• December 31, 2012 Deadline For Amending Certain Severance Arrangements to Ensure Section 409A Compliance
  • December 5, 2012 | Authors: Brian G. Belisle; William J. Egan; Pamela A. Thein
  • Law Firm: Oppenheimer Wolff & Donnelly LLP - Minneapolis Office
  • Special transition relief ends December 31, 2012 for amending certain severance arrangements that require an employee (or other service provider) to sign a release before payment is made. Unless the agreement includes appropriate language, it may violate Internal Revenue Code Section 409A. To avoid the potential penalties for violating Section 409A in form, these agreements must be amended.

    Not all severance arrangements are subject to Section 409A. They may be exempt under the “short-term deferral” exception or the “separation pay” exception. It is not necessary to amend these arrangements.

    If a severance arrangement is subject to Section 409A and receipt of payment is conditioned upon the signing of a release—which may impact the timing of payments—then the arrangement may violate Section 409A. This arrangement should be reviewed and, if necessary, amended to comply with Section 409A payment timing rules.

    Under the special transition relief rules, if an arrangement in effect prior to 2011 is properly corrected by December 31, 2012, the employer can avoid providing a special notice to the employee for attachment to the employee’s Federal income tax return. In addition, special relief is available for any payments made from April 1, 2011 through December 31, 2012 under a noncompliant document. 

    The document correction program is also available for certain severance arrangements adopted after 2010 and arrangements in effect prior to 2011 that are not corrected by December 31, 2012, but correction will also require notice to the employee and the employee will need to include an attachment to the employee’s Federal income tax return.