Using Release of Claims as Trigger for Installment Severance Payments

[401 Chaos]

Seems I have seen some discussion of this issue before but was unsuccessful in finding prior posts here.

I am seeing a number of severance agreements drafted to provide for 409A-compliant severance payments in periodic installments with the first payment to commence within a certain time following the effective date of a release of claims against the employer (i.e., after a release of claims is signed by the former employee and the revocation period for the release has expired).

Obviously, a timely executed release ties into an employee's separation from service yet the effective date of the release could vary from case to case depending on timing of signing, whether this is a group exit, or other factors. As a result, the beginning date (and thus the entire schedule) of installment payments is not entirely definite. Also, the effective date of a release of claims is not one of the listed 409A triggers for deferred compensation payments. This all seems hyper-technical but it seems to me that having an agreement that ties the period of payments to a non-409A listed trigger could arguably violate 409A on its face.

Question: Is the fact that the release of claims ties directly to a separation of service (i.e., an acceptable 409A distribution trigger) sufficient to allow the payment schedule to trigger off of the effective date of a release of claims or is there reason to think this is a problem. I do not believe I have heard the IRS / Treasury folks address but am wondering if I have missed some informal commentary.

Thanks

[Steelerfan]

At the last ALI-ABA executive comp conference in NY Dan Hogans commented on this, but didn't say much other than that you are right in that paying benefits, without more, upon the signing of a release is not permissible under 409A. For example, it could result in a payment occuring more than 90 days after separation.

FWIW, the way I would approach it is this: If I'm remembering correctly, the regulations talk about a 90 day window after separation of service as satisfying the rule, so you could design your plan to say, e.g., "payments shall begin no later than 90 days following separation from service (provided a properly executed release is received within 60 days of separation)" Therefore, presumably, you could give the employee a lot of time to sign the release, but not more than, say 60 days, since you need some time adminstratively after the release is signed to get him paid. If they don't sign the release they don't get paid. Seems like a good thing for employers. (small rant following)

It's amazing how much leverage some employees have. If someone needs more than two or three months to sign a release something is wrong.

[401 Chaos]

Steelerfan,

Thanks. If you are referring to the meeting on August 30th, I sent that question (along with some others) into the panel. I only got a couple answered but I'm glad they addressed this one.

I like your suggested approach. Wondering what you and others think about an approach where the agreement clearly indicates that the severance is contingent upon signing a release of claims but doesn't neceesarily delay the beginning of severance for an extended period. For example, severance might begin the first day of the month following separation from service without specific reference to the timing of the release of claims. In some cases, the release would presumably be signed and the revocation period would expire before the first day of the next month. In those cases everything works fine. In other cases, however, the release might still be pending on the first day of the month. In those cases, it seems to me that the company could nonetheless hold or delay that payment until the release is provided and become effective. The theory would be that because you essentially provided for payment on a specified date, missing that date would still give you until the end of the calendar year or 2 1/2 months after year-end to actually make that delayed payment. As you note, as long as the specified date for beginning the severance is within 90 days of the separation from service date, then it seems that would qualify as a specified date for purposes of making use of the administrative delay rule.

I guess my thinking is that such an approach might be preferrable to the more detailed timeframes you propose because it might allow somewhat more flexibility but would also permit you to go ahead and set out the desired schedule of installment payment schedule rather than having that still up in the air based on when the employee actually gets the release back.

[Steelerfan]

My feeling about that is that it could work but is aggressive in that there is some risk that the delay provisions you mention are there for situations that are unforeseen or out of the control of the employer and not meant to be "regularly" used in this situation. I suppose you could argue it is out of the control of the employer but in this case, it smacks of abuse. To me they are limited exceptions that should not be "overused". That is a different situation than for example, a payment that is scheduled to be made in 2010, and you can clearly wait until the end of the year. A parallel to your example I think would be to use a short term deferral plan that specifies payment within 2.5 months after the end of the vesting year, to instead pay on December 31, since there is "extra" time given when theplan specifies the time. I think the IRS would look at that repeated behavior as a violation.

It's creative, but I don't think I'd advise an employer to do it unless they had no better alternative. I don't really understand the reluctance with setting a time frame to get the release done, unless some people are seeing it as an opportunity to further delay payment, as opposed to needing more time to negotiate a release.

BTW the question I referred to was raised at the ALI ABA exective comp conference earlier this June at the Waldorf-Astoria

[401 Chaos]

Thanks. The situations I contemplate do not involve so much a reluctance to set a timelimit on the release or attempt to further delay payment but want to establish a standard or set schedule for payment that is tied to separation from service so that schedule could more or less be determined up front (assuming release is signed). I take your point about not wanting to abuse that rule although it seems the potential for abuse here would be pretty small given the general time restrictions.

I think the uniform payment date can be accomplished even if it is linked to effective date of a release received within a certain period but it seems that approach could require a good bit more revisions to existing documents to bring into compliance. I thinkyou may be correct, however, that the extra revisions required would be worthwhile here.

[Steelerfan]

I looked at the preamble pp 19255 and 19256 and I completely agree your scenario would work with little or no risk.