The Internal Revenue Service (IRS) has given employers until December 31, 2012 to correct a problem frequently found in severance agreements and other similar arrangements. If the problem is not addressed by that date, then it could be much more expensive to correct the issue later. Typically the issue arises in the context of severance payments tied to execution of a release, but it could arise in any deferred compensation arrangement that conditions payment timing on an action by the recipient. Anytime a payment of deferred compensation is contingent upon an employee signing a release, or some other agreement such as a noncompete, the employee has some ability to manipulate the timing of the payment and perhaps even the year in which the payment will be made. The IRS says that this ability to manipulate the timing of the payment violates Code Section 409A and could cause the employee to owe substantial penalty taxes.
For more details on this timely issue, read the full article here.