409A Correction Window For Release-Based Severance Payments

August 28, 2012

We are sending this Alert to remind clients and friends that there is a window under the IRS's 409A correction program for correcting a 409A issue with respect to released-based severance without paying a 409A correction fee and, equally important, that this window will close on December 31, 2012. Very briefly, the IRS sees a 409A issue with any kind of open-ended provision for a released-based severance payment. For example, the IRS would see a 409A issue with the following: "...the employee will have at least 21 days to sign the release, and the employer will make the severance payment as soon as practicable after the release becomes irrevocable." The IRS sees any open-ended provision as violating 409A to the extent that the employee has the opportunity to control the timing of the severance payment. The alternatives for a correction simply eliminate the timing opportunity. Please note two points. First, the correction window is only available for arrangements which were in effect on December 31, 2010. Second, there will be a 409A correction fee for corrections made after 2012 under the IRS's correction program to arrangements which were in effect on December 31, 2010, which is why there is an advantage to taking action before the correction window closes. Accordingly, we recommend that the provision in each employment and other agreement which conditions severance on signing a release be reviewed early this fall to determine whether there is any opportunity for an employee to control the timing of the severance payment. If there a timing opportunity in any such provision, we would be happy to discuss the alternatives for making a 409A correction to such provision. Please contact Jan Marsh (678.336.7135) if you would like to discuss the foregoing in more detail.

‹ Alerts