Section 409A of the U.S. Internal Revenue Code imposes specific requirements on the timing of deferral elections and the designation of the time and form of payment of amounts under non-qualified deferred compensation plans. That section also imposes severe tax penalties on the employee if the requirements are not satisfied. On November 30, 2010, the Internal Revenue Service (IRS) issued Notice 2010-80, which modified its Section 409A corrections program. The Notice included transitional relief through December 31, 2012, to correct certain failures involving payments conditioned upon the execution of a release agreement. If a payment under a deferred compensation arrangement is conditioned upon the execution of a release, the IRS believes that the employee may manipulate the taxable year in which payment is made in violation of Section 409A.
Non-conforming release provisions of deferred compensation arrangements can be corrected by either
- providing for payment on a fixed date (such as the 60th or 90th day following separation from service); or
- providing that a payment that could be made during a specified period (not to exceed 90 days) that begins in one taxable year and ends in a second taxable year will be made in the second taxable year.
These corrections are designed to ensure that the delivery of the release does not affect the timing of payment. Arrangements that are exempt from Section 409A, such as short-term deferrals or exempt separation pay, are not required to be amended.
The December 31, 2012, deadline is fast approaching. U.S. companies and Canadian companies with employees who are U.S. citizens or residents should review non-qualified deferred compensation arrangements under which payments are conditioned upon the execution of a release agreement to identify and amend any non-compliant provisions.