"Good Reason" under Severance Agreements


Code 409A Safe Harbor Definition

  • See the regulatory text highlighted below in red font.

Litigation

  • No Good Reason if Post-transaction Job is Equivalent (or Better). The 7th Circuit explains that “the question . . . is whether the jobs are comparable, not whether the employer is carrying over the operations unchanged.”  Williams v. Interpublic Severance Pay Plan, 523 F.3d 819, 822 (7th Cir. 2008), affirming denial of executive’s post-acquisition claim for severance benefits; finding Dabertin (below) inapplicable because it involved an “effective demotion,” inapplicable).​
  • Good Reason from Post-Closing Diminution of Duties. See Dabertin v. HCR Manor Care, 7th Cir., in which the 7th Circuit focused on several post-closing job changes that significantly reduced the executive's responsibilities, and recognized that "In any case, the determination of what constitutes a substantial reduction in duties and responsibilities obviously varies greatly based on the specific facts of the particular case and the tasks allotted before and after a job re-assignment.  After considering all of the evidence that the Committee had before it, including the functions, duties, and responsibilities Dabertin lost, as well as those she gained, we conclude, that under a common sense view of the changes in Dabertin's job assignments, the Committee arbitrarily and capriciously denied her benefits. 

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Treas. Reg. 1.409A-1(n):


(2)  Separations from service for good reason -
       (i) In general. Notwithstanding paragraph (n)(1) of this section, a service provider's voluntary separation from service will be treated for purposes of this section and §§ 1.409A-2 through 1.409A-6 as aninvoluntary separation from service if the separation from service occurs under certain limited bona fideconditions, where the avoidance of the requirements of section 409A is not a purpose of the inclusion of these conditions in the plan or of the actions by the service recipient in connection with the satisfaction of these conditions, and a voluntary separation from service under such conditions effectively constitutes aninvoluntary separation from service. Generally such conditions will be prespecified under an agreement to provide compensation upon a separation from service for good reason. Such a good reason (or a similar condition) must be defined to require actions taken by the service recipient resulting in a material negative change to the service provider in the service relationship, such as the duties to be performed, the conditions under which such duties are to be performed, or the compensation to be received for performing such services. Other factors taken into account in determining whether a separation from service for good reason effectively constitutes an involuntary separation from service include the extent to which the payments upon a separation from service for good reason are in the same amount and are to be made at the same time and in the same form as payments available upon an actual involuntary separation from service, and whether the service provider is required to give the service recipient notice of the existence of the condition that would result in treatment as a separation from service for good reason and a reasonable opportunity to remedy the condition.


       (ii) Safe harbor. For purposes of this section and §§ 1.409A-2 through 1.409A-6, if a plan provides that a voluntary separation from service will be treated as an involuntary separation from service if the separation from service occurs under certain express conditions, a separation from service satisfying the conditions set forth in the plan will be treated as an involuntary separation from the service if the necessary conditions (or set of conditions) require the following:


                  (A) The separation from service must occur during a pre-determined limited period of time not to exceed two years following the initial existence of one or more of the following conditions arising without the consent of the service provider:

                        (1) A material diminution in the service provider's base compensation.

                        (2) A material diminution in the service provider's authority, duties, or responsibilities.

                        (3) A material diminution in the authority, duties, or responsibilities of the supervisor to whom the service provider is required to report, including a requirement that a service provider report to a corporate officer or employee instead of reporting directly to the board of directors of a corporation (or similar governing body with respect to an entity other than a corporation).

                        (4) A material diminution in the budget over which the service provider retains authority.

                        (5) A material change in the geographic location at which the service provider must perform the services.

                        (6) Any other action or inaction that constitutes a material breach by the service recipient of the agreement under which the service provider provides services.


               (B) The amount, time, and form of payment upon the separation from service must be substantially identical to the amount, time and form of payment payable due to an actual involuntary separation from service, to the extent such a right exists.

               (C) The service provider must be required to provide notice to the service recipient of the existence of the condition described in paragraph (n)(2)(ii)(A) of this section within a period not to exceed 90 days of the initial existence of the condition, upon the notice of which the service recipient must be provided a period of at least 30 days during which it may remedy the condition and not be required to pay the amount.


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