Does restricted stock circumvent 409A requirements?

Restricted stock gets around the most obvious feature of IRC 409A -- the 20% federal surtax imposed on option recipients who are granted options priced below the fair market value of common stock (in California this effectively is doubled because the Franchise Tax Board imposes its own 20% surtax).

However, a restricted stock grant is taxable to the recipient at the time of grant -- and the taxable amount is the fair market value of the common stock granted. The one benefit of the structure is that taxation takes into account the vesting schedule of the restriction.

Can you clarify your question? In what sense are you using "409A requirements"? 409A regulates both deferred compensation and stock valuation.

If you're asking about 409A in the context of deferred compensation, then the answer is that all equity compensation awards must be either compliant with or exempt from 409A. This applies to both public and privately held companies.

If you're asking about 409A in the context of stock valuation, then the answer is sort of yes and no. This portion of 409A only applies to privately held companies. Restricted stock is a full-value award meaning that for accounting purposes it is expensed at the full price of the underlying stock awarded and is not subject to the "option pricing model" analysis required by ASC 718 (formerly FAS123R) in which independent 409A valuations play a prominent role for privately held companies. However, setting the value of the underlying stock of privately held companies is still reviewable by the IRS for taxation purposes and the SEC for cheap stock issues, and an independent 409A valuation provides a safe harbor which puts the obligation on the investigating agency to prove that the stock was improperly priced - whereas a stock price set by the company's board of directors puts the burden of proof on the company. So even though a restricted stock award does not force the 409A issue in the same way an option award would, the underlying stock still needs to have a value set and setting that value is best done in compliance with 409A's safe harbor provisions.