409A Checklist for Employment Agreements

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:

1. ___Non-renewal at end of term triggers a payment, or a right of employee to resign to collect the payment (as severance).
2. ___Bonus rights vest in one year but payment could occur after March 15th of the next year.
3. ___Reimbursements for expenses incurred in one year could occur in future years.
4. ___Reimbursements cover multi-year periods (such as $5,000 for tax planning every two years), or could offset each other.
5. ___Stock or phantom stock awards have any features that could defer income past vesting date.
6. ___Stock options or SARs could have a below-market exercise price when granted.
7. ___”Change in control” does not determine vesting but affects time of paying vested amounts.
8. ___”Good reason” severance rights allow an employee to resign and to collect severance.
9. ___Severance could under any circumstance be paid more than 2-1/2 months after the end of the year in which employment terminates.
10. ___Severance is payable at a time determined by reference to when the terminating employee signs a claims release.
11. ___Severance is subject to employee – or employer – discretion to pay any or all at different times (g., lump sum or installments).
12. ___Post-termination medical coverage or other welfare benefits involve the employer paying all or part of the premiums, or imputing income to the employee.
13. ___Post-employment consulting is addressed in the agreement or a separate one.
14. ___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