Severance arrangements involving “involuntary terminations”, “terminations for good reason” and “window programs” are not subject to Section 409A.
What conditions are imposed on “involuntary terminations”, “terminations for good reason” and “window programs” under Section 409A? Severance paid pursuant to an involuntary termination, a termination for good reason or a window program is not subject to Section 409A to the extent that the severance pay, or a portion of the severance pay, meets the following requirements:
(1) the amount of severance pay does not exceed two times the lesser of: (i) the employee’s annualized compensation for the calendar year preceding the separation; and (ii) the maximum amount that may be taken into account under the qualified plan compensation limit in effect for the year the employee separates from service; and
(2) all severance payments must be made no later than December 31 of the second year following the year in which the employee’s separation from service occurred. (For example, if an employee separates from service January 27, 2020 all severance must be paid by December 31, 2022.)
Does Section 409A permit the division of severance into parts that are and are not subject to Section 409A? Yes, IRS regulations permit the total amount of severance to be divided amongst portions that are subject to Section 409A and portions that are not subject to Section 409A. Thus, if the total amount of severance exceeds the above dollar amount or is paid over a longer period of time than permitted above, but is still paid pursuant to an involuntary termination, a termination for good reason or a window program, only the amount that exceeds the dollar limit or that is paid over the impermissible period of time is subject to Section 409A. Only amounts subject to Section 409A need to comply with its requirements (such as, in part, the six-month delay imposed on payments of severance to certain key employees of publicly traded companies).
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