Determining the level of bona fide services for employee separations from service

[SycamoreFan]

As a practical matter, what are companies doing to determine the level of bona fide services for purposes of determining whether an employee that will render some post-termination services has separated from service? If the employee is a typical exempt executive, the HR record might reflect 40 hrs. per week, but the actual services rendered might be more than that. The situation I see is an employee transitioning to a consulting role. We need to determine at the time of separation from service if the 20% threshold is reasonably anticipated to be exceeded. Are companies just using the straight 40 hours and saying that if it is reasonably anticipated that he will render less than 8 hours / week then there is a separation from service and if it is reasonably anticipated that he will render more than 8 hours / week then there is a separation from service? Any formal IRS guidance on this point? - I'm not aware of any. Thanks!

[gc@chimentowebb.com]

It gets even trickier, because the 20% (or higher percentage if you set the arrangement up that way) is based on a rolling 36 month average. I went back and forth with people at the National Office on this. It makes no sense not to be looking back to the last 36 months of full-time service, but the response was to look at the most recent 36 months, because the regulation is written that way.

As a practical matter, if the compensation is at the necessary rate in your arrangement for a separation from service, and if the employee is not required to be on premises, and if the employee is not eligible for other benefits, you should treat this as a separation from service. If you do not, there is a better chance that the IRS would consider this to be an abusive deferral technique.

[Peter Gulia]

How much discretion should a deferred compensation plan's administrator have in deciding whether a participant's circumstances result in a "termination of employment" (as 26 C.F.R. 1.409A-1(h)(1)(ii) describes it)?

[SycamoreFan]

Discretion is generally a bad thing for an employer to have for amounts subject to 409A. With respect to whether a separation from service has occurred, I'd say employers have little or no discretion. If the reasonable expectation of future services is below 20% (or such other level in the plan) of prior level of service, then the employer should treat such event as a separation from service (unless it can overcome the presumption - just not a good idea IMHO). If the reasonable expectation of future services is 50% or more of prior level of service, then the employer should not treat such event as a separation from service (again, unless it can overcome the presumption - just not a good idea IMHO). If you are in between 20% and 50%, then look at the facts and circumstances (including the items George mentioned above), and clearly document the intent of the parties at the time of the event.