[authors: Thomas R. Hoecker, Marvin S. (Bucky) Swift, Jr., Anne M. Meyer and Greg Gautam]

Change in control, severance, employment and other nonqualified deferred compensation agreements that are subject to Section 409A of the Internal Revenue Code of 1986, as amended ("Section 409A"), and require an employee to sign a release to receive payment, should be reviewed for compliance with the documentary requirements of Section 409A by December 31, 2012. Failure to identify and amend these agreements by year-end could create tax problems for the employees covered by such agreements.

Background
In 2010, the Internal Revenue Service ("IRS") issued IRS Notice 2010-6, which refined (and, in some cases, simply changed) the IRS’s interpretation of the way the Section 409A regulations apply to nonqualified deferred compensation arrangements that condition the payment of a future benefit (e.g., severance) on the execution of a release agreement. In Notice 2010-6, the IRS indicated that, in certain circumstances, since the consideration and revocation period described in the release could span two years, an employee has the ability to pick the calendar year in which the income will be paid (by either accelerating or delaying the signing of the release), which violates the requirements of Section 409A. The IRS also suggested that one “fix” for this problem would be to modify the arrangement to provide that the payment would be made on the last day of either a 60- or 90-day period following the employee’s termination of employment.

The IRS subsequently issued IRS Notice 2010-80, which offered an additional solution, namely an amendment to provide that payment will be made in the second taxable year if the period during which the employee may consider and revoke the release spans two calendar years. Notice 2010-80 also provides transition relief that permits the amendment of such arrangements to address this issue in one of the ways suggested by the IRS and to generally avoid the imposition of Section 409A penalties and additional disclosures to the IRS. In order to take advantage of the transition relief, parties must amend the arrangements by December 31, 2012.

Action Items
If you have not yet reviewed your change in control, severance, employment and other nonqualified deferred compensation agreements for compliance with the Section 409A release timing rules, you should strongly consider doing so prior to December 31, 2012. This may permit you to correct violations of Section 409A without taxes and penalties and, in some cases, without additional disclosure to the IRS.