McAfee & Taft EmployerLINC Employee Benefits Law Alert: Year-end IRS deadline looms for correcting release language in 409A agreements by Alison Patel

by McAfee & Taft

Alison McCalla Patel[author: Alison Patel]                            

Employers with employment agreements, severance policies, and other non-qualified deferred compensation agreements that contain language conditioning any payment on employee action, such as the execution of a release of claims, need to take action immediately to ensure such condition does not cause the agreement to violate Section 409A. In the event a release provision does not comply with Section 409A, employers have until December 31, 2012 to amend the offending language and take advantage of transition relief from Section 409A penalties.

The following types of deferred compensation arrangements are most likely to condition payment on an employee action (e.g., executing a release of claims, non-competition agreement or non-solicitation agreement, returning company property, etc.), and should be reviewed immediately if they do:

  • Employment agreements providing severance benefits
  • Severance pay plans or individual severance agreements
  • Change of control bonus plans and individual agreements
  • Other plans or agreements with severance benefit features

Employers should review these arrangements even if they were previously reviewed for compliance with the final Section 409A regulations.


Section 409A of the Internal Revenue Code imposes adverse tax consequences on the non-qualified deferred compensation agreements listed above unless the agreement satisfies numerous requirements or is otherwise exempt from Section 409A regulation. One requirement is that an individual receiving payment under a non-qualified deferred compensation arrangement cannot choose the tax year in which payment is made or begins. The IRS has taken the position that non-qualified deferred compensation arrangements that condition payment on the payee executing a release of claims, non-solicitation or non-competition agreement, or taking any similar action will violate this requirement, and therefore, Section 409A absent appropriate restrictions on payment timing.

Example #1

As an example, consider an employment agreement that provides a severance payment following an involuntary termination of employment but states payment will not be made or begin until the employee’s execution of a release of claims. This violates Section 409A in two ways. First, it does not designate a specific payment date or period. Second, it allows the employee to control the tax year in which payment will be made because he or she can either execute the release in the current tax year or delay execution until a later tax year.

Example #2

Same facts as Example 1, except the employment agreement provides that the release must be executed within 60 days of the termination of employment to receive payment and the payment must be made within 90 days of the termination of employment. The payment period designated (within 90 days of termination of employment) is compliant with Section 409A. However, even though the release period is limited to 60 days, it is viewed as not compliant. This is because an employee terminated at the end of a tax year can choose whether to execute the release at the beginning or end of the release period, thereby controlling the tax year in which it is paid.

Transition Relief Available

To the extent a deferred compensation arrangement violates the requirements of Section 409A, the amount payable under the arrangement is immediately includable in income and subject to an additional 20% tax and potential interest penalties. Fortunately, the IRS has issued guidance providing relief from these negative tax consequences to arrangements with the payment timing errors discussed in this alert. Employers can take advantage of this relief by correcting the offending plan or agreement, as follows:

  • Agreements or plans that condition payment on employee action and also fail to properly designate a payment date or period under Section 409A (See Example #1) can be corrected by an amendment that provides for either (1) a payment on a fixed date either 60 or 90 days after the payment event occurs (e.g., termination of employment, change of control) or (2) a payment at any time during a specified period (up to 90 days) following the payment event under the condition that, if the period begins in one tax year and ends in the second tax year, payment will be made in the second tax year.
  • A plan or agreement that only fails to comply with Section 409A because the employee has the ability to affect the year of payment by choosing when to sign the release during the designated period (See Example #2), can be corrected by an amendment that provides for payment on the last day of the designated period, or for payment in the second tax year in cases where the payment period starts in one tax year and ends in the second tax year.

Important Note: More favorable relief is available for arrangements that were entered into prior to 2011, if such arrangements are corrected no later than December 31, 2012. Notwithstanding the foregoing, arrangements entered on or after January 1, 2011, should also be reviewed and corrected as soon as possible, and in any event prior to a payment-triggering event, to avoid penalties under Section 409A.

Recommended Action

  • All deferred compensation arrangements that condition payment of benefits under such arrangement on the employee executing a release of claims or taking any similar action should be immediately reviewed for Section 409A compliance.
  • To the extent a corrective amendment is required to comply with Section 409A, adopt an amendment (and obtain employee consent to such amendment, if necessary) prior to December 31, 2012, and comply with disclosure requirements set forth in IRS guidance.
  • Review the internal process for drafting future agreements to ensure that release provisions violating Section 409A are not included in such agreements.

This alert provides only a brief summary of the potential risk and relief opportunities associated with this issue. If you have any questions or would like more information, please contact one of the attorneys in McAfee & Taft’s Employee Benefits and Executive Compensation Group. They are prepared to help you identify Section 409A failures in your plans or agreements and guide you through the correction process, if needed.



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.

© McAfee & Taft | Attorney Advertising

Written by:

McAfee & Taft

McAfee & Taft on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.