Severance

[Guest jmc51]

Situation: New employment contract for a new executive that has not worked for employer before. Employer wants to pay severance over the course of 5 years. One payment will made annually on March 1 for the first 5 tax years following the year in which separation occurs. The amount of each payment will be spelled out in the employment agreement. Services will not be performed for employer until after employment agreement executed.

Thoughts on whether this satisfies 409A? I know it is subject to 409A but believe it should satisfy the form and timing of payment requirements?

[Steelerfan]

Situation: New employment contract for a new executive that has not worked for employer before. Employer wants to pay severance over the course of 5 years. One payment will made annually on March 1 for the first 5 tax years following the year in which separation occurs. The amount of each payment will be spelled out in the employment agreement. Services will not be performed for employer until after employment agreement executed.

Thoughts on whether this satisfies 409A? I know it is subject to 409A but believe it should satisfy the form and timing of payment requirements?

you should think about satisfying the 6 month delay rule unless you want to try and structure the first payment (separately) to fall within the short term deferral rule.

[Guest jmc51]

It is not a public company so the 6th month delay is not an issue. Also, its my intent to structure the pay as installment pay, as the amount of severance exceeds two times the executive's pay and is outside the 2 year time frame. So a portion of the severance will be subject to 409A no matter what given the employers preference to pay over 5 years.

Thus, I guess the only issue is whether payments on March 1, starting in the year following termination, in the amount of 000000.00, for 5 years constitute a series of installment payments. I think it does. Any one have a different thought?

[Guest CABatty]

It is not a public company so the 6th month delay is not an issue.

Any chances it might be acquired by a public company at any point in the future? If so, you should probably think about the 6-month delay.

Also, its my intent to structure the pay as installment pay, as the amount of severance exceeds two times the executive's pay and is outside the 2 year time frame. So a portion of the severance will be subject to 409A no matter what given the employers preference to pay over 5 years.

Thus, I guess the only issue is whether payments on March 1, starting in the year following termination, in the amount of 000000.00, for 5 years constitute a series of installment payments. I think it does. Any one have a different thought?

Check out 1.409A-3(b) for information on whether payments upon a certain event comply with the final regs. Out of curiosity, if payments on March 1, starting in the year following termination and paid for 5 years aren't installment payments, what else could they be?

[Steelerfan]

Not sure if saying payment starting March 1 after separation from service is "an objective payment date based upon the separation from service event". See the blurb below from the preamble. You might have to say that the first payment will be made within 90 days from separation, then each March 1 thereafter for 4 years. If anyone thinks that't wrong, please say so.

By contrast, a payment scheduled to be made to such a service provider at any time on or before July 1, 2008, would not be deemed to have a fixed payment date, because the payment could be made before January 1, 2008. In addition, a payment scheduled to be made to a service provider, for example, within 180 days of a separation from service generally will not provide for a specified time and form of payment under the final regulations, because it specifies neither the taxable year of the service provider in which the payment must be made following the separation from service, nor a period of 90 days or less following the separation from service in which the payment must be made. Because such a payment schedule would not provide an objective payment date based upon the separation from service event, the payment also would not be eligible for the relief provided for payments made by the later of the end of the taxable year of the service provider or the 15th day of the third month following the specified payment date. However, a plan provision providing that the payment will be made within 90 days of a separation from service generally will be treated as a specified payment date, and for purposes of the subsequent deferral rules the date of the separation from service will be treated as the scheduled payment date.

[Guest jmc51]

My thoughts are that March 1 is more objective than "within 90 days from separation," because there is no discretion to make the payment earlier than March 1 whereas "within" provides discretion. Also, shouldn't the first payment fall within the 2 1/2 month short term deferral rule anyway?

[Steelerfan]

My thoughts are that March 1 is more objective than "within 90 days from separation," because there is no discretion to make the payment earlier than March 1 whereas "within" provides discretion. Also, shouldn't the first payment fall within the 2 1/2 month short term deferral rule anyway?

STD deferal rule won't apply unless you designate each installment as a separate payment and you're sure there's an SRF.

I agree March 1 is objective, the regs trip me up by saying you have to state the calendar year in which the distibution will occur, but you obviously can't tell with out a crystal ball what calendar year a separation will occur.

[Guest jmc51]

How is the above any different than saying "payments in the amount of x will be made for the next 5 taxable years, on the anniversary date of the separation"? This later language is in the examples contained in the regulations where the IRS blesses it as a compliant method. Thanks for your thoughts, I appreciate them.

[Steelerfan]

I would think that is ok. If you wanted the first payment to fit within the STD exception you'd have to have some additional language involving the specific timing of that payment and then making it clear that each payment is a separate payment. that way, the first payment would be exempt and the subsequent election rules would apply to each subsequent payment separately and not as though the installments were considered one single stream of payments like an annuity.