Severance arrangements involving “involuntary terminations” are not subject to Section 409A.
What is an “involuntary termination”? An involuntary termination, for purposes of Section 409A, means a severance of the employment relationship due to the employer’s independent exercise of the unilateral authority where the employee was willing and able to continue performing services. A termination on prompt of the employee’s implicit or explicit request will not constitute an involuntary termination.
Does an involuntary termination include the expiration of an employment agreement? Yes, an involuntary termination may include the employer’s failure to renew an employment agreement at the time such agreement expires provided that the employee was willing and able to execute a new contract with terms and conditions substantially similar to those in the expiring contract and to continue providing such services.
How is the existence of an involuntary termination proved? Any documentation characterizing the separation as voluntary or involuntary by the employer and the employee is presumed to properly characterize the nature of the separation. However, ultimately, the IRS will scrutinize the facts and circumstances to determine whether there has been a severance of the employment relationship and whether that severance is involuntary.
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