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Severance Arrangements and Code Section 409A

We recently posted an item that discussed when a severance policy would be subject to ERISA and the potential benefits of the policy being subject to ERISA (that post is available here). Another potential issue employers should consider is whether their severance arrangements are subject to Code Section 409A, which applies to certain deferred compensation arrangements. If a severance arrangement is subject to Code Section 409A, it must comply with Code Section 409A’s various documentary and operational requirements to avoid the additional 20% tax and underpayment penalty that may be assessed for any compliance failures. Severance arrangements can be drafted to be exempt from Code Section 409A, such as under its short-term deferral and separation pay exceptions. If the severance arrangement is subject to Code Section 409A, some of the potential issues employers should consider include, among others: Any changes to the time or form of payments must comply with… Continue Reading

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