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Legally Binding Right - Notice required to amend


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Employer has severance pay plan (adopted about 10 years ago) that pays based on a service and compensation formula upon either voluntary or involuntary termination of employment. Covers rank and file as well as management and owners as long as they have at least a year of service.

In the plan, the employer retained the right to unilaterally modify amend or terminate the plan after 90 days' notice to affected employees.

Putting aside those employees who might be considered to have effective control, does this plan provide deferred compensation (legally binding right to compensation in subsequent tax year)? Generally there is no legally binding right to a payment if the service recipient can eliminate it after the services are performed. However, in this case, the employees have a right to notice and in the 90 days following the notice they can take action (voluntarily terminate employment) and then would be entitled to the severance pay. So does the employer's discretion to reduce or eliminate the payment lack substantive significance?

(I understand that because payments are made upon voluntary termination that this plan doesn't qualify for separation pay plan exception to 409A).

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Thanks rcline46. We are operating under the assumption that the plan is covered under ERISA as a welfare benefit plan. It isn't an employee pension benefit plan because it does meet the requirements for an exception as a severance pay plan set forth in the regulations under 2510.3-2. Still, it is possible that under the analysis set forth in the Fort Halifax case, no ERISA plan would be found. The plan doesn't require much of an ongoing administrative scheme. Employees are paid in a single lump sum upon termination and there are no decisions to be made as to the cause of termination since voluntary terminations, involuntary terminations and terminations for cause are all treated the same.

What I am having more trouble with is whether Code Section 409A applies, which is independent of whether or not the plan is an ERISA plan. This depends on whether there is a legally binding right created according to the 409A regulations. There is a non-409A compliant term in the plan document that will require correction if the plan is subject to 409A. Since the transitional relief for 409A document corrections has long since expired, this would involve notice to the employees and a possibly complicated attachment to the employer's and employee's tax returns.

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