The difficulty of 409A is the overly broad definition of what constitutes an unqualified plan for deferred compensation. The 409A Treasury Regulations define an unqualified plan for deferred compensation as any plan, agreement, program or agreement that provides a “service provider” (including non-employees and non-employee contractors) with a “legally binding right” to compensate compensation in a subsequent tax year. This definition includes bonuses, equity, severance agreements, as well as other forms of compensation and benefits payable under a compensation contract or an employment contract for executives. In order to qualify for the short-term exception, compensation must not only be paid within the short-term deferral period, but it must not be paid after the expiry of that period. Assuming that an employment contract provides that the worker receives a deferred bonus of 50,000 $US in the event of dismissal, but that the worker is only entitled to payment after three years of work. This could not be a short-term deferral of Section 409A, even if the worker terminates immediately after three years of work, since the worker can still work for many years and the payment can only be made after the short-term deferral period has expired. Most employers present the payment of severance pay on the execution of an agreement to release the employee to the company. To the extent that certain IRS guarantees are not included in the compensation contract or employment contract, the employee has the power to receive the payment (or the first staggered payment) in the current fiscal year or to delay payment in the following fiscal year by unlocking in the current fiscal year or by delaying execution until the following fiscal year. The IRS has approved two approaches to remove this discretion. Under the first approach, the document may provide that the payment is made on the 60th or 90th day following the termination date, provided that the disclosure has become irrevocable before the payment date. Under the second approach, the document may allow payment within 90 days of the termination date, provided the document indicates that the payment will take place in the second year if the period extends over two calendar years. One approach to the IRS allows the worker to be assessed for the current tax margin or the next fiscal year. Many pay and employment contracts allow employees to withdraw for “good reason” and recover severance pay.
A good reason why a resignation may constitute an involuntary separation from service for the purpose of a short-term exemption from deferral and separation of wages when certain conditions are met. The general rule is that circumstances that constitute a valid reason must be defined so that the employer`s actions resulting in a substantially negative change in the worker`s role or obligations, compensation or other circumstances are included. The 409A Treasury Regulations rightly offer a secure definition of port which, if followed, will rightly characterize a resignation as an involuntary separation from service. It is important to understand that the failure to properly characterize a dismissal as an involuntary separation from service does not only result in an offence of 409A. Many practitioners make this mistake in negotiations. The only trap is to prevent the separation allowance of 409A from being released as a short-term deferral or secure under the separation wage. Separation pay is exempt from Section 409A requirements, to the extent required under a foreign plan, even if payments are made after a voluntary separation. As a general rule, a foreign separation compensation plan applies only to foreign income within the meaning of Section 911 (b) (1), but excluding amounts paid after the end of the fiscal year in which the services on which the amounts relate were established.