409A Checklist for Employment Agreements and Releases
It has been nearly 10 years since Congress enacted Code §409A, and compliance has become generally routine for traditional deferred compensation and other non-qualified plans. Most mistakes tend to arise when no one thinks to involve 409A experts for employment agreements, releases, settlement agreements, and severance payouts. Management of this risk requires thoughtful detection and review systems. Here is a checklist by which to preview employment-related agreements for potential 409A violations. Note that the following list merely identifies some common provisions and agreements that have 409A implications. It is not a substitute for review by a qualified 409A lawyer.
Seek 409A expert assistance if any of the features described below are included in an agreement with any employee, independent contractor, or other service provider who is a U.S. taxpayer:
1. ___ Non-Renewal at end of term triggers a payment, or a right of employee to resign to collect the payment (as severance).
2. ___ Bonus rights vest in one year but payment could occur after March 15th of the following year.
3. ___ Reimbursements for expenses incurred in one year could occur in future years.
4. ___ Reimbursements cover multi-year periods (such as $5,000 for tax planning every two years), or could offset each other.
5. ___ Stock or Phantom Stock Awards have any deferred compensation features.
6. ___ Stock Options or SARs could have a below-market exercise price on the grant date.
7. ___ "Change in Control" does not determine vesting but affects time of payment for vested amounts.
8. ___ "Good Reason" Severance Rights allow an employee to resign and to collect severance benefits.
9. ___ Severance could under any circumstance be paid more than 2-1/2 months after the end of the year in which employment terminates.
10. ___ Severance is payable at a time determined by reference to when the terminating employee signs a claims release.
11. ___ Severance is subject to employee - or employer - discretion to pay any or all at different times (e.g., lump sum or installments).
12. ___ Post-termination Medical Coverage or Other Welfare Benefits involve the employer paying all or part of the premiums, or imputing income to the employee.
13. ___ Post-employment Consulting Rights require, or could require, consulting services at a level exceeding 20% of the employee's average level of bona fide services over the preceding 36-months.
14. ___ Any other compensation that vests in one year but that could be paid after March 15th of the following year.
Seek 409A expert assistance if an agreement with a terminating employee, independent contractor, or other service provider who is a U.S. taxpayer falls into any of the following categories:
1. ___ Prior Agreement -- The release or settlement agreement changes the timing of severance benefits due under a prior employment agreement.
2. ___ Stand-alone Agreement -- The release or settlement agreement directly or indirectly involves provisions described in any of the 14 items listed above.
3. ___ Consulting Agreements -- An agreement separate from the release or settlement agreement requires, or could require, consulting services at a level exceeding 20% of the employee's average level of bona fide services over the preceding 36-months.
Most recently updated: 2016 May 04
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