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


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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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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