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Substantial risk of forfeiture

In the context of compensation, this concept applies when you have rights to receive money or stock that are contingent on vesting or performance requirements. The lapsing of forfeiture risks usually triggers taxable compensation. Under the rules of Section 409A, a substantial risk of forfeiture exists when payment of the nonqualified deferred compensation is conditioned upon either the “performance of substantial future services” or the occurrence of a “condition related to a purpose of the compensation” and the possibility of forfeiture is substantial (i.e. no risk of forfeiture exists if enforcement is unlikely). When nonqualified deferred compensation for operational or documentary reasons does not meet the Section 409A requirement, it is taxable and subject to penalties if it is no longer subject to a substantial risk of forfeiture and the short-term deferral exemption does not apply. A noncompete does not constitute a substantial risk of forfeiture.