With certain limitations, Section 409A does not apply to severance pay involving “short-term deferrals”, foreign severance arrangements and the catchall exception for limited severance pay.
What is a “short-term deferral”? Section 409A does not apply to severance benefits paid as a one-time lump sum within 2 ½ months of the year in which an involuntary termination or a termination for good reason occurs. The definitions of involuntary termination and termination for good reason must satisfy the requirements of the Final Regulations.
What are foreign severance arrangements? Severance arrangements (including severance paid to employees that voluntarily terminate service) are generally not subject to Section 409A to the extent that the laws of a foreign country require that severance be paid and that the severance pay constitutes income taxable in that foreign country. This exception is intended to provide some relief to U.S. citizens that work outside the U.S. and that may receive severance from their foreign employer in the event employment is terminated.
Is there a catchall exception for a limited amount of severance pay? Yes, Section 409A contains a catchall exception designed to exclude incidental severance benefits commonly provided upon a termination where the employer and employee may not even realize that Section 409A may have an impact. In this regard, Section 409A does not apply to severance payments that, in the aggregate, do not exceed $17,000 (i.e., the 2012 dollar limitation under Code Section 402(g)).
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