a sale — before they vest. Because a liquidity condition is a risk of forfeiture in its own right, 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, as long as the plan fixes settlement before the deadline. Two features can move an award inside 409A.
Example of the 409A short-term deferral, with dates
Five awards, one employee with a calendar tax year. Unless the row says otherwise, the employer’s tax year is the calendar year too. The fourth row shows the “later of” rule: the employee’s year gives 15 March 2027, but the employer’s first year in which the bonus is vested ends on 30 June 2027, so the deadline is 15 September 2027. The last row is not a 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, and paying it early, in March, would be a prohibited acceleration.
The short-term deferral rules, as of October 2026
General information, not tax advice Whether a payment is a short-term deferral depends on the exact wording of the award or plan, including clauses about retirement, separation and change in control. Have your award agreement reviewed by a qualified tax adviser if its settlement date is not tied directly to vesting.
Key risks and common mistakes
Counting from the grant date The window runs from vesting. A grant made in 2024 that vests in 2026 has a deadline in 2027. A “may pay later” clause A term allowing payment on separation or at a later date disqualifies the payment, even if it is in fact made on time. Retirement-eligible employees Full vesting at a retirement age ends the risk of forfeiture early; settlement on the original schedule is then deferred compensation. Stretching vesting to buy time Adding a new service condition after the right arose does not move the deadline.
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 lose the pay. Its lapse is vesting.
What people ask about the 409A short-term deferral exception
What is the 409A short-term deferral exception? 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 employee’s or the employer’s year, whichever ends later — under terms that never allow payment later. Is the deadline always 15 March? For a calendar-year employee and employer, yes. If the employer’s tax year ends on another date, the deadline can be later, because the rule takes whichever of the two dates falls later. Are RSUs short-term deferrals? Usually, when they settle at or shortly after vesting.
What is the 409A short-term deferral exception?
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 employee’s or the employer’s year, whichever ends later — under terms that never allow payment later.
Is the deadline always 15 March?
For a calendar-year employee and employer, yes. If the employer’s tax year ends on another date, the deadline can be later, because the rule takes whichever of the two dates falls later.
Are RSUs short-term deferrals?
Usually, when they settle at or shortly after vesting. They can fall outside the exception if the award allows settlement on a later event, or if retirement vesting ends the forfeiture risk before the scheduled settlement dates.
What happens if a payment misses the deadline?
It is no longer exempt and must meet every 409A rule. Unless it was paid on a permitted event fixed in advance, that can be a failure with the 409A penalties attached. Three narrow excuses for late payment exist in the regulation.
Do stock options rely on the short-term deferral?
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 2 October 2026; the rule and its worked examples are in Treas. Reg. §1.409A-1(b)(4). The dates in the example are illustrative, not market data.