Correction of Release Timing Language After Termination

[401 Chaos]

I have a situation involving a 2005 employment agreement that makes severance payments (to be paid in installments over 18 months) contingent upon a release of claims being signed no later than 45 days following delivery of the required release by the Company but without any other of the necessary release timing provisions in 2010-6 / 2010-80.  (A copy of the form of release required was provided as an exhibit to the employment agreement so I think an argument could be made that the executive was generally provided the required release as of termination; however, that form was not personalized.)

The individual has already been terminated so we do not appear to have the ability to correct the provisions without penalty per 2010-6.  A large portion of the severance (but not all) is exempt from Section 409A.  If we cannot find a basis for claiming the release timing provisions satisfactory and must pay an excise tax, can we exclude the severance amount exempt from 409A from the excise tax calculations or is there any concern that the entire severance benefits may potentially be subject to the excise taxes since the entire employment agreement / severance payments are not exempt.  Thanks  

[gc@chimentowebb.com]

if the period to consider the release did not overlap two calendar years, you do not have a timing concern under 409A. Just take the position that you do not need the magic (silly) language for this arrangement. 

[jpod]

There is no excise tax; there is additional income tax for which the employee is liable, assuming of course there is a 409A violation in the first place.

[401 Chaos]

Thanks very much to all.  Even though the existing agreement was imprecise about timing of delivery of the release, etc., seems like we are fine here given the time of year and the company's immediate delivery of the release and deadline for executing since there is no way the period to consider the release could stretch into 2018.   Also, all of the amounts to be paid in 2017 will qualify for separation pay plan exemption so that seems to further bolster any lack of a problem here.

 

Jpod:  Thanks for your comments.  Just to be sure I am following, our you saying even if there were a violation of the release timing requirements (say if the period did span two years and was not exempt and we were too late to amend) that the violation would never result in excise taxes?

Thanks

[jpod]

The point I was trying to make is that the sanction for violating 409A is not the imposition of excise taxes, because there are no excise taxes (unlike, for example, a COBRA violation, which does result in an excise tax).  The sanctions are the acceleration of the employee's regular income tax liability on the deferred compensation and the imposition of additional income taxes attributable to the deferred compensation.

[401 Chaos]

Got it.  Thanks.