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Guest crs

"Good Reason" Severance & Time of Payment

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Guest crs

A severance agreement provides that if the employee terminates for "good reason" or is terminated not "for cause," the employee will receive 5 months salary and benefits (insurance, 401(k)). The salary and benefits will be paid in accordance with the company's regular payroll practice.

Since the employee can terminate for good reason, I understand that the 2 1/2 month and severance options aren't available. Do payments that are made in accordance with regular payroll practice qualify as fixed payment dates for purposes of 409A? If not, how do you structure arrangements like this because it is very possible the payments can fall over 2 years?

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Guest Harry O

This is a real problem under the proposed regs. Many comments have been submitted to the IRS on this topic. You just have to wait for the final (well, hopefully final) regs to be issued later this month or next.

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Guest crs

What are folks doing in the interium? Stating a fixed date despite that it may not be made at that time? For example, could an agreement provide that a severance payment will be paid in the year of termination, and if the employee terminates in late December such that it is administratively impraticable to make the payment before the end of the year, deeming the payment made during the year despite that a check isn't cut until early January?

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Guest Harry O

You are in a good faith compliance period. One could argue that a good reason termination provision is a SRF for purposes of 409A pending finalization of the regulations.

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Guest Harry O

Ignoring the preamble to a *proposed* regulation?

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Having a "good reason" provision can mean (and probably does in all relevant cases) that there is no substantial risk of forfeiture from the start. Therefore, the arrangement can't fit within the short term deferral exception since that would require payment within 2 1/2 months after the end of the year in which the services were provided, and this agreement provides for a later timing with longer payment terms.

So it's subject to 409A. If payment is made only upon a separation from service, and it's paid in accordance with the company's normal payroll schedule, it seems logical to argue that you have a permissible distribution event and fixed payments.

Why would that not qualify satisfy Section 409A, especially considering that you have a good faith standard?

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Guest Harry O

"Having a "good reason" provision can mean (and probably does in all relevant cases) that there is no substantial risk of forfeiture from the start."

Even the IRS was not this categoric in the preamble to the proposed regulations.

"So it's subject to 409A. If payment is made only upon a separation from service, and it's paid in accordance with the company's normal payroll schedule, it seems logical to argue that you have a permissible distribution event and fixed payments."

What about the requirement that key employees of public companies need to wait 6 months to get paid?

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No, the IRS did not "categorically" say that all "good reason" provisions would cause a 409A agreement to fail to have a substantial risk of forfeiture, but in the absence of any reassuring guidance, it may be safer to assume you don't have a susbstantial risk of forfeiture and design the arrangement accordingly.

Certainly, if the service provider is a specified employee and the service recipient is publicly traded, then the 6 month hold back rule would apply. As would all other rules applicable to deferred compensation that is subject to Section 409A.

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