Year-End Amendment Deadline Under Code Section 409A
In the last two years, the IRS has issued several pieces of guidance regarding the correction of deferred compensation arrangements that violate the requirements of Code Section 409A – either by their express terms or because of how they have been operated. This guidance makes clear that the IRS views an arrangement (such as an employment agreement or a severance pay plan) conditioning the payment of deferred compensation on an employee’s execution of a release as creating the possibility that the employee could manipulate the year in which the payment is received (by accelerating or delaying the execution and delivery of the release). Such a provision therefore violates the Section 409A prohibition on allowing an employee to designate the calendar year of payment for any deferred compensation – thereby triggering an automatic violation of the Section 409A “form” requirements.
Fortunately, the IRS has also announced transitional relief for arrangements that violate the requirements of Section 409A. However, the transition period for this particular type of form defect expires at the end of 2012. Employers thus have only a few more months in which to determine whether any of their arrangements contain this type of form defect and, if so, take appropriate corrective action.
IRS Notice 2010-80 provides transitional relief through December 31, 2012, for Section 409A “documentary failures” involving arrangements that condition a payment on the recipient’s execution of a release (such as a terminated employee’s execution of a release of claims). Under this transition relief, such a documentary failure may be corrected by either:
1. Expressly providing for payment on a fixed date (such as on the 60th day following separation); or
2. Expressly providing that any payment that could be made during a “release consideration and revocation period” that begins in one taxable year and ends in a subsequent taxable year will in all cases be made in the subsequent year.
Under either approach, the delivery of the executed release would not affect the timing of the payment.
This transition relief also requires that any payments under an arrangement with a non-conforming release provision that are triggered between March 31, 2011, and December 31, 2012, be administered by paying in the later taxable year (if the applicable release period spans two taxable years).
Accordingly, any deferred compensation arrangement under which payments subject to Section 409A are contingent on the execution of a release of claims must be amended by December 31, 2012, to comply with the requirements of Section 409A (by adopting one of the two alternative provisions described above).
Of course, only arrangements that are subject to Section 409A (and for which no exemption applies) are affected by these requirements. There is thus no need to modify arrangements for the payment of amounts that are exempt from Section 409A under either the "short-term deferral" rule (where the deferred compensation is paid shortly after it becomes vested) or the "severance pay" exception (where the circumstances triggering the severance pay, as well as the amount and timing of the severance payments, meet certain requirements set forth in the Section 409A regulations).
Robert A. Browning, Partner
Spencer Fane Britt & Browne LLP