Transition Relief under Code Section 409A Will Expire on December 31, 2012 for Certain Deferred Compensation Arrangement Corrections
This Alert is intended as a reminder that the limited transition relief available to correct certain deferred compensation arrangements that impermissibly link the timing of payments to an employee’s performance of an action (such as the signing of a release of claims or a restrictive covenant agreement) is scheduled to expire on December 31, 2012. In the absence of corrective action, employees with impermissible arrangements could be subject to a 20% penalty tax plus interest under Section 409A of the Internal Revenue Code (“Section 409A”). Affected arrangements may include employment agreements, severance plans or deferred compensation plans that condition an employee’s right to receive severance or other deferred compensation payments upon the employee’s execution of a release of claims.
The rules related to employee releases under Section 409A are very fact specific and, as such, many arrangements that condition an employee’s right to receive payments upon the employee’s execution of a release will be exempt from Section 409A or may already comply with Section 409A without the need for further action. Additionally, while certain transition relief rules will expire at year-end, many of the same corrective methods currently available with respect to noncompliant arrangements will remain available in 2013 and beyond (subject to limitations).