• Nearing Deadline for Correcting Deferred Compensation Agreements
  • November 16, 2012 | Author: Kirby Waddell Yost
  • Law Firm: Chambliss, Bahner & Stophel, P.C. - Chattanooga Office
  • Employers should be aware that the correction deadline is drawing near for documents that do not comply with Internal Revenue Code Section 409A ("409A"). 409A applies to deferred compensation arrangements, including certain incentive and executive compensation agreements, and in limited and specific circumstances, severance agreements. The penalties for non-compliance with 409A are harsh. Companies should review existing plans to determine if they must be amended before the expiration of the correction period on December 31, 2012.

    The IRS has surprised many by stating that some severance agreements requiring the employee to sign a release before receiving payment may violate 409A by allowing the employee to choose when he or she will get paid. Such severance agreements and similar arrangements that do not satisfy 409A make the deferred compensation taxable in the current year, plus interest, penalties, and an additional 20 percent tax. As a result, companies with severance or other deferred compensation arrangements may need to have all such agreements amended to avoid the tax consequences of non-compliance.

    Note: 409A normally does not apply to the traditional severance agreement, negotiated at the end of an at-will employee’s employment, where the severance payment is paid before the end of the calendar year. Similarly, 409A is not implicated if the employee signs a severance agreement (and thereby his right to receive payment vests) in one year, and payment is made before March 15 of the following year, whether by lump-sum or incremental payments.