Employee Benefits Law Alert: Year-End Deadline for Retroactive Relief Under Section 409A for Correction of Agreements That Require Release of Claims

Executive Summary On December 31, 2012, the deadline will expire for correction of document failures under section 409A of the Internal Revenue Code ("Code") in agreements and plans that require employees (or independent contractors) to execute a release of claims as a condition of receiving severance pay or other deferred compensation. Employers need to act fast to take advantage of the transition relief for correction of such document failures. The Issue As discussed in a prior Employee Benefits Law Alert, the IRS published Notice 2010-6 to provide a program to correct failures of the written terms of agreements and plans to comply with the requirements of section 409A. Employment agreements, severance agreements, and change-in-control agreements and plans may provide deferred compensation that is regulated by section 409A. Plans and agreements that condition payment on the employee signing a release of claims (or non-competition or non-solicitation agreement) will run afoul of section 409A if the time of payment in the agreement depends on when the employee signs. For example, the employee's delay in signing may cause section 409A to apply to amounts that would have been exempt under the short-term deferral rule. In that case, the agreement would violate section 409A because no payment date was set forth in the agreement. Even agreements that set a time for signing the release may run afoul of section 409A if the agreement allows the employee to choose the year of payment in cases where the payment period starts in one year and ends in the next. Correction of Document Failures In response to negative comments about portions of Notice 2010-6, the IRS modified portions of the document correction program in Notice 2010-80. Under Notice 2010-80, plans and agreements with release provisions that violate section 409A could be fixed in one of the following ways:
  • A plan that does not designate a period for payment of severance pay or other deferred compensation that complies with section 409A can be corrected by an amendment that provides for either a payment on a fixed date 60 or 90 days after the payment event occurs (typically, termination of employment) or a payment at any time during a specified period (up to 90 days) following the payment event, with the condition that, if the period spanned the end of a year, payment would be made in the second year.

  • A plan or agreement that does designate a period for payment that complies with section 409A, except for the employee's ability to affect the year of payment by choosing when to sign the release, can be corrected by an amendment that provides for payment on the last day of the designated period, or for payment in the second year in cases where the payment period starts in one year and ends in the next year.
Benefit of Correction by December 31, 2012 If the offending provision is corrected under Notice 2010-80 by December 31, 2012, the IRS relief will include the following benefits:
  • The correction is retroactive to January 1, 2009, when the final regulations under section 409A became effective.

  • The requirement that the correction of the document be completed before a payment event (such as termination of employment) occurs is waived.

  • If payments have already been made, the employer may be able to take advantage of the IRS correction program for operational failures to comply with section 409A.

  • The employer does not need to provide a formal notice that describes the document failure to the employee, and the employee does not have to attach a description of the document failure to his or her personal income tax return. (The employer must still attach a notice describing the error to its return.)
While correction of this sort of document failure may be made after December 31, 2012, the special relief for correction by December 31, 2012, will be lost. Next Steps Employers should review all existing compensation arrangements that condition payment on the signing of a release of claims, non-solicitation agreement, or non-competition agreement for provisions that violate section 409A and take action to correct them by December 31, 2012. These arrangements may include employment agreements, offer letters, change-in-control agreements, severance agreements or plans, and deferred compensation plans. Employers should also review their process for drafting future agreements and plans to ensure that provisions violating section 409A are identified and corrected before signature. That may require internal training and procedures for review of such agreements and plans by legal counsel. This alert is a brief summary of the special relief offered by Notice 2010-80. In the interest of brevity, many details and issues have been omitted. If you have any questions or would like more information, please contact one of the following attorneys:

Related Client Alert

Employee Benefits Law Alert: Year-End Grace Period Deadline Approaches for Correction of Plan Document Failures for Nonqualified Deferred Compensation Under Code Section 409A

Employee Benefits Law Alert: Overview of Key Provisions of the Section 409A Final Regulations

IRS Circular 230 Notice: Any tax advice contained herein was not intended or written to be used, and cannot be used, by you or any other person (i) in promoting, marketing or recommending any transaction, plan or arrangement, or (ii) for the purpose of avoiding penalties that may be imposed under federal law.




Employee Benefits
Bethany Bacci
(503) 294-9837
Stuart Chestler
(503) 294-9500
Christopher Briggs
(206) 386-7616
Peggy Noto
(503) 294-9348
Howard Bye-Torre
(206) 386-7631
Melanie Curtice
(206) 386-7651
Richard Hopp
(206) 386-7609
Jeffrey Krueger
(503) 294-9856
Christopher Heuer
(503) 294-9206
Dennis Leybold
(503) 294-9424
Greg Jenner
(612) 373-8857
Gregory Macpherson
(503) 294-9205
Eric Kodesch
(503) 294-9684 
Alan Ross
(206) 386-7689 
Charles Lewis
(206) 386-7688
Mimi Warner
(206) 386-7628
Kevin Pearson
(503) 294-9622
Steven Woodland
(801) 578-6976 

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