Severance Agreements And 409A
By : Nicole -
The difficulty of 409A is the overly broad definition of what constitutes an unqualified plan for deferred compensation. The 409A Treasury Regulations define an unqualified plan for deferred compensation as any plan, agreement, program or agreement that provides a “service provider” (including non-employees and non-employee contractors) with a “legally binding right” to compensate compensation in a subsequent tax year. This definition includes bonuses, equity, severance agreements, as well as other forms of compensation and benefits payable under a compensation contract or an employment contract for executives. To give workers choice and flexibility in their financial programming, some employers give workers a choice between lump sum and monthly payments. While this approach may seem reasonable, this project poses two potential problems: as a general rule, a severance agreement requires the release of rights that must be signed by the resigned employee and not revoked. Where a compensation agreement is covered by Article 409A, the contract must indicate a specific date for the payment of severance pay or the start of severance pay. The agreement must indicate when the release must be signed in a manner consistent with Section 409A. For example, the compensation agreement may indicate that severance pay begins on a fixed date, subject to the employee`s signature and not before that date on release. In setting a fixed date, you must consider the period that must be indicated to the employee in order to take into account a release before signing and not when revocation of the release. If a compensation agreement is covered by one of the exceptions in Section 409A, the date of signing an release and payment after the expiry of the retraction period for release is not a problem. Many pay and employment contracts allow employees to withdraw for “good reason” and recover severance pay. A good reason why a resignation may constitute an involuntary separation from service for the purpose of a short-term exemption from deferral and separation of wages when certain conditions are met. The general rule is that circumstances that constitute a valid reason must be defined so that the employer`s actions resulting in a substantially negative change in the worker`s role or obligations, compensation or other circumstances are included.
The 409A Treasury Regulations rightly offer a secure definition of port which, if followed, will rightly characterize a resignation as an involuntary separation from service. It is important to understand that the failure to properly characterize a dismissal as an involuntary separation from service does not only result in an offence of 409A. Many practitioners make this mistake in negotiations. The only trap is to prevent the separation allowance of 409A from being released as a short-term deferral or secure under the separation wage. Ten years ago, the adoption of Section 409A of internal revenue significantly changed the rules for unqualified deferred compensation plans. This includes how we look at severance agreements. Section 409A generally applies to compensation or in-kind benefits received in one year for benefits provided and paid in a subsequent year. Severance agreements or compensation plans are either governed by Section 409A or excluded from Section 409A. If a redundancy agreement is exempt from Section 409A, the agreement is not subject to all the technical requirements of Section 409A, including definitions of key terms, timing and form of distribution, etc.