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Employment Agreements and Severance
Section 409A of the Internal Revenue Code was enacted on Oct. 22, 2004 in an effort to regulate executive pay practices through the federal tax system. Failure to account for ' 409A's impact can seriously and adversely affect the economics of employment agreements, severance agreements, and other similar plans or other arrangements providing for a deferral of compensation. Consequently, this article details how ' 409A applies to these arrangements.
What Is ' 409A?
What is ' 409A and why does it warrant such special attention? Section 409A sets forth new rules regulating nonqualified deferred compensation. It warrants special attention for two reasons. First, ' 409A regulates deferred compensation through a large number of detailed rules. This is in sharp contrast to the state of the law prior to ' 409A, when there were few specific tax rules in this area. The proposed regulations interpreting ' 409A total 240 pages. Final regulations may be longer. Some of the rules are difficult to apply; others are not. Regardless of difficulty, though, these rules must be considered in designing and drafting employment and severance arrangements.
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