Employment Severance Releases: Avoiding Spectacular Tax Problems for Related Separation Pay

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It is a common practice for an employer to require a terminating employee to execute a release of claims in exchange for designated separation pay. Compliance with esoteric tax rules governing deferred compensation is typically far from the minds of the decision makers in that process. The Internal Revenue

Code, however, has laid a trap for the unwary: §409A, while aimed at preventing manipulation of deferred compensation arrangements to artificially delay payment of executive income

tax liabilities, has unfortunate and complex interactions with the release/severance process.

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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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