December 31 Deadline for Correcting Release of Claims Provisions that Fail to Comply with Section 409A

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Employers preparing for year-end compliance efforts should be aware of a December 31, 2012 deadline for correcting a common problem in compensation arrangements subject to Section 409A of the Internal Revenue Code.

The problem relates to plans and agreements that condition payment on an employee-related action such as the giving of a release of claims.Where an employee’s ability to time a release may affect the timing of payments, the employee’s discretion to affect payment timing may result in a violation of 409A. A violation of 409A in turn may result in early income inclusion, a 20% additional federal income tax, and other taxes and tax-related penalties.

Relief for problems arising out of this common fact pattern is available under the IRS’s 409A documentary corrections program, originally published in Notice 2010-6 and subsequently amended by Notice 2010-80 (together, the “Notice”). In some cases, however, relief from employee notice requirements is available only if action is taken by December 31, 2012.

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