It has been over 15 years since Congress enacted Internal Revenue Code §409A, and compliance has become generally routine for traditional deferred compensation and other non-qualified plans. Most mistakes tend to arise when no one thinks to involve 409A experts for employment agreements, releases, settlement agreements, and severance payouts. Here is a checklist by which to preview employment-related agreements for potential 409A violations. Note that the following list merely identifies some common provisions that could have 409A implications. It is not a substitute for review by a qualified 409A lawyer.
Seek 409A expert assistance if any of the features described below are included in an agreement with any employee, independent contractor, or other service provider who is a U.S. taxpayer:
- ___Non-renewal at end of term triggers a payment, or a right of employee to resign to collect the payment (as severance).
- ___Bonus rights vest in one year but payment could occur after March 15th of the next year.
- ___Reimbursements for expenses incurred in one year could occur in future years.
- ___Reimbursements cover multi-year periods (such as $5,000 for tax planning every two years), or could offset each other.
- ___Stock or phantom stock awards have any features that could defer income past vesting date.
- ___Stock options or SARs could have a below-market exercise price when granted.
- ___”Change in control” does not determine vesting but affects time of paying vested amounts.
- ___”Good reason” severance rights allow an employee to resign and to collect severance.
- ___Severance could under any circumstance be paid more than 2-1/2 months after the end of the year in which employment terminates.
- ___Severance is payable at a time determined by reference to when the terminating employee signs a claims release.
- ___Severance is subject to employee – or employer – discretion to pay any or all at different times (g., lump sum or installments).
- ___Post-termination medical coverage or other welfare benefits involve the employer paying all or part of the premiums, or imputing income to the employee.
- ___Post-employment consulting is addressed in the agreement or a separate one.
- ___Any other compensation that vests in one year but that could be paid after March 15th of the following year.
Please contact Mark Poerio if you have any questions: [email protected] (443) 756.1116