Section 409a Severance

This approach would provide for severance payments that are either exempt from section 409a under the short term deferral exception or that comply with section 409a as they are now payable upon a separation from service i e a permissible section 409a trigger event at an objectively determinable time.

Section 409a severance. Service recipients are generally employers but those who hire independent contractors are also service recipients. Under prior irs guidance it was unclear whether or not termination for good reason would be recognized as an involuntary termination of employment for purposes of the separation pay exemption from section. Thus section 409a can impact not only traditional nqdc plans such as salary deferral plans and supplemental executive retirement plans serps but also arrangements such as executive employment agreements severance agreements and unwritten bonus programs.

Severance agreements or separation pay plans are either subject to section 409a or are exempt from section 409a. Executive employment and severance pay under section 409a of the internal revenue code 05 22 07 effective generally january 1 2005 congress set off a sea change in the tax treatment of nonqualified deferred compensation arrangements with the adoption of new section 409a of the internal revenue code. For the same reason severance benefits that are negotiated.

The final section 409a regulations provide significant clarification relating to employment agreements and severance arrangements. Section 409a of the united states internal revenue code regulates nonqualified deferred compensation paid by a service recipient to a service provider by generally imposing a 20 excise tax when certain design or operational rules contained in the section are violated. If a severance agreement is exempt from section 409a then the agreement does not have to comply with all of the technical requirements of section 409a including definitions of key terms timing and form of distribution etc.

Severance arrangements that provide for lump sum payments shortly following an involuntary termination may also be exempt from section 409a. In particular under the short term deferral exception to section 409a compensation paid within two and a half months after the end of the year in which it vests will be exempt from the provision. Separation from service under section 409a in the context of severance arrangements the most common permissible payment event is a separation from service.