(Yet Another) Section 409A Transition Deadline Approaching

Plans that require execution of a release may need to be amended by December 31, 2012.

In 2010, the IRS changed the rules and regulations under Code Sec. 409A with IRS Notice 2010-80. This change may require a minor revision to employment, severance, and change in control plans and agreements that require an employee to execute and deliver to the employer a release of claims before receiving payments. According to Notice 2010-80, employers and employees have until December 31, 2012 to make this change.

The reason the IRS is requiring this change is its concern that some employers and employees will delay the commencement (and defer the taxation) of severance payments into the following calendar year by “sitting on” the required release for a period of time or, conversely, will accelerate payments into the current calendar year by speeding up the waiver process.

Many plans and agreements were drafted so as to be exempt from Code Sec. 409A, for example, by qualifying for the short-term deferral exception. These plans and agreements generally would not need to be amended. However, when in doubt as to whether the plan or agreement is exempt, we believe that many employers will decide simply to make the one page-one sentence amendment. Acceptable amendments include providing for payment on a fixed date or, where the release consideration period spans two calendar years, payment in the later of those two calendar years.

Employers should be able to amend most plans and agreements without any IRS filing requirements. However, some employers may need to fulfill the onerous reporting requirements of Notice 2010-80 in order to make such amendments.

Take Action: Employers should contact their Winston & Strawn counsel to discuss any arrangement where payments are contingent upon execution of a release. Often, any amendment to these arrangements requires signature by both the employer and the employee. So don’t delay!

If you have any questions regarding any matters discussed in this briefing, please contact any of the Winston & Strawn Employee Benefits and Executive Compensation Practice Group attorneys listed below or your usual Winston & Strawn contact.

Chicago
Michael Falk
Steve Flores
Linda Hoseman
Erik Lundgren
Michael Melbinger
Erin Kartheiser
Michael P. Roche
Mark Weisberg

New York
Harvey Kurzweil
Adrienne Scerbak
Loran Thompson

Paris
Déborah Attali

Washington, D.C.
William G. Miossi

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