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Guest kodle

Correction Needed if Exempt from 409A?

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Guest kodle

Forgive my paranoia, but my reading of Notice 2010-6 indicates that correction would be necessary only if an arrangement with a failure is subject to 409A. Clients have severance plans exempt from 409A under the separation pay exception. Releases are required, and the severance is paid when the release is returned. Since this plan is exempt from 409A, the IRS' problems with releases providing the employee with discretion as described in Notice 2010-6 should not be of any concern, correct? Or, is anyone thinking that all 409A-exempt severance plans must be amended to include the specific payment date indicated under the Notice?

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Guest George Chimento

--Forgive my paranoia, but my reading of Notice 2010-6 indicates that correction would be necessary only if an arrangement with a failure is subject to 409A. --

A plan that is within the two and two exception would not have to be amended for 409A. Arguably, you might want to amend anyway in case compensation exceeds the two x limit at a future date. Maybe you could defer that amendment until the year when compensation is high enough to cause a 409A problem, but for sanity you probably just want to put it in your "boilerplate" now.

My concern is how do you set up a system that pays precisely on the 90th day as IRS suggests? I hope IRS backs off on this new "flaw" after considering comments.

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Guest basilb
--Forgive my paranoia, but my reading of Notice 2010-6 indicates that correction would be necessary only if an arrangement with a failure is subject to 409A. --

A plan that is within the two and two exception would not have to be amended for 409A. Arguably, you might want to amend anyway in case compensation exceeds the two x limit at a future date. Maybe you could defer that amendment until the year when compensation is high enough to cause a 409A problem, but for sanity you probably just want to put it in your "boilerplate" now.

My concern is how do you set up a system that pays precisely on the 90th day as IRS suggests? I hope IRS backs off on this new "flaw" after considering comments.

I absolutely agree. Sure, we can get the documents into perfect shape, but how on earth are clients supposed to administer perfectly as well with so many moving targets? I have been going with a "will be paid with the first regular payroll immediately following the 90th day", hopefully that is sufficiently precise and mildly easier to administer than an off-payroll exact date.

As for amending the severance agreement - agreed with @George's response, with the added note that you will want to make sure that the agreement is clear that payment will be made within the 2-year time period. I attended the BNA webcast with Stephen Tackney discussing Notice 2010-6, and one of his points was that if it is possible that the release could be returned 4 years after termination and payment made, then he thought that the 2x2 exception wasn't fully met. Of course, his comments were delivered with the usual "this webcast is not an official statement of the IRS's position" caveat.

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